Supreme Court upholds pre-nuptial agreement in Radmacher case

Practical Law UK Legal Update 4-503-6520 (Approx. 9 pages)

Supreme Court upholds pre-nuptial agreement in Radmacher case

by PLC Private Client, incorporating material provided by Richard Hogwood and Tom Farley-Hills of Speechly Bircham LLP.

Background

Pre-nuptial agreements are entered into by a couple before their marriage and set out the financial arrangements in the event of their divorce. Pre-nuptial agreements are not contractually binding in England and Wales. The courts have an overriding discretion when considering the financial arrangements that should apply on divorce (section 25, Matrimonial Causes Act 1973 (MCA 1973)). However, increasingly the courts have been inclined to consider appropriately prepared agreements as a "circumstance of the case" or "conduct of the parties" that should be taken into account by judges when exercising their discretion.

For further background on the current law relating to pre-nuptial agreements, see Practice note, Pre-nuptial agreements and asset protection.

Post-nuptial agreements have the same objectives as pre-nuptial agreements, but are entered into by a couple after their marriage. The Privy Council has held that a post-nuptial agreement can be contractually binding provided the parties' circumstances have not changed so as to make the agreement unfair and sufficient provision is made for any children of the family (MacLeod v MacLeod (Isle of Man) [2008] UKPC 64). The Privy Council drew a distinction between pre-nuptial and post-nuptial agreements, finding that only post-nuptial agreements were contractually binding. The Privy Council is not binding authority on the English courts, but is often persuasive.

The Supreme Court in Radmacher reviewed the historic approach of English law to pre-nuptial and post-nuptial agreements (see the majority judgement at paragraphs 31 - 48). It also considered the Privy Council's decision in MacLeod (see the majority judgement at paragraphs 49 - 66).

This update adopts the Supreme Court's use of the term "nuptial agreements" to mean both pre-nuptial and post-nuptial agreements.

Facts

The parties married in England in 1998. The wife was from a wealthy German family. The husband was French and had been a successful banker.

Before their marriage, the parties had entered into a pre-nuptial agreement in Germany. The agreement provided that neither party would gain financially from the other if they divorced.

The parties had two children together, but separated in 2006. The wife petitioned for divorce in England in 2007.

In the High Court proceedings, the husband sought £6.9 million by way of financial settlement and argued that the pre-nuptial agreement should play no role in determining the case. In response, the wife offered a much smaller settlement in reliance on the terms of the pre-nuptial agreement.

For further detail on the facts, see Legal update, Court of Appeal upholds pre-nuptial agreement: Facts.

High Court decision

The High Court held that a pre-nuptial agreement was a factor to be taken into account when the court exercised its discretion under section 25 of MCA 1973 and that, in the right case, it could be a compelling factor, although not determinative. On this basis, the High Court awarded the husband a sum of £5.56 million. Baron J held that a number of defects in the pre-nuptial agreement reduced its weight in the eyes of the court. These defects included the fact that the husband had not received independent legal advice and the agreement did not make any provision for the children of the family.

The wife was subsequently granted leave to appeal.

For further detail on the High Court decision, see Court of Appeal upholds pre-nuptial agreement: The issues at first instance and The decision at first instance.

Court of Appeal decision

The Court of Appeal allowed the wife's appeal, and significantly reduced the husband's financial settlement, with the focus of the reduced award being on the husband's role as a father rather than as a former spouse. The court found that, although there were flaws in the pre-nuptial agreement, they did not detract from its influence in the circumstances, and the agreement should therefore carry decisive weight.

The husband appealed.

For further detail on the Court of Appeal decision, see Legal update, Court of Appeal upholds pre-nuptial agreement: Decision of the Court of Appeal.

Supreme Court decision

The husband's appeal was dismissed. The Supreme Court decided by a majority of 8 to 1 (Lady Hale dissenting) that the Court of Appeal had been correct to conclude there were no factors that rendered it unfair to hold Mr Granatino to the terms of his pre-nuptial agreement with Ms Radmacher.

