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Guide to Making Financial Orders
A very wide discretion to divide the assets
In England and Wales there are no rules setting out precisely how assets will be divided on a divorce. Unlike some other legal systems, English law starts from the principle of separate property during marriage, but gives the courts, on divorce, a very wide discretion to redistribute all the assets of the parties, taking into consideration “all the circumstances of the case”. The court may, in its discretion, transfer property from one spouse to another, it may order lump sum payments to be made by one spouse to another, and it may order one spouse to make ongoing payments, known as periodical payments, to the other spouse. When deciding how to exercise its discretion to make any or all of these orders, the court is required to consider certain factors: the welfare of the children, the parties’ financial resources, their financial needs, their standard of living, their ages and the duration of the marriage, any physical or mental disability of either party, the contributions made by each party to the welfare of the family and, in exceptional circumstances, their conduct. Finally the court must give particular consideration to whether it is possible to achieve a clean break settlement, that is a final settlement involving no on-going payments.
The powers of the court and the factors which the court has to consider are set out in the Matrimonial Causes Act 1973 in general terms – but the statute contains little guidance as to what weight the judges are to apply to the different factors. In the past few years there have been some major changes to the approach taken by the courts, particularly to cases involving large sums of money. First a case decided by the House of Lords, called White v White, set out two important guiding principles: (1) that the financial and the domestic contribution must be treated as being equal, and (2) that the courts should measure their conclusions against ‘the yardstick of equality’. The Lords again considered the principles to be applied to the division of assets on divorce in a case called Miller v Miller; McFarlane v McFarlane, and offered some new guidance, based on three new principles (1) satisfying needs; (2) compensating for economic disadvantage; (3) sharing the fruits of the marriage. Most recently, in a case called Charman v Charman , the Court of Appeal provided guidance on the practical application of these three principals.
It continues to be true that the judge’s aim is fairness, and that judges have a very wide discretion to decide what is fair. The only universal rule is that the criteria set out in Matrimonial Causes Act 1973, s 25(2) (see below) must be applied to all the circumstances of the case, giving first consideration to the welfare of the children, in a way that produces a fair result without discrimination.
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Three important cases: White v White; Miller v Miller, Charman v Charman
In White v White the House of Lords considered the way in which the lower courts had been applying the law, and made a number of criticisms. Two important principles are clearly set out by White.
The Lords made it very clear that there is no place for discrimination between the money-earner, traditionally, but not always, the husband, and the home-maker, traditionally, but not always, the wife. In the examples below it is easier to talk about ‘husbands’ and ‘wives’, than about ‘the spouse with control of the assets’ and ‘the spouse without control of the assets’, but the Lords made the point that the traditional roles are often reversed, and that in many marriages the husband and wife are both involved in both roles, money-making and domestic. The key point is that whatever the division of roles between the husband or wife, their contribution to the marriage, and to the family assets, should be seen in equal terms.
While it is by no means possible to predict that the parties will end up with a particular percentage of a particular kind of asset, the Lords did make it clear that judges who give a spouse less than half of the matrimonial assets should be able to explain why they have ‘departed from equality’. This does not necessarily mean, even in ‘big money’ cases, that assets will be split fifty/fifty. Even if an asset is jointly owned by the parties, for example a matrimonial home held in joint names, or a family business the shares of which have been equally divided between the husband and wife, there is no presumption that the asset will be divided equally. Nothing in the 1973 Act provides for such a presumption, and in any event, dividing the assets in half would not necessarily achieve true equality or fairness. The Lords made a clear distinction between equal division of capital and equality of outcome: giving half the present assets to someone earning a large income and half to someone caring for children and earning nothing might produce a very unequal and unfair result.
In Miller v Miller; McFarlane v McFarlane the House of Lords confirmed the two main principles set out in White but went much further in exploring the issues facing the courts when making financial orders on divorce. The Lords agreed on three key principles justifying the redistribution of property on divorce, disagreeing to some extent on the detailed application of those principles. When dividing assets on divorce, judges should be considering: (1) the needs (generously interpreted) generated by the relationship between the parties; (2) compensation for relationship-generated disadvantage; and (3) the sharing of the fruits of the matrimonial partnership. The court should consider all three, being careful to avoid double counting. The ultimate objective is to give each party an equal start on the road to independent living.
Providing for the needs of both parties, set at a level as close as possible to the standard of living enjoyed during the marriage, has been a long-standing goal of the courts and is reasonably well understood (see financial needs below). Although in most cases this one principle tends to consume all the assets, big-money cases involve a surplus, sometimes a substantial surplus, available for distribution between the parties after needs have been provided for.
The idea of compensation for relationship-generated disadvantage is newer, and is proving more difficult to apply in practice. In brief the concept of compensation recognises that one of the parties, usually the wife, may have seriously damaged her own ability to earn money, for the greater good of the family, with an obvious impact on her ability to achieve independent living. Even if her future needs have been met generously, if she has given up her own ability to generate an income surplus to her needs, it seems that she is entitled to look to the husband, for a share in any of his future surplus income.
The idea of sharing in the fruits of partnership has been current since White v White, firmly rooted in the idea that marriage is a partnership of equals. Although equal sharing of assets may not necessarily be the ‘fair’ outcome in all cases, many big money cases will involve a relatively straightforward equal division of the assets. In Miller the Lords answered some questions which had arisen about the practical implications of ‘sharing’, but seemed to disagree in some important ways about the extent to which sharing should apply to all assets. They were all agreed that the differences between them were likely to be of significance only in big money cases (see below), and even then only in comparatively few such instances.
