Miller and McFarlane (2006 UKHL 24) What does it all mean?

We are by now all familiar with the case of White -v- White (2000) which changed the direction of English Law in considering Financial Relief Applications in big money cases. Hitherto, the Court’s approach was to have regard to the parties’ reasonable needs and then to find the resources to meet those needs from the parties’ assets (and income). This would mean for the vast majority of ordinary people the wife would end up with the lion’s share of the assets as she needed to provide a home for the children, and the husband’s housing needs were less, and of secondary importance, to hers and the childrens.

In big money cases, this gave the husband an advantage. A much smaller percentage of the overall assets accumulated during the marriage needed to go to satisfy the wife and children’s reasonable needs. Take a man who had assets of £50 million. On a reasonable needs basis, the wife would be unlikely to make a good case for a division of assets of any more than £5 million-£10 million in her favour.

The House of Lords in White held that this approach was discriminatory. It did not recognise the role of the wife and mother and the contribution that she makes to the wellbeing of the family. In providing only for her needs, this approach assessed her contribution as far less than that of her husband, who had made the real money. The Lords said that with long marriages the wife and mother contributes as much as the husband; indeed she had created the home and looked after him and the family so that he has been able to go out and make the money he had. In a real sense this is a true partnership of equals, and the spoils of the marriage – the matrimonial assets, ought to be divided equally. Equality was now the new yardstick with which to measure financial settlements between divorcing spouses.

White left open the question of what to do with Capital in short and medium-term marriages, that is marriages less than 12-15 years, and the vexed question of does the wife share in the husband’s high income, as well as his assets, on an equality basis, notwithstanding that any share would be beyond her reasonable needs. The High Court and Court of Appeal have offered a number of conflicting and contradictory Decisions.

DECISION IN MILLER AND McFARLANE

Miller’s concern with Capital – McFarlane with income

In Miller there was a short childless marriage of only two and three-quarter years. Mr. Miller’s Capital was somewhere between £15 million and £20 million (depending upon differences in valuations). Mrs. Miller had a career, and although she had given up that career for a short period of time, she was in a position to return to work. The lower Courts had given her £5 million on a “clean break” basis. To put it mildly, Mr. Miller was none too pleased. McFarlane was a case that had been decided in the Court of Appeal with the Parlour case (Ray Parlour being the famous Arsenal footballer). Neither Mr. & Mrs. Parlour appealed the House of Lords.

The husband was a Partner in a firm of Accountants earning in excess of £750,000 per annum and the wife had given up what otherwise would have been a lucrative career as a solicitor in a City law firm. There was not enough Capital to provide for a “clean break” after the matrimonial assets had been split (and they provided for each party’s housing needs). The question the Court had to determine is what level of maintenance was to be paid to the wife. Should it be for her reasonable needs or ought it to be a great deal more to recognise the fact that she was losing out on sharing in the good fortune of her husband’s high income?

In short marriage cases, the House of Lords considered there were three elements, or strands, as to how to construct a settlement which was fair to both parties, being:-

(a) Needs.

(b) Compensation for economic disparity arising from the marriage, and

(c) Entitlement to sharing of the assets/fruits of the marriage partnership.

Needs are obvious. Compensation is a novelty and sharing had already been considered by the Courts in White.

The Court went on to consider the identification of matrimonial and non-matrimonial property and the treatment of each class of property in the marriage.

MATRIMONIAL AND NON-MATRIMONIAL PROPERTY

According to Lord Nicholls, matrimonial property is a property acquired during the marriage otherwise by inheritance or gift. In addition, the Former Matrimonial Home, whenever acquired, will be treated as matrimonial property. It is unclear whether all the other Law Lords agree with this. There may also be a specie of non-matrimonial property (only to be found in short marriages) of “non-business partnership, non-family assets” – as per Baroness Hale and Lord Mance.

Non-matrimonial property can arise either before a marriage, or during a marriage, either as a result of property coming to one of the parties by way of inheritance, or gift, or as a result of money being earned, say, during a period of separation.

There cannot be much dispute that pre-marital property, or property acquired by inheritance or gift during the marriage, cannot be described as matrimonial property. If there has been an increase in the value of that property during, say, a short marriage, it would only be right to include that increase if it has been achieved over and above a normal passive return, say, due to market forces, i.e. an increase in the value of land and buildings. Clearly, if the appreciation in value is due to the active efforts of the husband or wife, then that increase must be considered to be marital property.

HOW TO DIVIDE UP MATRIMONIAL ASSETS

The importance of identifying matrimonial and non-matrimonial assets is that the majority of the House of Lords would divide the increase in the matrimonial property equally between the parties whatever the length of the marriage. As I said, the Former Matrimonial Home is considered to be a matrimonial asset, whether it belonged to one of the parties before the marriage or not. Clearly, however, there can only be one Former Matrimonial Home, and if the husband has, say, homes in London, Paris and Geneva, the wife has to identify one as the Matrimonial Home, to be matrimonial property.

