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Prenuptial and Estate Planning

KA v MA [2018] EWCH 499 (Fam) 

In the recently reported High Court case of KA v MA the wife argued successfully on her divorce from her husband in 2016 that she should not be held to the terms of the prenuptial agreement (“PNA”) they had entered into in 2008, on the grounds that it failed to meet her reasonable needs and was therefore unfair. Nevertheless the Judge, Mrs Justice Roberts, found that she could not simply disregard the PNA in its entirety in circumstances where the wife had a full appreciation of its implications at the time of signing up to the agreement and, indeed, intended to be bound by its terms. In this case, although the terms of the PNA were not determinative of the outcome of the wife’s application, its existence operated as a significant brake on her overall award.

Although PNAs are not legally binding in England and Wales, the 2010 decision of the Supreme Court in Radmacher v Granatino [2010] UKSC 42 has meant that agreements of this nature may have greater influence on the outcome of financial remedy proceedings if certain safeguards are observed. PNAs can therefore have an important role in estate planning and, as the case of KA v MA shows, may be of particular use as part of an overall strategy for asset protection where one party wishes to preserve their pre-marital or separate wealth for future generations.

KA v MA: Case summary

Background

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

Before the parties' relationship began, H had developed a successful business in the travel and tourism industry. H’s work allowed the parties to lead a life of considerable luxury: H had a flat on the river Thames in London, he employed various staff members at Property G, the family travelled to exotic and expensive holiday destinations several times a year and H was able to indulge his passion for classic cars. As a family they would spend around £1,000,000 a year, with a quarter of this being spent on holidays.

W moved into Property G in 2004 and gave birth to their son, M, in September. With H’s full agreement W gave up her role as a senior office manager and from that point devoted her time to raising M, helping care for H’s older three sons and looking after H and the family home.

Following M’s birth W started to press H on the subject of marriage. H had made it plain to W 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 PNA. Eventually in the autumn of 2008 the parties decided to tie the knot.

A PNA 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. W filed her divorce petition and application for financial relief simultaneously in July 2016. H followed this with an unsuccessful application for notice to show cause as to why an order should not be made in the terms of the PNA. Throughout the proceedings H’s position was that the PNA should (in almost every respect) be determinative of W’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 H could continue to extract £1.5m a year net from his business.

Circumstances surrounding the PNA

The first draft PNA was sent to W 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 W 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 H’s wealth decreased over time (but there was no formula for what might be paid if it had increased). W would also be given a car. M was to be provided for separately. In the schedule to the draft agreement H disclosed wealth of approximately £33m. There was no disclosure in relation to H’s income or pension.

It is clear from W’s solicitors’ file (to which W readily waived privilege in these proceedings, as eventually did H to his own solicitors’ file) that W and her solicitors had serious misgivings about the draft agreement. W was advised:

(a) 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;
(b) that PNAs 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
(c) 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 PNA W recalled in her evidence at least two major arguments with H over its terms. W’s solicitors’ contemporaneous attendance notes recorded the pressure W 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 W did sign the PNA 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):

(a) that the figures in the PNA originated from H and were not based on legal advice as to what the Court might consider appropriate;
(b) that W fully understood the terms to which she was agreeing and that she intended to be bound by those terms; and
(c) that W understood that H’s primary concern was to ring-fence his pre-marital wealth, the benefit of his earlier commercial success, for the benefit of his four children and W regarded that as a reasonable aspiration.

Weight attaching to the PNA

A number of arguments were advanced on behalf of W as to the proper weight to accord to the PNA. The two most serious challenges to the agreement’s enforceability are explored below.

1) Undue pressure: did W enter into the agreement freely?

Roberts J restated the principle that whether one party’s refusal to marry without a PNA 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 H’s stance was capable of constituting duress or exploitation of a dominant position. She made the following observations in support of this conclusion:

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


2) The overarching criterion of fairness: how are W’s needs to be assessed and are they met by the agreement?

