Waggott v Waggott  EWCA Civ 727
Court of Appeal, 11 April 2018, Sir James Munby P, Moylan LJ and MacDonald J
The husband was 53 and the wife 47, they started living together in 1991, married in 2000 and separated in 2012. They had one child, born in 2004. When they met they were both working as accountants for a well-known firm; neither of them brought any significant financial resources into the relationship. In 2001, the husband accepted work in London, which led to the wife leaving her work; apart from a brief period in 2002/2003, she did not work in paid employment after this.
In the financial remedy proceedings the husband and wife agreed that their capital resource, including pensions, should be divided equally. They disagreed about the extent to which the wife should receive additional provision by way of maintenance.
The total family assets were £16.4 million. The husband’s net income for 2013/14 was just under £3 million. His total estimated net income for 2014 was £3.7 million, but there were reasons for being cautious about whether his income for the future would continue at these levels. A substantial proportion of the husband’s income was received by way of discretionary bonus, a performance share plan, deferred for 3 years. The wife sought 50% of the deferred sums received to 2014 and 35% of the net bonuses awarded for the years 2014 to 2019 (receivable up to 2022). In addition she sought continuing spousal maintenance at the rate of £190,000 pa. The husband was arguing that the wife should receive a share of his deferred remuneration received in 2014 and 2015 and spousal maintenance for 5 years (£80,000 for 3 years and £50,000 for 2 years) with a clean break thereafter, on the basis that she would be able to meet her own needs in part with an assumed earned income starting at £30,000 pa after 3 years. The husband did not seek a s 28(1A) bar but was instead arguing that there be an ‘option’ of capitalising the wife’s income claim during the term (the judge regarded this as ‘akin’ to seeking a s 28(1A) bar.
The judge decided that the wife’s housing need totaled £3.25 million, to include a holiday home costing £750,000. She had an income need for herself of £175,000 pa plus £24,000 pa for the child. He decided that she should receive 25% of the bonuses paid in 2014 and 12.5% of those paid in 2015. The final court order provided that the wife should have £8.4 million of the available capital resources and that the husband should receive £7.8 million; this difference reflected adjustments to ensure that true equality was achieved, for example to account for the wife’s costs of purchasing alternative accommodation. In addition, the wife was to receive just under £1.4 million in respect of the various percentages of deferred remuneration received by the husband post-separation. The wife’s total award was therefore £9.76 million. In addition, the judge ordered the husband to pay the wife ongoing maintenance, for joint lives; this was set at the difference between the return the judge considered she would receive from her ‘free capital’, and her income need of £175,000 pa. The wife appealed and the husband responded with a cross-appeal.
The wife argued that she should have been awarded 35% of the husband’s net bonuses payable in respect of the years up to and including 2019 (payable until 2022) and maintenance at the rate of £190,000 pa for the parties’ joint lives. The husband argued that the judge should have awarded term maintenance, rather than maintenance for joint lives, proposing a 5 year term from 2016, with a s 28(1A) bar to take effect at the end, in February 2021.
The case raised issues about the application of, and the relationship between, the principles of need, sharing and compensation in the determination of financial claims under the Matrimonial Causes Act 1973 (“the 1973 Act”).
(i) Was an earning capacity capable of being a matrimonial asset to which the sharing principle applied and in the product of which, as a result, an applicant spouse had a continuing entitlement to share?
(ii) How should the court assess whether an award determined by application of the sharing principle met the party’s needs? More specifically to the arguments advanced in the case, to what extent was it fair for the wife to be required to use her sharing award to meet her income needs when the husband would meet his needs from earned income?
(iii) As a subsidiary issue, the wife was arguing that the compensation principle had not been properly understood and applied because it was applicable not only when the applicant spouse had sustained a financial disadvantage, but also, separately, when the respondent had sustained a financial advantage during the marriage.