Baroness Hale identified another class of assets as “non-family assets – non-business partnership”. In such a case then “The duration of the marriage may justify departure from the yardstick of equality of division”. It appears to have been supported in this view by Lord Mance. Examples of assets that are “family assets” are obviously the family home, its contents, holiday homes, caravans, furniture, insurance policies and other family savings, including family businesses, or joint ventures in which they both work. However, one party may have assets, which he or she does not share with the other party and they maybe treated differently, as per Baroness Hale – Lord Mance.

HOW SHOULD THE COURT TREAT NON-MATRIMONIAL PROPERTY?

In a recent case, heard subsequent to Miller and McFarlane, Rossi -v- Rossi before Mr. Nicholas Mostyn QC, sitting as a Deputy High Court Judge, the Judge said that:

“Non-matrimonial property represents an unmatched contribution made by the party who brings it to the marriage justifying, particularly where the marriage is short, the denial of an entitlement to share equally in it by the other party…..”.

Of course, with longer marriages, the position is not so obvious. Non-matrimonial property clearly represents a contribution made to the marriage by one of the parties. As, however, years pass, the weight to be attributed to this contribution will become less and less. After a long marriage, for instance, the Court is likely to treat all property the same because there has been financial inter-dependence in the family, and as Baroness Hale stated in Miller:

“It becomes harder and harder to disentangle what came from where….”.

DOES THE COURT NOW MAKE AN AWARD FOR THE SHARE OF FUTURE HIGH INCOME?

It had been argued in Parlour/McFarlane in the Court of Appeal that the earning capacity developed during a marriage should be treated, as happens in some countries, as an intangible product of the marriage, i.e. an asset that should be shared. It is fair to say the Court of Appeal ignored this argument.

In addition, the argument appears to have been largely ignored by the House of Lords. Only Baroness Hale considers this and holds the earning capacities of the parties are of a revenue nature. Only, however, her pronouncements are seen to be ambiguous.

In one part of her speech she says:

“The wife is also entitled to a share in the very large surpluses (of income) on the principles of both sharing and fruits of the matrimonial partnership..”.

In another part she says:

“If Capital has been equally shared and is enough to provide the need and compensate for disadvantage, then there should be no continuing financial provision.”.

This would appear to suggest that a sharing claim to future income, once needs had been provided for, could not justify on an equal division of the assets in the wife’s favour.

Baroness Hale expressly goes on to state that this is so, when she says:

“In general, it can be assumed that the marital partnership does not stay alive for the purpose of sharing future resources unless it is justified by need or compensation.”.

HOW DOES COMPENSATION WORK?

Compensation in income terms is not simply that the wife suffered by making a sacrifice of a career in order to marry. It can also be argued that a wife who did not have a career has suffered a loss by the Divorce in that she has lost the prospect of sharing in the husband’s enhanced income. The House of Lords’ Decision on this appears to be that compensation is a head of loss where only a claim can be made where the wife has given up something of real value, such as her own career, rather than a loss of a share in her husband’s enhanced income. The Law Lords are thinking only of sacrifices of earning capacity made as a result of decisions made during the marriage as to the respective parties’ roles. The House of Lords have therefore set quite a high hurdle for a successful compensation claim. It is clear that such a claim would be separate and independent from a needs based claim.

CONCLUSION

The House of Lords in Miller and McFarlane have clarified the Law further after the White Decision, in relation to the provision of assets of short and medium-term marriages, and the Court’s approach to dealing with high earners generally. The important point to bear in mind is that the Court has stressed again that the overriding objective remains that of achieving a fair outcome and that the three elements, or strands, that are considered – needs – compensation – entitlement to sharing of assets, are simply tools to achieve that end.

As a result of the House of Lord’s Decision, we as advisers to divorcing clients will have to go through the following checklist:-

Calculate all the assets and identify those that are matrimonial and non-matrimonial.

Matrimonial assets are to be valued as at the date of separation. Natural growth on separation will be included in the value of the matrimonial assets. Only an increase in value which has been brought about by one of the parties since separation will be excluded.

In a short marriage, family assets and the parties “non-business partnership – non-family assets will need to be identified”. Family assets are shared equally, non-business partnership – non-family assets may not be.

In a long marriage non-matrimonial assets will likely to be considered to have been part of the matrimonial assets.

In some cases the right of one of the parties to compensation from the other will need to be considered separate to any right to share. This is the right in respect of what could be termed a loss in earning capacity as a result of the marriage.

What is also clear is that the Law has moved away from the needs-based approach and has become more complicated within an analysis requiring consideration of the assets available for division, what principles do apply as to how to achieve fairness in the division of those assets, and how to deal with excess income of one of the parties over the family’s needs. It is more important than ever that clients get expert advice at the outset of separation or divorce, to take but one example how to deal with bonuses paid, but maybe not earned during separation.