Before being able to assess whether this PNA was fair, Roberts J first had to address the question of what “needs” meant in circumstances where a PNA had been entered into, the purpose of which was to protect pre-marital property from a sharing claim (ie a claim to share the fruits of the matrimonial partnership equally). Calling upon the relevant case law she reiterates that the existence of a PNA is capable of altering what is fair in any given circumstances, but such fairness does not necessarily have to equate to near destitution.

Housing

H’s open position was that W should receive a lump sum of £750,000 to re-house, while W said she required an overall housing fund of £2.3m. Roberts J found that in circumstances where a claim proceeded from a clean sheet, in the context of the parties’ standard of living there was nothing objectionable about W’s figure of £2.3m. However she did not start here from a clean sheet. In her oral evidence, W 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 Property G. Roberts J considered that this was the best evidence she had of a property that would meet W’s future needs, rather than her aspirations, and awarded W an overall housing fund of £1.35m.

Income

W sought £150k a year for life capitalised on a Duxbury basis. Taking into account the £20k per annum gross income W accepted she could earn from employment until the age of 65, this would require a Duxbury fund of £3.22m. H’s position was that W should receive £24k a year, index-linked to £27k, capitalised in the sum of £537k.

Roberts J held that to confine W to a budget of just £27k a year would expose her to a degree of financial hardship which was blatantly unfair. She found the sum did not reflect W’s past or ongoing contributions or the standard of living the family enjoyed and which H, and M when he is with him, continue to enjoy. £2,000 was equivalent to the monthly spending allowance H gave W during the marriage.

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

Relevance to Private Client practitioners

Prenuptial agreements: the law

The legal test in relation to enforceability of PNAs was recast in the Supreme Court’s 2010 decision in the landmark case of Radmacher v Granatino. It is worth repeating here:

“The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement.”

In practice, the elements of the test are often translated into a checklist of safeguards which, if observed, may increase the sticking power of a PNA. These include that there has been an absence of undue pressure or influence (which is more likely to be found to be the case where the agreement was signed no fewer than 28 days before the wedding); that each party has given full disclosure of their financial and other relevant circumstances prior to entering into the agreement; that each party has taken independent, specialist legal advice; and that the terms of the agreement are in line with what the Court would consider to be a fair outcome in the circumstances at the time of the divorce. The last of these criteria is often the most difficult to satisfy as, in long marriages in particular, the parties’ financial circumstances may change considerably over the years in ways that could not have been foreseen at the time of entering into the agreement.

Post-Radmacher it remains the case therefore that parties to a marriage cannot "contract out” of the Court’s powers to make an order that is quite different to the outcome envisaged by a PNA if it finds that any of the elements of the legal test have not been met. A PNA that fails to meet the financially weaker party’s reasonable needs will not be upheld and is therefore unlikely to constitute effective estate planning.

KA v MA concerned a PNA that was entered into some two years before Radmacher, at which time the ability to enforce PNAs was somewhat more of a grey area. It was argued on behalf of W, and accepted by Roberts J, that the “seismic shift” in the law since 2010 should not inure to W’s disadvantage. Roberts J was satisfied it did not do so here as the legal advice W received bore sufficient resemblance to the advice that is given in the post-Radmacher environment: W was advised that her decision to enter into the PNA 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 in the near future and that she should therefore expect to be bound by it.

The importance of autonomy

The judgment in KA v MA demonstrates the Court’s recognition of the importance of personal autonomy. Roberts J echoed the Supreme Court’s (obiter) remarks in Radmacher that, in relation to non-matrimonial property, there is nothing inherently unfair in parties wishing to organise their finances in such a way as to meet obligations towards existing family members or children of one of the spouses from a former marriage. She also cited Mostyn J in the case of BN v MA [2013] EWHC 4250 (Fam), who agreed that if the test in Radmacher is met, heavy weight should be accorded to a joint decision to regulate the financial outcome on divorce, and added that the question of autonomy is of particular importance where an agreement seeks to protect pre-marital property.

Although the PNA in KA v MA was entered into pre-Radmacher, Roberts J concluded that the later authorities were relevant because of the clear importance to H of securing some concession from W prior to his agreement to marry that his pre-marital wealth should be protected, subject only to his obligations to meet her needs in the event of a future divorce.

