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  1. Law
November 1, 2006

Do The Splits

By Spear's

As if breaking up wasn’t bad enough, the whole process of getting divorced in Britain is a legal mess too, says Ann Northover

The press carries daily news of celebrity and high-profile agony in the form of domestic unhappiness and divorce. At the moment we have Mills/McCartney and possibly Abramovich, if the papers are to be believed. The uncertainty clearly fuels the unhappiness and bitterness as the weaker party feels they have everything to play for at a time in England when the law is in a great state of flux. A greater degree of certainty for these parties, and for the wealthy but less famous, will be very welcome.

Marriage has become far more complicated than just choosing your outfit, the cake and the venue and turning up to say ‘I do’ in front of friends and family. Entering marriage, you have to think about divorce (and pre-nuptial contracts), and once married you or your partner may be thinking about divorce (and forum shopping, ongoing maintenance versus a clean break and so on). Rather unromantic perhaps, but statistically a reality.

There are a confusing and perplexing range of issues facing the modern wealthy and international family including tax, enforceability of orders and protection on death. These issues must all be viewed against the backdrop of the international stage because we all now seem to have assets or property abroad.

Set this alongside the rapidly changing landscape of family law over the last six years and it makes for rather unsettling – or exciting – reading. Help is, however, at hand in the shape of your friendly matrimonial solicitor who will guide you through the jargon and ensure that you know exactly what you are letting yourself in for and that you have protected yourself as far as possible against any nasty shocks.

White v White (2000), was a landmark case, and the last time that the House of Lords considered a divorce case before the recent judgments of Miller and McFarlane in 2006. Out went the concepts of reasonable needs and discrimination against the traditional female role of homemaking and in came the concepts of fairness and the ‘yardstick of equality’ which meant that the Courts should not depart from equality unless there was a good reason to do so.

Working out a ‘fair’ settlement has given rise to increased litigation. ‘Fairness’ is naturally subject to change along with cultural mores at any one time. The cry for anti-discrimination will now have to be interpreted by the courts this December when inevitably the first civil partnerships will end in dissolution, and fairness is once again debated.

Fairness is not necessarily always an equal division of the marital property. There are some common misconceptions here. Reasons for departing from equality have been further examined since White including in Sorrell and Charman.

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These cases both raised the concept of ‘stellar contribution’ and whether the (husbands) who created exceptional wealth through their brilliance were allowed to retain more than half the marital assets. They were, with 60 per cent and 63 per cent respectively.

Other reasons to not split martial property equally may be where there is inherited wealth or pre-acquired assets, and where one party had a fully fledged earning capacity before the marriage. Mr Justice Coleridge in Charman suggests that for the ‘huge money’ cases (he says over £30 million), given the discretionary nature of our divorce jurisdiction, and to assist parties in negotiation, the time may have arrived for guidance in the form of a tariff approach. He concludes:

‘Tariffs are a bit crude and purists would protest that this is an incursion into the hallowed s.25 [of the Matrimonial Causes Act 1973) exercise, but are they, in the end, likely to produce a less fair result than any other unscientific exercise of judicial discretion?’

Miller and McFarlane sent ripples of excitement through the family law world at the thought that the House of Lords would finally have the long awaited opportunity to bring some clarity and certainty to the laws on divorce, particularly in cases involving little capital and high income, and where a clean break would likely be unachievable. Unfortunately this opportunity was not grasped with both hands and some uncertainty remains – and hence the likelihood of further litigation in huge money cases.

The case of Miller dealt largely with the appropriate division of capital. Mr and Mrs Miller had a marriage of two years and nine months. Mrs Miller was American and at the time of their marriage she was working in a financial PR firm earning £85,000 per annum. Mr Miller was a senior hedge fund manager and main board director at Jupiter Asset Management when he married.

He moved to New Star Asset Management Group Ltd in January 2001. His basic salary at the time of separation was £181,000 with a bonus of £3 million. At the time of the marriage he had assets of £16.7 million which, by the time of separation had increased to £17 million plus whatever value could be attributed to his 200,000 shares in New Star. At the time of the October 2004 hearing, his assets were worth £17.5 million plus the value of the 200,000 New Star shares.

