Legal Update
9 May 2018

Court of Appeal gives guidance on treatment of earning capacity and sharing and compensation principles.

Giorgia Sessi examines the case of Waggott v Waggott [2018] EWCA Civ 727, in which the Court of Appeal gave guidance on the treatment of earning capacity and considered the application of the sharing and compensation principles.  

Background

The husband and wife began cohabiting in 1991, married in 2000 and separated in 2012. They had one child together, who was born in 2004. The husband worked as an employed accountant. The wife, also an accountant, left employment permanently in 2003.

At the time of separation, the parties’ capital assets were assessed at £16.4 million. The husband and the wife agreed their capital resources, including pensions, should be divided equally.

The dispute centred on the distribution of income, namely the extent to which the wife should receive maintenance payments.

The final award, made by Recorder Tidbury in September 2016, was as follows:

-        Capital: £9.76 million to the wife and £7.8 million to the husband (the difference was justified on the basis that the wife had not yet rehoused and to reflect a percentage of the husband’s deferred remuneration). 

-        Income: the wife was awarded on-going maintenance for joint lives in the sum of £115,000 per year (to bridge the shortfall between her income needs of £175,000 and her assumed net income of £60,000, arising from a 2.25% net return on her available capital)

The appeal

The wife appealed on the following grounds:

  1. The judge was wrong not to award the wife a share of the husband’s post-separation income: his earning capacity was a matrimonial asset acquired during the course of the marriage, which the wife was entitled to share in the same way as any other marital asset.
  2. The judge failed to properly apply the compensation principle. This applied not only when the applicant had suffered a financial disadvantage through the relationship, but also when a financial advantage had accrued to the other party.
  3. The judge was wrong to attribute any return on the wife’s capital resources when determining how she could meet her income needs, because the husband would not have to make use of his capital to meet his income needs.

The husband cross-appealed against the judge’s decision not to impose a term on the maintenance payments.

In response to the wife’s appeal, the husband argued that:

  1. Earning capacity and post-separation earnings are not marital property to which the sharing principle applies. An extension of the sharing principle as sought by the wife would contravene the clean break principle in a fundamental manner and would make it very difficult for the courts to determine financial claims.
  2. With regards to compensation, the wife had not sustained a financial disadvantage greater than the sum awarded to her through the sharing principle. The compensation principle only applies if the applicant spouse has sustained a financial disadvantage, not when the respondent has sustained an advantage.
  3. The wife’s income needs were sufficiently met by the award received and a clean break was justified (this was the subject of the husband’s cross-appeal). The husband proposed a 5-year term with a section 28(1A) bar.

In respect of the wife’s first ground of appeal, that the judge was wrong not to award the wife a share of the husband’s post-separation income, Moylan LJ agreed with Wilson J’s observations in Jones v Jones [2012], that earning capacity is ‘not easily measurable in capital terms’, which had led him to conclude that earning capacity did not fall to be capitalised for the purpose of the sharing principle ([85] to [88]).

Moylan LJ concluded that earning capacity is not a matrimonial asset, stating at [123] that ‘any extension of the sharing principle to post-separation earnings would fundamentally undermine the court’s ability to effect a clean break’. The only way to effect a clean break, he added, would be to capitalise its value, which would be contrary to what had been determined in Jones. Courts would be required to assess the extent to which earning capacity had accrued during the marriage ([125]), inevitably causing evidential problems ([98]).

In respect of the wife’s second ground of appeal, that the judge had failed to properly apply the compensation principle, Moylan LJ observed the difficulty in estimating the extent of the advantage accrued by the respondent spouse, noting the evidential hurdle a court would encounter in establishing how the parties’ careers would have developed had they not married ([96]).

He rejected the argument that the compensation principle should be applied to cases where one party has sustained a financial benefit, adding that ‘compensation is for the ‘disadvantage’ sustained by the party who has given up a career’ ([139]).

In respect of the wife’s third ground of appeal, Moylan LJ reminded himself of the principle laid down in Miller; McFarlane [2006], that a clean break is to be encouraged unless the parties’ capital is insufficient to meet their continuing financial needs or there is a need for compensation ([101]).

Moylan LJ held that the wife’s argument conflicted with the clean break principle because ‘absent other resources, the applicant spouse would always have a claim for an additional award to meet his or her income needs’ ([130]).

On the husband’s cross-appeal, Moylan LJ found that the judge at first instance should have determined the issue of imposing a term on maintenance payments by taking into account the wife’s ability to obtain a net return from her capital ([146]). He held that this was a relevant consideration in order to determine whether the wife would be able to adjust to the termination of maintenance without undue hardship. At [153], he concluded that requiring the wife to use a proportion of her award to meet her needs would not be unfair having regard to the section 25 factors.

Accordingly, the wife’s appeal was dismissed and the husband’s cross-appeal was allowed. The Court of Appeal therefore imposed a term on the husband’s periodical payments to the wife expiring on 1st March 2021 with a section 28(1A) bar.

Discussion

This is a case where the level of resources significantly exceeded the financial needs. The principles that arise from it are, however, very important and add to the expanding body of law on post-marital assets. The Court of Appeal also provided guidance on the interpretation of the compensation principle, which will apply to cases across the whole spectrum.

In assessing the wife’s arguments, Moylan LJ adopted a pragmatic approach, reflecting on the evidential (and conceptual) difficulties that would arise if courts had to quantify the extent to which a spouse’s ‘earning capacity’ was the result of marital endeavour and the level of relationship-generated advantage.

This approach is in line with the court’s requirement to have regard to the proportionality of evidence gathering in financial remedies disputes. Notwithstanding the focus on the parties’ available resources, the Court of Appeal was not prepared to accept that ‘earning capacity’ is a marital asset. This would constitute a complex and, arguably, disproportionate exercise for the courts to undertake. The same consideration applies to assessing any advantage gained by the respondent spouse post-separation.

Interestingly, at the end of his judgment Moylan LJ acknowledged the wife’s submissions on the current public debate on joint lives orders, described by the press as ‘a meal ticket for life’. He accepted that such expression could be perceived as unfair and that long-term maintenance could be required in certain cases. He clarified, however, that the determination of the appeal had been based solely on the proper application of the MCA 1973 to the facts of the case.