A family court’s decision to award compensation to a wife in financial proceedings, in addition to her sharing award, has clarified what may constitute the “truly exceptional” circumstances meriting a compensation award. The case highlights the importance of evidence and the facts of each case.

In this article, trainee solicitor Georgina Hayward considers the decision of His Honour Judge Hess in TM v KM [2022] EWFC 155 and the principle of compensation in financial remedy cases.

Background to TM v KM

TM v KM concerned a 17-year marriage (including pre-marital cohabitation) in which the wife had sacrificed her highly successful career in the financial sector to raise the parties’ children. The parties have two children, born in 2008 and 2011 respectively, and had lived in the USA, England and the Middle East. The wife attained an MBA from Wharton Business School in Pennsylvania and had a lucrative career in investment finance before the birth of the parties’ first child. The husband also had a highly successful career in investment finance, earning a gross annual income of approximately $2m per annum.

In 2003 and 2004, while working in the USA, the wife earned a gross income of around $800,000 per annum. Following a move to the UK in December 2006, the wife earned £505,000 and then a salary of £325,000 in 2007. The judge was of the view that the reduction in the wife’s income in 2007 was most likely because of her move to London and the transition from an American bank to an English bank (which was also hindered by the effects of a global financial crisis). In 2008, the wife took maternity leave and was later made redundant by the English bank. She did not return to work in investment finance after that.

The husband sought to argue that the events of 2007 and 2008 showed that the wife had lost her way and lost her status as a potential high earner. The judge felt this was an “unfortunate feature” of the husband’s presentation and had little doubt that the wife lost her position due to relationship-generated sacrifices. The judge was satisfied that the wife would have remained a very high earner had she not moved to England and become pregnant. The judge also referred to two additional “relationship-generated developments” that inhibited the wife’s earning power: the birth of the parties’ second child in 2011 and the family’s move to the Middle East between 2010 and 2016.

In making this point, the judge referred to a letter the husband wrote to his employers in 2011 in the context of negotiating his financial package. In this letter, the husband referred to the wife as having “generously agreed to give up her (very successful) career on the HY trading floor and also travel to the other side of the world” to allow him to pursue his career despite her being a “career woman”. The judge felt that this letter was significant and clear evidence of the husband accepting that moving to the Middle East involved a hefty career sacrifice for the wife, justifying a higher pay for him.

Consideration of key principles

When determining the appropriate outcome in a financial remedy case, the courts will consider  the principles of ‘sharing’, ‘needs’ and ‘compensation’:

• Sharing: As spouses are equal parties in a marriage, they should share the “fruits of the matrimonial partnership” equally (Miller v Miller; McFarlane v McFarlane [2006] UKHL 24). This principle is often the starting point in financial remedy cases, however there are cases in which a departure from the sharing principle may be justified, for example, where there is significant pre-marital wealth.
• Needs: Although there is no statutory definition of ‘needs’, it refers to the financial needs of the parties, namely their capital and income needs. It is one of the factors to be considered by judges under section 25 of the Matrimonial Causes Act 1975. If a sharing award is not appropriate, or if the equal division of assets does not meet the financial needs of the parties, the judge will search for alternative solutions to satisfy such needs, even if it leads to an unequal division of assets.
• Compensation: In limited circumstances, a party can be “compensated” for the loss that they suffered as a result of the relationship. The principle arose out of McFarlane, where the court acknowledged that compensation was a way in which to remedy relationship-generated disadvantage. In that case, the wife had sacrificed a potentially lucrative career in law to care for the parties’ children. The husband proceeded with his career and enjoyed a significant income, with excess funds even after the parties’ ongoing needs had been satisfied. In their decision, the House of Lords considered that the wife was entitled to a compensation award for the loss that she had suffered as a result of her career-sacrifice.

