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Financial Remedy Update, July 2022

Stephanie Hawthorn and Abigail Pearse, associates, at Mills & Reeve LLP consider the most important news and case law relating to financial remedies and divorce during June 2022.

Stephanie Hawthorn and Abigail Pearse, Associates, Mills and Reeve.

Case Law Update

Gallagher v Gallagher (No. 1) (Reporting Restrictions) [2022] EWFC 52

In this case, the husband ("H") applied for a reporting restriction order ("RRO") or alternatively an anonymity order. This was further to an interim reporting restriction order made by Mostyn J in advance of the final hearing in financial remedy proceedings.

H was seeking a RRO on the following grounds:

(i) His rights under Article 8 of the ECHR were engaged (the information disclosed in financial remedy proceedings was obtained under compulsion);

(ii) A proportion of the final hearing focused on the valuation of a construction business that H is a joint and equal shareholder of.  Dissemination of such information could sour existing business relationships, enable competitors to obtain a significant advantage and impact upon the commercial interests of third parties;

(iii) Reporting of business information would affect the commercial interests of others (most importantly, H's business partner)

(iv) Parts of H's evidence could be exploited and used to prejudice his position in an Irish lawsuit against him, potentially exposing him to a criminal sanction, including imprisonment.

(v) Most of the evidence filed was done so with the reasonable expectation that their anonymity would be preserved.

Held: H's application was refused (although an RRO was made prohibiting the naming / identification of the parties' minor children.

Mr Justice Mostyn noted the importance of transparency in family law cases, noting that "the rule of open justice is an ancient and deeply entrenched constitutional principle in this country..."

Under FPR 27.10 family proceedings are to be heard "in private". However, Mr Justice Mostyn noted that this means only that members of the public (aside from journalists or legal bloggers) cannot attend – it does not grant special significance in terms of confidentiality. Only in cases regarding (wholly or mainly) child maintenance would be restricted.

It was argued that anonymising the judgment would achieve transparency. Mr Justice Mostyn disagreed and was of the view that if very rich businessmen are in court fighting with their ex-spouse over millions, the public has a right to know who they are and what they are fighting about. In any event, it is often possible to determine parties from anonymised judgments – achieving complete invisibility is impossible.

The potential for some litigants to blackmail others into reaching settlement to avoid a public hearing was not enough to trump the constitutional principle of open justice, neither was potential distress / embarrassment to the parties.

The fact that children may be indirectly identified (via the identification of their parents) was also not enough to trump open justice. This would mean that many, many cases would need to be made secret. Clear causal evidence of harm would be required for indirect identification of the children to be a relevant factor in the balancing exercise. In any event, the children's art.8 rights were not the subject-matter of the husband's application. The names of the children themselves would not be reported.

Providing documents such as skeleton arguments or compulsory disclosed documents to journalists will not amount to contempt of court.

In this case, an RRO was made only regarding reference to the content of advice of a jointly instructed tax counsel and their consequential calculation and the advice given to H regarding the risks he faces in the Irish lawsuit. On the fact specific balancing test of rights under Articles 6, 8 and 10 this was justified, but a wider RRO or anonymisation order was not.

RRO or anonymisation order can only be made in an individual case after conducting the balancing exercise between Articles 6, 8 and 10 European Convention on Human Rights (Re S [2004] UKHL 47). Making financial remedy judgment systematically anonymous would require primary legislation.

Gallagher v Gallagher (No. 2) (Financial Remedies) [2022] EWFC 53

This was the wife's (W) application for a full range of financial remedies.  W and the husband H, both from the Republic of Ireland, met in 2003/2004 when W was completing a post-graduate course and H was working in London.

Mr Justice Mostyn determined that the overall value of the parties' combined asset pot was £35,456,884. 

The husband was a 50% shareholder in a construction company. An agreed computational exercise was pursued to determine the value of the company.

A key point of dispute between the parties was how much of the value of the business was to be excluded to reflect H's pre-marital contribution.  W contended that a linear assessment should be pursued to ascertain the figure, H contended for the calculation to be done on a linear basis. Mostyn J decided that 24.5% of the value of the business should be treated as pre-marital property. 

This ultimately meant that the total matrimonial pot amounted to £28,475,246. The wife was awarded £14,237,623 (made up by way of two properties, including the FMH, and a lump sum of £12m). W received 40.2% of the total pot of assets.