Seven of the majority Justices gave a joint judgment (Lords Phillips, Hope, Rodger, Walker, Brown, Collins and Kerr). Lord Mance agreed with the majority on the outcome and in most other respects, but gave a short separate judgment. Baroness Hale gave a dissenting judgment, albeit that she was the only judge in the court with a family law background.

The Supreme Court majority judgment began by considering the status of nuptial agreements, before moving on to examine the circumstances in which they carry weight, and then applying the resulting principles to the facts of the case.

Status of nuptial agreements

The Supreme Court confirmed that no agreement between the parties to a marriage can override the relevant statute, the MCA 1973, and the courts' broad discretion as set out in section 25 of MCA 1973, when deciding a financial claim on divorce. In exercising that discretion, a court must consider all the relevant circumstances of the case.

In light of the courts' overriding discretion, the Supreme Court majority considered that the question of whether or not nuptial agreements are contractually binding was a red herring and need not be decided in this case. However, the majority (excepting Lord Mance) concluded, in obiter dictum, that there was no conceptual difference between pre-nuptial and post-nuptial agreements, and that both were capable of being legally enforceable contracts. In this respect, the majority (excepting Lord Mance) disagreed with the Privy Council’s decision in MacLeod.

The fact that a nuptial agreement had been made subject to the law of a foreign jurisdiction in which such agreements were contractually enforceable was only relevant in that it demonstrated the parties' intention to be bound by its terms. The Supreme Court noted that, following its decision in this case, it would be natural to infer that parties who entered into a nuptial agreement to which English law was likely to apply intended that agreement to be binding.

Since the courts' discretion is overriding, the importance of a nuptial agreement is as a relevant circumstance of the case that must be weighed by the court alongside all other relevant circumstances.

Fairness the overriding consideration when weighing relevant circumstances

Before turning to the specific question of how to determine the weight of a nuptial agreement, the Supreme Court considered the general principles to be applied when weighing relevant circumstances. In doing so, it cited the House of Lords decisions in White v White [2000] UKHL 54 and Miller v Miller; McFarlane v McFarlane [2006] UKHL 24. These decisions established that fairness should be the courts' overriding consideration when exercising their discretion to determine financial arrangements on divorce, and identified three strands to the concept of fairness in this context:

Need. Fairness requires that provision is made for both parties' housing and financial needs. When assessing these needs, the court should take into account a wide range of factors, including the parties' ages, earning capacity and current standard of living.
Compensation. Having provided for both parties' needs, the court should consider whether one party's financial situation is stronger than the other's as a result of the way in which the parties have divided their responsibilities within the marriage. If so, fairness may require the court to award an element of compensation to the weaker party. A typical example is where one spouse has taken on the role of primary carer for the children of the family, leaving the other spouse free to pursue a career. The Supreme Court suggested that a nuptial agreement that precluded or ignored compensation was likely to be deemed unfair.
Sharing. Marriage may be seen as a partnership, and fairness requires that each partner should be entitled to an equal share of the assets of the partnership unless there is good reason to the contrary. One such reason might be the distinction between matrimonial property generated during the marriage, and non-matrimonial property brought by one party to the marriage or inherited by or given to one party during the marriage. In the case of non-matrimonial property, there is likely to be a better reason for departing from the principle of equality.

Determining the weight of a nuptial agreement

The Supreme Court found that where a nuptial agreement divided a couple's assets in a way that, in the absence of the agreement, a court might have adopted applying the principles in White and Miller, then the agreement should have effect. However, this reasoning did not assist where the terms of the nuptial agreement failed to achieve fairness under the White and Miller principles. Furthermore, in the Supreme Court's view, the mere existence of a nuptial agreement was capable of altering what was fair under that test.

Faced with this problem, the Supreme Court majority formulated a new three-part test to be applied when determining the weight given to a nuptial agreement, as follows:

"The Court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement."

