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Ordering the would-be undertaker: the equitable reach of the Family Court

Norma Cronin, solicitor at Hughes Fowler Carruthers and Mark Ablett, Senior Paralegal at Hughes Fowler Carruthers and soon to be pupil barrister at 1 Garden Court Family Law Chambers consider the troublesome issue of enforcement of undertakings in financial remedies cases.

Norma Cronin
, solicitor at Hughes Fowler Carruthers and Mark Ablett, Senior Paralegal at Hughes Fowler Carruthers and soon to be pupil barrister at 1 Garden Court Family Law Chambers.

The Scene

Family lawyers up and down the country often advise their clients in financial remedy proceedings that the appropriate approach is to settle the case; indeed, it is a relatively rare case in which the circumstances justify the time and expense of a trial. Proceeding to final hearing inevitably involves a high cost, which is more often than not disproportionate to the level of assets in the case. Another factor is the uncertainty of the outcome given that the courts themselves have been inconsistent in their approach to financial remedy orders. It is rare for a family lawyer to be able to predict with confidence what the court will order. Take, for example, the seemingly perpetual uncertainty as to the correct approach to spousal maintenance, and particularly differing attitudes of courts inside and outside London.

In appropriate cases, if a settlement can be reached, it is to the financial consent order that most family lawyers turn as a way of providing certainty for their clients. Arguably, the drafting of consent orders has become considerably easier with the release of the financial remedy omnibus, prepared and approved by the financial remedy working group headed by Mr Justice Mostyn.

A lengthy section of this omnibus is devoted to a range of possible undertakings. As many family lawyers will be aware, an undertaking is simply defined as a promise given by one party to the court, frequently of a mandatory nature and relating to an obligation to the other party to the proceedings.

Undertakings are routinely used as a way of getting an enforceable term in circumstances where the term sought goes beyond that which the court has the power to order. For example, a term providing for a party to take out or maintain a life insurance policy, with the other party nominated as the beneficiary, frequently forms part of financial settlements, and could be crucial where there is provision for ongoing child or spousal maintenance and, in particular, joint lives spousal maintenance. This term however falls outside the court's remit as regards the orders it can make, but can still be enforceable if it is included in the order as an undertaking. In fact, it is not even necessary for an undertaking to be included in an order for it to be enforceable, although clearly this is best practice where there is a financial consent order.

Is there any detriment in having an undertaking rather than an order? One of the primary difficulties with undertakings is enforcing them abroad and, indeed, defining an undertaking for foreign practitioners. The concept simply does not exist in civil law.

Form of undertakings

With the Family Procedure Rules 2010 came Practice Directions 33A, and later in this context 37A, dealing specifically with the enforcement of undertakings. There are two types of undertakings: to do or abstain from doing an act and to pay a sum of money.

(i) Undertaking to do or abstain from doing an act

Practice Direction 37A sets out that any form of undertaking to do or abstain from doing an act must be endorsed with a notice setting out the consequences of breaching an undertaking in the following words (or words with substantially the same effect):

Notice pursuant to PD37A 2.1

"You Husband McHusband may be held to be in contempt of court and imprisoned or fined, or your assets may be seized, if you break the promises that you have given to the court".

The court is likely to decline to enforce the undertaking or treat its breach as a contempt of court if the statement below is not signed by the undertaker, so as to signal the undertaker's full understanding of the implications of making this promise.

Statement pursuant to PD37A 2.2

"I, Husband McHusband, understand the undertaking that I have given and that if I break any of my promises to the court I may be sent to prison, or fined, or my assets may be seized, for contempt of court."

(ii) Undertaking to pay a sum of money

Practice Direction 33A sets out that any form of undertaking for payment of money must be endorsed with a notice setting out the consequences of disobedience, as follows:

Notice pursuant to PD33A 2.2

"If you, Wife McWife, fail to pay any sum of money which you have promised the court that you will pay, a person entitled to enforce the undertaking may apply to the court for an order. You may be sent to prison if it is proved that you –

(a) have, or have had since the date of your undertaking, the means to pay the sum; and

(b) have refused or neglected, or are refusing or neglecting, to pay that sum."

The notice should then be endorsed, as with PD37A, with the undertaker signing the below statement:

Statement pursuant to PD33A 2.3

"I, Wife McWife, understand the undertaking that I have given, and that if I break my promise to the court to pay any sum of money, I may be sent to prison."

It should be stressed that PD37A defines the undertaking notice above as a penal notice. Although it is strictly not required to advertise the PD Notices prominently on the front of the order, the authors suggest it would be advisable to adopt this approach so that there can be no question that the implications of non-compliance have not been drawn to the undertaker's attention.

The issue

The above notices and statements pursuant to the various edicts of PD33A and PD37A require the signature of the promising party. Here a difficulty may arise. Many practitioners have been, or indeed will at some stage be, faced with a situation where a consent order has been drawn up and agreed, perhaps with an impending hearing or mention, yet, for whatever reason, one party has been struck by a bout of intransigence and they are unable to obtain a signed copy of the undertaking.

What is the answer? Even if you can point to an agreement, without a signature from the promisor on the PD notice and statement as above, the promisee may struggle to enforce the undertaking because the court is unlikely to be willing to approve an undertaking absent a signature from the promisor testifying to have understood the significance of the promise.

By contrast, if it can be shown that the terms of an order are agreed (most often by a joint letter from both parties' solicitors or perhaps from correspondence clearly setting out the agreement reached) and that genuinely all that remains is to obtain a signature, the court could approve an order so long as it did not include undertakings.

