PRENUPTIAL AGREEMENTS IN ENGLAND AND WALES – DO THEY BITE?

This paper deals with the legal and practical aspects of pre-nuptial agreements intended to apply in England and Wales.

I am going to deal with the following issues:

• What is the current state of the law – are they binding?

• Law Commission report – where are we now?

• Must there be disclosure?

• Timing of the prenup

• What are the objectives of the pre-nup? Effect of public policy?

• Legal Advice for the parties

• International aspects – is separate expert legal advice needed? One pre-nup or two? What jurisdiction and applicable law will govern the pre-nup?

I. What is the current state of the law – are prenups binding?

The law is very much in a state of flux and unfortunately remains up in the air – I was, as a result, tempted to rename this seminar “as clear as mud” to reflect this.

Crossley

Prior to Radmacher, there were a series of decisions which were moving away from any decisions based upon considerations of public policy. Of these decisions, Crossley v Crossley [2007] 1FLR 1467 makes particularly interesting reading. H and W had both been married before and both came into the marriage with considerable assets – H £44 million and W £18 million. The marriage was short and childless. With the benefit of independent legal advice they signed a prenup agreeing not to make any claims against eachother for any order for financial provision upon divorce.

The case was an appeal to the Court of Appeal against a case management decision made by Bennett J that the parties should explain in their Form Es why the prenup was not binding.

The Court of Appeal made it clear that the directions given were appropriate. Although neither party could oust the jurisdiction of the English court under s25 MCA 1973, the court was very willing to entertain the possibility that a prenup could be of “magnetic importance” as indeed it considered was likely in this case.

As far back as 2007 Lord Justice Thorpe was making it clear that what was needed was legislative change. He was particularly concerned as the Head of International Family Justice to bridge the gap between the common law and civil law jurisdictions in which prenups are clearly binding. Many of my clients from continental jurisdictions simply look aghast when I tell them that the English court may simply not be interested in considering their agreements made before notaries a couple of days before the wedding ....

MacLeod

The next major case was MacLeod v Macleod [2010] 1 AC 298 decided by the Privy Council on appeal from the Isle of Man. This case concerned the status of a post nuptial agreement concluded by a husband and wife who were still living together. It is vital to note though that within a year of the PC producing the judgment, the Supreme Court was to decide on Radmacher which included a very critical judgment in relation to parts of the MacLeod judgment. The post nuptial agreement was governed by sections 49-51 of the Manx Matrimonial Proceedings Act 2003 which is equivalent to sections 34-36 of the Matrimonial Causes Act 1973, thus providing the court with a power to vary it.

Baroness Hale in her judgment referred to the case of Edgar v Edgar [1980] 1WLR 1410 in which a wife sought a lump sum in her divorce proceedings following an agreement made with the benefit of solicitors’ advice in which she agreed not to claim any capital. The wife was held to her bargain by the Court of Appeal albeit that this result was achieved via a consideration of the s25 factors, namely the wife’s “conduct” in agreeing not to claim any capital:

“It is not necessary in this connection to think in formal legal terms, such as misrepresentation or estoppels, all the circumstances as they affect each of the two human beings must be considered, in the complex relationship of marriage, So, the circumstances surrounding the making of the agreement are relevant. Undue pressure by one side, exploitation of a dominant position to secure an unreasonable advantage, inadequate knowledge, possibly bad legal advice, am important change of circumstances, unforeseen or overlooked at the time of making the agreement are all relevant to the question of justice between the parties ...formal agreements, properly and fairly arrived it with the competent legal advice, should not be displaced unless there are good and substantial grounds for concluding that an injustice will be done by holding the parties to the terms of their agreement...” [1417 C]

In my opinion, this remains a good statement of the law as it presently stands.

In her judgment in MacLeod Baroness Hale concluded by stating:

“it is contrary to public policy to cast onto the public purse an obligation which ought properly to be shouldered within the family.”

It is therefore made clear in this case that whilst the PC did indeed consider that the burden should be on the person asserting that the agreement should not be binding, the court retained its powers to revisit a post nuptial agreement, particularly if inadequate and/or unfair provision had been made, necessitating reliance on the benefit system.

The PC concluded that a post-nuptial agreement was indeed contrary to public policy and was not valid and binding in the contractual sense. It was, however, valid and enforceable subject to the power of the court to vary the agree arrangements.

Radmacher

The facts of Radmacher v Granatino [2010] UKSC42 are now very well known. A German heiress married a French banker of Italian origin. Both were wealthy albeit that the wife was much more wealthy. A prenup was drafted for them by the wife’s advisers which the husband was invited to take advice on but failed to do so. The agreement essentially provided that neither party would have any claim on the property brought into the marriage by the other party. Further resources accruing to either party during the marriage would also remain owned by that party alone. There was also a provision that there could be no claims in respect of income even if the party were “in serious difficulties”. This provision ousting maintenance claims was expressed to apply “to the fullest extent permitted by law”. Clearly for the parties themselves, such agreements would very largely reflect divorce laws in their own continental jurisdictions in any event, where pre-marital assets are simply not considered in any shape by the courts on divorce and spousal maintenance is minimal.

