Many husbands who are currently paying spousal maintenance do not realise that they could be liable to pay a further lump sum to their former wives if the wife seeks to apply for variation of maintenance and capitalisation of that maintenance is sought. A recent Court of Appeal case H v H 2014 EWCA Civ 1523 has made it clear that the compensation element remains relevant on an application for variation and that when judges assume a rate of interest on the wife’s capital there is no industry standard but the judge is not able to pluck a figure out of thin air.
In H v H the parties had divorced in 2004, there had been a joint lives order for spousal maintenance of £90,000 per annum. After further litigation following the case of McFarlane v McFarlane 2006 UKHL 24 this was increased to £150,000 per annum. This the first McFarlene case, heard by the House of Lords with the case of Miller v Miller, was the case where the concepts of “compensation” and “sharing” were first introduced.
In H v H the husband applied to terminate the maintenance as he was intending to retire shortly in order to care full time for the two young children from his second marriage. The judge who heard the case Mr Justice Coleridge replaced the maintenance with a lump sum of £400,000 to be paid upon the husband’s retirement.
Perhaps not surprisingly the wife was unhappy with this outcome and appealed. At the first hearing the wife had argued that her existing capital fund of £1m savings would produce an annual income of £28,000 per annum assuming a rate of return of 3.75% gross which she submitted was the rate of return that was to be regarded as “standard”. Her income shortfall given her needs as quantified in the existing annual maintenance sum of £150,000 would be £122,000 which would require a lump sum (sometimes called a “Duxbury Fund”) of £2.6m. There had been an element of compensation in the calculation of the increased maintenance order of £150,000.
Alternatively the wife argued that if the judge had applied a rate of 3.75% gross to the capital fund that rate of return would have produced a lump sum of £746,000 not £400,000. However she was only seeking £746,000 if she was on unsuccessful in her argument about compensation. The appeal focused on firstly whether the judge failed to have proper regard to the compensation principle in quantifying her needs and in particular whether she should have to downsize to release funds to generate income. She argued forcefully if this was the case it damaged the compensation element of her existing award.
The McFarlane case returned to court some years after the original hearing when Mrs McFarlane sought an increase in her maintenance McFarlane v McFarlane (No 2) 2009 EWHC 891. The court held in that case that on application for variation the courts need to apply the relevant section of the Matrimonial Causes Act Section 31(7) in light of the three principles of the parties’ financial needs, compensation and sharing. A fair summary of this might be said to be the amount and structure of an award was to be guided by (A) an application primarily of the needs principle to identify the surplus income over and above need by reference to the standard of living during the marriage and the expectations of the parties; and (B) an application of all three principles to determine how that surplus should be applied as between the parties.
Returning to H v H the husband argued there was no industry standard and the Judge was entitled to apply the rate he felt appropriate, or, alternatively, that the figure of £400,000 reflected the exercise of a broad discretion and the Judge had taken into account compensation in his approach. The Court of Appeal found that compensation was relevant even at this stage. The judge at the first hearing Coleridge J had said he was dealing with compensation in four ways: (A) only £500,000 of the value of the wife’s home was to be regarded as part of the long term income fund, (B) neither that sum nor the £1m savings was to be amortised, (C) there was no further step down in the wife’s income needs after the husband’s retirement, (D) the additional savings between the Order and the husband’s retirement were to be the wife’s to keep (estimated at £100,000). The Court of Appeal were clear there was no industry standard but as the figure of 3.75% gross was the one discussed and considered during the hearing it was not open to the judge to pluck a figure out of thin air (as he did).
Some judges have been historically generous in assessing compensation. Others less so. It is interesting that the case of H v H concerned two qualified accountants, the husband had been with a major international financial services firm since 1984 and had been Chief Operating Officer of the tax practice of the firm until June 2010. The wife worked until 1990 eventually as a Financial Director. She then took redundancy which coincided with the birth of their first child. The high point of the assessment of compensation took place in the case of McFarlane v McFarlane 2006 where Baroness Hale said:
“The main family asset is the husband’s very substantial earning power generated over a lengthy marriage in which the couple deliberately chose the wife devote herself to the home and family and the husband to work and career. The wife is undoubtedly entitled to generous income provision for herself and the sake of the children, including sums which will enable her to provide for her own old age and insure her husband’s life. She is also entitled to a share in the very large surplus, on the principles of sharing the fruits of the matrimonial partnership and a compensation for the comparable position which she might have been in had she not compromised her own career for the sake of them all”.
McFarlane concerned a husband who was a high earning accountant and a lawyer wife, who had compromised her career for the children. She had returned to work by the time of the 2009 hearing but her earnings were comparatively modest.
A much more restrictive interpretation of the compensation principle was made in comment made by a leading judge, Sir Nicholas Mostyn J in SA v PA (pre-marital agreement: compensation) 2014 EWHC 392 Fam) where he said that it was only in a “very rare and exceptional case” where the principles would be successfully invoked. However there is a case that is persuasive on how the principle is to be applied and that is a decision of Sir Mark Potter in VB v JP 2008 EWHC 112 where the Judge who was at the time President of the Family Division said:
“…Second, on exit from the marriage the partnership ends and in ordinary circumstances the wife has no right or expectation of continuing economic parity (“sharing”) unless and to the extent that consideration of her needs, or compensation for relationship – generated disadvantage so require”. The judge continued “where it is necessary to provide ongoing periodical payments for the wife after the division of capital assets it is insufficient to cover her future maintenance needs any element of compensation is best dealt with by a generous assessment of her continuing needs unrestricted by purely budgetary considerations.”
The Court of Appeal’s Lord Justice Ryder who gave the leading judgment, declined to express a view in the case of H v H about the application of the compensation principle. They felt it would be wrong to do so where the judge, Coleridge J, accepted that this was a compensation case.
However the court said in H v H that:
“what is of relevance to this court is whether the judge having decided this was a compensation case marked that fact by following through his decision. Complaint is made that the Judge’s treatment of the wife’s home and savings did precisely what he said he would not do. If this is a compensation case requiring the wife to use part of her capital funds that arguably represents the benefits she had obtained from the application of the compensation principle by downsizing is to re-create the detriment that the compensation is meant to provide for unless there is an adequate comparison of the position of the parties such that on the husband’s retirement their income and asset positions remain fairly distributed. The judgment concluded at paragraph 46 “I do not intend to suggest that application of the compensation principle involves reconsideration of the lump sum award originally made: it does not or that downsizing is incompatible with the application of the compensation principle. As an issue downsizing is common place in applications of this kind… My point is that the court needs to undertake a more sophisticated exercise than was undertaken here in order to avoid discriminating against wife who is entitled to compensation”.
The court therefore granted the wife’s permission to appeal and ordered the matter should be reheard by a different High Court Judge of the High Court.