Wedded to the pact?

“Wedding planning” is a term synonymous with wedding dresses, floral arrangements, cakes and perhaps a last-minute panic from the groom.

In the modern marriage, the “to do” list often includes an additional task – organising the pre-nuptial agreement.

Pre-nuptial agreements – once the preserve of the rich and famous keen to protect their wealth and avoid litigation – are increasingly used by couples who, in advance of tying the knot, want to decide how to divide and protect their assets should the marriage break down.

A recent poll of 1,000 people found that nearly half of 18 to 24 year olds in the UK want a pre-nuptial agreement before they wed: 44% of respondents would be willing to sign a pre-marriage contract. The poll also found that 42% of 45 to 54 year olds would be willing to sign. But do pre-nuptial agreements really have a place in British divorce settlements?

New departure

In the recent high-profile case of Radmacher v Granatino [2010] UKSC 42, the Supreme Court’s decision suggests that pre-nuptial agreements will play an increasing role in English divorce actions. Mr Granatino challenged the standing of the pre-nuptial agreement he and his then fiancée Ms Radmacher signed in advance of their marriage. The Supreme Court ruled against him, stating that the pre-nuptial agreement must carry “decisive weight” in any divorce proceedings. As a result, Mr Granatino’s settlement was reduced from £5.5 million to £1 million.

The Supreme Court confirmed what many see as an increasing acceptance of pre-nuptial agreements by the English system. Until now, English courts have jealously guarded their powers to decide financial issues in divorce cases, and while account has been taken of pre-nuptial agreements, such an agreement will be only one factor of many in reaching a decision.

The decision also highlights the significant difference in the status of pre-nuptial agreements between continental Europe – where such agreements are routinely implemented and where this one was signed – and England, where agreements are still very much a grey area of family law and, notwithstanding Radmacher, will still require to be considered on a case-by-case basis.

In situations of cross-border marriages, or those involving European nationals from different states, the enforceability of pre-nuptial agreements should be explored in detail to ensure that both parties are fully protected, and thought must be had to which jurisdiction should be selected.

Further clarity on the issue of pre-nuptial agreements should also be provided by the report of the Law Commission for England & Wales, due in 2012, which will recommend whether a change in the law should be made to ensure that such agreements become fully enforceable.

Beyond ring-fencing

Scotland’s treatment of pre-nuptial agreements differs significantly to that of our southern counterparts. Here, there is a long tradition of pre-nuptial agreements and specifically the use of such agreements to ring-fence assets which the parties would not wish brought within the ambit of matrimonial assets should the marriage dissolve.

The development of pre-nuptial agreements should be considered within the context of the significant differences between the Scottish and English legal systems. In Scotland, the provisions of the Family Law (Scotland) Act 1985 already ring-fence the matrimonial assets to be divided between the parties.

Pre-nuptial agreements have, for a number of years, been considered by family law practitioners to be helpful in protecting pre-marriage, inherited or gifted assets, but more particularly where a non-matrimonial asset is realised during the marriage or used to acquire or develop an item of matrimonial property. A pre-nuptial agreement has been traditionally used to protect assets that may change in nature or evolve during the marriage.

In her recent marriage contracts seminar, leading family lawyer and temporary judge Morag Wise QC drew family practitioners’ attention to the timely decision in Kibble v Kibble 2010 SLT (Sh Ct) 5. Here, a Russian lady and her middle-aged fiancé entered into a pre-nuptial contract the day before the marriage. In the divorce action, she attempted to introduce a crave in terms of s 16 of the 1985 Act seeking to set aside the pre-nuptial agreement on the basis that it was not fair and reasonable at the time it was entered into.

The sheriff refused to allow an amendment that would have introduced this crave. Sheriff Principal Dunlop QC upheld the wife’s appeal, holding that such agreements fell within the scope of s 16(1), as an agreement between the parties to the marriage as to financial provision to be made on divorce. The sheriff principal considered that s 16 implicitly recognises that a claim for financial provision might be barred by the terms of an agreement and that in giving the court power to set aside such agreements, the legislature clearly intended that such a consequence might be moderated in appropriate circumstances.