The Court of Appeal dismissed the wife’s appeal and allowed the husband’s cross-appeal, and impose a term order expiring on 1 March 2021, with a s 28(1A) bar.
The statutory framework, by ss 31(7A) and 31(7B) of the 1973 Act, gave the court the power on a variation application to make a further capital order, including a lump sum, combined with, in effect, a s 28(1A) direction. These were powers which existed and no order was required to enable a party to apply to the court to exercise those powers. The best way to achieve a deferred clean break was by seeking a s 28(1A) direction. Therefore, the judge had been right to regard the husband’s case as “akin to (seeking) a s 28(1A) bar”.
During the course of submissions, it sometimes seemed as though the court was being invited to undertake a detailed textual analysis of what had been said in some of the authorities, in a manner similar to the approach when the court was required to interpret a statute. The court questioned whether such detailed scrutiny was apt and whether it properly reflected the differences between the drafting process for a judgment and that for a statute and their different roles in the administration of justice. Indeed, even in the interpretation of statutes, the court was able to take a broad purposive approach.
Further, in the context of financial remedy applications, the court was giving guidance. Guidance could, of course, be given with a degree of specificity but, it was perhaps obvious
to say that one could not expect judgments to be written in the expectation that they would be analysed, as though they were statutes. This was not to suggest that precedents could not create binding authority, but concerned how those precedents were interpreted and applied.
The present case engaged with a number of principles which underpinned the exercise by the court of its discretionary powers under the 1973 Act – non- discrimination; sharing, compensation, need; and clean break – in the context of the court’s statutory objective to achieve a fair outcome having taken into account all the relevant circumstances of the case.
The overarching question was whether the award made by the judge was fair. The answer needed to have a principled basis of sufficient substance to explain why any specific award was to be regarded as fair or unfair. This was not, of course, the same as saying that the application of identified principles would lead to one answer. Discretion and evaluation remained important elements which would inform the judge’s determination, but it was incumbent on the courts to seek to provide sufficient clarity as to the relevant legal principles and the manner in which they should be applied, so that the outcome in any specific case could be identified as being within a reasonably circumscribed range of potential awards.
First: an earning capacity was not capable of being a matrimonial asset to which the sharing principle applied and in the product of which, as a result, an applicant spouse had an entitlement to share. Any extension of the sharing principle to post-separation earnings would fundamentally undermine the court’s ability to effect a clean break. In principle, the entitlement to share would continue until the payer ceased working (subject to this being a reasonable decision), potentially a period of many years. If the court was to seek to effect a clean break this would, inevitably, require the court to capitalise its value, which would conflict with Jones v Jones  Fam 1. Looking at its impact more broadly, it would apply to every case in which one party had earnings which were greater than the other person’s, regardless of need. It would not sit with the observation in Miller v Miller; McFarlane v McFarlane  2 AC 618 that, even confined to “(i)n general”, “it can be assumed that the marital partnership does not stay alive for the purpose of sharing future resources unless this is justified by need or compensation” or the observation as to the effect of “(t)oo strict an adherence to equal sharing” (para 142). Additionally, it would inevitably require the court to assess the extent to which the earning capacity had accrued during the marriage. This would require the court to undertake the exercise to which there were the powerful objections referred to in Jones v Jones. Where would the court start and by reference to what factors would the court determine this issue? How would the court (i) determine the percentage division of the income which was, of course, only generated by actual work (ii) determine how long the relevant earned income should be deemed to continue (would it be based on some notional “retirement” date considered to be “fair” or would it require a factual determination?); or (iii) determine whether any changes in employment were reasonable (if resulting in a lower income) or were, or were not, sufficient to make the new job of a different “character” to the earning capacity claimed as having been developed during the marriage. To apply the sharing principle in this way
would significantly undermine an “important aspect of fairness”, namely to achieve an “acceptable degree of consistency of decision”.