In this case of TM v KM, the parties’ assets totalled £12.9m and the sharing principle was followed. In assessing the wife’s needs, the judge concluded that a combination of the earning capacity and the capital assets with which the wife would receive under the sharing principle was greater than her needs claim. Therefore, while there was no justification for making additional provision for the wife based on her needs, there was the potential for a compensation award based on the evidence before the court.

Compensation award

The wife sought a compensation award with a capital worth around £1.5m.

The judge considered the core guidance and case law on compensation and acknowledged that the High Court authorities had discouraged compensation claims, suggesting that such an award should only be made in a “very rare and exceptional case”.

In the previous case of SA v PA [2014] EWHC 392 (Fam), Mr Justice Mostyn had considered whether a compensation award ought to be made to the wife. Although no award was made, the judge referred to a “very rare and exceptional case” as being one where the courts can say with almost near certainty that the party claiming compensation sacrificed a very high earning career which, had they not done so, would have led to earnings at least equivalent to that of the other party. Mr Justice Mostyn also expressed that such a high-earning career would have to have been practised over an “appreciable period” during the marriage and evidence of such a track-record is key.

Although the judge in TV v KM agreed with Mr Justice Mostyn’s sentiment in SA v PA, he was of the view that the decision in the earlier case of RC v JC [2020] EWHC 466 echoed, and was more applicable to, the facts of this case.

In RC v JC, prior to the marriage, the wife had been on a clear path to becoming a partner in a magic circle law firm and it was found that she was highly likely to have had very high earning capabilities. The wife decided to be the main carer to the parties’ children and sacrificed her high-earning role by doing so. The husband proceeded to work at a high level during the marriage and a capital pool was established accordingly. The husband would also continue to earn at a high level for at least another four years after the final hearing. There was strong evidence before the court that the wife would have been made partner had it not been for the relationship-generated sacrifice.

In that case Mr Justice Moor applied the sharing principle which was sufficient to meet both the wife’s housing and income needs and made a compensation award of £400,000 by way of lump sum. In addressing compensation, Mr Justice Moor acknowledged the historic lack of successful compensation claims. The reasoning for this, in the judge’s view, was that in most cases there were insufficient assets to do more than cover the parties’ 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 also 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 the wife had experienced a significant relationship generated disadvantage and ought to be compensated.

Following RC v JC, the judge awarded compensation to the wife on the basis that this case fell into the category of the “rare and truly exceptional”, as there was clear evidence that the wife had a highly successful career prior to making a relationship-generated sacrifice by devoting herself to the childcare role and supporting the husband’s career choices.

Upon finding that compensation should be awarded, the judge acknowledged that quantification was the “most difficult part of the exercise”. The judge accepted that any award had to reflect the fact that the wife had significantly benefited through her award on a sharing basis, including the capital sum from the husband’s high earnings and the benefits that arose from the absence of income tax in the Middle East. The judge also acknowledged it was the wife’s “voluntary choice” to change her career path. Considering everything in the round, he awarded the wife an additional £500,000 to be paid as a lump sum on a clean break basis.

Conclusion

The decision in RC V JC arguably salvaged the compensation principle from extinction. Despite this, the decision left practitioners wondering whether the judgment would set any precedent, especially in light of Mr Justice Moor’s health warning that practitioners considering pursuing a compensation award should not take the judgment as a “green light to do so unless the circumstances are truly exceptional”. Helpfully, the 2022 decision of TM v KM has further clarified what may be considered by the courts as a “truly exceptional” case.

Partner Voirrey Ward says: “There has arguably been a developmental shift in the court’s approach to the principle of compensation following both RC v JC and TM v KM, which provide some guidance on what might be considered “rare and truly exceptional”. TM v KM had the necessary foundations to enable the judge to consider a compensation award; there were high-value assets and clear evidence of the wife’s career and earning capacity and the fact that she had given up a career which would have generated for her earnings equivalent to that of the husband. For now, the courts appear willing to award compensation in cases where there is strong evidence of relationship-generated sacrifice. However, the principle of ‘exceptionality’ still applies, and it will greatly depend on the facts of each case.”

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