Roberts J set great store by the fact that W acknowledged and accepted H’s position in relation to his pre-marital assets as reasonable. W was aware almost from day one that the intended beneficiaries of H’s wealth were his children (to include M, after he was born) and took no issue with this.

Roberts J may have departed from the precise terms of the PNA here, but it will be evident from the case summary above that the agreement’s existence acted as a considerable drag on the computation of W’s needs, both in relation to her capital and her income award. This, in turn, served to limit the likelihood of H having to call upon his pre-marital wealth to meet the terms of the final order.

Wider considerations: Inheritance Act issues

What if the marriage in KA v MA had ended in the death of H, rather than divorce? If H had failed to make reasonable financial provision for W and she had made a claim against his estate under the Inheritance (Provision for Family and Dependants) Act 1975, would the existence of the PNA have acted as a brake on her award, as it did on divorce?

Although there is currently no case law on the topic, the Court is bound to consider of all of the relevant circumstances in an Inheritance Act claim and the fact of the applicant signing up to the agreement may very well be taken into account under section 3(1)(g) of the Act. A PNA should also be relevant to what is known as the “divorce cross-check”, contained in section 3(2) of the Act, which requires the Court, in the event that a claim is made by a surviving spouse of the deceased, to consider the provision that spouse might reasonably have expected to receive if the marriage had been terminated by divorce instead of death. However case law confirms that this exercise need not be as exhaustive an enquiry as the Court would make in a financial remedy application and any finding as a result of the cross-check represents neither a high nor a low watermark in relation to the relief available under the Inheritance Act.

For someone who is anxious to limit their estate's vulnerability to a potential Inheritance Act claim at the time of entering into a PNA, the following considerations may be relevant:

(a) In so far as a PNA may have a bearing on the outcome of a claim under the Inheritance Act, it is reasonable to assume that it will only do so to the extent that the requirements distilled from Radmacher are met. An agreement that does not meet the survivor’s needs will not be decisive (though, in a scenario like KA v MA, it seems possible that such an agreement might have a depressing effect on the quantum of the award if it was otherwise freely entered into with a full appreciation of its terms).
(b) It is relatively common for each party to agree in a PNA not to make a claim against the other’s estate, at least in circumstances where what they are left with on their spouse's death is no less than what they would have received had the PNA been invoked. Although strictly speaking it is not possible for parties to oust the Court's jurisdiction to make an order under the Inheritance Act by agreement, such a clause should be a useful indicator of the parties’ intentions at that time and can be drawn to the Court’s attention if a claim is made.
(c) Marriage revokes a Will (unless it is specifically drafted in anticipation of a marriage), so at the same time as entering into a PNA, a new Will should be drawn up. Some PNAs stipulate the testamentary provision that each party will make for the other. If this is the case, the Will should be drafted accordingly. If this is not the case, as a general rule the provision for the spouse in the Will should be at least as generous as in the PNA, if not more so, to minimise exposure to a potential claim. It is worth bearing in mind that, if on the divorce cross-check the Court finds it is dealing with what would be categorised by Family practitioners as a "needs case" (ie a case where the parties' resources are not sufficient to enable both parties to maintain their standard of living following divorce), the Court may make a greater award to a surviving spouse claiming under the Inheritance Act than that spouse would have received on divorce, as the competing needs of the deceased are no longer a relevant factor.

Conclusion

The judgment in KA v MA illustrates the potential effectiveness of a PNA that aims to protect pre-marital wealth from a claim by a divorcing spouse. A PNA that seeks to ring-fence one party's assets to the extent that the other party's needs cannot be met from the remaining resources is very unlikely to be upheld in its entirety. However if the PNA was entered into without undue pressure and with a full understanding of its nature and effect, it could well serve to limit the financially weaker spouse's claim to some degree, as the Court's assessment of what is fair in the circumstances will necessarily have to take account of that spouse's decision to sign up to the agreement. It is likely that where the Court is faced with a post-Radmacher PNA (unlike the one in KA v MA), it may be even more willing to endorse the exercise of two spouses' autonomy to organise their financial affairs as they see fit.

This article was first published in the Law Journals in June 2018. Learn more about Pre and post-nuptial agreements.

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