Matrimonial Property, Needs and Agreements

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LAW COMMISSION REPORT ON

“MATRIMONIAL PROPERTY, NEEDS AND AGREEMENTS”

The International Family Law Group LLP

Briefing paper for international family lawyers

EXECUTIVE SUMMARY

40 years since last statute law reform of financial issues on relationship breakdown

England has almost entirely judge made law

This is flexible to changes in social expectations but sometimes law is uncertain, contradictory, confusing, unclear and without any (stated) policy or democratic basis

Law Commission 4 year project on marital agreements, needs and marital property

Recommendation of binding marital agreements, but cannot exclude “needs”

Qualifying conditions to include independent legal advice and material disclosure

Foreign marital agreements only binding if satisfy qualifying conditions

No recommendations on definitions for non-marital property

Guidance on needs referred to Family Justice Council, with no timetable or clear brief

Recommendation of formula style approach referred onwards for more research

Major disappointment at wasted opportunity for creation of fundamental reform, with a codified law in plain English, accessible to the public and balancing common law discretion with civil law certainty and predictability of outcome

Considerable implications for international families and international family lawyers

A. INTRODUCTION AND BACKGROUND

It is now 40 years since England had substantive statute law on financial consequences of marriage breakdown. During this time, our society has changed dramatically as have our expectations of marriage. Financial wealth has changed. Gender roles have changed. But Statute law has stayed the same. After huge disquiet in the 1990s, the Supreme Court (as it now is) saved the day with its decisions in White[1] and Miller[2]. They introduced categorisation of assets (marital and non-marital), with financial needs trumping the (respective) sharing or non-sharing principle. However uncertainty prevailed and, with it, the inevitable encouragement to disputes, litigation and ensuing legal costs.

The English Law Commission in 2009 started a project to look at marital agreements. After calls for the need for further reform, the government prompted the Law Commission also to look into the problematical areas of marital property and needs. Specifically the remit was not the whole area of divorce financial provision. There is no dissatisfaction with the objective of fairness and the starting point of equal sharing of maritally acquired assets.

The Original Remit – the 2011 Consultation

The project first began in October 2009, focusing solely on the legal status of marital agreements. The Law Commission published their first Consultation Paper in January 2011[3]. This explored the extent to which the financial consequences of divorce[4] should be determined in advance by way of agreement.

Despite agreements being binding in a number of foreign jurisdictions, the English courts had historically viewed them with suspicion and even as contrary to public policy. As such the courts would not enforce any marital agreement that sought to oust the court’s powers to determine the financial outcome on divorce.

However several high-profile cases indicated that the English legal system was growing increasingly receptive to them. Indeed, publication of the Law Commission’s 2011 Consultation paper was delayed for the Supreme Court’s judgment in the much publicised Anglo-German “pre-nup” case of Radmacher[5]

Although Radmacher confirmed that marital agreements were still not binding in English law, it did provide that they will be given appropriate weight where entered into freely, unless it would be unfair to hold the parties to their agreement. This was excellent progress but still left uncertainty

The Extended Project – the 2012 Supplementary Consultation

The research into the extent to which marital agreements could and should be binding and enforceable opened up a can of worms and begged further questions. There was considerable support for the introduction of a ‘qualifying nuptial agreement’ provided there were certain safeguards. One of the greatest was to protect spouses from contracting out of provision for ‘needs’. Moreover should qualifying agreements exclude the court’s powers only as they related to non-marital property, and how should this be defined?

Unfortunately both the concepts of ‘needs’ and ‘non-matrimonial property’ are problematic. They suffer from a distinct lack of principled legal foundation and definition. This can lead to a lack of clarity and an inconsistency in matrimonial finance decisions being made on a case-by-case basis.

In light of the further questions raised by the 2011 Consultation and in response to calls for reform[6] and with government prompting, the Law Commission expanded the scope of their project to encompass an analysis of the law relating to needs and the treatment of non-matrimonial property. A Supplementary Consultation Paper was published in September 2012[7]

The final Report, published 27th February 2014, therefore covers three aspects:

(1)Recommendations about the legal status and requirements for the formation of binding marital agreements.

