Mostyn J on Compensation- A legitimate “Big Hit” or a High

Tackle

www.zenithchambers.co.uk

Roger Bickerdike 21st October 2015

Miller;McFarlane [2006] UKHL 24

Lord Nicholls • [13] Another strand, recognised more explicitly now than formerly,

is compensation. This is aimed at redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage. For instance, the parties may have arranged their affairs in a way which has greatly advantaged the husband in terms of his earning capacity but left the wife severely handicapped so far as her own earning capacity is concerned. Then the wife suffers a double loss: a diminution in her earning capacity and the loss of a share in her husband's enhanced income. This is often the case. Although less marked than in the past, women may still suffer a disproportionate financial loss on the breakdown of a marriage because of their traditional role as home-maker and child-carer.

Miller; McFarlane [contd]

• [14] When this is so, fairness requires that this feature should be taken into account by the court when exercising its statutory powers. The Court of Appeal decision in SRJ v DWJ (Financial Provision) [1999] 2 FLR 176, 182, is an example where this was recognised expressly.

• [15] Compensation and financial needs often overlap in

practice, so double-counting has to be avoided. But they are distinct concepts, and they are far from co-terminous. A claimant wife may be able to earn her own living but she may still be entitled to a measure of compensation

Miller; McFarlane [contd]

• [32] In particular, I consider a periodical payments order may be made for the purpose of affording compensation to the other party as well as meeting financial needs. It would be extraordinary if this were not so. If one party's earning capacity has been advantaged at the expense of the other party during the marriage it would be extraordinary if, where necessary, the court could not order the advantaged party to pay compensation to the other out of his enhanced earnings when he receives them. It would be most unfair if absence of capital assets were regarded as cancelling his obligation to pay compensation in respect of a continuing economic advantage he has obtained from the marriage

Miller; McFarlane [contd]

• [34] Times and attitudes have changed, and with them the content and language of the ancillary relief provisions. The history was conveniently summarised by Thorpe LJ in the McFarlane case at [2005] Fam, 171, 196-198, paras 87-99. The wife's financial needs, or her 'reasonable requirements', are now no more a determinative or limiting factor on an application for a periodical payments order than they are on an application for payment of a lump sum. I agree with Charles J's observations to this effect in Cornick v Cornick (No 3) [2001] 2 FLR 1240, para 10

Miller; McFarlane [contd]

Baroness Hale [140] A second rationale, which is closely related to need, is compensation for relationship-generated disadvantage. Indeed, some consider that provision for need is compensation for relationship-generated disadvantage. But the economic disadvantage generated by the relationship may go beyond need, however generously interpreted. The best example is a wife, like Mrs McFarlane, who has given up what would very probably have been a lucrative and successful career. If the other party, who has been the beneficiary of the choices made during the marriage, is a high earner with a substantial surplus over what is required to meet both parties' needs, then a premium above needs can reflect that relationship-generated disadvantage.

Miller; McFarlane [contd]

• [144] Thus far, in common with my noble and learned friend, Lord

Nicholls of Birkenhead, I have identified three principles which might guide the court in making an award: need (generously interpreted), compensation, and sharing. I agree that there cannot be a hard and fast rule about whether one starts with equal sharing and departs if need or compensation supply a reason to do so, or whether one starts with need and compensation and shares the balance. Much will depend upon how far future income is to be shared as well as current assets. In general, it can be assumed that the marital partnership does not stay alive for the purpose of sharing future resources unless this is justified by need or compensation. The ultimate objective is to give each party an equal start on the road to independent living.