On the facts of the case, the prenup was essentially upheld by the Supreme Court, albeit that the husband’s “rights” under Schedule 1 Children Act by virtue of his shared residence of the children could not be excluded by the prenup. These formed the basis for the only financial orders which were made in the husband’s favour.

The Supreme Court made it clear that prenups must be given weight but are not binding as a matter of contract as s25 MCA cannot be ousted [see para 2]. They also made it clear that they considered the issue of whether pre or post nups were contracts was a red herring....

The Supreme Court posed and answered three questions at para 67 onwards:

(i) Were there circumstances attending the making of the agreement that detract from the weight that should be accorded to it?

- material lack of disclosure [para 69]

- standard vitiating factors ie duress, fraud, misrep [para 71]

- unconscionable conduct such as undue pressure [falling short of duress] [para 71]

- unworthy conduct such as the exploitation of a dominant position to secure an unfair advantage – this would reduce or eliminate any weight to be given to the prenup [para 71]

- the parties’ emotional states, ages, maturity, previous relationship history and whether the marriage would have gone ahead without a prenup [para 72]

- unfair terms of an agreement [para 73]

(ii) Were there circumstances attending the making of the agreement that enhance the weight that should be accorded to it; the foreign element?

- Clearly after the judgment in Radmacher, parties even in England must expect that the agreement will be given weight – this is again something which should be reflected in the prenup itself [para74]

(iii) Did the circumstances prevailing when the court’s order was made make it fair or just to depart from the agreement? [see para 75]

- The Supreme Court said [in bold!] “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”

- This is where it really gets difficult and is indeed the reason no doubt for the further consultation by the Law Commission [see below] as clearly the English courts’ view on what a party’s reasonable needs might be will determine the prenup’s fairness

- Such considerations of fairness and needs vary wildly between jurisdiction so it is extremely important to warn overseas clients that an English court’s views of “needs” are likely to be much more generous than those in their own jurisdiction – see for example Z v Z [2011] EWHC 2878 [below]

- Parties to a prenup therefore need to understand [preferably as evidenced in a recital to the agreement] that what they are signing may provide something quite different to what would have been the outcome pursuant to English law

Post Radmacher

Since Radmacher, there have been a series of judgments in relation to much more standard arrangements between “continental spouses” ie where the agreements as to how to hold assets during marriage/divorce is not in fact specifically drafted for the parties but is merely a standard form which both parties sign before a notary virtually immediately before marriage, receiving no independent legal advice and providing no disclosure.

All of these judgments are High Court judgments only, and no doubt no other court wishes to hear these cases on appeal as they are still waiting for the Law Commission to report...

An overview of the High Court decisions shows as follows:

GS v L [2011] EWHC 1759 – Mrs Justice King – H Polish and German and W Spanish. Couple had been living in Spain for much of the time. H in fact contending not only that the capital split should be as per Spanish matrimonial regime but also that Spanish maintenance rules should apply .... Spanish matrimonial regime of community of marital assets [thereby excluding pre-marital assets] not upheld – parties received equal shares of capital. V v V [2011] EWHC 3230 – Mr Justice Charles - Italian H, Swedish W, 2 small children, majority of assets belonging to H pre marriage. Swedish prenup indicating that assets were H’s given some weight and H given Mesher of 33% over W’s new home. No full and frank disclosure Z v Z [2011] EWHC 2878 – Mr Justice Moor – Both parties French, 14 year marriage, 3 children. Total assets of £15 mn – only £1.5 mn in W’s name. French matrimonial regime of separation of assets given some weight even though made only a week before wedding – assets not shared but W’s needs v generously assessed and W awarded £6mn...

Kremen v Agrest (No. 11) [2012] EWHC 45 – Mr Justice Mostyn – in long running litigation in which H had behaved very badly. H and W both Russian. Israeli post-nuptial agreement given no weight – no independent legal advice, no disclosure, purported to include children act claims as well ...

B v S [2012] EWHC 265 – Mr Justice Mostyn - Spain, W Spanish, H not British, 2 children living with W. Catalan default matrimonial regime providing for separation of assets given no weight, nor was a further express separation of property agreement [para 35] “I consider that the Court must guard against the introduction of applicable law by the back door” ... [para 10]

II. Law Commission report – where are we now?

Somewhat belatedly the Law Commission opened its consultation on marital property agreements in October 2009 – “Marital Property Agreements Consultation 198”. This report has now been further delayed as they have widened the scope of their consultation to include a consideration of “needs” and non-marital property which generated a yet further consultation during autumn 2012. The Law Commission states that it intends to report with their final recommendations in autumn 2013 ....[see March [2012] Fam Law]. One has to wonder whether the timetable will be allowed to drift further. Clearly following the Law Commission report there will be yet further delay prior to any proposed legislation, none of which is music to the ears of family lawyers for whom clarity is essential.