In Charman v Charman, the Court of Appeal reviewed the three principles identified by the Lords in Miller/McFarlane , and discussed how to apply the principles in practice. In particular the Court suggested that, depending on the nature of the case, one principle might have much greater importance than the others, and might prevail over them. For example, when the award suggested by the needs principle is greater than the award suggested by the sharing principle, then the needs principle should prevail, and when the award suggested by the sharing principle is greater than the award suggested by the needs principle, that the sharing principle should prevail. The Court did not deal with the issue of conflict between the compensation principle and one of the other principles, except by making the general point that in the event of irreconcilable conflict between the principles, the overriding criterion is fairness. The Court did emphasise that compensating an individual spouse for financial disadvantage created by decisions taken by both spouses for the benefit of the family during the marriage, in particular career sacrifices, is simply another aspect of the search for fairness.
Probably the best way to look at the impact of these three cases on the way in which the courts now approach the division of assets on divorce, is to look first at big money cases specifically, as these are the cases most affected by the three judgments, and then in turn at each of the elements which the courts are required to take into account by the Act, taking into account the guidance provided by White, Miller and Charman as relevant.
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Big money cases
‘Big money’ cases are those like White, Miller, McFarlane and Charman in which the resources exceed the separate financial needs of both parties; they do not necessarily involve clean breaks, as there may not be enough money immediately available to allow the husband to pay his wife a lump sum large enough to satisfy all of her claims, but big money cases do involve an overall surplus of resources in the broadest sense over needs, generously defined. In the majority of ordinary cases the assets are not, or are only just, sufficient to meet the parties’ needs, and in those cases equal division is not the norm. In these more typical cases the judge will look first at the needs of any children, then at housing needs, and will also have to consider whether there is a need to buttress the ability of one or other of the parties to work. If there is any surplus cash after this, then the judge should go on to look at what, in his estimation, would be a fair result, focusing on the other parties' needs. However in big money cases since White the approach is rather different, and equal division, or the sharing principle, has become, if not the norm, then certainly ‘the yardstick’, departure from which must be explained. As a result, awards have become larger; in Charman the Court of Appeal noted that post- White the levels of award in big money cases had more than doubled.
The Lords laid down the sharing principle in White, but expressed reservations about applying this principle to all assets in all circumstances, and in Miller the Lords confirmed that the exclusion of some assets from the sharing exercise might be justified in big money cases. The Lords seem to have agreed that a distinction might usefully be made in such cases between non-matrimonial assets, that is assets brought into the marriage, or generated independently of the marriage for example by inheritance, and assets generated in the course of the marriage (see financial resources below). In Charman the Court of Appeal put the point somewhat differently, stating that the sharing principle applied to all the parties’ property, but that to the extent that the property was non-matrimonial there was likely to be better reason for departure from equality. In any event, the nature and the source of the property and the way the couple have run their lives can sometimes be taken into account in deciding how the assets in a big money case should be shared.
Two of the Lords in Miller went further and suggested that, given that the English system did not involve community of property, there was still some scope for one party to acquire and retain separate property during the marriage, not automatically to be shared equally on divorce. They made the point that while great wealth could be generated in a very short time, domestic contributions, by their very nature took time to mature into contributions to the welfare of the family. In many cases while the generation of wealth has an obvious impact on the nature and burden of the domestic contribution, the domestic contribution, while undoubtedly important, does not in fact contribute in a similar way to the generation of the wealth. There is an obvious tension between these comments, and the obligation following White to make no distinction between the domestic and the financial contributions of the parties and the Court of Appeal made it clear in Charman that at present courts should continue to focus on ‘equality’ or sharing.
In any event, the Lords all agreed that, while the source of the assets might be taken into account, and the way in which the couple had run their lives might be relevant, the importance of both factors would tend to diminish over time. The Court of Appeal restated this strongly in Charman, confirming that any distinction between unilateral assets and other matrimonial property was for use only when considering short marriages, and pointing out that such a distinction could gravely undermine the sharing principle. It seems clear that in practice any such distinction, only ever of real significance in big money cases, will usually be made only in relation to relatively short marriages, and will be of little or no significance in longer marriages (see length of marriage below).
However, one significant exception to the sharing principle has survived, at least in relation to some of the very biggest big money cases. The concept of special contribution permits one party to resist the sharing principle on the basis that their own contribution to the marriage has been unmatched by the contribution made by their spouse. In Charman the Court of Appeal acknowledged that the special contribution argument was bound to survive, because s 25 requires the court to consider the contributions of both parties to the marriage. However, someone claiming special contribution must now demonstrate an exceptional and individual quality that deserves special treatment; in theory that quality might take many forms, but in practice usually involves the ability to make a great deal of money. The Court of Appeal in Charman was not prepared to give an indication of the level of wealth generation that might act as threshold beyond which special contribution can be argued. Although in some cases the sheer amount of wealth generated will be sufficiently extraordinary to establish an exceptional quality of contribution, in other cases involving great wealth it will be clear that the money involved, however much there is, was merely a windfall, not generated by special contribution. In general the court should be looking for independent evidence of an exceptional individual quality, such as ‘genius’ in business or in some other field. Special contribution can be claimed in relation to long marriages as well as short marriages, although it may have a greater impact on an award in a short marriage. The Court of Appeal in Charman suggested that once special contribution has been established in a long marriage it could justify an award to the special contributor of between 55% and 66% of the matrimonial assets, but also cautioned that in some cases fairness might require departure from this range.