Miller; McFarlane [contd]

• [154] There is obviously a relationship between capital sharing and future income

provision. If capital has been equally shared and is enough to provide for need and compensate for disadvantage, then there should be no continuing financial provision. In McFarlane, there has been an equal division of property, but this largely consisted of homes which can be characterised as family assets. This was not enough to provide for needs or compensate for disadvantage. The main family asset is the husband's very substantial earning power, generated over a lengthy marriage in which the couple deliberately chose that the wife should devote herself to home and family and the husband to work and career. The wife is undoubtedly entitled to generous income provision for herself and for the sake of their children, including sums which will enable her to provide for her own old age and insure the husband's life. She is also entitled to a share in the very large surplus, on the principles both of sharing the fruits of the matrimonial partnership and of compensation for the comparable position which she might have been in had she not compromised her own career for the sake of them all. The fact that she might have wanted to do this is neither here nor there. Most breadwinners want to go on breadwinning. The fact that they enjoy their work does not disentitle them to a proper share in the fruits of their labours.

Miller; McFarlane [contd]

• [155] She does, of course, have to consider what she will do in the future. The children will eventually take up much less of her time and energy. She could either return to work as a solicitor or retrain for other satisfying and gainful activity. She cannot therefore rely upon the present level of provision for the rest of her life. But the Court of Appeal was wrong to set a limit to it on the basis that she would save the whole surplus above her requirements with a view to providing for herself once the time limit was up. They were wrong to place the burden upon her of justifying continuing payments, especially now that they have set a high threshold for doing so: see Fleming v Fleming [2003] EWCA Civ 1841; [2004] 1 FLR 667. On any view she will continue to be entitled to some continuing compensation, even if the needs generated by the relationship diminish or eventually vanish (although that cannot be guaranteed, despite her best endeavours, given the length of time she has been out of the labour market and the difficulties of repairing her pension position). The burden should be upon the husband to justify a reduction. At that stage, the court will again have to consider whether a clean break is practicable, as it could be if the husband has generated enough capital to make it realistic.

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VB v JP [2008] EWHC 112 Fam

Sir Mark Potter. P. • [45] These are clear statements of an underlying principle falling for

consideration in cases where it is clear that (i) the parties have arranged their affairs in a way which has greatly advantaged the husband in terms of his earning capacity but left the wife very considerably handicapped in the terms of her own earning capacity and (ii) the husband is a high earner with a substantial surplus of resources over what is required to meet both parties needs. However, as made clear by their Lordships, while the term compensation is a convenient or appropriate label by which to identify and emphasise the need for an approach which would not preclude a wife from relying on a clear relationship-generated disadvantage in support of a claim for maintenance, it is no more than an aspect of fairness, important to be identified as a strand or step in the thinking of the court when exercising its powers under ss 23 and 25 of the 1973 Act.

VB v JP [contd]

• [52] On the basis (as the judge recognised elsewhere) that there are indeed implicit in the provisions of s. 25 the strands or rationales adumbrated by the House of Lords, there is little to disagree with in the passages quoted in the context of that case. I share and endorse the concerns expressed. The judge was dealing with a case where it was accepted there were before the court just sufficient capital assets to achieve a clean break in a situation where the wife, because her own earning capacity remained essentially intact, would not be left in a position of continuing reliance for her needs upon the husband's future earning capacity. Thus, on the facts, the case for compensation, whether viewed simply as a matter of fairness, or as itself adding some "premium" element, was weak if not non-existent. Further, I would endorse the warning sounded by the judge against the introduction of an approach which seeks to separate out and quantify the element of compensation, rather than treating it as one of the strands in the overall requirement of fairness in the assessment of the parties' joint contribution to the marriage, where the wife, as a result of joint marital decision has sacrificed her own earning capacity in the interests of the bringing up the family. Attempts under the rubric of Compensation to isolate and quantify the level of income or earning capacity sacrificed by a wife years after the event for the purpose of calculating a premium element on the award, constitutes a search for precision which is to be discouraged both on the grounds of policy and practicality, and which goes beyond what is required or generally appropriate in the exercise required of the court under s.25.