Mrs Miller’s award of £5 million represented, broadly speaking, half the value by which the shares had increased during the course of the marriage and equated to approximately one-sixth of Mr Miller’s wealth at the time of the divorce.

Despite the facts being fairly unusual, the case certainly kicks into touch the idea that conduct, and in this case adultery, can be used to increase an award to the other spouse unless that conduct is exceptional such that it would be inequitable to disregard it. Pandora’s Box has been well and truly slammed shut and the keys disposed of in relation to this point.

Miller at first instance seemed to herald the return of the Duxbury calculation (a mathematical calculation commuting a wife’s income needs into a self-amortising capital fund and therefore generating a clean break). There had been a retreat from this pure ‘reasonable needs’ based approach in White and following ‘big money’ cases which emphasised fairness and equality.

The crux of the Duxbury calculation is reasonable needs set out in an estimate of future expenditure calculated by reference to past expenditure, capitalised into a lump sum lasting the wife’s actuarial life, which it has been said would allow her to drink her last glass of champagne (bought with the last of her Duxbury fund) on the last day of her life. The problem is, of course, that there is no certainty about what the Court will consider reasonable.

Clearly Duxbury remains an important tool for the Courts in complying with the requirement that they consider a clean break in every case. It is, however, extremely unlikely to reach the dizzy heights of popularity it previously enjoyed following the judgments of Miller and McFarlane and is more likely to be of use in the smaller money cases which still focus on needs.

McFarlane, however, was based on a set of facts that we have all come across in some way or another and a position that we could conceivably find ourselves in, at some point in the future. They married on the first of September 1984 having lived together for two years, and they separated in December 2000.

This was an 16-year income-rich but capital-poor marriage, with three dependant children, a working husband and a wife who gave up her job by mutual agreement to stay at home and care for the children. At the time of separation the children were 16, 15 and nine years old.

At the time of the marriage both husband and wife had qualified professionally, the wife as a solicitor and the husband as an accountant. The wife worked for Freshfields until 1991 when she gave up work, and up until 1990 she earned more than the husband. The husband worked at Touche Ross, becoming a partner in 1990, and then at its successor Deloittes.

At the time of the first hearing there were capital assets of approximately £3 million, which they agreed to split equally between them. The wife had minimal income but the husband was earning £753,000 net per annum.

What is interesting about the House of Lords judgment is the wife’s entitlement to the husband’s income, not only at the time of the divorce, but also into the future and how to compensate a wife for her loss of income following divorce.

The House of Lords decided that Mrs McFarlane was entitled not only to maintenance for her needs, but also to compensation for the ongoing economic disadvantage she suffered in giving up her job and for a share of the ‘financial fruits’ that had been jointly generated during their lengthy marriage (i.e. Mr McFarlane’s substantial income that could more than cover both their income needs). It was decided that she would be awarded £250,000 per annum net for life (excluding the children’s needs) – being approximately a third of Mr McFarlane’s net income.

It is important to note that the Courts recognise that the law needs to take into account changes in ideas of what is fair. Perhaps pre-nuptial agreements (so long as full and frank financial disclosure is given by both parties and there is no suggestion of the less wealthy party being coerced into signing shortly before the marriage) will be given greater weight in future.

The specific mention of dual career marriages in Miller/McFarlane and the fact that parties should have some autonomy over the way they deal with their finances – and with reference to how they conducted themselves during the marriage, also lends weight to the desire for many parties to be able to agree in advance how to divide their assets. Unromantic they may be, practical they certainly could be, and without a pre-nup you are left unable even to raise these arguments. If you do decide to go down this route, then make sure that both of you have separate independent legal advice.

Europe has for some time been trying to regulate the law to be applied on divorce in the European Community. This has led to proposals that parties enter into written agreements pre-marriage specifying the law that will apply to them on divorce, and if no such agreement is made the criteria that will be applied to determine the law to be used. Perhaps another argument for Pre-Nuptial Agreements.

This would spell an end to the much criticised ‘forum shopping’ but could also lead to courts having to apply the law of another country. Imagine if you will, an English court trying to apply Greek or Polish law. However, it seems unlikely to happen because the Government has opted out for the time being. Certainly food for thought though.

While we eagerly await further guidance on the huge money cases, we must remember the advantages of our discretionary system which turns on the individual facts of each case and allows the solution to be individually tailored to those facts.

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