Miller and subsequent decisions, in particular Jones and Scatliffe v Scatliffe  AC 93, did not support the extension of the sharing principle to an earning capacity. The sharing principle applied to marital assets, being “the property of the parties generated during the marriage otherwise than by external donation” (Charman v Charman No 4), para 66). An earning capacity was not property; rather, in the context advanced, it resulted in the generation of property after the marriage.
Secondly, how should the court assess whether an award determined by application of the sharing principle met the party’s needs? More specifically, to what extent was it fair for this wife to be required to use her sharing award to meet her income needs when the husband would meet his needs from earned income? The more extreme argument that the wife’s capital, apart from her housing need, should be preserved and should not be used in any way to meet her income needs, would conflict with the clean break principle to such a significant extent as to undermine the statutory “steer” because, absent other resources, the applicant spouse would always have a claim for an additional award to meet his or her income needs. It was clear from Miller and Charman v Charman (No 4)  1 FLR 1246 alone that, as a matter of principle, the court applied the need principle when determining whether the sharing award was sufficient to meet that party’s future needs. There must be a means of determining whether, and if so how, the sharing award did or did not meet the applicant’s needs. There was no suggestion that the question of needs for these purposes was to be determined by reference to a different need principle, or more broadly, by means of a different approach. Any other approach would be inconsistent with the authorities.
This did not mean that the manner in which the need principle was applied to the sharing award was inflexible, any more than that the application of the need principle was itself inflexible. Applying Jones, an earning capacity could be “relevant to a fair distribution of the assets pursuant to the sharing principle”. It could be taken into account when the court was deciding whether the capital should be amortised in full, in part or not at all and when deciding what assumed rate of return to apply. However, quoting Jones: “Even if, however, an earning capacity may also sometimes be relevant to a fair distribution of the assets pursuant to the sharing principle, it does not follow that the earning capacity should itself be treated as one of those assets, still less that an attempt should be made to capitalise it.”
Further, if, in some circumstances, a wife could be expected to meet her income needs out of inherited capital, it was difficult to see why the same should not apply to a wife’s share of marital wealth. Applying Vaughan v Vaughan  3 WLR 1209, it was “impossible to be categorical about what the law expects in this area”. Given the range of options, from full amortisation to an assumed rate of return and the range of potential circumstances (including all the s 25 factors), it was difficult to see how a definitive outcome could, in fairness, be mandated for all cases. In some cases it would clearly be fair for that part of the sharing award available to meet income needs to be fully amortised, for example, because neither party had any resources other than those being shared. In other cases, the court
might take the view that the applicant should have a greater level of security than that provided by an amortised sum because of the respondent’s earnings and apply only an assumed rate of return. To repeat, when determining this issue, the court would need to have regard to all the relevant circumstances, to the clean break principle and, as appropriate, the issue of undue hardship.
There was a scope of different rates of return to be applied; the relevant question was the gross rate of return, which was not necessarily confined to income but could include both income and capital returns. There were, however, clearly advantages – both in terms of clarity and consistency – if the Duxbury model and the assumptions within it were to be used at least as a starting point. The manner by which the court assessed an award by application of the need principle and the manner by which it assessed whether a sharing award was sufficient to meet needs must be consistent. Given the consequential correlation between needs and sharing, using the same model would remove a potential element of inconsistency between the two, which might result in different outcomes depending on whether the court started with a needs based award or vice-versa.
The court did not accept the wife’s submission that the court should determine what rate of return the wife could obtain “now” and leave any adjustments as might be justified in the future to a subsequent application. Apart from this being a recipe for continued litigation, it ignored the fact that the court was taking a long-term perspective when assessing whether the sharing award met needs. If the needs were being assessed by reference to the applicant’s life expectancy then the rate of return was being assessed by reference to the same period.
When considering whether it was fair for an applicant spouse to be required to use their sharing award to meet their income needs, when the other spouse would meet their needs from earned income, the latter factor would be relevant to the court’s determination of the former issue.