VB v JP [contd]

• [59] In my view there emerge from the post-Miller and McFarlane authorities to which I have been referred the following propositions in elaboration of, but consistent with, the House of Lords decision. First, it is at the exit of the marriage and in relation to the division/ redistribution of the family assets that the consideration of the element of compensation immediately arises, but as a feature of the concept of fairness rather than as a head of claim in its own right. Second, on the exit from the marriage, the partnership ends and in ordinary circumstances a wife has no right or expectation of continuing economic parity ("sharing") unless and to the extent that consideration of her needs, or compensation for relationship-generated disadvantage so require. A clean break is to be encouraged wherever possible. Third, in big money cases, where the matrimonial assets are sufficient for a clean break to be achieved, a wife with ordinary career prospects is likely to be have been compensated by an equal division of the assets and consideration of how the wife's career might have progressed is unnecessary and should be avoided. Where, however, that is not the case and the parties accept or the court decides that fairness can only be achieved by an award of continuing periodical payments in respect of a wife's maintenance, then the matter of compensation in respect of relationship-generated disadvantage requires consideration, again as a strand or element of fairness

VB v JP [contd]

• Fourth, in cases other than big money cases, where a continuing award of periodic payments is necessary and the wife has plainly sacrificed her own earning capacity, compensation will rarely be amenable to consideration as a separate element in the sense of a premium susceptible of calculation with any precision. Where it is necessary to provide ongoing periodical payments for the wife after the division of capital assets insufficient to cover her future maintenance needs, any element of compensation is best dealt with by a generous assessment of her continuing needs unrestricted by purely budgetary considerations, in the light of the contribution of the wife to the marriage and the broad effect of the sacrifice of her own earning capacity upon her ability to provide for her own needs following the end of the matrimonial partnership. These considerations are of course inherent in s.25(a)(b)(d) and (f) of the 1973 Act.

VB v JP [contd]

• [65] That award took into account the wife's right to have an element of compensation but did not quantify it separately from the element of the wife's needs as generously interpreted. Again, in my view that approach was appropriate. The judge was right to refuse to interfere with the clean break settlement of the wife's capital claims (albeit in modern eyes they might have been regarded as discriminatory). However, under s. 31(7) of the 1973 Act, her task in assessing the application for variation of the wife's joint lives maintenance order was to have regard to all the circumstances of the case, including any change in the matters to which it had to have regard when making the original periodical payments order: c.f. per Booth J in Boylan [1988] 1 FLR 282 at 286D; see also the observations of the Court of Appeal in Cornick v Cornick (No2) [1995] 2 FLR 480 when decisively rejecting the "budgetary" approach urged upon it by counsel for the appellant.

VB v JP [contd]

• [66] I have the same task. Having made the findings which I have in relation to this wife's earning capacity, it is right for me to have regard to her undoubted relationship-generated disadvantage, albeit difficult to quantify, and to take it into account in my award. However, because of (1) the general uncertainty of the extent of the disadvantage, (2) the realistic agreement of the parties that there is an indefinite continuing need for periodic maintenance, and (3) the fact that a clean break at this stage is not suggested to be possible or appropriate, this case is not one where it is necessary to attempt to quantify the element of compensation separately from that of the wife's needs generously assessed against the background of the standard of living during the marriage, the husband's considerably increased income and the reduced availability to the wife of a substantial proportion of the child maintenance originally provided.

B v S [2012] EWHC 265

Mostyn J

• [73]The capital division in this case will be determined by application of the familiar distributive principles of sharing and need. The principle of compensation is not applicable, and, as I have observed before, is likely only to be applicable in the exceptional kind of case exemplified by McFarlane v McFarlane [2006] 2 AC 618, HL.