(2)The role of provision for needs on divorce, especially in the context of sharing of marital property and non-sharing of non-marital property

(3)Non-matrimonial property, especially how and when it becomes marital property and therefore subject to a starting point of automatic equal sharing.

In fact in relation to the second and third, the Law Commission declined to make any recommendations, as set out below. This was a great pity. They made fundamental recommendations for the introduction of binding marital agreements with qualifying conditions, to be incorporated into a Parliamentary Bill.

This briefing paper provides an overview of the law as it currently stands on these issues affecting financial outcomes on divorce and how the Law Commission proposes to reform the law through their recommendations. It sets out how the proposed reforms are likely to affect international family lawyers and their clients. It concludes with remarks about where the global future of international family law may now lie between the common law and the civil law and also the future of the family justice system in the context of uncertain law yet the considerable cost of court based resolution of disputes.

B. MARITAL AGREEMENTS

Current law

A marital agreement is an arrangement that seeks to determine by agreement the financial consequences of separation and divorce[8]. There are three types:

Pre -marital agreements – made before the marriage and wedding ceremony;
Post-marital agreements – made after the wedding but before separation; and
Separation agreements – agreements made after separation and often in contemplation of divorce.

The position of English law was historically, in the 19th century and early part of the 20th century, that marital agreements were void or potentially void as bad for public policy[9]. Marriage involved a duty to live together and it was felt that an agreement making provision for the possibility of separation might act as an encouragement to separate or condition the marriage to potential failure. This has not been the position in practice for several decades[10]. In Radmacher, the Supreme Court held that the public policy rule that makes void a contract providing for a divorce was “obsolete and should be swept away[11]”. The Law Commission recommends this occurs

For many years the divorce courts have taken account of agreements. There is a strong encouragement to settle disputes by agreement. If agreement is reached, a couple submit a consent order to the court. Such agreements cannot and do not presently exclude the jurisdiction of the court. The judge will not simply “rubber stamp” the agreement, but will assess it on its merits. In practice, there has to be good reasons why a consent arrangement by two parties with specialist legal representation will not be made into a final order by a court

In Edgar[12]the Court of Appeal held that it was:

“… a general proposition that formal agreements, properly and fairly arrived at with competent legal advice should not be displaced unless there are good and substantial grounds for concluding that an injustice will be done by holding parties to the terms of their agreement[13].”

Over the last three decades there has been a shift in the court’s approach to marital agreements - from caution and disregard to growing acceptance and weight in appropriate cases. For example, in 1995 Thorpe LJ, whilst acknowledging that ante-nuptial agreements were commonplace in other jurisdictions, said that they must be of “very limited significance” in this jurisdiction[14]. However 12 years later in 2007 he held that the premarital agreement was a “factor of magnetic importance[15]”.

Radmacher v Granatino

This was a groundbreaking Supreme Court decision[16] which led the way to an acceptance that marital agreements including some foreign marital agreements should be given decisive weight. Although only Parliament could make them binding, the Supreme Court made clear that this decision made them as close as possible to being binding.

The Supreme Court set out the following statement of general principle:

“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[17]”.

The Supreme Court recognised that this left “outstanding the difficult question of the circumstances in which it will not be fair to hold the parties to their agreement[18]”.

The Law Commission Recommendations

The Law Commission recommends qualifying marital agreements should be binding in law.

They set out the qualifying conditions for agreements to be binding.

The family court then has no power to interfere with the financial arrangements in the agreement and neither party can seek other orders or provision on relationship breakdown.

The Law Commission Recommendations - Needs

There is a fundamental exception. The marital agreement cannot exclude provision for the reasonable financial needs of either party nor can it be contrary to the interests of any child of the family. The former is crucial. On divorce, the family court will still have power to provide out of the assets of either party for the needs of the other - even if this means interfering with the terms of the marital agreement.

England is a “needs” centred jurisdiction. Needs takes primacy over sharing of marital or non-marital resources. It was a consistent message throughout the Consultation that parties should not be able to contract out of duties to provide for the needs of the other on relationship breakdown nor should the court be fettered in its power to provide for needs.

