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The Covid-19 Pandemic as a Barder Event

Richard Kershaw, partner at Hunters Law LLP, considers the implications of Mr Justice Cohen’s judgment in FRB v DRC (No 3)

Richard Kershaw, partner at Hunters Law LLP.


Introduction

Could the Covid-19 pandemic constitute a Barder event? This was a hot topic of debate among family lawyers last spring as it became clear that the pandemic would bring serious economic disruption in its wake. Given the caselaw following the 2008 financial crash, most commentators were dubious about the prospects of such claims succeeding, and Mr Justice Cohen's judgment in FRB v DRC (No 3) [2020] EWHC 3696 (Fam) suggests that their doubts were well-placed. However, the evidential weakness of the application before the court leaves open the possibility of a different result in a stronger case.


When can the court re-open capital settlements based on subsequent events?

The circumstances in which the capital elements of a financial settlement can be re-opened as a result of subsequent events are narrow, reflecting the importance the court attributes to the finality of litigation.

Under the Barder jurisdiction, a financial remedy order may be set aside where an event taking place shortly after the order invalidates the basis on which the order was made, so long as the application is made promptly and there would be no prejudice to third parties. In the tragic case of Barder v Barder [1987] 2 FLR 480, Mrs Barder's suicide and murder of the parties' children led the court to set aside an order made five weeks earlier transferring the family home to her.

In addition to the Barder jurisdiction, under s 31(2)(d) MCA 1973, lump sums payable by instalments can be varied not only as to the amount and timing of the instalments, but also as to the overall quantum. The Court of Appeal in Westbury v Sampson [2001] EWCA Civ 407 held that this should only be considered "when the anticipated circumstances have changed very significantly, and/or for cogent reasons rendering it quite unjust or impracticable to hold the payer to the overall quantum of the order originally made". The Court of Appeal noted that this gives the court "a little more latitude" than it has under the Barder jurisdiction.

Past attempts to re-open final orders based on changes in asset values have not generally succeeded. In her influential judgment in Cornick v Cornick [1994] 2 FLR 530 (concerning a rise, rather than fall, in value), Hale J (as she then was) distinguished between:

• situations where an asset "changes value within a relatively short time owing to natural processes of price fluctuation", which do not fall within Barder; and

• those where "something unforeseen and unforeseeable had happened since the date of the hearing which has altered the value of the assets so dramatically as to bring about a substantial change in the balance of assets brought about by the order", which may fall within Barder.

Hale J went on to say that the "mere fact" of unforeseeability was "not sufficient to turn something which would not otherwise be a Barder event into one". In Cornick, the tripling in value of the husband's business, whilst unforeseeable, was a natural ("albeit dramatic") change in value, and thus not a Barder event.

Following the 2008 financial crash, the Court of Appeal rejected two applications to re-open financial settlements following dramatic declines in asset values. In Myerson v Myerson (No 2) [2009] EWCA Civ 282, where the extent of the fall in value in the husband's shares meant that the wife would receive over 100 per cent of the parties' assets, the Court of Appeal confirmed that natural processes of price fluctuations, however dramatic, do not satisfy the Barder criteria. It was additionally relevant that the order had been reached by consent, with the husband choosing to retain his shares and pay cash to the wife. Similarly in Horne v Horne [2009] EWCA Civ 487, [2009] 2 FLR 1031, the Court of Appeal considered it relevant that the husband had agreed to his business being treated as a liquid asset for the purposes of the final hearing, and held that its decline in value following the global economic crash was a natural process of price fluctuation and therefore not a Barder event.

It can be appreciated, then, that any application to re-open an order due to the financial implications of Covid-19 was always likely to face an uphill battle.


What was the situation in FRB v DCA (No 3)?