• [74] In S v AG (Financial Remedy: Lottery Prize) [2011] EWHC 2637 (Fam) I strove to

summarise all the authorities about sharing and concluded at para 7:"Therefore, the law is now reasonably clear. In the application of the sharing principle (as opposed to the needs principle) matrimonial property will normally be divided equally (see para 14(iii) of my judgment in N v F). By contrast, it will be a rare case where the sharing principle will lead to any distribution to the claimant of non-matrimonial property. Of course an award from non-matrimonial property to meet needs is a common place, but as Wilson LJ has pointed out we await the first decision where the sharing principle has led to an award from non-matrimonial property in excess of needs."

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B v S (contd)

• [75] The law relating to an award of periodical payments is not so clear. I have already observed that a compensation based award is only likely to arise exceptionally. This applies equally whether the claim is in relation to the division of capital or is for periodical payments. But an aspect of controversy is whether the sharing principle applies to a claim for periodical payments. In McFarlane v McFarlane [2006] 2 AC 618, HL at para 154 Baroness Hale stated:…..(see slide 8)

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B v S (contd)

• This would, taken by itself, suggest that the sharing principle as well as the compensation principle justified an uplift over needs. But earlier in the same paragraph Lady Hale stated:
"If capital has been equally shared and is enough to provide for need and compensate for disadvantage, then there should be no continuing financial provision. In McFarlane, there has been an equal division of property, but this largely consisted of homes which can be characterised as family assets. This was not enough to provide for needs or compensate for disadvantage. "
This would suggest that the only factor that would ever justify an uplift over need would be compensation.

B v S (contd)

• This accords with the view of Lord Nicholls who stated

at para 93: "Clearly in this situation the wife is entitled to a periodical payments order in respect of her financial needs. She needed money to live in the former matrimonial home which was to be the continuing home for her and the children. But it would be manifestly unfair if her income award were confined to her needs. This is a paradigm case for an award of compensation in respect of the significant future economic disparity, sustained by the wife, arising from the way the parties conducted their marriage."

B v S (contd)

• [76] The reason that the sharing principle is sometimes advocated as being applicable to a periodical payments claim is to reflect the theory that post-separation earnings derive from an earning capacity built up during the marriage which is, in some intangible way, a piece of matrimonial property there to be equitably or fairly shared. The high point of that theory is the dictum of Lady Hale which I have quoted above viz "the main family asset is the husband's very substantial earning power, generated over a lengthy marriage". As a theory it is problematic, because at the end of the day the only reason there is income after separation is because of work done after separation. A footballer who earns £100,000 per week earns that because he is on the pitch playing football. Certainly, the skills he was born with, and the development of those skills (which may well have happened during his marriage), are all reasons why he can command his salary, but he will not get paid it unless he plays football. The footballer has to fill the unforgiving minute with sixty seconds' worth of distance run after the marriage.

B v S (contd)

• [77] I turn to consider the decision of Hvorostovsky v Hvorostovsky [2009] 3 FCR 650, CA. In that case HHJ Horowitz QC varied an existing periodical payments order to £120,000 annually to the wife and £12,500 to each of two children. The wife relied on the sharing and compensation principles to seek an uplift above her assessed needs. In the Court of Appeal the reliance on the latter principle was described as a "departure from reality" by Thorpe LJ at para 38. But the award was increased to £140,000 and £17,500 for each child. In his judgment Thorpe LJ at para 37 specifically commended this dictum of Charles J in Cornick v Cornick (No.3) [2001] 2 FLR 1240 at para 106:

• "the court should not rely on the judicial concept of 'reasonable requirements' as a determinative or limiting factor in cases where a payer has, or acquires, an ability to pay more than the payee's financial needs even when they are interpreted generously and called 'reasonable requirements'" 
But he went on in the same paragraph to commend equally this dictum from Sir Mark Potter P in VB v JP [2008] 1 FLR 742 at paragraph 59:
"Second, on the exit from the marriage, the partnership ends and in ordinary circumstances a wife has no right or expectation of continuing economic parity ('sharing') unless and to the extent that consideration of her needs, or compensation for relationship-generated disadvantage so require"

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B v S (contd)

• [78] Moreover at para 33(iii), Thorpe LJ commended the utility of a percentage comparison between the original order and the order on variation, which would seem to suggest some kind of sharing approach. In this regard I note that the well-known and binding decision of Lewis v Lewis [1977] 3 All ER 992, [1977] 1 WLR 409, CA was not referred to in judgment, where Ormrod LJ specifically disapproved such an approach and stated that "the court should have as unfettered a discretion as possible to deal with the situation as it is when the matter comes before it."