In this context, the law does not define needs. It includes accommodation including accommodation with any child of the family, spousal maintenance which may be for a term of years or joint lives, pension sharing for pension needs and other capital provision. England has a reputation of being very generous in interpreting needs. It may often be based on the standard of living of a marriage.

In a few countries e.g. Germany, a marital agreement is binding even if it makes no provision for needs. In a number of other countries e.g. France, needs are separately provided for and cannot be excluded by marital agreements.

We also consider it is unlikely that the court will uphold an agreement as binding if it would mean that one spouse was dependent upon state benefits and the other could provide.

The Law Commission Recommendations - Qualifying Conditions

To be a binding qualifying marital agreement, there are certain conditions. These are not as onerous as some countries. They are as follows, with a short commentary

1there must be no suggestion of any undue influence or misrepresentation; this is normal contractual law

2the agreement must be in a formal deed; lawyers are able to draw up such documents

3there must be a statement that each party understands that the marital agreement removes the court’s powers to make orders, other than in the context of needs; this will have to be in clear, specific terms so there is no uncertainty and lawyers will have a high duty to make sure clients fully understand

4it must have been made more than 28 days before the wedding if it is a pre-marriage agreement; this sort of provision is to avoid particular duress of signing on the eve of the ceremony

5both parties must have received at the time of the agreement disclosure of material information about the other’s financial circumstances or have known of them; this is a fundamental element in the recommendations, is not intended to be the exhaustive disclosure as with a divorce settlement but is the information needed to help someone decide whether to enter into an agreement and what they may be giving up by doing so

6both parties must have received independent legal advice at the time of the agreement; this must be from a solicitor or barrister or qualified legal executive, with a standard statement in the agreement confirming this advice was received although, unlike some countries, it does not have to state the advice actually given or any more details

In our opinion these qualifying conditions are fair and reasonable. They are not particularly onerous in circumstances where one party could be giving up substantial rights and entitlements and the powers of the court are being excluded. These proposals should avoid some of the problems experienced with the equivalent legislation in Australia with its very heavy demands on the preconditions. They should also avoid the very intensive and expensive disclosure procedures of US marital agreements. Yet they are explicit in requiring independent legal advice and disclosure, and therefore at odds with civil law requirements. We explore this implication below

The Law Commission Recommendations - other elements and observations

The Law Commission recommend that any variation of a qualifying marital agreement must comply with all the pre-requisites for the formation. Termination has only to be in writing and signed. It does not need the other qualifying conditions.

Although marital agreements will be taken into account on a claim that unreasonable provision has been made out of someone’s estate on death, the marital agreement does not have the status of a will or other testamentary disposition.

The marital agreement may well have importance and significance for tax planning and estate planning purposes but equally it may be relevant for tax liabilities to English or foreign fiscal authorities.

Marital agreements are only binding from the time of the new legislation whenever passed by Parliament. We anticipate many families with existing marital agreements will then want new agreements made once the legislation has come into effect so that their marital agreement is binding, as invariably they originally intended. In the meantime, as a consequence of the Supreme Court decision in 2010 in Radmacher, the law is that marital agreements will be given substantial weight provided the parties understood the implications of entering into the agreement and it is fair in all the circumstances.

These Law Commission proposals give certainty and confidence to couples entering into marital agreements, namely they will be upheld provided qualifying conditions are present and needs are met

We refer below to the implications for international families of international marital agreements.

One significant benefit of marital agreements is that it produces knowledge for both parties about what happens to their respective assets, both non-marital and maritally acquired, on any divorce. It confers certainty about what may sometimes be uncertain law. This should reduce litigation. Discussing these issues before marriage can sometimes be very beneficial for the couple.

But we continue to be very worried at the inherent prejudice of marital agreements to one of the parties. Many marital agreements provide specifically less well for one spouse than they are entitled in law on relationship breakdown. In our experience this is invariably the financially weaker spouse and/or the one most keen to marry. The Law Commission qualifying conditions provide some help. But ultimately marital agreements can often work to the real disadvantage of the financially weaker party.

As a law practice acting for many international families from countries and cultures where marital agreements are the norm and presumed as part of the process of getting married, we have prepared many cross-border agreements. We are delighted at these proposals with their necessary safeguards and commend them to Parliament for early legislation.

C. NEEDS