Up until now, many practitioners were nervous of using pre-nuptial agreements for anything other than ring-fencing certain assets. It is possible, standing the terms of the sheriff principal’s decision, that family practitioners might see a rise in the type of pre-nuptial agreement which contains discharge clauses (even clauses designed to discharge all and any claims that the parties may have in terms of the 1985 Act for financial provision on divorce).

Open to challenge?

But would such agreements be more open to attack? Here, guidance is to be found in the leading case of Gillon v Gillon (No 3) 1995 SLT 678.

The principles established in Gillon are well known in the context of challenges to post-nuptial or separation agreements:

(a) The agreement has to be examined from the point of view of both fairness and reasonableness.

(b) All the relevant circumstances leading up to and prevailing at the time of execution of the agreement need to be considered, including the nature and quality of the legal advice given to either party.

(c) Evidence that some advantage had been taken by one party of the other by reason of the circumstances prevailing at the time of the negotiations might have a cogent bearing on determination of the issue.

(d) The court should not be unduly ready to overturn agreements validly entered into.

(e) An agreement which has led to an unequal, and possibly very unequal, division of assets, does not itself necessarily give rise to any inference of unfairness or unreasonableness.

The Gillon principles were considered and followed in two decisions of Sheriff Principal Lockhart, McKay v McKay 2006 SLT (Sh Ct) 149; 2006 Fam LR 78, and MacDonald v MacDonald 2009 Fam LR 131. Essentially, the decision in McKay turned upon the non-disclosure by the defender of the existence of a claim by him for compensation for a mis-sold pension policy. The sheriff principal found that the sheriff at first instance was correct in holding that the non-disclosure of this asset vitiated the test of fairness and reasonableness.

In MacDonald, the case turned on the actings of the defender, and the sheriff principal upheld the sheriff’s decision that the pursuer had been coerced into signing the separation agreement by the defender (notwithstanding the advice of her very experienced solicitor that there was insufficient disclosure of matrimonial assets or liabilities), rendering the agreement unfair and unreasonable.

Hollywood lead?

As can be seen from the above cases, any practitioner drafting pre-nuptial agreements would need to ensure that the circumstances surrounding the negotiation and preparation of the agreement were above suspicion and scrupulously fair to both parties. A full disclosure of the parties’ respective pre-marriage assets might be necessary, particularly if the agreement seeks to discharge the parties’ financial claims on divorce. Proper time for legal advice and reflection should be given in the run-up to the couple’s marriage. There should be no suggestion that any advantage is taken by either party of the other. Many parties on the threshold of an extravagant white wedding would no doubt be happy to sign up to anything rather than have the embarrassment of calling off the wedding. Handing back wedding presents, however, could be the least of their worries!

What might be reasonable at the time of entering into an agreement for a young couple setting forth on the path of matrimony might not be as appropriate 20 years down the line and several children and lost pension contributions or career opportunities later. In certain circumstances, it might be appropriate to include a periodic review clause in the original pre-nuptial agreement.

As the use of pre-nuptial agreements looks set to rise in Scotland, it will be interesting to see whether we follow the lead of the United States of America, and pre-nuptial agreements introducing penalty clauses for an adulterous indiscretion, or settlements rising incrementally dependent on the length of the marriage (so beloved by Hollywood royalty or top sportspersons) become the norm in Scotland.

There is no doubt, however, that by entering into carefully drafted and robust pre-nuptial agreements, couples can decide on their own financial arrangements rather than be subject to the vagaries of a court decision, and possibly avoid significant emotional distress and costly litigation.

Carolyn MacBride is a senior associate and accredited specialist in family law at national law firm HBJ Gateley Wareing

All the fun of the fair

Notwithstanding the media’s tendency to confuse English law and so-called British law (“Yesterday’s ruling is the first time that a prenuptial agreement has been considered binding under British law”, The Times, 21 October 2010), the decision of the Supreme Court in Radmacher v Granatino should serve to reinforce some of the key differences in approach between the jurisdictions of Scotland and of England and Wales (“England”).

