The Guardian has reported on a divorce case where the wife has received half of the assets plus another £400,000 to compensate her ‘relationship – generated disadvantage: giving up work as a solicitor to become primary carer to the parties’ children while the husband pursued his ‘stellar’ career. The article is here.
We don’t have a judgment yet*, so there is lots that we do not know about the circumstances.
What is compensation?
Although not mentioned explicitly in the Matrimonial Causes Act, compensation is one of the reasons for distributing the parties’ assets on a divorce, alongside meeting the parties’ needs and equal sharing. Usually, the courts will look at the effect of dividing the parties’ assets equally and then if that doesn’t give one of them enough to meet their needs (living costs, housing costs) they might deviate from 50-50. Compensation doesn’t usually come into it, for reasons I’ll explain, but it comes from judgments in two joined cases, Miller v Miller and McFarlane v McFarlane. Its purpose is to compensate for future economic differences between the parties that are the result of the way that they conducted their marriage. For example, the wife might have cut her hours at work or given up work entirely to be the primary carer for the parties’ children, and time out has a long-term effect on her earning capacity even if she goes back to work. As Mostyn J noted in SS v NS, ‘for many women the marriage is the defining economic event of their whole lives and the decisions made in it may well reverberate for many years after its ending’. Another example of a relationship-generated disadvantage might be giving up career opportunities to relocate for a spouse’s job.
In this case, the court awarded the wife £400,000 above an equal division of the assets by way of compensation for relationship-generated disadvantage. She had given up her career to raise their children. The Guardian reports that:
‘The ruling could have implications for other divorce cases in which one partner has stepped back from their career for the good of the family, a lawyer said.’
The wife’s solicitor, Jane Keir at Kingsley Napley, is quoted as saying that
‘Although Mr Justice Moor has made clear this decision should not open the floodgates to a raft of relationship-generated disadvantage claims, the judgment affirms that in truly exceptional circumstances the principle of compensation still exists in family law, and rightly so.’
‘In theory, this would apply to whichever partner steps back in their career putting family ahead of ambition and earning power.’
In theory, this is correct. The principle exists, and it applies to situations in which a partner steps back from their career in favour of the other. However, Ms Keir is right to call this ‘exceptional’. It does not open the door to compensation claims in all cases in which a party has reduced or given up paid work to care for children. Please do not get excited at the possibilities. It is very unlikely to happen for several reasons.
- Not enough money
In most cases, it will be necessary to use up all the parties’ assets in order to meet their needs once they are in two separate households, which means there is no additional money to compensate them. Compensation, therefore, is only really relevant in cases where there is a ‘substantial surplus over what is required to meet needs’ i.e., cases involving wealthy people.
- Double-counting with needs
There is an overlap between compensation and needs. For example, a party may need more capital in the divorce because they have can’t borrow much because they are not working full-time because they reduced work to care for children. So one needs to be careful of double-counting.
- Judicial attacks on compensation
In Miller/McFarlane, Lady Hale thought that sometimes ‘the economic disadvantage generated by the relationship may go beyond need, however generously interpreted’ and ‘in some cases, compensation could justify a greater award than needs and equal sharing’. For Mrs McFarlane, for example, an award limited to her needs, even generously assessed, would leave her significantly worse off than her former husband by around £650,000 per year as a result of the choice they made that she would give up work to care for their children.
Despite the fact that meeting needs does not always adequately compensate, most judges have treated compensation as falling simply within a generous assessment of needs – see VB v JP (‘any element of compensation is best dealt with by a generous assessment of her continuing needs’), McFarlane (No. 2), B v S, and SA v PA. That is in part because of conceptual and practical difficulties with the principle of compensation. Although these judges cannot overrule Miller/McFarlane, they are finding ways to limit its scope in two ways. First, they are restricting compensation only to those cases where the court can say, with almost near certainty, that the claimant gave up a very high earning career which would have led to earnings at least equivalent to that presently enjoyed by the respondent. That is only a small number of cases. Secondly, they are just meeting the claimant’s needs generously rather than giving her (it is usually a her) a lump sum on top of the needs.
What’s unusual about the present case is that the judge, Moor J, has found that the wife gave up a very high earning career and, rather than just meet her needs generously, has awarded her a lump sum over and above needs and equal sharing of assets. The judge stated that ‘I accept that it is unusual to find significant relationship-generated disadvantage that may lead to a claim for compensation but I am clear that this is one such case.’ The case H v H is the only other reported case that I can think of where a lump sum above equal sharing has been ordered for compensation.
We will try to update this post when the judgment is published. Some discussion in this post of the prior case law is adapted from my chapter in Oxford University’s book Family Law (edited by Ruth Lamont).
6 May 2020 Update*
We now have the judgment of Moor J in this case, which is called RC v JC, and is on BAILII at EWHC 466 (Fam) (25 February 2020). This gives us much more information about the circumstances in which the award of compensation was made.
The wife was a solicitor in a ‘magic circle’ law firm, doing litigation work, and with real partnership potential based on exemplary performance appraisals. The husband also worked there, and when they married, the judge found that the husband did not want her to remain at the same firm. As they intended to have children, and the wife saw herself as becoming their primary carer, she did not join another magic circle firm but instead became a director of a bank. The income from this was equivalent to an associate at a magic circle firm, so large by normal standards but less than she would have received through partnership at the firm. When they did have children, she was unable to go part-time and moved sideways to a different department where she could work part-time. Unfortunately, she was then made redundant. The judge found that ‘The Wife gave up her legal career, with the support of the Husband.’
So what effect should that have on the financial settlement? In my first post on this case, I outlined the way in which compensation cases are really the preserve of the wealthy, that is, those who have money left over when their future financial needs are met. This is clearly one such case. The parties’ assets were some £9.7 million although some of that was tied up in pensions. Applying the principles of needs, compensation, and sharing discussed above:
- The wife received half of the assets under the sharing principle
- This coincidentally was the amount required to meet her needs (if she had ‘needed’ more she would have received more; the parties’ needs must be met on divorce if that is at all possible).
- She received an additional lump sum of £400,000 which was the compensation. The judge came to this figure by noting that the husband would retire in four years’ time and would need to be mortgage-free then, so affordability was relevant to the quantification. It did not compensate for prior loss of earnings because the wife had already benefited from that through the marriage and as maintenance during the divorce process. The husband’s income was around £1 million per annum net.
If all of the money had been required to meet the parties’ needs then compensation would not be possible. It was therefore key to this case that there was surplus money available to pay compensation. The court also decided that the compensation should be paid to the wife as a single lump sum rather than as maintenance. This was because the case had taken a significant toll on the parties’ wellbeing, and if maintenance had been paid the parties might well end up in further stressful litigation when the husband retired and wanted to reduce his payments.
In his judgment, Moor J is at pains to say that compensation cases: ‘will be very much the exception rather than the rule. It is rare to be able to make the findings of fact that I have made in this case.’ He emphasised that ‘in many of these cases, the assets will be such that any loss is already covered by the applicant’s sharing claim. In other cases, the assets/income will be insufficient to justify such a claim in the first place. It follows that litigants should think long and hard before launching a claim for relationship generated disadvantage and they should not take this judgment as any sort of “green light” to do so unless the circumstances are truly exceptional.’
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