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Pre-nuptial agreements - a balancing act

Head of Family, James Ferguson, and Family Associate, Katie Male, look at the courts' approach to the weight to be given to a pre-nuptial agreement freely entered into by the parties, and the need for overarching fairness.

In circumstances where spouses-to-be enter into a pre-nuptial agreement, where both understand the nature and effect of the document and intend to be bound by its terms, but the provision contained within it does not meet the financially weaker spouse’s needs, how is overall fairness to be achieved upon the division of their resources on divorce? That is the question with which Roberts J was concerned in KA v MA [2018]. The judgment also serves as a useful reminder of the potential impact of a pre-nuptial agreement’s existence on the court’s assessment of a party’s needs, and the differences between the pre- and post-Radmacher (formerly Granatino) v Granatino [2010] landscape in this area.

Background

Both parties had been married previously. The wife was aged 54 and the husband 55. By the time the parties met and began their relationship in 2000, the husband had three children from his previous marriage and lived at a 20-acre property near Reading (the former matrimonial home).

By the time the parties met, the husband had developed a successful business in the travel and tourism industry. His work allowed the parties to lead a life of considerable luxury: he had a flat on the river Thames in London, he employed various staff members at the former matrimonial home, the family travelled to exotic and exclusive holiday destinations several times a year and the husband was able to indulge his passion for classic cars. As a family they would spend around £1m a year, with a quarter of this being spent on holidays.

The wife moved into the former matrimonial home in 2004 and gave birth to their son in September that year. With the husband’s full agreement the wife gave up her role as a senior office manager, and from that point devoted her time to raising the parties' son, helping care for the husband’s older three sons and looking after the family home.

Following the parties' son’s birth, the wife started to press the husband on the subject of marriage. The husband had made it plain to the wife from early on in their relationship that he did not want to remarry, having already been through one acrimonious divorce, and insisted that if they did marry, it would not be without a pre-nuptial agreement. Eventually in the autumn of 2008 the parties decided to tie the knot.

A pre-nuptial agreement was signed on 11 November 2008, and the parties married on 2 December 2008. They separated in November 2013 but maintained a financial continuum until early 2016. The wife filed her divorce petition and application for financial relief simultaneously in July 2016. The husband followed this with an unsuccessful application for notice to show cause. Throughout the proceedings the husband’s position was that the pre-nuptial agreement should (in almost every respect) be determinative of the wife’s claim. At the time of the divorce the parties’ assets were worth between £23m and £33m. There was single joint expert evidence to suggest that the husband could continue to extract £1.5m a year net from his business.

Circumstances surrounding the pre-nuptial agreement

As part of these proceedings, both parties waived the privilege attaching to their respective solicitors’ files in respect of the pre-nuptial agreement. The correspondence and contemporaneous attendance notes gave valuable insight into each party’s motivations and mindsets at the time of entering into the agreement.

The first draft pre-nuptial agreement was sent to the wife and her solicitors on 6 November. In order for the agreement to be signed no less than 21 days before the wedding (the then best practice), it had to be finalised by 11 November, just three working days later.

The original draft of the agreement provided for a lump sum payment of £500k to the wife, with maintenance of £2,000 a month for life. Both the capital and income provisions were subject to a pro rata reduction in the event that the husband’s wealth decreased over time. The wife would also be given a car. The parties' son was to be provided for separately. In the schedule to the draft agreement, the husband disclosed wealth of approximately £33m. There was no disclosure in relation to the husband’s income or pension.

It was clear from the wife’s solicitors’ file that the wife and her solicitors had serious misgivings about the draft agreement. She was advised:

  • that the proposed provision was far less than she could expect to receive under either the Matrimonial Causes Act 1973 or the Children Act 1989;
  • that pre-nuptial agreements were becoming 'increasingly persuasive', and were likely to be placed on a statutory footing in the not-too-distant future, which could severely limit her ability to challenge the agreement; and
  • that she needed to work on the assumption she would be bound by the agreement if she signed it.