In the judgment, Mostyn J was very critical of the amount of costs incurred by both parties dealing with what should have been a 'very straightforward' case. In total, approximately 5% of the total assets (approximately £1,670,380) had been exhausted on legal costs and disbursements. 

W had made an open proposal that was within the realms of what the court might have ordered, H did not.

The judgment emphasised the court's obligation to ensure parties' deal with cases proportionately – financial remedy litigation should not be so expensive that it is only accessible by the very rich.

The matter also included a warning to experts regarding their duty to remain impartial when solely instructed. One of the experts here stood in H's corner and acted in a way that had the "hallmarks of the mentality of an advocate".

IR v OR [2022] EWFC 20

This case concerned a final hearing of H's final remedy application in a case involving an asset base of c£184 million. There were various issues for Mr Justice Moor to deal with in this case, including the extent to which non-matrimonial property should be considered and the enforceability of a Pre-Nuptial Agreement.  In terms of the key factual background, W (in her early 50s) and H (in his early 60s) began cohabiting in Country X (of which they are both nationals, though W is also a British citizen) in 1996 and married in 1997. The parties have five children (ranging from age 9 to mid-20s). The parties separated in 2019, with divorce and financial remedy proceedings commencing in 2020.

In her Form E, W described herself as a homemaker, but disclosed net assets of £28 million. H described himself as a company director with net assets of £139 million (H's gross assets worth £229 million, but liabilities of £89 million).

H's father set up a retail shop in the 1950s and he later set up the R Family Trust in 1975. H became the CEO of the business in 1993 and the business began to grow at a fast rate. H case was broadly that the success of the business was down to his father's efforts. Comparatively, W's case was that H was instrumental in transforming the business. There are various relevant trusts in this case and trusts continued to be set up regularly. In 1993, H's father set up the Investment Trust. The Property Trust was set up in 1998, and the Distribution Trust and IR Family Trust were set up in 1999. In 2003, the IR and OR Trust (named after the two parties, who are beneficiaries) was established. Ultimately, all of the trusts (save for the Family Trust and the Investment Trust) post-dated the parties' marriage.

Prior to the marriage, both parties signed a Pre-Nuptial Agreement, but locating the signed and finalised copy of the Agreement proved impossible. A draft copy of the Agreement provided for separation of property, particularly in relation to H's family business (though the financial disclosure attached to the Agreement did not place a value on H's family business assets). W had not sought legal advice on the agreement (despite advice to do so).  The Agreement did not provide for W's reasonable needs despite the fact that she had virtually no assets at the point of marriage.

H was not seeking strict implementation of the Pre-Nuptial agreement, but rather that any order subsequently made reflected the spirit of the Agreement reached by the parties. W's position was that it should have no effect as she was told it would only last 3 years or until they had a child.

There were various issues in dispute on the asset schedule which Mr Justice Moor considered in turn in the judgment at quite some length.

A core issue that Mr Justice Moor had to contend with was whether the pre-marital assets should be excluded from the 'matrimonial pot' for distribution on the basis of 'unmatched contributions justifying a departure from the sharing principle'.

In making his award, Mr Justice Moor decided to entirely ignore the Pre-Nuptial Agreement, particularly in relation to deciding the extent of non-matrimonial property in the case. He held that it failed the Radmacher v Granatino test as it provided no provision at all for W, she would have ultimately faced a 'predicament of real need'. The agreement had a clause which provided for a review of the terms after three years or the birth of the parties' first child, whichever date was sooner – there was no review, the parties had ultimately forgotten about the Agreement entirely (evidenced by the fact they could not even locate the executed document).  Finally, the judge was satisfied that the Agreement would not have been enforceable in Country X.

The judge determined that a significant proportion of the resources came from the endeavours of H's father. However, under H's leadership the business "was transformed from a small regional chain to a national powerhouse that could be sold...for over $1 billion. This all occurred during the marriage". Mr Justice Moor held that this increase in value created matrimonial property which the W was entitled to share in. The fact that assets were placed in a trust named after the parties was irrelevant to the findings in this case. It was acknowledged that allowance must be made for the significant non-matrimonial element of the resources (e.g. as a result of H's father's efforts prior to H's involvement in the business). 

An evaluation exercise was carried out to determine what reduction on W's share should be made to reflect the non-matrimonial element of the assets.  The approach taken was to determine a figure for the non-matrimonial element, deduct that figure from the total asset pool and award W half of the resulting figure.  This was done alongside a broader Hart v Hart style calculation to ensure the award was not overly generous to the H. 

