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31 March 2014
For many years solicitors had advised prospective husbands and wives that pre-marital agreements (PMAs) were not enforceable and "not worth the paper they're written on". However, in K v K, reported this year, the High Court has for the first time substantially upheld the terms of a PMA. So does this represent a sea change in judicial attitude, meaning such agreements will become the norm rather than the exception?
As with many issues in family law, the answer is not a simple yes or no. To answer this, one needs to look at recent evolution. During the past few years solicitors for wealthier clients have noticed a steady growth in couples seeking the protection of such agreements. There are essentially two reasons.
The first is that in 'big money', long marriage cases, wives (usually) are now receiving a much larger proportion of the family assets then previously. This is as a result of the House of Lords decision in White v White (2001) and the subsequent line of authorities culminating in Lambert v Lambert (2002). The former case established the principle that, in determining 'fairness', reference should be made to the yardstick of equality; the latter was a case in which a wife received one half of a £20m fortune, principally because the court considered her contributions as wife and mother were of equal importance to the money-making contributions of the highly successful and hardworking entrepreneurial husband.
For a person who has, or who is likely to acquire, substantial wealth, England has become a much less attractive jurisdiction for a marriage breakdown. In these circumstances it is easy to see why such people would wish to protect their assets.
The second reason for the greater popularity of PMAs is the perception that the courts are now more willing to give effect to, or at least take into account, the terms (and existence of) PMAs in appropriate circumstances.
The traditional view was that PMAs were (i) contrary to public policy because they undermined the institution of marriage, and (ii) unenforceable, according to the rule in Hyman (1929), because they purported to oust the jurisdiction of the court. Even as recently as 1995, the judicial dislike of PMAs was shown by Judge Thorpe in F v F (Ancillary Relief: Substantial Assets) (1995). "In this jurisdiction," said the judge, "[PMAs] must be of very limited significance. The rights and responsibilities of those whose financial affairs are regulated by statute cannot be much influenced by contractual terms."
Contrast the view now, which is that, on divorce, PMAs are one of the factors the court may take into consideration, either as conduct or one of the other circumstances of the case, along with the other 'basket' of considerations under Section 25 of the Matrimonial Causes Act 1973 (Judge Cazalet in N v N (Foreign Divorce: Financial Relief) (1997); M v M (Pre-Nuptial Agreement) (2002); K v K). They may now be influential or even fundamentally important to the outcome of the case. This was predicted by Judge Wilson in 1997 (S v S (Divorce: Staying Proceedings)) in a case that marked the start of a steady progression towards recognition: "There will come a case where the circumstances surrounding the [PMA] and the provision therein contained might prove influential or even crucial."
In the same year, the court recognised a Swedish pre-marital agreement as being a material consideration (N v N (Foreign Divorce: Financial Relief)) (1997). In 1998 the Government published a green paper entitled 'Supporting Families', which suggested that PMAs should become binding, save in certain specified circumstances. Although the response in 1999 of the judges of the Family Division was unenthusiastic, they nevertheless expressed a majority view that "slightly, but only slightly, greater prominence might be given to the [PMA]", and a minority view that "where there is an agreement which satisfies the elementary requirements the shape of the law should be that it be enforced ".
In M v M (2002), the court went further than before by awarding a lower sum to a wife as a result of a PMA. The court bore the PMA in mind as "one of the more relevant circumstances of the case". It considered that it would be "as unjust to the husband to ignore the existence of the agreement and its terms as it would be to the wife to hold her strictly to those terms".
In the most recent case, K v K, the court went even further by substantially enforcing the terms of a PMA by holding the wife to its capital terms, even though the couple had a very young child. Although the court did not consider it was breaking new ground, this is certainly further than a court has been prepared to go in the past. It represents a big change over the past eight years from the view expressed by Judge Thorpe in F v F.
What of the future?
Will we advise everyone to enter a PMA before marrying? The simple answer to this is no, not everyone. The reason is that the circumstances in which a PMA are likely to be effective are still fairly limited. Unless there is a change of law, the court is bound to determine a financial claim on divorce according to what is reasonable by reference to the statutory criteria (Section 25 of the Matrimonial Causes Act 1973), none of which refer to PMAs, but which may be caught by the "backdoor" as "conduct" or "one of the circumstances of the case".
In many circumstances, a court is unlikely to be influenced much, if at all, by a PMA. For example:
Where the marriage lasts for more than a short period of time. Most precedents provide for a review clause after approximately five years. It is thought that, the longer a marriage goes on, the more the parties' positions, needs, expectations and contributions change and the more unfair it would be to hold the parties to an agreement made years before.
Where there are children. It is thought that the effect of having children so fundamentally alters the parties' relationship, respective needs, obligations and ability to provide (many of which may not be appreciated before having children) that it would be unfair to hold them to an agreement made before such changes. (Having said this, there was a child in K v K where the husband had agreed to make "reasonable financial provision" for any child. The court had to determine this issue. The husband was ordered to pay periodical payments for the child of £15,000 per annum and to put £1.2m into a trust to provide a house for the child and mother until the child ceased education.)
If the agreement is unfair. The fairer it is, the more likely it is to be upheld. Even though two of the most important prerequisites are that both parties should have received independent legal advice and given full and frank disclosure, nevertheless questions arise in relation to inequality of bargaining positions (the financially unsophisticated client who is unwilling or unable to allow financial detail, in the "unlikely event of things going wrong", to get in the way of a union based upon "love") or duress (the pregnant woman, under pressure from her family/background to marry, or the PMA concluded only hours before the wedding). Is it fair to hold such a person to the terms of a PMA?
Who would benefit from a PMA?
Older couples, each with their own independent wealth, who may already have their own families and are unlikely to have children together. Frequently they will wish to preserve a proportion of their assets for their own children.
For a limited period only, to protect the significantly greater assets of one party from claims against the other, less wealthy party. Although claims of a spouse after a short, childless marriage may be limited in any event, this could have the effect of further reducing a wife's claims. As part of this, a husband may be particularly keen to ringfence certain assets, eg his shares in a privately-owned company, preacquired assets or assets inherited during the marriage.
International couples where more than one country would have jurisdiction on divorce, but where the parties wish their divorce and PMA to be determined in a particular jurisdiction. However, this is a horse-and-cart situation, as all the ingredients must first be present for the PMA to be given maximum binding effect (short, childless marriage, disclosure, advice etc).
Those wishing to prevent litigation on divorce. The costs of a PMA will typically be a fraction of contested financial claims on divorce. There should be adverse costs consequences on a claimant if they are unsuccessful in trying to avoid the terms of a PMA. However, this, too, is a horse-and-cart situation, as it will only apply to the limited cases where all the other criteria are satisfied (short, childless marriage, disclosure, advice etc). If there are substantive issues as to whether or not a PMA should be upheld, it could, conversely, increase costs on divorce.
It will require some more PMAs to be tested and upheld, and a further change in the way in which PMAs are regarded by the courts, before we get to the stage where our first reaction as advisers on divorce changes from the current position of "why should a court uphold this PMA?", to the significantly different "why shouldn't it?". Unless and until there is a change in the law, PMAs will continue to be only one of many factors to be taken into account.
Our role as lawyers is to advise when and what terms are fair and appropriate and to ensure a court will give maximum weight to the PMA in the exercise of its wide discretion.
William Massey is a partner in Manches' family law department