In the days following the receipt of the draft pre-nuptial agreement, the wife recalled in her evidence at least two major arguments with the husband over its terms. The wife’s solicitors’ contemporaneous attendance notes recorded the pressure the wife felt she was under to sign the agreement, if the wedding was to go ahead, and her concern that signing the agreement could be to her detriment. Nevertheless the wife did sign the pre-nuptial agreement with just two amendments to the first draft: the lump sum was increased to £600k and both the income and capital provision were index-linked.

Considering the solicitors’ files and the oral evidence, Roberts J found (inter alia):

  • that the figures in the pre-nuptial agreement originated from the husband, and were not based on legal advice as to what the court might consider appropriate;
  • that the wife fully understood the terms to which she was agreeing and that she intended to be bound by those terms; and
  • that the wife understood that the husband’s primary concern was to ring-fence his pre-marital wealth for the benefit of his four children, and that the wife regarded that as a reasonable aspiration.

Pre- and post-Radmacher: 'a seismic shift'

The pre-nuptial agreement in this case was entered into before the legal test in relation to enforceability had been recast in the Supreme Court’s decision in Radmacher (formerly Granatino) v Granatino [2010]. It was argued on behalf of the wife, and accepted by Roberts J, that the 'seismic shift' in the law since 2010 should not be to the wife’s disadvantage. Roberts J was satisfied it did not do so here: the wife was advised that her decision to enter into the pre-nuptial agreement was one of the factors the court would be likely to take into account in the event of divorce (absent any vitiating factors), and further that such agreements were likely to be placed on firmer legal footing and that the wife should therefore expect to be bound by it.

A number of arguments were advanced on behalf of the wife as to the proper weight to accord to the pre-nuptial agreement. The two most serious challenges to the agreement’s enforceability were as to the issue of undue pressure, and overarching fairness.

Undue pressure: did the wife enter into the agreement freely?

Roberts J restated the principle that whether one party’s refusal to marry without a pre-nuptial agreement can amount to undue pressure, and therefore undermine the decisiveness of the agreement, depends on the characteristics of the relationship in question. In this particular case Roberts J did not find that the husband’s stance was capable of constituting duress or exploitation of a dominant position. She made the following observations in support of this conclusion:

  • The parties were two consenting adults, each of whom had been married previously. The husband had made it clear from the outset that a pre-nuptial agreement would be a condition precedent to marriage. This was part and parcel of the dynamic of their personal relationship.
  • The pre-nuptial agreement was signed within an acceptable time limit according to Home Office guidelines.
  • There may well have been arguments between the parties prior to the agreement being signed, which the wife found distressing. However Roberts J could not conclude that the wife’s free will had been overborne by the husband’s conduct, nor that the wife was disabled from negotiating (with the support of her solicitors), even though she might have feared that seeking a better deal could lead to the husband to breaking off their engagement.
  • The wife chose to reject professional advice against signing the agreement. At the time of signing the pre-nuptial agreement, she intended to abide by it.

In absence of undue pressure, Roberts J could not disregard the pre-nuptial agreement as having no bearing on the outcome of this case. She therefore turned next to the question of fairness.

The overarching criterion of fairness: how were the wife's needs to be assessed and were they met by the agreement?

It was clear from the husband’s open position that he was not seeking to implement the terms of the agreement in full. He now proposed a lump sum of £750k (without express reference to the baseline figure of £600k), and offered to capitalise the maintenance element on a Duxbury basis.

Roberts J accepted that it was not for the husband to cherry pick which terms to enforce, and it was for the court to assess the fairness or otherwise of the agreement in its entirety. Nevertheless, in so doing, Roberts J had to factor in the wife’s understanding of the husband’s desire to protect his pre-marital wealth and her acknowledgement that this was a reasonable objective.

It was argued on behalf of the wife that a provision subject to reduction without a floor can never be fair. Moreover the income provision of £2,000 a month bore no relation to the family’s standard of living and was, in fact, the sum that the husband had paid the wife throughout the marriage as her spending allowance.

However before being able to assess whether this pre-nuptial agreement was fair, Roberts J first had to address the question of what 'needs' means in circumstances where a pre-nuptial agreement has been entered into, the purpose of which being to protect pre-marital property from a sharing claim. Calling upon the relevant case law she reminded us that the fact of an agreement is capable of altering what is fair, but such fairness does not necessarily equate to near destitution.