Some additional issues emerge of particular relevance to cases that are ‘big money’ in the sense that the post-divorce financial needs of the parties are significantly less than the total assets of the parties, but in which there is insufficient capital to satisfy a claim based on needs plus any compensation. The case of McFarlane, which was heard at the same time as Miller and which forms part of the same judgment, was identified by the Lords as a paradigm case for an award of compensation in respect of significant future economic disparity sustained by the wife, arising from the way in which the parties had conducted their marriage. In McFarlane equal division of the capital was not enough to provide for the wife’s needs or to compensate her for economic disadvantage, but the husband’s very substantial earning power was far in excess of the family’s financial needs after separation. The wife, having given up her own established career as a city solicitor for the family, was not only entitled to generous income provision, including sums which would enable her to provide for her own old age and to insure the husband’s life, she was also entitled to a share in the very large surplus which would be generated by the husband after divorce. The wife was awarded a periodical payments order on the basis of joint lives or remarriage to satisfy her needs and to compensate her for her economic disadvantage.
The need to ‘compensate’ a wife who has given up an income greater than her needs for the good of the family may lead to an increase in the number of periodical payment orders, where there is not enough capital to provide such compensation but the husband’s income contains a surplus of income over both his own and the wife’s needs (see clean breaks below). A judge may decide to award the wife an element to compensate her for loss of earning capacity not only when making the final award, but also on an application to vary a periodical payments order; this means that a court reviewing a periodical payments order made before Miller/McFarlane may now include an element for compensation. In general, however, compensation seems rarely to be awarded. There have been a number of cases in which compensation has been refused to a wife on the basis that it would result in double counting; in general in big money cases a wife with ‘ordinary’ career prospects, forfeited following marriage to a financial high-flyer, will be judged to have been adequately compensated for that forfeiture by the very fact of equal division of the family’s resources.
When seeking compensation for a wife’s loss of earning capacity the claim must not, in any event, be expressed as a straightforward ‘loss’, akin to a claim in negligence. A number of judges have criticised lawyers recently for presenting financial claims on divorce in this way, emphasising that this approach encourages double counting, and that the compensation principle is merely a feature of the concept of fairness, not a head of claim in its own right. A senior judge recently stated that if periodical payments were necessary any element of compensation should be dealt with by assessing the wife’s continuing needs generously, unrestricted by purely budgetary considerations; he criticised attempts to isolate and quantify the level of income or earning capacity sacrificed by a wife years after the event for the purpose of quantifying a compensation claim.
There has beensome uncertainty as to whether or not courts should be taking future income into account when applying the sharing principle to big money cases. In Miller/McFarlane the Lords clearly stated that in general the ‘martial partnership did not stay alive for the purpose of sharing future resources’. However, in Charman the Court of Appeal confirmed that no matter how substantial the assets at the time of the financial hearing, future income must always be appraised, even in clean break cases, because it might be relevant to the fair overall outcome. In practice it seems that judges do consider a future income disparity to be a factor relevant to fairness, even in a clean break case, but are taking this into account by assessing the wife’s needs very generously indeed in such a case, giving her more than half the assets at the date of the hearing on the basis of need rather than by directly ‘sharing’ the future income. There is another sense in which resources may be shared even though they are generated after the end of the ‘marital partnership’: while many would consider the marital partnership to be at an end when the couple actually separates, particularly if no children are involved, the court considers all the assets available at the hearing, which may take place many years after separation. Money generated post-separation is always available to satisfy ‘needs’, which are, once again, often generously interpreted, and will it seems also be available to be shared equally if the asset growth came from the same source as asset growth during the marriage; e.g. the same job, or investments.
The recent changes in the law have not only increased the sizes of awards in big money cases, they seem also, at least in the short term, to have made it more difficult to predict with any confidence the range within which a big money award is likely to fall. As the Court of Appeal noted in Charman, many specialists in the field are not convinced that the Lords pronouncements have resulted in a greater predictability, and are concerned that the prospect of achieving a compromise has reduced.
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Welfare of children
The court must give first consideration to the welfare of any children. Although the couple may go their separate ways, they are still jointly responsible for the welfare of the children. The interests of the children will often play a decisive part in the distribution of the assets. Their interests will often justify or require an unequal division of the family assets between the husband and wife.
One of the court’s priorities, for example, will be housing the children, and another will be the related priority of making proper provision for the person caring for the children, to ensure stability for the children. The court may particularly wish to transfer the matrimonial home or enough money to fund a suitable home to whoever will be caring for the children, in order to provide the children with a secure home. In the past the court has tended to make such transfers absolute, so that even after the children grew up, the spouse who had been looking after the children had the benefit of the family home, but, following White, more spouses have been permitted to recover some money from the property after the children have grown up (unless the children are very young when the distribution takes place), on the basis that unless the spouse living separately was able to claim some of the value of the family home after the children had grown up, the divorce would leave him or her with an unfairly small portion of the family assets.
