Partner Toby Atkinson and Associate Amy Wills discuss the current state of the law after the 2018 Court of Appeal decision in Waggott v Waggott in particular following the decision of Mr Justice Moor in RC v JC handed down in February this year.
Waggott v Waggott
Waggott concerned a husband (H) and wife (W) who had been married for 12 years and had one child. Although they were both accountants when they married, W later gave up work to care for their child. H’s income was £3.7m per annum, and the parties had total assets of £16.2m.
At first instance, Recorder Tidbury decided the assets should be split such that:
- W received a total of £9.76m to reflect both her share of capital and H’s deferred remuneration
- W would be left with £4.6m of available capital following the application of her share towards housing, pension and other capital needs. This would see a return of around £103,500 per annum
- W should receive £75,500 per annum by way of periodical payments to meet the gap between the above sum and her assessed income needs of £175,500 per annum.
W appealed this judgment on the basis that she was not awarded a fair share of H’s future income. She asserted this was a matrimonial asset built up during the marriage to which she had a continuing sharing entitlement. Furthermore, W queried the approach taken to her share of the capital and the extent to which this ‘pot’ could be used to meet her needs moving forwards. Finally, W argued that as she had given up work for the benefit of the family, and H had suffered a financial advantage as a result, the compensation principle should apply such that she should be entitled to a share of these enhanced earnings to the extent they were surplus over needs.
H cross-appealed on the basis that the first instance judgment was too generous and there should, instead, be a five-year maintenance term with a bar that would prevent W from applying to vary the term of maintenance. The hook upon which H hung his cross-appeal was self-sufficiency. He argued that insufficient weight had been given at first instance to the clean break principle and that Recorder Tidbury had erred in not finding “that the wife could adjust without undue hardship to the termination of maintenance”.
The primary issue in the Court of Appeal, therefore, was whether surplus post-separation earnings after a long marriage are a marital asset which should be shared.
In his judgment, Lord Justice Moylan dismissed W’s appeal. He said that while there were a small number of reported cases in which the applicant received a share of bonuses, the accrual of which had post-dated the parties’ separation, these were rightly described as ‘run-off’ cases. In these cases, offers were made on a pragmatic basis in order to achieve an agreed resolution rather than on any principled basis.
On compensation, Lord Justice Moylan did not accept W’s submission “that the compensation principle could be applied not only when the applicant has sustained a financial disadvantage …but also when the respondent has sustained a financial benefit”. He stated that “it is clear from [the case of] Miller that compensation is for the ‘disadvantage’ sustained by the party who has given up a career”. He set out that in practice compensation “is a claim which appears very rarely to have been established” and says that he does not intend to “encourage any more extensive or expensive exploration of the issue.”
Lord Justice Moylan went on to set out that as a necessary foundation in a compensation case the court would have to determine “on a balance of probabilities, that the applicant’s career would have resulted in them having resources greater than those which they will be awarded by application of either the needs principle or the sharing principle”.
Compensation – the landscape after Waggott
In any financial remedy case, the court considers three principles in determining the appropriate outcome: needs, sharing and compensation. Of these, while needs and sharing have become the cornerstone of any financial remedy case, arguments on compensation have largely fallen away. Following the judgment in Waggott, most family practitioners considered the compensation principle to be more or less extinct.
In subsequent judgments, at most, compensation had been considered something to bear in mind only in rare and exceptional cases. In such cases, it would perhaps at most be used as justification for fixing periodical payments intended to meet a party’s needs at the top end of the discretionary bracket. This particular approach was set out by Mr Justice Mostyn in SA v PA.
The perception remained, therefore, that compensation would be an extremely difficult argument to run. That was until the case of RC v JC in February this year.
RC v JC
In RC v JC, Mr Justice Moor took the unusual decision to not only award compensation to W but to do so in the form of a premium or additional award in excess of the sum needed to meet W’s needs.
RC v JC concerned an 11-year marriage (including pre-marital cohabitation) in which W had given up her legal career to raise the parties’ children. Although she had been on track for partnership at her firm prior to marriage, she moved to an in-house role shortly before the marriage and later to a non-legal role to allow her to be more hands-on with the couple’s children.
The parties’ assets totalled £9.7m, and by the time of the hearing, H was earning just under £1m net per annum as a partner in the law firm at which the parties met. H anticipated retiring in four years, at the age of 52, following 20 years in the partnership.
In his original offer, which was subsequently withdrawn, H had offered an equal split of the couple’s capital assets together with £200,000 in capitalised maintenance payments. W, in contrast, had offered to settle for an equal division of capital plus £360,000 per annum in maintenance payments.
At the final hearing, W presented considerable evidence that she had been on track for partnership, including comments that she had been one of the best litigation associates the firm had ever had. Despite H’s protestations to the contrary, Mr Justice Moor found that it was likely that W would have been made partner.
In discussing compensation, Mr Justice Moor acknowledged that there had been very few successful compensation claims. He said this was primarily because, in most cases, there were insufficient assets to do more than cover the party’s needs. In other cases, this was because the financially weaker party had suffered no overall loss as the amount they would have received by way of compensation was reflected in the amount received under the sharing award. Mr Justice Moor noted that while earning capacity was not an asset which could be shared and that the clean break principle applied, this was a case in which W had obtained a significant relationship generated disadvantage.
Mr Justice Moor, therefore, awarded W an equal share of the capital assets (which represented her maintenance and housing needs) together with a £400,000 lump sum in respect of compensation for giving up her legal career. Mr Justice Moor considered the appropriate source for this additional sum to be H’s income over the next four years leading to his retirement. He considered that £400,000 represented an amount that was both affordable and appropriate to compensate W for her relationship generated disadvantage, bearing in mind the possibility that she may not have made partner.
Even though Mr Justice Moor awarded compensation in this instance, the judgment concludes with a stark warning that cases which justify compensation would be “very much the exception rather than the rule”. He said spouses should think “long and hard before launching a claim for relationship generated disadvantage”. He warns that this case is not to be considered a “green light” for compensation claims moving forwards.
Where does this leave us?
While the case of Waggott indicated there is no right to share in a former spouse’s future income, the judgment in RC v JC provides that in exceptional cases there is a right to compensation from it. That is where the distinction lies. Such compensation will be appropriate where there is strong evidence to support the existence of a relationship generated disadvantage, there are sufficient resources to meet needs, and the fruits of the husband’s earnings are not so great that they will put the wife in a better position than she otherwise would have been.
The approach taken by Mr Justice Moor was unusual in that compensation could have been dealt with simply by more generously assessing W’s needs. Instead, Mr Justice Moor took a firm line on treating compensation separately. Only time will tell whether this judgment sets any sort of precedent moving forwards.
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