Housing

The husband suggested properties for the wife with a purchase price of between £745k and £800k, while the wife’s proposals for herself ranged between £1.95m and £2.25m. These two polarised positions were separated by an evidential lacuna.

Roberts J found that in the context of a claim that proceeded from a clean sheet, there was nothing untoward in the wife’s claim for a housing fund of £2.3m. However she did not start here from a clean sheet. In her oral evidence, the wife conceded that her current property (which had an agreed value of just under £1m) was suitable in almost every respect, save that it was less than half a mile from the former matrimonial home. Roberts J considered that this was the best evidence she had of a property that would meet the wife’s future needs, rather than her aspirations, and awarded wife an overall housing fund of £1.35m.

Income

The wife sought £150k a year for life, capitalised on a Duxbury basis. Taking into account the £20k gross income the wife accepted she could earn from employment until the age of 65, this would require a Duxbury fund of £3.22m. The husband’s position was that the wife should receive £24k a year, index-linked to £27k, capitalised in the sum of £537k. There was no issue that the wife should receive maintenance for life and Roberts J regarded this as entirely appropriate in the circumstances.

Roberts J held that to confine the wife to a budget of just £27k a year would expose her to a degree of financial hardship that was blatantly unfair. She found the sum did not reflect the wife’s past or ongoing contributions or the standard of living the family enjoyed and which the husband, and the parties' son when he was with the husband, continued to enjoy.

On the other hand Roberts J did not find that the annual figure of £150k fairly reflected the wife's agreement to place a brake on her future entitlement in the event of divorce. She instead awarded the wife £100k per annum, stepping down to £75k when the parties' son turns 21. Taking into account the wife’s agreed earning capacity, this was capitalised at just under £1.6m.

Provision for the parties' son

The parties were largely agreed on provision for their son, with the husband to discharge school fees and pay periodical payments to the wife for the benefit of the child of £30,000 per annum, index-linked, to reduce by 50% during the child's tertiary education. In making an order for a 50% reduction, Roberts J balanced the wife’s wish to remain involved with arrangements for the parties' child after he goes to university, with the husband’s preference to make financial provision independently with his son.

Practice point: recording advice and privilege

The parties in this case both waived privilege in relation to the files kept by their respective solicitors in respect of the pre-nuptial agreement. Although, ultimately, there was no finding of undue pressure, the attendance notes kept by the wife’s solicitors were potentially powerful evidence of the distress she felt at the time of entering into the agreement, as well as the advice she received. Similarly the absence of a contemporaneous attendance note of the husband’s initial meeting with his solicitors allowed the wife’s counsel to argue by inference that the husband had not been advised on what the court might consider to be a fair outcome on divorce. On the other hand the correspondence between the husband and his solicitors evidenced his clear intention to protect his pre-marital assets, as far as possible, as part of his overall succession planning.

Practitioners should remember the importance of keeping detailed and contemporaneous attendance notes when acting for a party to a pre-nuptial agreement. It should be borne in mind that, if the marriage ends in contested financial proceedings, the entire file could find itself subject to the court’s scrutiny.

Conclusion

Although this case does not change the law in this area, the characteristically clear and comprehensive judgment of Roberts J is a useful exposition of how the court will factor into a financial order the existence of a pre-nuptial agreement that has been entered into freely and with full understanding of its implications, but where the provision contained within the agreement cannot be said to meet even the most basic needs of the financially weaker party in the context of the standard of living during the marriage. The decision illustrates that the existence of such an agreement can act as a brake or a drag on the assessment of that party’s needs in the court's search for a fair outcome.

It is worth noting Roberts J’s ringing endorsement of the suitability of a whole life maintenance order in this case. She found that in circumstances where the parties were in a later phase of life, and the wife’s earning capacity had been substantially curbed by the parties’ joint decision to have their son (by which stage the wife was age 40), this was the perfectly appropriate order to make (albeit it was capitalised here). This case provides at least one example of judicial recognition that joint lives maintenance orders still have their place in the court’s armoury.

Cases

KA v MA [2018] EWHC 499 (Fam)
Radmacher (formerly Granatino) v Granatino [2010] UKSC 42

This article first appeared in the Family Law Journal, July 2018

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