B v S (contd)

• [79] In my judgment simplicity and clarity are just as much needed in this part of the field as in the part designated "division of capital". Simple and fair guidance is needed so that the majority of cases can be settled. Settlement is almost always better than adjudication for a divorcing couple. And the functioning of the family justice system depends on a high rate of settlement of these cases. Save in the exceptional kind of case exemplified by McFarlane a periodical payments claim (whether determined originally or on variation) should in my opinion be adjudged (or settled), generally speaking, by reference to the principle of need alone. Of course needs are elastic in concept and there is much room for the exercise of discretion in their assessment.

B v S (contd)

• …But to allow consideration of the concept of sharing to intrude in the assessment of a periodical payments award seems to me to be based on a doubtful principle, and is replete with problems of quantification by any sure standard. The sharing principle in relation to matrimonial property is simple enough: it is usually 50/50, because in the division of the marital acquest equity (or fairness) is (usually) equality. But if the concept of sharing is going to uplift above the assessment of need a periodical payments award which will be paid from post-separation earnings how does a judge set about doing it? Is it a third? Or 40%? Or 20%? There are not even any signposts along the road to a fair award.

SA v PA [2014] EWHC 392

Mostyn J

• [24] I confess that I find the theory to be extremely problematic and challenging both conceptually and legally. It would seem that I am not alone.

• [36] Obviously I am bound by the decision of the House of Lords. However, in the light of the later authorities, I think that the principles concerning a compensation claim can properly be expressed as follows:-

SA v PA (contd)

• i) It will only be in a very rare and exceptional case where the

principle will be capable of being successfully invoked.
ii) Such a case will be one where the court can say without any speculation, i.e. with almost near certainty, that the claimant gave up a very high earning career which had it not been foregone would have led to earnings at least equivalent to that presently enjoyed by the respondent.
iii) Such a high earning career will have been practised by the claimant over an appreciable period during the marriage. Proof of this track-record is key.
iv) Once these findings have been made compensation will be reflected by fixing the periodical payments award (or the multiplicand if this aspect is being capitalised by Duxbury) towards the top end of the discretionary bracket applicable for a needs assessment on the facts of the case. Compensation ought not be reflected by a premium or additional element on top of the needs based award.


H v H [2014] EWHC 760

Coleridge J [47] Mr Chamberlayne has drawn my attention especially to the case of McFarlane v McFarlane [2009] 2 FLR 1322 sometimes known as McFarlane Number 2, a decision of Mr Justice Charles in a case which has some factual similarities to the present one and of course was the second hearing of the case which gave rise to the concept of "compensation". Mr Chamberlayne invites me to draw a direct comparison or parallel with that case but I decline to do so. The circumstances in that case were quite different (as they always are). Some of the figures may coincidentally be similar, but it seems to me to be no particular precedent, and only an illustration of how that meticulous judge decided to try and achieve fairness in the then circumstances of that case. Charles J was laying out a road map into the future to try and predict a situation years down the line when the wife might be in a position to have saved sufficiently to enable a termination under section 31. This case is very different. The husband's employment is imminently and predictably going to cease, as I find, and so there will be a dramatic reduction in his earnings and earning capacity.