A potential solution (in certain circumstances)

If the court cannot or will not make an order which includes an undertaking without a signature as above, one possible solution is to transplant the undertaking into the orders section. Of course this contradicts what we have said above, namely that undertakings are used where the court is considered to have no power to make an order.

A common undertaking in consent orders is for one party to stand solely liable for debts owed to third parties and to indemnify the other party against any loss they may suffer in respect of such debts. A frequent example of this is where one party stands as sole, or primary, financial provider for the family and so guarantees ongoing payment of the mortgage for the former matrimonial home until the property is sold, or some other such date. It is a common view that this has to be an undertaking because it is beyond the powers of the court to order an indemnity, but there is an alternative.

The starting point for the Family Court's powers in financial remedy proceedings is, of course, the Matrimonial Causes Act 1973, in particular sections 22 to 24. These sections effectively set out the possible orders the court can make, with section 25 then setting out the considerations for the court in making these orders.

However, we are a common law jurisdiction and there is a whole raft of powers available under the ambit of equity. Before venturing further, it is important to note that other great matrimonial statute, the Matrimonial and Family Proceedings Act 1984. In particular, section 31E, as introduced by the Crime and Courts Act 2013, set out in Schedule 10.  This states that the Family Court shall have the same powers as the High Court and county court. We can therefore safely apply High Court authority to a situation more frequently encountered in the county courts and Family Proceedings Courts.

In releasing a draft of the financial remedy omnibus referred to above, the working group faced various concerns. Some of these concerns centred on the inclusion of orders such as the following:

1. "Procure release from mortgage and to indemnify
The [applicant]/[respondent] shall use [his]/[her] best endeavours to procure the release of the [respondent]/[applicant] from any liability under the mortgage [as in definition above] [by [insert date]]/[on or before completion of the transfer provided for by paragraph [insert] / [within [insert] days of the date of this order], and shall in any event indemnify the [applicant]/[respondent] against all such liability."

The consternation from family lawyers stemmed from a perceived lack of authority for the court to make such an order, with practitioners unable to find the statutory basis in the Matrimonial Causes Act 1973. In an effort to address those concerns, the interim Report of the Financial Remedies Working Group dated 31 July 2014 specifically addresses the issue at paragraph 84. It draws on the 1897 House of Lords' decision in Salomon v A Salomon and Co Ltd [1897] AC 22. The High Court had found that Mr Salomon should indemnify the company A Salmon and Co Ltd against creditors' claims (the detailed facts are lengthy and unnecessary for this article). The indemnity was in fact ordered at the suggestion of the judge, who allowed an appropriate amendment to the company's counter-claim. The basis on which the judge made the order was that the company was a mere agent of Mr Salomon and so the company's debts were, in fact, his. In effect, he held that the company was a sham arrangement. The Court of Appeal also held that there should be an indemnity, but for different reasons. The House of Lords however overturned the order as it offended the rule about the separate legal personality of companies, but it did not state that, as a matter of principle, an indemnity could not be ordered.

It is on this equitable basis that Mr Justice Mostyn et al. justify the inclusion of an order for an indemnity. They also noted that the power to order mortgage payments, as in the clause above, is available in proceedings under Part IV Family Law Act 1996 and so it would be "anomalous" if a similar power were not available in financial remedy proceedings.

Considering the concept of indemnities more widely, in Cooper-Hohn v Hohn [2014] EWHC 4122 (Fam) H sought two indemnities from W: one for hypothetical tax charges (to which W agreed) and the other was a general indemnity for "unascertained and unquantified risks", effectively speculative liabilities. The basis on which W agreed to the first indemnity was that, if she was going to take on a percentage of the assets, then fairness dictated that she should take on a percentage of the tax liability also. 
At paragraph 220, Mrs Justice Roberts held:

"In terms of my jurisdiction to require the wife to provide the husband with an indemnity, and in the event of her unwillingness to do so, we are in the territory of contingent lump sums. The statute will not permit me to achieve that outcome by any other means."

The ultimate order portrays an unwillingness to rely on the equitable power. This brings into question the true breadth of the equitable power. Prior to the above case, this article has been considering an indemnity in the context of a hard debt, a debt in actual existence and which can be quantified. In Cooper-Hohn, the debts in issue were speculative, with even the more certain debts being uncrystallised. Perhaps we can conclude that a distinction must be made between hard debts and speculative debts and thus we can query the applicability of the equitable power beyond debts already in existence.

It seems clear that, under equitable principles, the Family Court can order one party to indemnify the other against debts already owed to third parties. As regards the ordering of the actual payment of a debt to a third party, Mr Justice Mostyn discusses only a mortgage and household outgoings. However, we would tentatively suggest that, when drafting the obligation to meet a liability, the use of "best endeavours" should be sufficient to allow the court to make an order more widely for a party to discharge liabilities to third parties, remain solely liable for them and indemnify the other party against any loss in respect of them. The caveat of "best endeavours" allows the promisor the opportunity to justify any future default, but the position of the promisee remains protected by the indemnity as far as possible.

Where a party is faced with intransigence from a would-be undertaker, where all that is required is a guarantee for current and potentially ongoing liabilities, the best approach would be to transplant this term from an undertaking to an order. Where agreement can be shown, a court would be hard pressed not to make the order, perhaps with a window of, say, 14 days for the would-be undertaker to make an application setting out any objection.