When a couple divorce, the basic concept of the ‘sharing principle’ assumes that each spouse would be entitled to an equal share of the matrimonial assets, that being assets unequivocally built up during the course of the marriage, to ensure fairness (unless there was good reason to depart from it). Whilst the starting point is sharing, it is subject to meeting a party’s needs. Where there are sufficient matrimonial assets to meet the parties’ needs, it can therefore be relatively straightforward to consider how capital or property could be divided to achieve a clean break.
However, what principles apply in relation to income generated by a spouse, which will continue after the marital breakdown? Should this income be shared in accordance to the ‘sharing principle’ possibly resulting in a perpetual payment to the other spouse? The leading case which dealt with this issue was Waggott v Waggott  in which it was held that post separation earnings were not considered matrimonial and should not therefore be shared unless a party’s needs required it. Moylan LJ specifically said that;
‘any extension of the sharing principle to post separation earnings would fundamentally undermine the court’s ability to effect a clean break…’
A recent decision in the case of O’Dwyer v O’Dwyer in the Court of Appeal sought to rigorously test the decision reached in Waggott v Waggott. It should be noted that when the O’Dwyer case was first decided in March 2018, the decision of Waggott v Waggott (which was decided in April 2018) was not available. However it was on the basis of the subsequent Waggott decision that the husband decided to appeal.
The case of O’Dwyer involved a longstanding marriage of 28 years. The husband was 62 and the wife was 60. By the time the parties divorced, their four children were all grown up. The husband ran a successful franchise of McDonald’s restaurants which had an agreed net valuation of £5.8m.
His Honour Justice O’Dwyer [no relation to the parties], sitting at the Central Family Court, presided over the Final Hearing in March 2018. At that time, it was agreed between both parties that, given the length of their marriage and their respective contributions, the net capital assets of £6.5m should be divided equally which, after deduction of CGT and tax, would provide the Wife with just under £3m. As well as dealing with the capital assets, His Honour Justice O’Dwyer also addressed the issue of maintenance which later became the crux of the Husband’s Appeal.
When considering the level of maintenance required by the Wife, His Honour Justice O’Dwyer referred to the Husband’s income and had asked;
“why, after divorce, should only [the husband] continue to live well upon it when clearly it is a product of matrimonial endeavour...”
The judge took the view that the Husband’s future earning capacity should be available for sharing, describing the Husband’s future business as ‘matrimonial’. The judge thereby ordered the Husband to pay the Wife maintenance of £150,000 per annum (although it is not clear how the sum was calculated). By applying the sharing principle to the Husband’s future income stream, this effectively contradicted the later decision reached in Waggott v Waggottand made an appeal inevitable once that decision was made public.
The Husband sought permission to appeal the periodical payment award but permission was refused. The Husband subsequently appealed to the Court of Appeal.
In December 2018, the Husband’s application for permission to appeal the award was granted and the matter was heard by Mr Justice Francis. The Husband argued that the Judge’s decision at first instance was contrary to the decision made by the Court of Appeal in Waggott v Waggott, stating that ‘the sharing of an income stream is unprincipled’. Following the outcome of Waggott, the Husband argued that the judge had applied the wrong test when determining periodical payments. The Husband supported his argument by stating that the sharing principle should not apply to his income, but rather he should be ordered to make payments in accordance with the Wife’s needs only.
Mr Justice Francis accepted Counsel’s position for the Husband (the late Valentine Le Grice QC) that ‘it is now settled law that income cannot be shared’. The judge went on to confirm that periodical payments ‘must be calculated on the basis of needs’ although this would not prevent a judge from generously applying a spouse’s available income. It was emphasised that the judge would need to demonstrate a formulaic approach but that a judge would still be left with ‘a significant margin of discretion as to how generously the concept of need would be interpreted’. In this case, when determining the Wife’s needs, Mr Justice Francis made it clear that the starting point should have been to assess the Wife’s reasonable needs and then decide if she could draw on any available capital provision to meet those needs. If there was insufficient capital to meet the Wife’s needs, the judge should then consider periodical payments.
Having applied the Duxbury calculation, Mr Justice Francis determined that the Wife’s existing capital award could provide her with a yearly income of £52,000 and having accepted that the Wife’s income needs of £120,000 per annum (as stated in her Form E) were reasonable, Mr Justice Francis ordered the Husband to meet the shortfall of £68,000, effectively reducing the initial award of £150,000 to £68,000 per annum. It is noted that between the Wife filing her Form E at the beginning of the case, to the conclusion of the Final Hearing, her stated income needs had increased from £10,000 per month to £15,000 per month which Mr Justice Francis did not accept.
Whilst some readers may consider this ruling to be unfair towards the Wife (as she would need to start living off her capital award), the outcome of this case strengthens the decision reached in Waggott v Waggott. It confirms that income generated after parties separate should not be shared unless a party’s needs require it and, in this case, arguably the Wife’s needs have been met in accordance with her income needs as correctly calculated. The approach taken by the courts in this regard only seeks to encourage a clean break between parties which is usually the desired outcome, especially if you are the paying party.
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