Practitioners may recall the factual circumstances from FRB v DCA (No 2) [2020] EWHC 754 (Fam), in which Cohen J presciently remarked "It would be over-optimistic of me to think that this hearing will bring to an end the gladiatorial combat between the parties". Both parties came from very wealthy backgrounds, and the main issues in the case were the wife's conduct in allowing the husband to bring up the child of the marriage in the mistaken belief that he was the child's natural father, and the husband's seriously deficient financial disclosure. Ultimately the wife's conduct and the husband's non-disclosure were set off against each other, and Cohen J ordered that the known marital acquest of £128m be shared equally. This resulted in an award of £64m to the wife, comprising the FMH worth £15m, and a lump sum payable by instalments of £49m.

The final hearing took place in January and February 2020, with a draft judgment circulated on 28 February 2020 and a hearing on 27 March 2020. The first national lockdown had commenced a few days earlier, on 23 March 2020. At the hearing on 27 March the husband's counsel asked Cohen J to defer handing down judgment on the basis that the economic effects of Covid-19 were "such that the basis of the order was likely to be fundamentally undermined", and suggested that the court should adjourn the case until September 2020. This was refused and the parties went on to discuss the terms of the order.

In his judgment Cohen J had expressed concern about the lack of evidence on liquidity and had raised the possibility of the husband paying part of the amount due to the wife by way of an asset transfer, rather than a cash payment. The husband however, at the hearing on 27 March, elected not to take up that option. Crucially, the timing of the lump sum instalments was set out in the order based on dates volunteered by the husband: £30m was to be paid within six months of the date of the order, and £19m within 18 months. Notably, therefore, it was after the husband had already raised concerns about the economic implications of Covid-19 that he opted to pay the wife's award in cash and agreed the payment schedule.

The first lump sum payment was due to take place by 30 September 2020. On 28 September the husband applied, based on the alleged economic consequences of Covid-19, to vary the lump sum payable by instalments, both as to overall quantum and the timing of the payments. Alternatively, he sought to have the lump sum order set aside under the Barder jurisdiction and re-quantified. It is worth noting that a significant number of the husband's business interests were in the international hotel sector.


Why did Cohen J reject the husband's application?

Cohen J set out that whilst he had jurisdiction to vary the overall lump sum quantum under s31 MCA 1973, it would be "exceptional" to do so in circumstances markedly different from those which would justify a Barder variation.

Cohen J noted that a "striking feature" of the husband's evidence was "how very little of it relates specifically to the assets which I found either to belong to [him] or in which he has an interest". Rather, the husband's statement focused on the "macro-economic" situation arising as a result of the pandemic, and the references in his evidence to the impact of Covid-19 on his assets were "general in the extreme", such as pointing out that some tenants had fallen behind on their rent, and that hotel occupancy had fallen. Further, instead of indicating what he now considered he could pay and when, the husband simply asked the court to order a revaluation of all of his assets - an exercise Cohen J considered would cost £300,000 - £400,000 plus tax and expenses and take six months.

The husband's failure to provide prima facie evidence that there had been a fundamental change in his worth so as to justify re-opening the settlement was fatal to his case. Whilst some sectors in which the husband had interests had undoubtedly suffered as a consequence of the pandemic, his interests were varied, making it "far from obvious" that his worth had collapsed. Cohen J was clear: "It is not sufficient for [the husband] just to invite the court to look to the general global financial situation. If that was the case, huge numbers of cases would be being reopened on no basis other than the fact that further inquiry might reveal something specific".

That the husband had given no indication of what he said he could pay, or when, was also harmful to his case. Of particular significance was his lack of explanation as to what had changed about his ability to pay between 27 March, when he had volunteered the timeframes subsequently enshrined in the order, and the date of the application. Further, referring to the Court of Appeal's decision in Myerson, Cohen J noted that "it was a material fact that there, as here, the husband chose to pay a capital sum rather than transfer assets in kind".