The Law Commission has already given its initial views in the Consultation document in its provisional proposals. The full document makes very interesting reading indeed and it is certainly worth all practitioners reading at the very least part 8 setting out their preliminary views: http://lawcommission.justice.gov.uk/docs/cp198_Marital_Property_Agreements_Consultation.pdf

Part 8 of this Consultation states that any prenup which does not involve an intention to create legal relations, independent legal advice, full and frank disclosure and probably also a reasonable time pre wedding, is not likely to be upheld. In addition, the Law Commission stated:

“8.13 We provisionally propose that in order to prove that legal advice has been given it shall be necessary to show that the lawyer advised the party against whom the agreement is sought to be enforced about:

(1) The effect of the agreement on the rights of that party;

(2) The advantages and disadvantages, at the time that the advice was provided, to that party of making the agreement.”

There would also have to be a focus on the effect of the pre-nup inasmuch as it should not be possible to contract out of provision for the other spouse’s needs and certainly not the needs of the children. This clearly does not bode well for most overseas prenups which simply do not operate this way in jurisdictions where spousal needs are simply irrelevant.

The Law Commission also made it clear that there should be contractual validity ie the agreement should be in writing and signed by both parties, enforceable in law and should comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 if creating or transferring any interest in land.

III. Must there be disclosure?

The short answer to this is yes and no. Whilst of course it is ideal to include either a Schedule of Assets or even a Form E indicating from where all the assets emanate and in whose name they now belong, it remains a moot point as to whether a party can opt not to receive full disclosure. In the case of K vK [2003] 1FLR 120 which is dealt with below, there was no actual disclosure by the husband albeit that the wife knew he was extremely rich – her father believed him to be worth about £150 million. A list of assets without valuations had been provided by the husband but no documentation was formally annexed to the agreement itself. It was the Wife though who decided not to press for detailed valuations of the assets. Despite the lack of full disclosure in this case, the pre-nup was upheld. Of course the situation may be quite different where the assets are smaller and therefore more accurate valuations become more important. Once again, good practice must therefore dictate full disclosure in line with the principles on which the courts of England Wales operate.

Radmacher at para 69 makes it absolutely clear that what the court is concerned about is material disclosure – however, this slightly begs the question as to what may be material. What may not have been material at the time of the prenup may of course become so, for example in 2004, a 1% shareholding in Facebook as an example might have dismissed as immaterial in terms of assets to be listed in a prenup ...

“if it is clear that a party is fully aware of the implications of an ante-nuptial agreement and indifferent to detailed particulars of the other party’s assets, there is no need to accord the agreement reduced weight because he or she is unaware of those particulars. What is important is that each party should have all the information that is material to his or her decision, and that each party should intend that the agreement should govern the financial consequences of the marriage coming to an end.”

Clearly once the assets have been described together with their provenance there can be agreements in relation to each asset brought into the relationship as to whether or not the other party would make a claim on divorce.

IV. Timing of the prenup

Many continental jurisdictions effectively provide that the parties sign a type of prenup virtually immediately prior to the wedding itself. The parties would attend a notary perhaps a couple of days before the wedding. It is also important that the parties have an opportunity to negotiate the terms of the agreement if they wish to.

Various worthy bodies have suggested particular periods of time prior to the wedding itself:

(a) Supporting Families Consultation paper (1999) – 21 days before marriage

(b) NA v MA [2007] 1 FLR 1760– Mrs Justice Baron recommended 28 days as being a proper period for reflection

(c) Resolution report on Family agreements – 42 days

Clearly, it is going to be much safer to leave as much time as possible, particularly where the arrangements for the wedding itself are complex and costly as the real issue in play is about whether undue pressure was exerted.