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H v H (contd)

• [48] At the end of the day, as is always emphasised in these cases, the court is in the business of trying to achieve fairness between the parties in the light of the past, in the light of the present circumstances and in the light of the future facts in so far as they can be predicted. It is in applying proper weight to all those factors that the concept of fairness can be fathomed, in my judgment. I do not think such an exercise is improved by an attempt to descend into great precision. Such precise predictions are as likely to be wrong in their outworking as a more broad assessment. It is always important to realise that such a multifaceted assessment is inevitably shot through with uncertainty. Any attempt, in my judgment, to apply some kind of formulaic approach is spurious and merely an attempt to fix the unfixable or pin down the unpin-downable. Part of the process necessarily involves economic forecasting which is on any view the blackest of arts and as everyone knows notoriously unreliable and necessarily inaccurate.

H v H (contd)

• [59] In my judgment, in this case (and I emphasise "in this case" because there can be no hard and fast rule) I think the compensation element is properly recognised in the way in which wife's current capital is factored into any assessment of her future position. By that method the court can recognise that she has more than just an entitlement, arising from the marriage, to have her reasonable needs met on a simple lifetime basis.

H v H (contd)

• [60] Accordingly, I shall recognise it in four ways. First, I shall attribute only £500,000 of the equity in her home as a part of her long term income fund, and I shall only ascribe to it a reasonable annual return of 3.75% net per annum. In other words, I shall not assume she has recourse to the actual capital in the way that a Duxbury calculation does. Secondly, by the same logic, I shall take the whole of the £1m which she has saved as being available to her but also on the same annual basis of 3.75% and not on a fully amortised capital basis. 3.75% net, in my judgment, is a medium level return over a long period without necessarily factoring inflation into the calculation. Thirdly, I shall not factor in any step down at a later date. And fourthly, I shall ignore in the calculation any extra savings which she makes between now and when the husband actually retires. Accordingly, if she is able to save another £100,000 or thereabouts, that is a bonus to her. And I have already indicated the budget figure has been increased.

H v H (contd)

• [66] I should only finally say that I agree with recent pronouncements about the dangers inherent in attributing special weight to arguments about compensation. However, there remain a very small number of cases where it stares the court in the face and to ignore it and simply approach the case on the basis of the more simplistic "needs" arguments does not do full justice to a wife who has sacrificed the added security of generating her own substantial earning capacity, as this wife undoubtedly did. I doubt in the end she is any worse off financially because her investment in the family enabled the husband to generate these enormous returns which she has fully participated in. However, the building up of a secure earning capacity over a working life is a greater security to an individual spouse, whether husband or wife, than merely being dependent on the future income generating resources of one's former partner however successful.

H v H (contd)

• Court of Appeal decision was very eagerly awaited. As it turned out, we needn’t have held our collective breath, as the appeal was allowed (and the matter sent back for a full re-hearing before a different judge) on the basis of Coleridge J having made various errors and having failed to explain sufficiently how he had factored compensation in to the award. So, the Court of Appeal didn’t in the end have to grapple with the nature and extent of the principle.

RE: H [2014] EWCA Civ 1523

• Ryder LJ [40] there is a reported case that is persuasive on how the principle is to

be applied and that is the decision of Sir Mark Potter in VB and JB [2008] 1 FLR 742. Although I take one small part of the exposition in that case, the full text of the judgment deserves careful consideration if and when the issue of compensation comes to be considered by this Court. At [59], the president said this……

[41] “One of the purposes of the President’s careful use of language was

to alert courts to the danger of double recovery in their consideration of the concepts of “sharing” and “compensation” – a hazard that was also in the mind of Baroness Hale. His suggestion (at [52]) that where the principle applies it should not be separated out from the overall exercise of discretion maybe sound pragmatic advice but one must always bear in mind that the purpose of the principle is to ensure that the courts adopt a non-discriminatory approach in the exercise of the discretion”.

SS v NS [2014] EWHC 4183 (Fam)

• Mostyn J:

“[46](ii)an award should only be made by reference to needs, save in a most exceptional case where it can be said that the sharing or compensation principle applies”.