Uncertainty in the application of pre-nuptial agreements

Uncertainty in the application of pre-nuptial agreements

Family analysis: Why is there a lack of clarity when enforcing pre-nuptial agreements? Hannah Mabbutt, solicitor in the family team at Kingsley Napley LLP, offers a comprehensive overview of WW v HW and explains that the case demonstrates a need for further clarity in pre-nuptial agreements.

Original news

WW v HW [2015] EWHC 1844 (Fam), [2015] All ER (D) 167 (Jul)

In a claim for financial provision, the Family Division determined the husband’s needs in light of a pre-nuptial agreement and other surrounding factors, in circumstances where the wife had significant inherited wealth. The court gave detailed consideration as to the law in relation to pre-nuptial agreements and the principles set out in the leading authority, the Supreme Court’s decision in Radmacher (formerly Granatino) v Granatino [2011] 1 All ER 373, [2010] UKSC 42.

What was the background to this case?

Husband (H) and wife (W) met in the summer of 2000 and married two years later on 4 July 2002. W had come into a significant inheritance at a young age following the death of her father. Her assets were virtually all inherited, held in trust for her, and in shared ownership with the rest of her family and, at the time of judgment, were valued at approximately £27m.

At W’s behest, prior to their marriage H and W both took independent legal advice and entered into a pre-nuptial agreement some three weeks before their wedding. The key provisions of that agreement were as follows:

  • the primary purpose was to protect W’s inherited property from a sharing claim
  • the agreement made no provision for the parties’ respective needs
  • the agreement expressly left open the possibility for either H or W to make a claim in relation to provision for their children

For the purposes of the agreement, H disclosed an income from royalties from his film production company of £80,000 per annum plus other income that, while being £60,000 in 2002, he asserted had been £200,000 in each of the two preceding years. By the time of the final hearing in April 2015, it had become clear that H’s disclosure had been a ‘substantial exaggeration’—presumably designed to comfort W that his motivations for their marriage were not financial. H’s income from royalties was in fact only £8,000 per annum, and a paltry £6,000 in 2002.

H’s lack of candour had continued for the duration of the parties’ marriage. Right up until the start of 2015, H had maintained that he enjoyed good levels of income prior to the marriage. H had therefore held himself out as someone who ‘could stand on his own financial feet’, thus rendering the pre-nuptial agreement readily capable of implementation because H could meet his own needs. This was simply not the truth.

Unfortunately, the parties’ marriage broke down. W sought to rely on the prenuptial agreement whereas H challenged it—albeit acknowledging that his claim could be no more than needs-based, particularly given the property against which he claimed was substantially non-matrimonial in nature.

What was the outcome of the case?

The judge had no difficulty in finding that significant weight should be afforded to the parties’ agreement, having applied factors that appeared in Radmacher, as both parties:

  • understood the agreement
  • had the opportunity for full advice about is contents, and
  • entered into it freely and intended that it should be binding upon them when executed

Both parties were comparatively mature at the time of marriage and neither sought to exploit a dominant position. However, the judge was able to depart from the agreement if H’s needs dictated a different outcome.

In considering how those needs should be interpreted, the judge noted that any award to meet needs would be made from non-matrimonial assets to which special provisions apply. In this case, there was an agreement that was specifically designed to protect those assets that, in effect, operated to enhance the protection afforded to them. The judge therefore held that there was no obvious basis for H’s needs to be generously assessed.

H was awarded a housing fund of £1.7m, enabling him to buy a house close to the children’s schools and with enough bedrooms for them to stay with him. This was considerably less than H had been seeking. The judge also accepted W’s case that, as per the terms of the pre-nuptial agreement, the housing fund should be provided for H’s life, reverting to W’s estate in due course.

H’s income needs were assessed to be £50,000 per annum, dropping to £35,000 on retirement. W was ordered to pay a balancing payment of £215,000 to top up H’s own assets to a capitalised maintenance amount that would produce such an income.

What was the impact of H’s financial conduct on the award?

The financial conduct relied upon by W was in relation to a number of tax issues resulting from the treatment of payments received into H’s film production company, which had resulted in a liability amounting to between £570,000 and £970,000. H placed the blame for these problems firmly at W’s door, but the judge was clear that H had been responsible and that he had designed deliberately to pass this liability to W. His view was that H’s aim was to increase the net value of his own assets so that, if the pre-nuptial agreement was strictly upheld, he would emerge with as much money as possible.

This conduct was used by the judge as a further justification for a narrower interpretation of H’s needs. H’s own assets were substantially dependent upon the final size of the liability to HMRC—at best they were £500,000 and at worst only £100,000. The judge considered that this was H’s risk to bear rather than W’s and therefore W’s payment towards the maintenance was fixed at £215,000. This award therefore produced an outcome whereby, on a best case scenario, H would have sufficient capital to produce an annual income of just under £50,000 per annum but, on a worst case scenario, a significantly lower annual income—which would not meet his court-assessed needs.

What is unusual about the case?

Practitioners are probably more used to clients understating rather than overstating their financial resources. Presumably, the pre-nuptial agreement did not provide for needs at least in part because H’s disclosure had shown him to be self-sufficient. Interestingly, the judge found that H had to accept responsibility for the disclosure he chose to give, true or otherwise.

How has this case demonstrated the need for more clarity in the enforcement of pre-nuptial agreements?

At the time of the final hearing, the parties had amassed legal costs totalling circa £1.77m. This was despite both parties attempting to avoid this very scenario by entering into a properly negotiated pre-nuptial agreement prior to marriage. The judge was sympathetic to W who he said entered into the marriage only upon the basis that H agreed that he would not make a claim, and yet she was nevertheless required to defend a series of attempts to undermine that agreement at great expense. This case therefore demonstrates the need for more certainty in relation to the application and enforcement of pre-nuptial agreements.

What lessons can those advising take away from the case?

Firstly, the judgment has a real emphasis on individual autonomy. At the time of marriage, H was already in his 40s, the parties had a child together and he knew that the protection of W’s inherited assets was a condition of marriage for her. This judgment is another in a long line of authorities showing that the courts are increasingly comfortable with holding parties to the terms of their agreements. In this case, the fact that the assets were primarily non-matrimonial strengthened the court’s resolve, as any claim by H would have been against those resources.

Secondly, one of the arguments deployed by H was that he did not have a full appreciation of the implications of the agreement. He says that he ‘switched off’ after having been advised by his solicitor that pre-nuptial agreements were not legally binding. He was offered written advice on the topic by his solicitor, but did not take it. The court was quite clear that this could not absolve him from responsibility for the consequences of the document that he signed. Practitioners must therefore ensure that clients appreciate that this kind of excuse will not wash with the courts and so it is important that they engage fully.

Interviewed by Ioan Marc Jones.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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