Compensation awards in divorce proceedings: the needle in the haystack

As family practitioners we are all familiar with considering sharing and needs as the two primary concepts in settling financial remedy matters. Compensation, the third concept, has always been an elusive one, often dismissed or not utilised in practice due to its very limited success.

Now, given the recent judgment in TM v KM [2022] EWFC 155, our attention has been drawn to this area again and consideration will be given here to the developments in compensation as an argument.

The origins of compensation

The principle was established in the judgment of Miller v Miller; McFarlane v McFarlane [2006] UKHL 24, where arguments in respect of “relationship-generated disadvantage” were successful.

It is often the case that, during a relationship, the parties make the joint decision that one spouse places their career on hold, or takes a step back, in order to be present and more heavily involved in the child rearing. Family lawyers are familiar with section 25(2)(a) of the Matrimonial Causes Act 1973, and the consideration that the court must give in exercising its discretion to make financial awards. The primary consideration in these circumstances is the earning capacity of the parties. Of course, if one spouse has placed their career on hold, particularly if this was extremely lucrative and on an upward trajectory, this cannot be simply ignored and will no doubt impact their earning capacity post-separation. This is relationship-generated disadvantage.

However, the courts have been fearful for some time about opening the floodgates to “compensation claims” in divorce and finances. The fear is similar to that in personal injury claims and tort law, where parties are awarded damages. The word “compensation” implies fault; one party is a victim, the other the wrongdoer. This will simply not be the case in family law matters, given that any such decision would have been joint, made during the course of a relationship, and for the benefit of the family. Contemplation of the impact of this decision in the event of the breakdown of a relationship is not what the majority of clients would ever consider.

Fairness is at the core of compensation as a concept in family law. While most cases start and end with needs and sharing, as Lord Nicholls stated in Miller; McFarlane: “This is aimed at redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage”.

The case law in recent years on this issue is few and far between given “compensation” is such a difficult argument to run. The court’s reluctance to make such awards has been made clear, with it only being awarded in “rare and exceptional” circumstances. There has always been a concern in awarding compensation of double-counting, given the close link between compensation and the risk involved in valuing an earning capacity for sharing purposes.

Prior to the 2022 judgment, the most recent case in which compensation was awarded (in the sum of £400,000), was by Moor J in RC v JC [2020] EWHC 466. The wife was on track for a highly successful legal career but left this to focus on childcare responsibilities, whilst her husband, who was already a partner in a law firm, had the freedom to meet his career goals. The wife’s career came to an end. The relationship-generated disadvantage was such that the wife could never expect to return to the field and achieve what she would have done were it not for these sacrifices – the judge could not ignore these and considered them sufficient to justify a compensation award.

In the recent case of TM v KM [2022] EWFC 155 HHJ Hess ordered compensation on the basis of relationship-generated disadvantage, acknowledging that this was a case of extremely rare circumstances.

The facts

This was a marriage spanning 17 years. The wife was 50 and the husband 48 at the time of judgment. This was a trans-Atlantic couple: the wife being from the US and the husband from England.

At the time the parties met, the wife was living in New York and was working in the world of investment finance. Her income was in the region of $800,000 at the time the parties met in the early 2000s. The husband also had a successful career in investment finance. He was on similar salary at the time the parties met.  At the end of 2006 the parties moved from New York to London and eventually lived in the Middle East for a number of years, before returning to London.

The parties have two children together, aged 14 and 11. It was following the birth of their first child that the wife went on maternity leave and was then made redundant by the English bank she was working for. She never returned to the investment finance field.

At the time the wife’s career came to a standstill, her gross annual income had been between £305,000 to £505,000 in the years preceding. The husband was earning at a similar level in the mid-2000s. By the date of separation, the husband’s gross annual income was £2m, plus significant shares and long-term investment schemes.

Due to the significant earnings the husband was making in the field, the parties had no financial need for the wife to return to work. The judge was satisfied that had the wife not made “relationship-generated sacrifices” (leaving New York for London to be with the husband and devoting herself to her child-care role), then she would have remained a very high earner.

The realisable asset pool in this case was in the region of £11.7m and combined pension assets in the region of £1.25m.

A second child came along in 2011 and between 2010 and 2016 the parties lived in the Middle East for the husband’s work. When negotiating the contract for the husband’s move he explicitly stated that the wife has “generously agreed to give up her (very successful) career…  there is a lot of sacrifice (particularly for her) in this move…”. The husband leveraged the wife’s career sacrifice for more pay.

The judge did not accept submissions put forward on behalf of the husband that she could simply return to the field earning at a high level. He felt the maximum she could earn was £50,000 gross per annum given her experience and age in a business setting. Whilst HHJ Hess acknowledged that a period of 15 years out of the industry placed a limit on the wife’s earning capacity, it did not mean that she did not have one at all. She was clearly a very capable woman and were it not for the decision that the parties made for her to step back and take the traditional role as a “homemaker”, her career would be on a far different path, as would her earning capacity.

Upon consideration of all the factors, and reflecting upon the wife’s career trajectory until the time that she stopped working, HHJ Hess was clear that this was “one of those rare and truly exceptional cases where a discreet compensational award is appropriate”. The facts in this case were actually very similar to those in RC v JC.  The court had to focus matters on fairness and HHJ Hess was of the view that the sacrifice by the wife needed to be reflected in the outcome of the award he made.

He awarded the wife an additional five tranches of £100,000, a total of £500,000, to her award as a lump sum and on a clean break basis.

Reflection

This case demonstrates that, in the right circumstances, a compensation claim should always be considered by lawyers at the early stages if presented with facts similar to those in this case. It remains the case that the court does not want to open the floodgates, but in the right factual matrix, the needle can be found in the haystack and compensation as a concept should never be forgotten or dismissed without due thought, and with the overriding consideration of fairness at the heart.