The opening paragraphs of the judgment very helpfully set the English context for the decision that follows:

“A court when considering the grant of ancillary relief is not obliged to give effect to nuptial agreements – whether they are ante-nuptial or post-nuptial. The parties cannot, by agreement, oust the jurisdiction of the court. The court must, however, give appropriate weight to such an agreement. This appeal raises the question of the principles to be applied by the court when considering the weight that should be attached to an ante-nuptial agreement… The approach of English law to nuptial agreements differs significantly from the law of Scotland, and more significantly from the rest of Europe and most other jurisdictions. Most jurisdictions accord contractual status to such agreements and hold the parties to them, subject in some cases to specified safeguards or exceptions. Under English law, it is the court that is the arbiter of the financial arrangements between the parties when it brings a marriage to an end. A prior agreement between husband and wife is only one of the matters to which the court will have regard.”

Fairness translated

The common law of Scotland has created a set of principles applicable to all contracts which provide for them to be set aside in circumstances which undermine their validity. An additional “get-out” clause for nuptial contracts can be found in s 16(1)(b) of the Family Law (Scotland) Act 1985. This clause allows for the possibility that the contract is “unfair”, a concept which Scots and English lawyers may think resonates with the principles set out in the section of the Radmacher judgment headed “Factors detracting from the weight to be accorded to the agreement”.

There is, however, an important difference. Section 16(1)(b) provides for “unfairness” to be judged on the circumstances which prevailed at the time the contract was entered into, not those at the time the court is asked to consider the matter. In contrast, Radmacher says (para 73): “If the terms of the agreement are unfair from the start, this will reduce its weight, although this question will be subsumed in practice in the question of whether the agreement operates unfairly having regard to the circumstances prevailing at the time of the breakdown of the marriage.”

That the fairness of an agreement may be judged by as yet unknown standards is perhaps one reason that English lawyers have traditionally been far more cautious than their Scottish counterparts about drafting and advising on nuptial contracts. Who among us would like to look into his or her crystal ball and anticipate whether the contract under contemplation will be considered fair at the point when the relationship breaks down or, indeed, later? And yet, if the court is to remain the ultimate arbiter of fairness, that is what English lawyers must do.

Powers undiluted

From an English perspective, Scottish courts place extraordinarily high value on the autonomy of the parties. In a family law context, this may be at its most obvious when considering the value of a minute of agreement.

Although a copy of the agreement will often be produced to the court when the initial writ is lodged (or at some later point), the sheriff dealing with a minute for decree is not expected to comment on the agreement, nor will the court routinely be supplied with information about each party’s current financial circumstances to enable a view to be taken as to its fairness. Indeed, the agreement can be registered at the Books of Council & Session for execution as well as preservation, enabling relevant aspects of it to become directly enforceable.

This is in stark contrast to the position in England. In that jurisdiction, the terms of an agreement, even if reduced to a deed of separation, will almost inevitably be converted at some stage into a judicially approved consent order. If not, it will remain open to either party to seek further ancillary relief from the court.

As is referred to in Radmacher, however, “the court is not a rubber stamp”, even if all that is sought is dismissal of each party’s claims. Any draft consent order submitted to the court must be accompanied by statements setting out each party’s current financial position; the court is then invited to approve the draft order having regard to the factors which underpin the English concept of fairness, as restated in Radmacher. It is by no means uncommon for English judges to request additional information in respect of draft orders, to request that drafting be tightened up or, indeed, to list the matter for hearing. This is the court, as arbiter of fairness, in action.

This may therefore be an apposite moment to remind Scots practitioners that carefully drafted minutes of agreement, whether or not registered in the Books of Council & Session, may not carry the weight they might in Scotland if the parties subsequently go on to divorce in England.

As set out in Radmacher, a prior agreement between husband and wife is only one of the matters to which the court will have regard in assessing whether fairness has been achieved. That involves consideration of the circumstances prevailing at the time the application comes before the court, perhaps years after the agreement was entered into. It is also worth remembering that in England, an application for ancillary relief may be made after decree absolute has been pronounced (provided that the claimant has not remarried in the interim).

Ensure, then, that you warn clients who may choose to deal with divorce “later” and who may be doing so in England, that they may wish to get on with it “sooner” and will need to ensure that appropriate steps are taken to prevent future claims being made against them in an English court.

Radmacher does not take away the power of an English judge to examine every claim for ancillary relief (or application for dismissal of same) which comes before the court; instead, it should serve to remind us that this power is undiminished.