Ultimately, it was decided that the proper award to W was £70 million, which was slightly under 38% of the total asset base. It was held that the award made sufficiently covered W's needs, very generously assessed (her housing need was assessed at £25 million, allowing £45 million for a Duxbury fund). A dispute over a joint property was dealt with by an order of sale on the basis that the equity was to be split equally (giving both parties' the opportunity to submit to the other a sealed bid (to be no less than $19 million) to acquire the property. 

WC v HC [2022] EWFC 40

This concerned an application for costs following financial remedy proceedings. H applied for costs assessed at £310,000. W initially suggested there should be no order, but now seeks her costs of two interlocutory hearings and costs incurred in addressing the post-nuptial agreement (PNA).

The total costs of the parties amounted to 13% of the total assets between the parties.

While the starting point is that each party should bear their own costs in financial remedy proceedings, sensible attempts to settle the case, or an unreasonable failure to make such attempts, would be a powerful factor when considering costs.

The interlocutory applications do not fall under the general rule of no order, thus a "clean sheet" for such applications applies.

Neither party was found to have been very flexible in open negotiations, although H's open offers were far closer to the eventual award than those of W. Aspects of H's litigation conduct was found to be unsatisfactory and W was largely successful in her application for maintenance pending suit (costs were reserved). It was only in closing submissions that H appeared to accept that the PNA was influential, not determinative (despite it being unsigned by W).

W was also not beyond reproach- she had not been successful in arguing the PNA should be disregarded completely du to undue pressure, that H was colluding with his father to conceal receipt of vast sums or that she needed a second home in Switzerland. The second home point formed the main difference between the parties, although W did establish a greater income need than H was willing to accept.

Peel J highlighted that "even in needs based claims no litigant is automatically insulated from costs penalties, notwithstanding the possible impact on the intended needs award".

W was to bear greater responsibility on costs, due to her disproportionate needs claim. W's offers were wide off the mark. She was therefore ordered to pay £150,000 by way of costs.

Although the costs order reduced the award to below W's assessed needs, £150,000 was a modest sum compared to the overall award and Peel J had rounded up £7.319 million to £7.45 million. £131,000 was not referable to W's housing or income needs.

Villiers v Villiers [2022] EWCA Civ 772

This was an appeal from a judgment of Mostyn J dismissing her application under Section 27 of the Matrimonial Causes Act 1973 (MCA 1973), whereby a spouse can apply for maintenance if the other party: (a) fails to provide reasonable maintenance; or (b) fails to provide, or make proper contribution towards, reasonable maintenance for any child of the family. Reference is to be made to the Section 25 factors when determining what order to make. 

Section 27 stands as a freestanding application and is not made within other proceedings.

The parties separated after an 18-year marriage, with W and their daughter moving to England from Scotland. W's application for maintenance was commenced 2 years after the issuing of divorce proceedings, following delay (which included a jurisdictional point going all the way to the Supreme Court for determination). The parties were ultimately divorced in Scotland.

W's application was on the basis of H failing to pay her any maintenance and the parties' evidence surrounded H's resources to pay maintenance.

A final hearing of her application was heard in March 2021, where her application was dismissed on the basis that she had not established a "condition precedent"- that prior to her application in 2015 H had failed to provide her with reasonable maintenance. This argument had not been raised by either party- indeed they did not raise broader arguments as to legal principle.

Mostyn J also viewed that the historical common law duty of a husband to maintain his wife was relevant to the court exercising its discretionary powers under Section 27, and that ultimately absent "exceptional circumstances" the duration of an order under Section 27 could not extend beyond " a valid foreign divorce in a friendly state, or in another part the British Islands".

Held: W's appeal was allowed.

Section 27 is freestanding application and deciding whether there had been the requisite failure to provide maintenance (required by Section 27) involved determining what would have been reasonable maintenance with regards to all circumstances of the case. This could have been determined on the facts.

Ultimately, the historical analysis adopted by Mostyn J of the did not support that Section 27 depended on, or was influenced by, the nature and extent of any common law duty of H to maintain W. The common law duty had not been relevant to the exercise of the s.27 jurisdiction since the significant amendments effected by the Domestic Proceedings and Magistrates' Courts Act 1978. 

It was found that Mostyn J had also been wrong to require exceptional circumstances before making a maintenance in the context of a foreign divorce – this amounted to an unreasonable fetter on the court's discretionary powers. A spouse was not to be criticised for the jurisdiction they chose to bring their claim in and the court had discretion to set the duration of the order according to what it considered to be a fair outcome.

