In the autumn the Supreme Court transformed divorce law in Britain. Stephen Foster of Stewarts Law assesses the status of the post-Radmacher prenup
ON 20 OCTOBER, when the nation’s media were focused on the announcement of the Comprehensive Spending Review, the Supreme Court released its long-awaited judgment on the appeal of Nicolas Granatino of his financial award on his divorce from Katrin Radmacher, a wealthy German heiress. Given that over six months had elapsed since the hearing of the appeal, it was a strange coincidence that the judgment, complete with a press summary, was released on a day of such importance.
The result was that the Radmacher decision was confined to the inner pages of the broadsheets and barely caused a ripple on the main news stations. But make no mistake, in a bold and radical judgment the Supreme Court had changed the landscape for prenuptial agreements in England and Wales in a historic fashion.
So what’s so significant about the judgment? For a start, in the opening paragraph of the press release setting out the reasons for the judgment, the Supreme Court makes it clear that it has swept away the long-standing rule that prenuptial agreements were void and contrary to public policy. A fairly radical starting point! Indeed, the Lords Justice move on to give the ominous warning that ‘after this judgment it will be natural to infer that the parties entering into agreements governed by English Law will intend that effect be given to them’.
Then, as we explore the judgment further, at its very heart is the new principle: the parties will be held to the terms of a prenuptial agreement that is freely entered into by each party with a full appreciation of its implications, even if they’ve entered into a bad bargain. This is the case unless in the circumstances prevailing it would not be fair to hold the parties to their agreement.
The champions of prenuptial agreements ask, ‘What’s all the fuss about?’ They point out that prenuptial agreements have been gaining momentum since the start of the millennium. Indeed, the story of the decade has been the court’s willingness to give increasing weight to agreements properly entered into. Isn’t the Supreme Court’s judgment simply the final link in the chain? The court has at last succumbed to the changing tide of social trends and the move towards greater harmony with Europe.
It is true that some couples, especially dual-career professionals, have an increasing desire to exercise autonomy over their own financial affairs on marriage breakdown: ‘I’m an investment banker, my fiancé is a hedge fund manager — aren’t we better placed to regulate our own financial affairs on divorce than the court?’ is an understandable sentiment.
Also, it’s certainly true that England was becoming increasingly isolated in its lack of recognition for prenuptial agreements, in contrast to all the main European jurisdictions and the USA, where they are largely binding.
Now, although there is some weight to the points put forward by the long-time advocates of prenuptial agreements, there is also growing concern that the Supreme Court may well have set up a new recipe for unfairness. My own view is that there is the potential for a vast chasm of inequality to develop between the very generous provision the English court affords the homemaker and the far less generous provision often provided by prenuptial agreements.
Pre-Radmacher, the court could usually be relied upon to protect the economically weaker party. Post-Radmacher, the problem is that there is now a very harsh threshold that the weaker party has to overcome if there is a prenuptial agreement in place. In essence, the court will not interfere with a prenuptial agreement unless in the circumstances prevailing it would not be fair to hold the parties to the agreement.
LONDON’S REPUTATION AS the divorce capital of the world is founded upon the coincidence of two key factors. First we are living through an era when huge fortunes can be accumulated swiftly, and secondly the equal division of the fruits of the marriage partnership approach adopted by the court can lead to vast awards. Even if the wealth is not built up during the marriage, the court’s view that financial needs trump everything (pre-acquired assets, inherited wealth, business assets — the whole lot) still leads to awards running into tens of millions of pounds.
The largest award by the English court was the £48 million awarded to Beverley Charman, the wife of the insurance magnate John Charman, but this case is only the tip of the iceberg. The assets were £131 million, but any top-tier central-London divorce firm will be dealing with a handful of cases where the assets dwarf this sum.
Although these cases don’t get reported because they invariably settle before a final hearing, they are negotiated against a backdrop of the court not discriminating between the homemaker and the breadwinner and the starting point of an equal division of all marital assets. In any case with assets over £100 million, the wealth creator is likely to argue that the size of the assets alone justifies a departure from equality; receiving ‘only’ £125 million from a £350 million asset base is hardly financial hardship.
Contrast the size of these awards and the court’s general approach, with the more modest provision likely to be negotiated by astute business people prior to entering into a marriage, and it’s easy to see the widening gap between those who have entered into prenuptial agreements and those who have not. Indeed, most specialist practitioners will have already dealt with cases where shortly before the marriage one party is talked into signing a prenuptial agreement against the advice of their lawyer. Moral blackmail can take various forms, but an argument along the lines of ‘by signing this you show me that you’re marrying me for love, not my money’ is often used.
The Lords Justice in Radmacher specifically stated that a prenuptial agreement may make provision that conflicts with what a court would consider fair. If there are children involved the claiming party has more protection, because the court will not uphold a prenuptial agreement that prejudices the reasonable requirements of any children — but of course Mrs Radmacher and Mr Granatino had children and the prenuptial agreement was effectively upheld.
So what does the future hold? Firstly, there will be more prenups for sure. They will remain of most use to wealthy individuals, especially where there is a large amount of pre-existing wealth or the likelihood of rapid wealth creation during the marriage well beyond the parties’ needs. Notwithstanding inhibiting cultural factors, prenuptial agreements are likely to become far more common with the mass affluent. Secondly, there is likely to be further litigation over the circumstances in which the court considers it would not be fair to hold the parties to their agreement.
Finally, I am surprised that there has not been more criticism of the Supreme Court effectively making law, thus usurping the role of the Law Commission, which is due to report in 2012, and Parliament in one fell swoop. Perhaps the lack of criticism is driven by realism in that, given the legislative programme this government will need to drive through, on balance it is best to have clarity even though it’s by the back door.
MAJOR DIVORCE CASES
White v White: The landmark 2000 case legitimised the credo that marriage is a partnership of equals. Considering a wife’s reasonable needs and the discrimination against the non-financial contribution to a marriage were finally laid to rest as principles.
Miller v Miller: The 2006 ruling in the Lords demonstrated that a wife’s entitlement does not accrue over time. It also showed that misconduct of one spouse could increase the final settlement.
McFarlane v McFarlane: This case, in 2006, was the first to consider the wife’s entitlement to her husband’s income both at the time of the divorce and afterwards. Mrs McFarlane was further compensated for giving up her job to support their three children.
Charman v Charman: Also in 2006, this case addressed issues of stellar contribution to a marriage. Mr Charman’s claim that he should keep most of the £130 million made during the marriage was rejected in the High Court as anachronistic. Mrs Charman won a record-breaking £48 million settlement.
MacLeod v MacLeod: The 2008 case, which concerned an American couple resident in the Isle of Man, paved the way for the postnup, as the Privy Council upheld an agreement signed by the couple as the marriage was failing. It gave couples in future more power over the division of their assets.
Cartoon by George Leigh