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The treatment of future earnings
- Apr 15, 2020
- Latest Journal
We are approaching 20 years since the seminal House of Lords decision in White v White  UKHL 54, yet the judicial debate as to how to implement the principle it established, that there should be no discrimination between breadwinner and homemaker in financial arrangements on divorce, remains alive. This has been highlighted by Mostyn J's recent decision in CB v KB  EWFC 78 on the issue of whether a wife should be required to amortise her sharing award to meet her income needs where the husband will have surplus income. Whilst Mostyn J said that he "cannot conceive of any case" where it would be reasonable for the wife not to have to amortise her sharing award, his approach marked a significant departure from the prevailing jurisprudence, and is in striking contrast to Thorpe LJ's approach in Lambert v Lambert  EWCA Civ 1685 where he could see "no possible reason why the wife alone should be required to amortise".
The issue arises in circumstances where, after the parties have shared the product of their marital endeavours, the wife (it is usually the wife) has capital in excess of her capital needs but insufficient income to meet her outgoings, while the husband's income exceeds his outgoings. Often the wife's inability to meet her income needs arises from joint decisions made during the marriage which limited the wife's earning capacity. In those circumstances, should the wife have to exhaust her sharing award by spending her capital on her future outgoings? Or should she receive sufficient maintenance to cover the shortfall between her income and her income needs, enabling her to treat her share of the family capital with the same flexibility as the husband will be able to treat his – perhaps as a rainy-day fund, to treat herself to luxuries, or to allow her to provide financial assistance to their children?
Lambert was probably the high point of the latter argument. It was a case in which the need to avoid discrimination between breadwinner and homemaker was firmly in the judges' minds; the judgment is primarily concerned with limiting the "special contribution" principle in view of the danger of gender discrimination it posed. Mr Mostyn QC, acting for the wife, demonstrated that the trial judge's award would have left the wife unable to meet her income needs without drawing on her capital, prompting Thorpe LJ to say that he could see no possible reason why she should have to do so, and Bodey J to note that this would "not seem to meet the aim of achieving fairness".
In subsequent cases, the court has moved towards emphasising the need for flexibility. Vaughan v Vaughan  EWCA Civ 349 was a variation case; both parties were approaching retirement, and whereas the wife's pension fund was worth £31,000, the husband's was worth £2.4m. The trial judge had proceeded on the basis that the wife should amortise all of her capital (excluding her home), most of which represented inherited assets. The Court of Appeal disagreed and ordered that the husband pay maintenance at a level that would enable the wife to meet most of her income needs, such that she would need to make only a "modest" draw on her capital. Wilson LJ held: "it is impossible to be categorical about what the law expects in this area… no doubt there are circumstances… in which it is reasonable to expect a wife to apply capital to the meeting of at any rate some of her maintenance needs".
The Court of Appeal returned to the issue in Waggott v Waggott  EWCA Civ 727. One of the two key questions in the case was "to what extent is it fair for the wife to be required to use her sharing award to meet her income needs when the husband will meet his needs from earned income?"; the other was whether there is a sharing entitlement in respect of post-separation income. Given the latter question, the judgment includes significant consideration of the clean break principle, and the provision that when making a periodical payments order the court must consider whether payments should only be made for such time as would enable the recipient to adjust without undue hardship to their termination (s25A MCA 1973).
In the High Court, the wife received a sharing award of £9.76m plus joint lives periodical payments to bridge the gap between the income produced by her free capital (i.e., that part of her sharing award which would not go towards her housing needs) and her income needs. On appeal the husband sought to limit maintenance to a term order, whilst the wife argued that the Court should not have taken into account the income produced by her free capital as the husband would not have to use his capital to meet his income needs.
The wife's argument was rejected, with Moylan LJ reiterating the need for flexibility, and added that: "in some cases it will clearly be fair for that part of the sharing award available to meet income needs to be fully amortised, for example, because neither party has 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 … when determining this issue, the court will need to have regard to all the relevant circumstances", one of which would be the husband's earning capacity.
Moylan LJ calculated that the husband's proposal for term maintenance would require the wife to amortise approximately 21% of her free capital to enable her to meet her income needs, and concluded that this would enable her to adjust without undue hardship to the termination of maintenance. This proposal was therefore consistent with the clean break principle, and the Court made an order in the terms sought by the husband.
In 2019, there were two conflicting High Court decisions on the issue of amortisation: that of Francis J in O'Dwyer v O'Dwyer  EWHC 1838 and Mostyn J's decision in CB v KB.
In O'Dwyer, Francis J followed the flexible approach, stating "whether or not a spouse should be required to amortise their capital will be case specific". In the circumstances before him, and taking into account the husband's future income, he held that the wife should not have to amortise her capital during the remaining years of the husband's employment, but thereafter would need to do so.
CB v KB concerned a 19-year marriage (including pre-marital cohabitation). The parties had six children; the husband, 41, was a member of a successful band, whilst the wife, 45, had not worked during the marriage. The wife's sharing award was £5.1m, with "free" capital of around £2.1m. The husband would continue to earn a high income, estimated at around £640,000 gross in 2020 and 2021, increasing to around £2.45m gross in 2022 and 2023 when his band would resume touring. Considering whether the wife's sharing award would enable her to meet her income needs, Mostyn J held that it was "pre-eminently reasonable that the wife should be required to amortise", saying he "struggle[d] to conceive of any case where in the assessment of a claimant's needs it could be tenably argued that it was reasonable for her not to have to spend her own money in meeting them. After all, that is what money is for". Assuming the wife would be able to earn £25,000 per annum between the ages of 49 and 60, and that at age 60 she would downsize her home and reduce her spending by a third, Mostyn J determined that her sharing award was sufficient to enable her to meet her needs (albeit at a significantly lower level than she had sought).
CB v KB is a departure from previous jurisprudence. No consideration of the circumstances of the case, including the husband's ongoing income, took place when determining that the wife should amortise, and the outcome was markedly different to previous similar cases. Mostyn J's assertion that "spending is what money is for" does not reflect the reality of the litigants in big-money cases, for whom capital represents financial security and flexibility; nor does it respect the difference most people accord to income and capital. Most significantly, if, following divorce, a wife has to deplete her share of the family capital in order to meet her basic needs, whilst the husband's share remains available to him as capital whilst he meets his income needs through the earning capacity he developed during the marriage, often with the wife's support and at the cost of her own earning capacity, then it does not appear that the discrimination warned against in White, between breadwinner and homemaker, has been avoided.
There is, plainly, a tension between the non-discrimination principle in White and the clean break principle. The Court of Appeal navigated this tension in Waggott by emphasising the need for flexibility. The uncompromising approach in CB v KB does not reflect this balance, and it is to be hoped that the courts return to the nuanced approach set out in Waggott and followed in O'Dwyer.
Many thanks to Family Law for permission to reproduce this article
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