Section 27 did not require the "condition precedent" required by Mostyn J- there was no requirement that the failure to provide reasonable maintenance be established as at the date of the application. The purpose of the provision was to enable a financially weaker spouse to obtain financial provision to meet their needs (current and future). It would be contrary to that purpose if an order could not be made regarding a spouse who had failed to make reasonable provision only after an application was made. It would be contrary to Section 27 to ignore evidence about events that occurred after the application.

Arnold LJ dissented, arguing that Section 27 was clear that applying for an order was based on a past failure to provide reasonable maintenance (not a future one). The relevant date therefore for the court's determination was the date of the application.

An order was made for periodical payments (until further or order or W's remarriage) at the rate of £10,000 per year.


Family Statistics Quarterly: January to March 2022

Every quarter statistics are published regarding the volume of family cases, with the statistics broken down into the types of cases involved.

This quarter shows a decrease in the number of financial remedy applications made, with the applications being 16% down in comparison to the same quarter in 2021. Of the applications that were made 75% were uncontested and 25% were contested.

The full statistics can be reached here.

Courts and Tribunals Judiciary publishes remote observation of hearings guidance

The Courts and Tribunals Judiciary has provided Practice Guidance on the new powers which allows courts and tribunals to permit the remote observation of hearings by reporters and members of the public. (Section 85A of the Courts Act 2003).

These powers came into effect on 28 June 2022.

Any court, tribunal or body exercising the judicial power of the state can direct that proceedings be transmitted electronically to enable those not taking part in the proceedings to watch and listen.

The Remote Observation and Recording (Courts and Tribunals) Regulations 2022, SI 2022/705, provide further detail on when and how the court will permit remote observation of hearings. It may apply to family proceedings where media / researchers are permitted under FPR 27.11(2) or where the court has allowed a non-participant to attend.

Mediation voucher scheme receives additional funding

The Mediation Voucher Scheme provides a contribution of up to £500 towards the mediation costs of eligible cases, in a bid to help matters settle outside of the court arena. Eligible cases are those where there is a dispute/application regarding a child, or another form of dispute/application, but where the parties are also involved in a dispute regarding a child.

Further funding has now been announced for the scheme, with an additional £5.4m available (10,200 vouchers), with total investment now totalling £8.7m.

Litigation for the rich only?

Mr Justice Mostyn, senior family law judge, has indicated that "financial remedy applications seem to be fast heading for Ritz hotel status- so expensive that it is only accessibly by the very rich."

The comments came as part of a case where the parties had spend £1.7m in costs over a two year period on what was thought to be a "very straightforward" matter, where under two days were spent in court hearing the issues.

He has previously urged the Lord Chancellor or the Family Procedure Rule Committee to take action to help prevent parties incurring high level of costs, which Mostyn J had described as "such extraordinary, self-harming conduct".

"Get help arranging child maintenance" system launched

In May, the Child Maintenance Service launched a new service that gives information about parents making their own arrangement for maintenance or using the Child Maintenance Service. It is available 24/7 and replaces the Child Maintenance Options in England, Scotland and Wales.

For the new system, click here

Rise in divorce applications following introduction of no-fault

Over 12,000 new divorce applications were made on the arrival of no-fault divorce in April 2022, newly published statistics reveal. Of these, over 10,000 were sole applications, with over 2,000 applications taking advantage of the new option for applications to be made jointly.

You can read about the Law Society's comments on the new statistics here.

Probe into litigation loans

The Law Gazette has reported that solicitors are now under the spotlights, after more than a dozen people claimed they felt compelled to take out litigation loans, without proper checks or due diligence. Annual interest rates for these loans can stand between 18-30% and there are reports of people needing to sell their homes to meet the debt.

As noted by the Gazette, these allegations of misconduct, as yet unfounded, are being investigated by financial and legal regulators.

You can read the full article here

Growth in family law market

IRN Research has published a new report that shows that the family law market grew by 4.1% in 2021, although the number of firms is falling.

The growth was said to be dived by "a strong increase in financial remedy matters needing legal advice and growth in advice for hight net worth individuals plus international cases."

With court backlogs being slowly addressed throughout 2021, more cases were completed, although the number of new cases was on the decline.

The Report indicates that IRN expect the market continue to grow by 4.5% in 2022 and 5% in 2023.