Agreement must be freely entered into

The first part of the test requires that each party entered into the agreement "freely". There should be no "tainting circumstances" surrounding the making of the agreement. Tainting circumstances would include evidence of duress, fraud or misrepresentation, as well as other forms of pressure or unconscionable conduct, such as exploitation of a dominant position to secure an unfair advantage. Each party's emotional state at the time is a relevant consideration, with factors such as their age and previous experience of long-term relationships having a bearing. In the case of a pre-nuptial agreement, a court might also ask itself whether the marriage would have gone ahead without an agreement in the terms signed.

Parties must have full appreciation of the implications

The second part of the test requires that each party entered into the agreement "with a full appreciation of its implications". This requirement encapsulates the Supreme Court's ruling that a nuptial agreement should only be capable of carrying full weight where, at the time of its signing, each party had all information material to his or her decision to sign and an intention that the agreement should determine the financial consequences of divorce. The presence of formal safeguards, such as disclosure of assets and independent legal advice, although desirable and persuasive, is not necessary.

Agreement to be upheld unless unfair

The third part of the test reduces or eliminates the weight of an agreement where the parties' present circumstances are such that it would no longer be fair to hold them to its terms. Although stating that this would depend on the facts of each case and expressing reluctance to lay down rules that would limit the courts' discretion, the Supreme Court nevertheless gave the following guidance:

It will not be fair to allow an agreement to prejudice the reasonable requirements of any children of the family.
The autonomy of adults should be respected. It is "paternalistic and patronising" to override the terms of an agreement simply on the basis that "the court knows best".
There is nothing inherently unfair about an agreement that seeks to ring-fence non-matrimonial property, including assets owned before the marriage and property that one or other party anticipates receiving from a third party during the marriage.
In general terms, the longer a marriage endures following the signing of an agreement, the greater the chance that it may not be fair to hold the parties to its terms because of unforeseen changes in circumstances. This is more likely to be an issue in the case of a young couple starting married life with few assets than where, for example, a couple who have both been married previously each bring significant assets to a second marriage.
The strands of need, compensation and sharing identified in White and Miller are relevant considerations, and the Supreme Court gave the following guidance as to how they might apply:
- if the effect of an agreement would be to leave one party in a state of real need, while the other is comfortably provided for, then this is likely to be unfair;
- if one party has a valid argument for an element of compensation (for example, for loss of earning power following a joint decision that one spouse should give up a career to look after children), then an agreement that precludes or ignores such compensation is also likely to be unfair; and
- if needs and compensation are adequately covered, a nuptial agreement may effectively prohibit further sharing of the assets.
There is potential for confusion here. The Supreme Court majority, when discussing the strand of compensation, commented that a nuptial agreement was likely to be unfair if it prevented a claim by a homemaker and primary carer of children against income accrued by the breadwinner throughout their marriage. Many practitioners, however, would view this as a matter of sharing rather than compensation, and therefore capable of being fairly excluded under a nuptial agreement if needs and compensation had been adequately covered.

It was fair to hold Mr Granatino to the agreement in this case

Applying their own three-part test, the Supreme Court majority dealt swiftly with parts one and two, finding that the parties had entered into their pre-nuptial agreement freely and with a full appreciation of its implications. In particular, the husband's lack of independent legal advice, the wife's failure to disclose the approximate value of her assets, and the absence of any negotiation between them, were not factors which tainted the agreement. In practice, none of these matters had affected the husband's willingness to enter into the agreement or his understanding of its implications. He had all the information material to his decision to sign.

Addressing the question of fairness under part three of the new formula, the Supreme Court tested the circumstances of the case against the three strands of need, compensation and sharing identified in White and Miller:

Need. Although the pre-nuptial agreement made no provision for the possibility that the husband might be reduced to circumstances of real need, the Supreme Court held that this did not reduce the agreement's weight because, in practice, a situation of real need had not arisen. The husband's needs were covered by his potential earning capacity and also, indirectly, by the financial provision ordered for the benefit of the children to which he would have access and which would provide him with accommodation and funds for some years to come (although not, it must be noted, for his lifetime).
Compensation. The court found that the husband had no argument for compensation. His decision to abandon a lucrative career for a life of academic study reflected his own preference and was not driven by the demands of his family.
Sharing. The court found that by signing the pre-nuptial agreement, the husband had agreed he should have no entitlement to the wealth that the wife received from her family.

