For better or worse?

Increasing numbers of couples are entering into prenuptial agreements, but the courts are still making up their own minds. By Louise Spitz

The landmark 2000 House of Lords’ decision in White v White continues to send ripples through the family law world. In that case, the Law Lords reiterated the importance of treating husbands and wives equally in the division of assets on divorce. Although Pamela White received only 38 per cent of the matrimonial assets after a long marriage to which she had contributed in every way, recent decisions have reinforced the idea that fairness demands equality. Wealthy husbands can no longer count on retaining the great majority of their assets after a marriage breakdown, and practitioners are observing a steady stream of clients seeking pre-marriage planning in the form of prenuptial agreements.

In parallel with the trend towards equality on divorce, increasing importance is being given to prenuptial arrangements by the courts. As recently as 1995, Lord Justice Thorpe in the case of F v F questioned the significance of such agreements and disregarded the one on which Mr F sought to rely. But only two years later, Mr Justice Wilson in S v S [1997] heralded the possibility of a prenuptial agreement being afforded significant weight. The prenuptial agreement in that case was executed in New York and was governed by the laws of New York. In 1996, the wife petitioned for divorce in England and the husband filed for divorce in New York. He applied for the wife’s petition to be stayed, arguing that the terms of the prenuptial agreement should be upheld. Judge Wilson found in favour of the husband and granted the stay, concluding that the prenuptial agreement was significant. Two years later, Mr Justice Wall, in N v N [1999], acknowledged the traditional view of prenuptial agreements as contrary to public policy, but nevertheless held that such agreements have evidential weight.

The most recent decisions in this area are M v M [2002] and K v K [2003]. It is in these judgments that the change in approach to prenuptial agreements can be seen.

Briefly, the facts of M v M were that a Canadian couple entered into a prenuptial agreement very shortly before their wedding. The wife was pregnant and anxious to get married and the husband, who had previously been divorced, was keen to protect his financial position in case his second marriage failed. The agreement provided that if their marriage broke down, the husband would pay the wife £275,000 in full settlement of her claims.

The marriage failed after five years and the wife argued that she should not be bound by the agreement because she was vulnerable and under pressure when she entered into it. Mr Justice Connell held that, although the court was not bound by the terms of the prenuptial agreement, it should consider its terms and decide in the particular circumstances of the case what weight should be attached to it. The agreement should not dictate what the wife was entitled to, but the provision made by the agreement should be treated as one of the more relevant circumstances of the case, or as an example of conduct which it would be inequitable to disregard.

Judge Connell did not hold the wife to £275,000. She was awarded a lump sum of £875,000 plus an order for periodical payments for the child of £15,000 per annum, plus school fees was made. He found that it would have been unjust to the wife to hold her strictly to the terms of the agreement, but it would have been unjust to the husband to ignore completely its existence.

A similar approach was adopted by Rodger Hayward Smith QC in his judgment in K v K. Again, the wife was pregnant at the time that she and her husband-to-be entered into the prenuptial agreement. Each party had separate legal advice before they signed the agreement and their respective solicitors knew that the wife was expecting a baby. The agreement provided that on divorce within five years of agreement, the wife would receive £100,000 (to be increased by 10 per cent per annum) and the husband was to make reasonable financial provision for any children. They separated after just 14 months. The wife sought a lump sum of £1.6m to house herself and periodical payments of £57,000 per annum. At the time of the final hearing it had already been agreed that the husband would pay periodical payments for the child at the rate of £15,000 per annum.

The judge found that the wife understood the prenuptial agreement, had been properly advised as to its terms and had signed it willingly. Both parties knew that the wife was pregnant and there were no unforeseen circumstances arising since the agreement that would make it unjust to hold the parties to it. Accordingly, the judge gave effect to the capital part of the agreement and awarded the wife £100,000 plus interest of £20,000. The judge went on to consider the child’s requirements and in so doing, carried out an exercise not dissimilar to that carried out by judges in determining Schedule 1 Children Act applications for non-marital children. He decided that a lump sum of £1.2m should be provided by the husband to purchase a suitable house for the wife and child, to be held on trust until the child finished full-time education. Further, the husband should pay periodical payments of £15,000 per annum for the wife during the period of the trust. The judge considered that this package was “reasonable financial provision for the child”.

The judge, while upholding the agreement in relation to capital, ignored the agreement when it came to maintenance for the wife. The agreement said nothing about periodical payments. How then did the judge justify making a periodical payments order in her favour? He said that he had approached the wife’s income requirements on the basis of what she needed for childcare and to augment the income that she would receive for the child and her own family trust income. The judge pointed out that the husband’s wealth was such that he would be able to take the child on very expensive holidays whereas the mother would not. He was clearly troubled by the “enormous disparity” in wealth and sought to rectify that to an extent by means of a periodical payments order for the wife.

Looking to the future, the Government green paper ‘Supporting Families’, published in 1998, contains a list of circumstances in which it is suggested that a prenuptial agreement should not be legally binding. They include where there is a child in the family; where either or both parties did not receive independent legal advice before entering into the agreement; where enforcement would cause significant injustice; where the couple or one of them failed to give full disclosure of assets; and where the agreement was made less than 21 days before the marriage.

No legislation has yet come out of the green paper, but the guidelines laid out in the document are useful for practitioners when advising clients on the issue of future enforceability. They should become ‘best practice’ in dealing with such cases.

Where one or both parties hail from jurisdictions where prenuptial agreements are recognised, careful consideration should be given to choice of jurisdiction.

It is increasingly common for a couple to receive advice in both possible jurisdictions so they can make an informed choice about which protects their interests best. Ultimately, if the marriage breaks down and there is a battle about jurisdiction, the usual considerations will come into play and the forum chosen by the prenuptial agreement will not necessarily prevail.

In the same way as any evolving area of law and practice, prenuptial agreements require expert advice and recognition that the statutory framework may take precedence over a regime for which the couple have elected. In the absence of statutory endorsement, the likelihood is that prenuptial agreements will have more weight in short marriage cases where there are no children, or where more mature couples are marrying late in life and have already built up their wealth so the ‘contributions’ argument is of much less significance. Whether a young person who brings substantial assets with them on marriage can preserve those assets over time remains to be seen.

Louise Spitz is a partner at Manches and was assisted with this article by assistant solicitor Lisa Jones