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Court of Appeal gives guidance on treatment of earning capacity and sharing and compensation principles

In Waggott v Waggott [2018] EWCA Civ 727 wife’s appeal dismissed; husband’s cross-appeal allowed

The Court of Appeal has given guidance on the treatment of earning capacity and the sharing and compensation principles in financial remedy cases.

In Waggott v Waggott [2018] EWCA Civ 727, the Court heard an appeal of a final financial remedy order made at the Central Family Court. The parties had lived together since 1991, married in 2000 and separated in 2012. They had one child, born in 2004. When they started living together both parties were accountants. After a move for the parties in 2001 to Manchester the wife left her job and, save for a one-off period, did not work again.

At first instance the wife was awarded some £8.4 million of capital resources and the husband £7.8 million. The wife also received an additional sum of just under £1.4 million comprising differing percentages of deferred remuneration received by the husband after the parties had separated.  Her award, therefore, totalled £9.76 million.

The judge ascribed a net income of £60,000 to the wife's 'free capital', being an assumed net return of 1.75% (this point was subject to further argument at first instance, including by reference to H v H (Financial Remedies) [2014] EWCA Civ 1523). 

The judge's ultimate order awarded the wife continuing maintenance of the amount required to bridge the shortfall between her assumed net income (£60,000) and her annual income need of £175,000. The judge did not consider that the wife could adjust without undue hardship to the termination of maintenance.

The wife appealed and the husband cross-appealed.

On appeal the wife argued that an earning capacity is capable of being a matrimonial asset to which the sharing principle applies and in the product of which, as a result, a spouse has a continuing entitlement to share. On behalf of the wife it was argued that an earning capacity is "an asset referable to or the product of marital endeavour and should, therefore, be divided between the parties by application of the sharing principle as with other marital assets".  It was argued that a different outcome would not be fair due to its discriminatory nature, much like the cases determined before White v White [2000] UKSC 54, [2001] 1 AC 596 (which were therein identified as having been decided on discriminatory grounds).

The wife further queried how the court should assess whether an award determined by application of the sharing principle meets a party's needs.  More specifically, to what extent is it fair for a wife "to be required to use her sharing award to meet her income needs when the husband will meet his needs from earned income?"

It was argued that the wife should not be required to use her capital share in this way, when the husband does not because of his earnings.  The wife's income needs should, instead, have been met purely by an award of periodical payments. 

The wife also relied upon the compensation principle, by which she is entitled to a share of the husband's earned income.  This principle, "properly understood", also applies, when a financial advantage (namely, "enhanced earnings" per Lord Nicholls in Miller v Miller; McFarlane v McFarlane [2006] UKSC 24) has accrued to the other party (confined to cases in which the benefit which has accrued produces a surplus over needs).

In summary, the wife sought 35% of the husband's net bonuses payable in respect of the years up to and including 2019 (payable until 2022) and maintenance at the rate of £190,000 per year for the parties' joint lives.

In response the husband argued that an earning capacity is not an asset to which the sharing principle applies.  As to the wife's second point, the husband mainly relied on the 'simple submission' that the court only has to look at the amount received by the wife, namely £9.7 million, to be able to conclude that she will have sufficient resources to justify effecting a clean break. 

As to the issue of compensation, the husband took the view "that this was correctly rejected by the judge who found that the wife had not sustained a financial disadvantage greater than the sum awarded to her by application of the sharing principle.  Absent such a finding there is, he submits, no basis for an award to be made by reference to this principle."

The husband cross appealed on the basis that the judge failed to give sufficient weight to the clean break principle, and was therefore "clearly wrong to make a joint lives maintenance order and was also wrong not to determine that the wife could adjust without undue hardship to the termination of maintenance".

In response to the husband's cross-appeal, the wife argued that there was no error of principle – this was not a "meal ticket for life" (a categorisation which the wife took exception to) because it would be brought to an end by, for example, the wife's remarriage. 

Given the issues raised, paragraph 66 onwards of the judgment contains a helpful and comprehensive analysis of relevant law. 

In respect of whether an earning capacity is capable of being a matrimonial asset to which the sharing principle applies Moylan LJ held that "there are a number of reasons why the clear answer is that it is not". These include:

The Court also rejected the 'more extreme argument' that the wife's capital should be protected and should not be used to meet her income needs.  The Court held that "this again would conflict with the clean break principle to such a significant extent as to undermine the statutory "steer" because, absent other resources, the applicant spouse would always have a claim for an additional award to meet his or her income needs". The Court held that, as a matter of principle "the court applies the need principle when determining whether the sharing award is sufficient to meet that party's future needs".

The Court also held "[a]s to the specific issue raised in this case, namely whether it is fair for an applicant spouse to be required to use their sharing award to meet their income needs when the other spouse will meet their needs from earned income, the answer is that the latter factor will be relevant to the court's determination of the former issue".

In respect of the compensation principle the Court did not accept the wife's argument. The Court held that it is clear from Miller "that compensation is for the disadvantage sustained by the party who has given up a career."

In contrast, the Court allowed the husband's cross appeal. It held that the judge determined whether to impose a term maintenance order by reference only to whether the wife would be able to earn the shortfall between her income needs and the amount generated by her free capital, and as such she could not adjust without undue hardship.  The Court held that this was too narrow an approach and the issue should have been addressed more broadly including by considering whether it would be fair for the wife to deploy part of her capital to meet her income needs.  "This broader consideration was required both so as properly to address the question of undue hardship and also so as to give proper weight to the clean break principle". 

As such the Court imposed a term order expiring on 1st March 2021 with a section 28(1A) bar.

For the judgment, prefaced by a summary by Luke Eaton of 1 Garden Court from which this item is derived, click here.