The court will also be concerned to avoid dividing the assets in such a way that the family income, from which the children are to be supported, is destroyed or seriously impaired. Concern about the children might, for example, lead a judge to refuse to divide up a family business equally (or at all), where that business is the main source of a family’s income and division would require the sale of the business, or would seriously weaken the business.
Having first considered the interests of the children, the court must then go on to consider all the other circumstances, including:
- Financial resources
- Financial needs
- Standard of living
- Age of the parties and duration of the marriage
- Any physical or mental disability of either party
- Contributions made by each party to the welfare of the family
- Conduct
- Clean-break settlements v periodical payments
- Balancing exercise
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Financial resources
The statute requires the court to consider the financial resources each party has or is likely to have in the foreseeable future, including all assets and types of income. This encompasses assets acquired before, as well as during the marriage, and even assets which a party is likely to acquire in the future including pension benefits.
Property owned by just one party, property owned jointly by the parties, and property which one party shares with a third party, may be considered, as well as interests under trusts, pension rights, any inheritances, (including an inheritance which has not yet been received but which is expected in the reasonably near future), current and likely future earnings and, in some cases, potential support from third parties. The court may decide that a person who did not work during the marriage will be able to earn some money in the future, and include that person’s possible earnings in the analysis, even though he or she has no immediate plans to obtain employment. The Act specifically requires the court to consider whether either party should take steps to increase their earning capacity — for example by retraining or by increasing the hours that they presently work.
Although all assets are potentially available for consideration, following White and even more importantly Miller, they are not all necessarily going to be treated in the same way by the courts. The Lords in Miller seem to have been in agreement that the nature and the source of the assets and the way in which the couple have run their lives can be taken into account in deciding how the assets should be shared, and may in some cases justify a departure from equality. The Court of Appeal in Charman said that the sharing principle applied to all assets, but that to the extent that property was ‘non-matrimonial’ there was likely to be a better reason for departing from equality.
Matrimonial v non-matrimonial property: this concept was referred to in White, but was explored more thoroughly in Miller. The classification of property as ‘matrimonial property’, that is property acquired during the marriage by the efforts of either spouse, as opposed to inherited property, or property acquired before the marriage, is not uncommon in other countries but is not referred to anywhere in the Matrimonial Causes Act. As discussed above, the Act refers to property, without making any distinction as to when or how it was acquired. In White the Lords noted that the question of how or when property had been acquired was one of the circumstances of the case, but commented that it was a circumstance which would have very little, if any, weight if the financial needs of both parties could not be met without use of inherited, or non-matrimonial property. Similarly they noted that it was a circumstance whose importance would diminish over time, so that the longer the marriage, the less relevant the source of the parties’ assets. In Miller the Lords agreed that in big money cases some sort of distinction based on the source of the assets might be justifiable. By implication, in big money cases all the Law Lords were prepared, to some extent, to treat assets brought into the marriage differently from those generated during the marriage. Once needs and compensation have been provided for, judges considering the ‘sharing’ principle may now choose to ask whether property was acquired during the marriage or was unconnected with the efforts of the parties during the marriage, and, if so, that could prove a solid basis on which to justify a departure from equality. Although a number of judges have referred to the need to identify the ‘matrimonial property’ in big money cases post-Miller, others have pointed out that matrimonial property is not referred to in the Act and cannot always be easily or precisely identified or valued. In the majority of cases, even big money cases, it seems that judges will still take a very broad view of the assets available at the hearing, and will discourage expensive attempts to distinguish between matrimonial and non-matrimonial property, especially if that involves the picking apart of complicated ‘mixed’ accounts. Some guidelines can be identified from the cases since Miller. The longer the marriage, the less likely it is that the source of the asset will be taken into consideration when dividing up the assets. Even in a case involving significant sums, if the couple’s needs, generously assessed, will not be met without using ‘non-matrimonial property’, the court will treat non-matrimonial property like any other asset available to the family. Whatever the source of the asset, if it is invested in the matrimonial home it will almost certainly be treated as available to be shared equally. Whatever the source of the asset, if it is pooled with other family assets, in other words treated by the family as an asset like any other, available to meet any family need, it becomes less likely that the court will treat it as a ‘non-matrimonial’ asset. On the other hand, once needs have been met there is a general recognition that assets brought into the marriage are less likely to be divided equally than assets generated during the marriage. The Court of Appeal recently granted a wife permission to appeal against a decision dividing the matrimonial assets equally, although all of them had been inherited by her and brought into the marriage; permission was granted not because there was any issue of principle involved, but because the decision was so ‘surprising’.
Family assets: two of the Lords in the Miller case went further than this, and offered a possible distinction between family and non-family assets. Family assets are assets acquired for the use and benefit of the whole family, obviously embracing the family home, holiday homes, furniture, and insurance policies, but also including family business or joint ventures in which both parties have worked. Non-family assets would include assets brought into the marriage and inherited property, but also perhaps business or investment assets generated by the efforts of one party. Given that the English system does not involve community of property, the suggestion was that it would be fair to allow some scope for one party to acquire and retain separate property which need not automatically be shared equally. It was not entirely clear whether this concept was approved by the majority of the Lords, and one of the other Law Lords strongly disliked the idea; certainly the Court of Appeal in Charman showed no enthusiasm at all for drawing a distinction between family and non-family assets in this way.