The Supreme Court majority therefore agreed with the Court of Appeal that, subject to making provision for the needs of the children of the family, it was fair to hold the husband to the terms of the pre-nuptial agreement.

Lady Hale's dissenting judgment

Lady Hale, the only one of the nine Justices with a family court background, disagreed with the majority on a number of points:

She disagreed with the majority's obiter finding that pre-nuptial agreements were capable of being legally enforceable contracts. This was a finding with which Lord Mance also disagreed.
She did not agree that, in policy terms, there were no relevant differences between pre-nuptial and post-nuptial agreements. This distinction had been a key part of the Privy Council's judgment in MacLeod (of which she had been the primary author) and she stood by the distinction.
In a departure from the arguments considered by the majority, and remarking upon her status as the only female member of the court, Lady Hale drew attention to what she described as the "gender dimension" to the question of whether pre-nuptial agreements should be legally enforceable. She expressed concern that courts might lose sight of the objective of pre-nuptial agreements, which was "to deny the economically weaker spouse the provision to which she – it is usually although by no means invariably she – would otherwise be entitled".
Whilst broadly agreeing with the considerations identified as relevant by the majority when determining the weight to be attached to a nuptial agreement, Lady Hale disagreed with the three-part test formulated by the majority. Her primary concern was that it could be construed as introducing a presumption that nuptial agreements would be binding, and that a court might feel restricted in the exercise of its overriding discretion as a result. She therefore put forward the following alternative test:
"Did each party freely enter into an agreement, intending it to have legal effect and with full appreciation of its implications? If so, in the circumstances as they now are, would it be fair to hold them to their agreement?"
Lady Hale's concern to avoid any suggestion of a presumption was shared by Lord Mance, although he felt that the difference between the two tests was unlikely to be important in practice.
In Lady Hale's view, the Court of Appeal had been wrong to restrict the husband's English housing entitlement of £2.5 million to the period up to his youngest child's 22nd birthday. In her opinion, the award should have been made for life. This view stemmed from Lady Hale's belief that there was an "irreducible minimum" to the legal consequences of marriage that should be protected from erosion by external agreements between individual couples. This minimum included a couple's duty to support one another and their children, and by focusing its award on the husband's role as a father whilst ignoring his former role as a spouse, the Court of Appeal had wrongly treated him in the same way as it would an unmarried parent.

Comment

Practitioners now have a clearer set of principles by which to assess the likely effect of existing nuptial agreements and to prepare future agreements. However, the courts' broad and overriding discretion when determining divorce settlements remains intact and so, pending the Law Commission's report on agreements between spouses and civil partners (scheduled for 2012, with a consultation paper expected in early 2011) and any legislation which may follow, the impact of nuptial agreements will continue to be determined by the courts on a case-by-case basis.

Despite Lady Hale's dissenting judgment, the conceptual distinction between pre-nuptial and post-nuptial agreements appears to have been dispensed with, and so family lawyers may consider that the previously well-founded practice of signing two agreements, one before marriage and one shortly after, is no longer necessary.

Practitioners may want to review clients' foreign nuptial contracts and draw up parallel English agreements where they do not comply with the principles of fairness identified by the Supreme Court.

It is worth remembering that, although the judgment of the Supreme Court refers only to marriage and married couples, the decision also applies to couples who sign an agreement before or after entering into a civil partnership.

The position of the couple in this case is perhaps not a common one. The husband, although financially the weaker party, was never likely to find himself in a state of real need and there were no circumstances which justified any element of compensation. Factors which bore relatively little weight in this case could, however, play a much more significant role given a different set of facts. Practitioners should therefore exercise caution and pay careful attention to the detail of a couple's relationship when advising the financially stronger party as to the robustness of his or her nuptial agreement.

Case

Radmacher v Granatino [2010] UKSC 42.

Supreme Court upholds pre-nuptial agreement in Radmacher case | Practical Law