V. Deal breaker clause

It is also a good idea to include something about whether the parties would have married in the absence of a prenup if that is indeed the case – see K vK [2003] 1FLR 120 in which a wife was held to the capital but not the income terms of a prenup after a short marriage. The wife had become pregnant prior to marriage and indicated she wished to marry or would abort the child. The husband did not agree with abortion but did not tell the wife that he would not have married without a prenup. It was the wife’s father who advanced the issue of a prenup by making an appointment with this solicitors who prepared a draft prenup which was later signed by the wife. The case makes interesting reading inasmuch as the court meticulously examined the factual circumstances surrounding the preparation and signing of the prenup. Of course this sort of issue may cut both ways as it may also indicate that one party has taken an unfair advantage over the other, particularly if children are involved – see paragraph 174 Radmacher

VI. What are the objectives of the pre-nup? Effect of public policy?

Great care must be taken when drafting the main terms of the prenup – it is good practice to include a recital in terms that the agreement does not seek to oust the jurisdiction of the English court to makes orders under the MCA or the Children Act Schedule 1 or the powers of the CSA, CMEC etc and that the parties have been advised that as the law currently stands that under the laws of England and Wales it is currently not possible to exclude the jurisdiction of the courts or of CSA etc. Equally there should be something in there indicating that the parties do intend the agreement to have some legal effect and have entered into the agreement of their own free will and being fully aware of its implications.

Consideration needs to be given to the likely changes on the horizon in terms on enforceability of prenups – a recital can be included specifically to clarify that the agreement is intended to remain binding in the event of changes in legislation and/or caselaw.

It is also good practice to include specific timings of reviews of the prenup for example after major life events – birth of children, loss of employment etc. This is emphasised at para 80 of Radmacher which concludes that the courts are less likely to hold the parties to a prenup agreed a long time ago where there has been little or no consideration as to how the parties’ circumstances may change.

Remember that any prenup which does not cater for both parties’ needs and those of their children is almost definitely not going to be upheld and/or Schedule 1 orders will be made which have the effect of totally undermining the intention of the prenup. One way forward might be for an agreement that the court will decide upon the children’s needs first and should have no other jurisdiction to interfere with the terms of the prenup.

It is also good practice to make it clear therefore that both parties consider the terms of the prenup to be reasonable and to meet their needs.

VII. Legal Advice for the parties

The legal advice should be independent and in the party’s own language or if not, then there should be an annexe certifying all advice was interpreted and by whom. It may be a good idea to include recitals as to who gave the advice and who paid for the advice. It is important to remember the words included in Edgar that of course bad legal advice in itself may also be a reason for not giving any weight to an agreement, it is therefore clearly in everyone’s interests that the legal advice should be thorough and in addition that documentation exists to show that clear, thorough legal advice was given, whilst respecting issues of client confidentiality. This can be done in the form of an Annex certifying that such independent advice was given and perhaps indicating how many hours the advice took and the nature of your qualifications. See as an example the words of warning given in RBC v Etridge [2001] UKHL 44 at para 58 in which guidance is given in relation to advice on property transactions.

VIII. International aspects – is separate overseas legal advice needed? One pre-nup or two?

Clearly further overseas legal advice is ideal when there is an international couple who may have rights in another jurisdiction. As an example if a couple have property in the Turkish Republic of Northern Cyprus which has no international agreements with the UK, thought will need to be given as to whether a divorce or order for financial relief would even be recognised there or whether effectively one party could have a second bite of the cherry by bringing further proceedings dealing with property located there. Other jurisdictions may also have their own requisites as far as the validity of a prenup is concerned – for example in Russia ideally the prenup should be executed in the jurisdiction where the marriage will take place – preferably Russia or at least in an Embassy and it must be executed at least 21 days before the marriage.

It is likely therefore that one prenup will not be sufficient and that in fact mirror prenups will be necessary in other possible jurisdictions. One of the recitals the parties give might well give would be to enter into further overseas prenups in all other relevant jurisdictions.

IX. Which jurisdiction and applicable law will govern the pre-nup?

These issues are obviously intrinsically bound up with the above international considerations. Ultimately the parties simply may not have control over the jurisdiction of any matrimonial proceedings or the law that is applied.

It is vital that there is a recital which indicates that the parties intend to be bound by English law wherever they may be habitually resident or domiciled. Although it is no doubt correct that as a matter of overseas law the parties may in fact not have the option of bringing proceedings either in an English court or applying English law, the agreement should recite that this is their expectation and intention.

Certain pieces of international legislation, such the European Maintenance Regulation 4/2009, do indeed provide for the prorogation ie contracting out of jurisdiction. Article 4 of the MR states in terms that the parties may choose the law applicable to spousal maintenance obligations provided that the state is one in which one of them has been habitually resident or a national at the time the agreement is concluded or the court is seised and is either a Member State of the EU or a signatory of the Lugano Convention. Importantly the MR does not provide for a prorogation of jurisdiction in terms of child maintenance, for any child under 18, which must therefore continue to be governed by the jurisdictional criteria in Article 3. Article 4 also makes it clear that any such prorogation of jurisdiction agreement should be in writing. If such an agreement forms a part of a pre-nup, again it is good practice to highlight the fact that the parties’ intention has precisely been to choose a particular jurisdiction pursuant to Article 4 as this is likely to be highly material given the vast differences in relation to the duration and level of spousal maintenance between England and most of the EU ....