Post-separation assets: the court is entitled to consider all the assets available at the date of the hearing, which may be larger, or smaller, than those available at the date of separation. This has proved particularly contentious in the case of large post-separation bonuses, especially if the family contribution of the domestic spouse is not ongoing because neither children nor the husband are being cared for in the home. Shortly after Miller a judge suggested that money acquired within 12 months of the separation would be treated as matrimonial property, but that money acquired more than 12 months after the separation might be excluded from consideration if it had been acquired by virtue of personal industry. More recently, it has been suggested that, however long it is between separation and the hearing, the assets at the hearing date should be treated as matrimonial property if the asset growth is not due to any new source of risk, endeavour or luck. On this basis bonuses would usually be included. A major problem with this approach is that it may well be in the interests of the applicant spouse to delay proceedings in order to ensure that the hearing takes place only after substantial bonuses have been paid, or there has been some other anticipated increase in the assets; it certainly does not encourage an early compromise of cases in which large assets are growing for any reason.
Future Income: future income has always been available to satisfy future needs, in the form of periodical payments, normally by the husband to the wife. There had however been some suggestion that the sharing principle, thought to apply only to existing assets, might be extended by the courts to future income. The Lords in Miller rejected that approach, suggesting that in general future income would only be divided between the parties if that was necessary in order to satisfy the principles of need or of compensation, not on the basis of the sharing principle. [See also standard of living below.] Charman however made it clear that in the interests of fairness future income must always be taken into account by the judge making the award, even in a clean break case involving no element of compensation. In practice judges have sometimes accepted that a significant future income disparity between the parties justifies a departure from equality in dividing the capital assets, even though no compensation is involved, although they have normally justified this by assessing a wife’s needs very generously, rather than by explicitly ‘sharing’ future income.
Illiquid assets: the courts have always included such resources in the survey of the family’s assets, but have not necessarily been prepared to order the sale or division of such assets to satisfy a claim. In particular, in the past, the courts have been very reluctant to make an order which would seriously damage the long-term future of a business, or to order the sale of a family business producing an income. In White the House of Lords emphasised the importance of achieving equality, and upheld an order for a lump sum the practical effect of which was to require the sale of the main family business, a farm. Nonetheless, where it is particularly complicated or undesirable to turn a particular asset, a business or anything else, into cash, it seems likely that the court will continue to take that difficulty into account as one of the circumstances of the case. In some cases the court may order unequal division of the assets to reflect the fact that one of the parties will be receiving cash, while the other retains a business or other illiquid asset, but there is a growing trend towards sharing the illiquid assets equally, requiring both husband and wife to share not only the potential rewards but also the risks associated with such assets, particularly in those cases where it is difficult to assess their value and the parties are in bitter dispute over how much the assets are really worth. There may also now be fewer ‘clean break’ orders, because a ‘clean break’ between the parties in which one party receives their share of the family assets and has no further claim on the other party is more difficult to achieve if non-cash family assets are to be shared equally. At one stage it was not uncommon for courts to order a clean break that required significant borrowing by one party, but some judges have warned that this has great potential for unfairness to the borrower.
Pensions: until December 2000 the courts had very limited powers to divide pension funds, but now the court can order the sharing of pension funds between the parties in such proportions as the court thinks appropriate. These new powers go some way to resolving what had previously been the difficulty of achieving any sort of real fairness if the largest asset of the parties was a pension fund belonging to one of them. However, unless the pension will become available reasonably soon, it is not sensible to treat is as though it were cash, or even as though it were an asset with any relevance to the short to medium term needs of the parties. The Court of Appeal has made it clear that it is particularly important that future pension provision be divided in a fair way; pensions are not be equated with most other forms of property, and the court should attempt to divide the pension between the parties in the same proportions as the assets generally, rather than leaving one of the parties with the bulk of the pension.
Credit: where sale of an asset in the immediate future is impractical, perhaps because the asset is more valuable to the family in its current form than in the form of cash, or because the value of the asset will grow significantly if the sale is delayed for a few years, the court will consider the possibility of borrowing against the asset. The most obvious example is that of the matrimonial home, which often ties up a considerable proportion of the family’s assets, but which is needed in the short-term to house the children of the family. Borrowing to achieve a clean break is not unusual, but there have been warnings that such borrowing exposes one spouse to considerable risk, while the other spouse remains completely secure. Courts will be hesitant to base an award on heavy borrowing by one spouse.
Financial resources have always been, for obvious reasons, a crucial factor for the court to take into account. When one of the parties refuses to disclose how much money there is, the court may make inferences about the assets available, taking into consideration the standard of living of the individual, and any evidence unearthed by the other party. The court will also treat efforts to conceal a person’s financial position as an indication that their resources are very substantial.
In White the Lords criticised the courts for treating the needs of the parties as the most important factor, as under the Act no one factor is any more important than any other. However, it has been suggested that application of the equality/sharing principle brings a risk that from now on the financial resources factor will dominate the process, at least in big money cases. Whether it does or not will depend on how ready the courts are to justify a departure from equality; Miller and Charman have offered some guidance on the extent to which some assets may be treated differently, but in general this guidance is relevant only to shorter marriages.
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Financial needs
The court must consider the financial needs of each party now and in the foreseeable future. In particular the judge will try to ensure that both parties have somewhere to live, and an adequate income, whether from investments or from employment. If it is not possible to house both parties, the judge will concentrate on providing any children of the family with a home.