The court did not accept that the compensation principle was to be applied not only when the applicant had sustained a financial disadvantage in his or her prospective career but also when the respondent had sustained a financial benefit. It was clear from Miller that compensation was for the “disadvantage” sustained by the party who had given up a career. That the other party’s career would have benefited was an assumption rather than an evidential issue which had to be determined, in part because of the difficulty of undertaking any such exercise. In practice compensation was a claim which appeared very rarely to have been established and the court did not intend to encourage any more extensive or expensive exploration of the issue. However, as a necessary factual foundation the court would be required to determine, on a balance of probabilities, that the applicant’s career would have resulted in them having resources greater than those which they would be awarded by application of either the need principle or the sharing principle. Further, the court must separately determine whether, and if so how, this factor should be reflected in the award so as to ensure that it is fair to both parties. The judge’s finding in this case that the wife would have been earning less than £100,000 gross pa (£64,000 net) had not been
challenged. There was, therefore, no basis for any compensation award, because the amount awarded to the wife exceeded what she might have been entitled to under this principle.
The wife had also queried the judge’s decision to revisit his initial determination of the wife’s housing need and the rate of return to be applied to her free capital. A judge was entitled to reconsider their judgment prior to the order being made, applying In Re L and another (Children)(Preliminary Findings: Power to Reverse)  1 WLR 634.
The judge had determined whether to impose a term maintenance order by reference only to whether the wife would be able to earn the shortfall between her income needs and the amount generated by her free capital. He had decided that, by this measure, she could not adjust without undue hardship. For the reasons set out above this was too narrow an approach. The judge should have addressed the issue more broadly, including by considering whether it would be fair for the wife to deploy part of her capital to meet her income needs. This broader consideration was required both so as properly to address the question of undue hardship and also so as to give proper weight to the clean break principle. The degree of specificity required would vary according to the circumstances of the case. However, it did not have to be more than would be conventionally required when determining a claim by application of the need principle. The question, therefore, was how would the wife be required to deploy her free capital in the absence of continuing periodical payments and, in the circumstances of this case, would it be fair for her to have to use it in this way. Applying 2.25% net, the wife’s free capital would provide just over £100,000 pa From the age of 60 (in 2028) the wife would in addition, be able to draw a gross pension of £76,000 pa. Very broadly, the two combined would produce £150,000 net pa. The wife would, in addition, in due course receive her state pension. The Duxbury sum required to produce an annual income of £25,000 net from the age of 60 would be £360,000. The husband sought a term expiring in February 2021 when the wife would be 52. There would, therefore, be a shortfall between the wife’s income needs and the net sum produced by her capital of approximately £75,000 per year between 2021 and 2028. Taking a simple arithmetical approach, this would lead to a shortfall totalling just under £600,000.
The total shortfall, applying the above very broad analysis, would be just in the region of £950,000. It was likely that the actual amount would be less but the court would address this issue on the basis that the wife would have to expend this proportion of her sharing award on her income needs. This would represent approximately 21% of the wife’s free capital of £4.6 million or 10% of her total award (acknowledging that part of the award was pension). First looking specifically at s 25A(2), the wife would be able “to adjust without undue hardship” to the termination of maintenance. To require her to use the above proportion of her award would not be unfair having regard to all the s 25 factors. She would still have free capital of £3.6 million and housing of £2.75 million. For these purposes, the court had not specifically factored in the judge’s finding that the wife would be able to obtain employment from late 2019. For the avoidance of doubt, the wife would still have no claim under the compensation principle because by any measure her retained
award would be greater than any award by reference to a lost net income of no more than about £64,000 pa.
Of course, long-term maintenance could be required as part of a fair outcome and the court understood that the expression “meal ticket for life” could be used as an unfair trope. However, the determination of this appeal had been based solely on the court’s view of the proper application of the 1973 Act and the principles identified above to the facts of this case.