In all divorces, but especially in high-net-worth (HNW) divorces, the financial settlement is one of the most contested issues. The greater the income and assets, the higher the stakes.

Understanding how the Court reaches a financial settlement will give you the knowledge you need to build a robust case in your favour. Even if the matter does not go to Court and an agreement is reached through negotiation and/or mediation, the below principles will still apply.

Section 25 of the Matrimonial Causes Act (MCA) 1973 lists factors that the Court must consider when making provisions for a financial settlement in a divorce. However, the Court has full discretion on the weight given to each factor. The first consideration of the Court is to any minor children of the relationship; however, this is not the courts only consideration.

The Court will first look at what resources are available to the parties and then decide how to distribute them. Equality and fairness are the two principles that will guide the Court in any decisions concerning the distribution of wealth and assets.

What are the section 25 factors which the Court must consider?

The Court will consider the following section 25 factors when making a financial order in a divorce case:

• The resources available to the parties, both capital and income and extant or reasonably foreseeable.
• The financial needs of each party, considering the needs of dependent children and any disabilities.
• The duration of the marriage and the age of the parties.
• The conduct of the parties (but only in exceptional circumstances).
• The standard of living enjoyed by the parties.
• Any benefit either party will lose as a result of the divorce.
• The contributions of each party to the marriage (both financial and non-financial).

How have the Courts interpreted the section 25 provisions?

The House of Lords in Miller v Miller; McFarlane v McFarlane [2006] UKHL 24 identified three principles that justified the making of financial orders:

• Needs
• Sharing
• Compensation

Of the three principles, only needs features in section 25 of the MCA 1973. The other section 25 factors (as listed above) must always be considered by the Court when deciding on a financial settlement.

The ultimate objective of the three principles is to achieve a fair outcome.

Needs

No statute sets out the meaning of needs and case law gives it a wide definition. It refers to the income and asset (for example property, vehicles etc) requirements of the parties. In 2014, the Law Commission published a report, Matrimonial Property, Needs and Agreements. The report highlighted that a lack of statutory definition of ‘needs’ in a financial settlement context led to a lack of transparency and regional differences in settlements awarded. To rectify this, the Family Justice Council published a Guidance on Financial Needs on Divorce and Sorting out Finances on Divorce. These include examples of different types of need and highlights key principles about the duration of any financial provision and the transition towards financial independence (the latter is something that the Courts have placed particular emphasis on in recent years).

Sharing

In the landmark case of White v White, Lord Nicholls laid the groundwork for London becoming the ‘divorce capital of the world ’ when he stated:

“…there is one principle of universal application which can be stated with confidence. In seeking to achieve a fair outcome, there is no place for discrimination between husband and wife and their respective roles. Typically, a husband and wife share the activities of earning money, running their home and caring for their children. Traditionally, the husband earned the money, and the wife looked after the home and the children. This traditional division of labour is no longer the order of the day. Frequently both parents work. Sometimes it is the wife who is the money-earner, and the husband runs the home and cares for the children during the day. But whatever the division of labour chosen by the husband and wife, or forced upon them by circumstances, fairness requires that this should not prejudice or advantage either party when considering paragraph (f) [of section 25(2)], relating to the parties’ contributions … If, in their different spheres, each contributed equally to the family, then in principle it matters not which of them earned the money and built up the assets. There should be no bias in favour of the money-earner and against the home-maker and the child-carer.”

The sharing principle was then set out:

“A practical consideration follows from this. Sometimes, having carried out the statutory exercise, the judge’s conclusion involves a more or less equal division of the available assets. More often, this is not so. More often, having looked at all the circumstances, the judge’s decision means that one party will receive a bigger share than the other. Before reaching a firm conclusion and making an order along these lines, a judge would always be well advised to check his tentative views against the yardstick of equality of division. As a general guide, equality should be departed from only if, and to the extent that, there is good reason for doing so [Emphasis added].”

Although there is no defined good ‘reason’ for departing from equality, the most common situation is where one party has stepped back from their career and therefore has limited earning potential when compared with the spouse who continued to work. If the children of the marriage are to predominantly live with the financially weaker spouse, then it is likely that a fair settlement will require him or her to be awarded a greater share of the matrimonial assets.

Compensation

In cases where there is a “almost near certainty” that one spouse gave up a lucrative vocation that would have otherwise seen them enjoy an income similar to the party who continued with their career, compensation may be needed to achieve fairness.

Compensation awards are exceptional and will only occur in cases where:

• There are sufficient assets to fund the claim once a sharing award has been made and needs met.
• The claiming spouse has provided evidence of a lucrative career and that high levels of remuneration were likely.
• Documentary evidence supports the arguments made about the Claimant’s abilities and future career prospects.

Final words

The Courts have made clear that in matters concerning financial orders, the legislation must be paramount over case law. The Court of Appeal and House of Lords decisions relate to the process of reasoning when applying the section 25 factors to reach a fair settlement.

Lord Justice Thorpe made this clear in Lawrence v Gallagher [2012] EWCA Civ 394, 2012 WL 1015830 when he stated:

“Since the decision of the House of Lords in White v White the specialist judges have developed new approaches often expressed in newly minted phrases. I have myself contributed to this process to a limited degree. All this erudition is designed to guide the search for the fair outcome or to safeguard against the unfair outcome. But we must never forget the legislated check list which is designed to achieve the same ends. [Emphasis added]”

Edwards Family Law is a niche London-based firm specialising in high-net-worth divorce and international family law. To find out more about financial orders, please phone +44 (0)20 3 983 1818 or email contact@edwardsfamilylaw.co.uk. All enquiries are treated in the strictest confidence.