Before White the court often used the term ‘reasonable requirements’, meaning that a wife’s reasonable needs were not restricted to the minimum needed to keep her alive, or even to keep her in modest comfort; the court’s view of reasonable requirements was affected by what she wasused to in the marriage, by what resources were available, and by her other personal circumstances.
In White and Miller the House of Lords made it clear that there was no reason why any surplus of assets over needs should not be shared, even where that involved giving the wife far more than her ‘reasonable requirements’. On the facts of a particular case there might be a good reason why the wife should be confined to her needs, and the husband be left with much more than is required to satisfy his needs. However, it is no longer be possible to argue that simply because the wife’s needs have been satisfied, she has no further claim.
The Lords emphasised that, in any event, the concept of financial needs was not to be restricted to a bare minimum. Financial needs continue to be relative, depending in part on a person’s age, health and accustomed standard of living. Indeed, it has now been recognised that one of the wife’s reasonable needs may be her desire to leave substantial assets to people in her will. The court may still have some regard to the available pool of resources in identifying needs. A generous assessment of needs will sometimes, even in cases involving large sums of money, result in the applicant spouse receiving more than half the assets available at the hearing; awards to prevent a significant income disparity between the spouses post-divorce have recently been quantified on the basis of a very generous assessment of a wife’s needs.
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Standard of living
The court must consider the standard of living enjoyed by the family before the breakdown of the marriage. However, if a lavish lifestyle has resulted in serious family debts, neither the husband nor the wife will be able to claim a similar lifestyle following the divorce. Equally, if the family has lived a fairly ordinary life while, for example, the husband was working hard in his own business and the wife was at home bringing up the children, but shortly before the breakdown of the marriage (or even after the breakdown of the marriage) the business was sold for a large amount of money and the family could then afford to live at a much higher standard, the relevant standard of living will not necessarily be that enjoyed during the majority of the marriage. Comments made by the judge and the Court of Appeal in Miller had suggested that the wife in that case was entitled to a larger settlement because the marriage had generated a legitimate expectation that she would have a certain standard of living for the rest of her life; the House of Lords firmly rejected the idea of legitimate expectation. Hopes and expectations are not an appropriate basis on which to assess financial needs, and claims for expectation losses do not fit comfortably with the notion that either party is free to end the marriage. The compensation principle does not apply to ‘expectations’.
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Age of the parties and duration of the marriage
The court must consider both the age of the parties and the duration of the marriage. The age of the parties is one of the personal circumstances that will affect how easily the parties will be able to make a fresh start, and of course has a major impact on both future resources and future expenditure. However, in White the House of Lords particularly criticised the calculation based on age which was used in the past to identify the amount of capital which the husband must give to the wife. This involved working out the wife’s annual expenditure and multiplying it by her life expectancy. The Lords said that although the amount of capital required to provide for an older wife’s financial needs might well be less than the amount required to provide for ayounger wife’s needs, it did not follow that where resources exceeded financial needs, the older wife’s award would be less than the younger wife’s. Indeed, it might be substantially larger.
If the marriage is a long one, the court regards the responsibilities of each party to the other as correspondingly heavy. The length of marriage was clearly an important factor in White, and in both Miller and Charman it was made very clear that the length of marriage was of great importance when considering the ‘sharing principle’, although it is still not clear just how long a marriage has to be before it can be classified as a long one.
Traditionally the courts have been less likely to transfer substantial assets between the parties when the marriage has lasted only a few years, but since White it has been argued that very large assets acquired during a short marriage ought to be divided equally. To some extent Miller leaves the question open; if the concept of ‘family assets’, promoted by two of the Law Lords, is applied to short marriages, equal division of large assets will be relatively rare, if the narrower concept of ‘non-matrimonial assets’ is applied then logically no matter how large the assets acquired during the shortest of marriages, they ought to be divided equally.
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Any physical or mental disability of either party
Any physical or mental disability of either party must be considered as one of the circumstances. If a disability has resulted in complete dependency on the other party, the court is unlikely, even in a short marriage, to regard the other party as completely free from responsibility for the disabled party.
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Contributions made each party to the welfare of the family
The court must consider the contributions made by each party to the welfare of the family, including any contribution by looking after the home or caring for the family, and any contributions which either is likely to make in the foreseeable future. This provision was included to make sure that the court took into account the non-financial contributions made to a family’s well-being, typically the contribution made by a wife in the form of child-care, house-work and moral support. The approach of the courts to this factor has changed dramatically in the past few years, and there remain some major question marks over the way in which the courts are now expected to carry out their duty under the Act.
In White the House of Lords criticised the way in which the courts had traditionally approached contribution, and stated, very clearly:
‘In seeking to achieve a fair outcome, there is no place for discrimination between husband and wife and their respective roles . . . There should be no bias in favour of the money-earner and against the home-maker and the child-carer.’
In other words, the Lords rejected any suggestion that the person who is directly responsible for the creation of the family wealth has a better right to that money than their spouse. The courts are now unlikely to spend very much time, if any, considering whether, and to what extent, a wife has directly assisted her husband in the creation of wealth; a wife who has directly helped to build up a family business, or in some other way beeninvolved in money-making, as well as performing a domestic role, now has no greater claim to a share of that money than a wife who devoted all her energies to looking after the home and any children. Moreover, it seems that a wife who has devoted most of her energies to personal non-domestic activities, employing staff to look after her home and her children, will now be deemed to have made an equal contribution to that of a full-time homemaker or even that of a wife combining work and the domestic role.