The prospect of further valuations was also unappealing, not only given that Cohen J considered, in light of his past findings on the husband's credibility, that the valuer was unlikely to be provided with adequate information, but also because the "topsy-turvy financial times in which we now live" meant that any valuation would almost certainly be overtaken by events before a subsequent hearing.

Of more fundamental significance for anyone considering applying to set aside an order based on the financial implications of Covid-19, however, was Cohen J's statement that it is "essential" in such applications to take a "long term" view. Cohen J noted that the major stock market indices have rebounded to above their pre-Covid-19 levels, and added that "most commentators believe that at some stage within the next couple of years the world economy will be back to where it was". Cohen J did however note that the husband may have an argument that the timing of the payments of the lump sum should be re-calibrated –  but no such argument had been made.

The financial circumstances were taken into account by Cohen J in determining the interest payable on the overdue lump sums. The final order had provided that in the event of late payment interest would be payable at 4 per cent or such higher rate as the court may subsequently order, and the wife applied to increase the rate to the judgment debt rate of 8 per cent. Cohen J considered that in the current economic climate it would be "excessive" to order interest at 8 per cent. Further, whilst the order had provided for the entire lump sum to become immediately payable if the husband defaulted on the first instalment, Cohen J declined to order interest on the second instalment as he considered that would be "oppressive" in the current financial circumstances.

As a matter of mechanics, interest was not yet payable as decree absolute had not been made–  meaning interest could accrue but was not enforceable. To get around this, Cohen J increased the wife's periodical payments by an amount equivalent to the interest which would be payable, making clear in his follow-up judgment, FRB v DCA (No 4) [2021] EWHC 116 (Fam), that interest would not accrue separately. Cohen J also held that as a result of interest on the first tranche of the lump sum becoming payable, the step-down in maintenance anticipated by the original order on payment of the first tranche would come into effect. 

The presumption of no order as to costs does not apply in set aside applications, and the husband was ordered to pay 80 per cent of the wife's costs.


What are the wider implications?

If there was ever a case that was going to succeed in setting aside a financial order due to the implications of Covid-19, it was not this one. The husband's evidence of the pandemic's impact on his financial position appears to have been negligible, and the judge had formed a negative view of his credibility in the main proceedings only a few months earlier. The judge had made numerous findings in the substantive litigation, including that there had been "blatant shenanigans" relating to the valuation of a hotel in India and, generally, "blatant attempts" to minimise the assets in the case. Further, the husband had, after the pandemic had already hit, not only declined the option of satisfying part of the wife's award in shares rather than cash (which would have reduced his financial risk) but also proposed the payment schedule.

Nevertheless, Cohen J's comments that it is necessary to take a long-term view given the anticipated economic recovery mean that even if financial loss resulting from Covid-19 is significant and well-evidenced, it looks unlikely to be sufficient to re-open an award, either under s31 MCA 1973 or Barder. There may however be cases where more persuasive arguments could be made to re-open a case due to the consequences of the pandemic. If, for example, a business has failed and had to be wound up due to the economic implications of Covid-19, then the fact that the wider economy is likely to recover may be of less relevance.

Non-financial consequences of Covid-19 could also potentially found a claim, for example if a party suffered serious health consequences, or if the pandemic led to a significant change in the family's living arrangements – in Nasim v Nasim [2015] EWHC 2620 (Fam) it was considered that the children moving to live with the husband following a violent incident six weeks after the order may be a Barder event.

Inheritances received unexpectedly soon may also found a claim, as in Critchell v Critchell [2015] EWCA Civ 436 where the husband's father died within a month of the consent order being made, leaving him an inheritance, which the Court of Appeal held fell within the Barder jurisdiction.

Any such application would, however, be highly speculative, and entail the risk of an adverse costs order. A less risky way forward for those who have been hard hit by the pandemic would be to focus on seeking to extend time for any payments still to be made, and a downward variation of maintenance payments. All such applications should be well-evidenced and commenced promptly, with efforts made to reach a negotiated solution.

25.2.2021