For a time after White it seemed likely that the answer to the question whether an individual had truly made an equal contribution would be answered on a pragmatic case by case basis. This raised concerns that the parties would spend a great deal of money, and the courts a great deal of time, on arguments about how much each party had contributed to the marriage. However, Miller has confirmed that the Court of Appeal was right in a case called Lambert to say that the courts should not enter into a detailed critical appraisal of the performance of each of the parties during the marriage.
Since White the cases in which the parties’ contributions have been found to be unequal are usually referred to as ‘special contribution’ cases, cases in which the contribution of one of the parties is unmatched by the contribution of the other, justifying a departure from equality when applying the sharing principle. Both Miller and Charman confirmed that the concept of special contribution has survived, not least because the parties’ contributions are a factor mentioned in s 25. However, special contribution can be claimed only in exceptional circumstances: only if one spouse can demonstrate an exceptional and individual quality that deserves special treatment. Although in practice claims for special contribution have always been based on a financial contribution, they could in theory take a non-financial form.
Special contribution cannot be found just because the amount of money generated is very large. Sometimes the sheer size of the fortune generated will be so extraordinary that it will be easy for the person claiming special contribution to demonstrate an exceptional and individual quality justifying departure from equality, but in another case substantial wealth generated during the marriage will be seen as a windfall, not the product of special contribution; it is therefore not possible to name a size of fortune sufficient to justify a ‘special contribution’ claim. Even without generation of an exceptional fortune it will sometimes be possible to demonstrate an exceptional and individual quality, for example ‘genius’ in business or some other field. In Charman the Court of Appeal suggested that a spouse who had made a special contribution would usually be able to claim between 55-66% of the assets, although in an individual case an award might be outside this range.
Following White some judges had started to treat ‘non-marital’ assets, that is assets brought into the marriage, sometimes including a husband’s pre-existing career and earning capacity, as a substantial contribution to the marriage. The Lords in Miller has emphatically rejected this approach, explaining that although the origin of assets may be relevant, it is to be considered in relation to the financial resources of the parties (see above), not in relation to their contributions.
The Act still requires the courts to consider the contributions of the parties, but since the judicial warnings against a detailed consideration of individual contribution, contribution has inevitably become less significant a factor. One of the Lords in Miller suggested that contribution should be treated like conduct (see below), so that contribution would only be considered ‘if it was inequitable to disregard it’. This would presumably mean that the court would still be prepared to consider whether there was a contribution during the marriage in the broadest sense; it seems unlikely, for example, that the court would view a wife who had left her family and lived alone for the majority of the marriage as a wife who had made a full domestic contribution. However, as soon as there is any debate about the extent of contribution, the courts run the risk of entertaining arguments about the detailed history of the marriage, which the Lords have told them not to do. In general it seems the courts will now proceed on the basis that the contributions of the parties are equal in almost all cases.
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Conduct
The Act says that conduct of each of the parties is only a factor if that conduct is such that it would be “inequitable to disregard it”, meaning that only conduct so extreme as to be far outside the range of normal bad behaviour, obvious and gross conduct, is to be taken into consideration. It had been clear for some time that the courts did not consider adultery or the kind of unreasonable behaviour usually relied upon in divorce petitions to be sufficiently far outside the range of normal behaviour to be taken into consideration. However, the judge and the Court of Appeal in the case of Miller, while acknowledging that the husband’s adultery was not outside the range of normal bad behaviour, were prepared to take it into account as one of the circumstances of the case, raising serious concerns that allegations of minor misconduct would once again feature in financial proceedings. The Lords in Miller firmly established that such conduct should not be taken into account, and it seems certain that it will remain very rare for the court to take conduct during the marriage into consideration, unless the conduct has impacted on either the resources of the parties (e.g. heavy gambling) or the ability of the other party to provide for him or herself (e.g. a physical attack causing permanent injury). Litigation misconduct, that is concealing assets or in some other way attempting to misguide the court, is sometimes considered to be sufficiently bad to be taken into account in dividing the assets, but is more likely to be taken into account in considering the question of costs.
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Clean-break settlements
The court is under a duty to consider whether it would be appropriate to order a clean break, that is, to divide the assets in such a way that neither party has any further financial responsibility for the other after divorce. Under a clean-break settlement the husband is not required to make periodical payments (sometimes wrongly referred to as maintenance or alimony) to the wife. However, a clean break is not usually possible, even in cases involving considerable assets, because it is relatively rare for the assets available at the date of the hearing to satisfy completely the long-term housing and income needs of both parties. At one stage it was not uncommon for courts to order a clean break that required significant borrowing by one party, but some judges have warned that this has great potential for unfairness to the borrower.
When a clean break is not possible, and periodical payments are to be made by one party to the other, the court should consider whether it is appropriate to set a limit on the number of years for which the payments should be made. The alternative is to make the periodical payments order for joint lives or until the wife’s remarriage or some other relevant event. Following a suggestion by a senior judge in a case called K v K (Periodical Payments: Cohabitation), periodical orders are now often made for joint lives until remarriage or until cohabitation for a significant period, e.g. 6 months.
Periodical payments orders are always liable to review by the court at the request of one of the parties, who may apply for an increase or a reduction in the amount to be paid on the basis of a change in circumstances. Judges reviewing a periodical payments order may decide to apply the compensation principle, as well as the needs principle, but may only do so in relation to income; they cannot make an order that amounts to a redistribution of capital. Following K v K, cohabitation may now be treated as a very significant ‘circumstance’ justifying either a reduction in the amount paid, or a new limit on the number of years for which the payments should be made. It is not clear how this approach to cohabitation will fit in with the principle of compensation. Under the Act, periodical payments must end on remarriage (which also may not fit in well with the principles of compensation), but possibly a wife who is entitled to periodical payments because she is entitled to compensation for loss of salary will be able to argue that such payments should not end merely because she is cohabiting.
A party may also apply to extend the term of the order, although such extensions are now more difficult to obtain.
It is also open to either party at a later date to apply to the Court to capitalise periodical payments to achieve a clean break. Improvements to the financial circumstances of the parties may make a clean break possible some years after the divorce, although it was not a realistic goal at the time.
Where possible, the court will avoid making periodical payments orders, not least because they are a continuing source of stress and sometimes resentment for both parties. However, following Miller/McFarlane it is clear that a periodical payments order may be made to provide someone with compensation as well as to meet their financial needs, and that a clean break is not to be achieved at the expense of a fair result..
Similarly Miller/McFarlane made it clear that there was no reason to limit periodical payments to a fixed term in the interests solely of achieving a clean break as soon as possible. Given the high threshold and difficulty which now applied to a party seeking to extend the term of a periodical payments order it was not appropriate to make an order whose continuation the wife would have to justify; it should be for the husband to justify a reduction, at which stage the court could consider whether a clean break had become a realistic option.
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Balancing exercise
It is still certain that in every case the court has to weigh each factor against the others, and must try to balance the competing claims of the parties. It has always been impossible to say before the hearing exactly what the court will decide to do, not least because different judges have taken different views of the importance of a particular factor in particular cases. In Miller the Lords acknowledged the flexibility and sensitivity of the English approach, but warned that such flexibility should not be at the cost of all consistency and predictability. It is to be hoped that the ‘three principles’ will, at least in time, help the courts to combine flexibility with increased consistency and predictability, although the Court of Appeal in Charman seemed reasonably pessimistic that this would happen without new legislation. Judges seem in general to be unimpressed by a presentation based on the ‘three principles’ rather than on the words of the statute, commenting that such an approach is too likely to lead to double counting.
The Court of Appeal in Charman suggested that post-Miller the court could, in cases in which there was clearly going to be a surplus even after a generous assessment of needs, consider the sharing principle early in the ancillary relief process. They warned however that the sharing principle could not be a true starting point, because the starting point in every enquiry is the financial position of the parties. The court can consider s 25(2) factors in any order, but must consider all of them, including all the financial resources of the parties. The Court in Charman criticised the approach favoured by some judges after Miller of dealing with needs first, and then dividing the surplus. One judge in the High Court has suggested that post-Charman the following approach to the s 25 statutory exercise should be adopted: first, determination of the assets and general financial position of the parties; secondly, a decision as to how all the property of the parties should be shared between them, sharing equally unless there are good reasons to the contrary; thirdly, a decision whether the result produced by the application of the sharing principle meets the needs of the parties, generously interpreted. If sharing assets equally will not meet all the needs, then the party whose future needs would otherwise be unmet will be entitled to a greater share of the property; if the award exceeds all the parties’ needs, there will be no reduction in the award.
The court continues to aim at a fair outcome. If the parties have few assets the focus of the court’s attention will continue to be on the difficulty of providing for the basic needs of the parties; if the parties have considerable assets the focus of the court’s attention now seems likely to shift to consideration of any special contribution by one of the parties, or, if the marriage is a short one, on the source of the assets; if there is an imbalance between the likely future assets of the parties, the focus of the court’s attention may instead be on whether there is a need for compensation of one party after the needs of each have been satisfied. In every case the judge will try to arrive at a solution which is fair to both parties. Of course, what might be seen as fair by the wife may very well be seen as distinctly unfair by the husband — and vice versa.
While it is not possible for anyone in any case to identify a particular financial arrangement as the solution which the court will certainly order, it should be possible in every case for the lawyers involved to identify a range of possible outcomes, and to suggest a bracket within which the final award will fall. Parties and their lawyers will, in almost all cases, manage to reach an agreement without a final hearing by applying the relevant principles and being mindful of the costs which will now invariably fall on both parties. Although, if agreement is not reached, it can be frustrating for the parties to wait until the hearing for the definitive answer, the advantage of the system is that all the circumstances of the case will be taken into consideration, and both the parties and the court will have the opportunity to tailor a unique settlement of the family’sunique financial situation. The House of Lords has attempted to secure a fairer and more predictable outcome by requiring judges to think about three guiding principles, offering some guidance on the different issues each raises. The Court of Appeal has called for legislation as the only sure way to make division of family assets more predictable, but it seems likely that we will have wait a long time for any changes to make their way through Parliament. Until any such legislation is passed, husbands and wives must continue to rely on the ability of the judge hearing their case to find a fair outcome.
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