During divorce proceedings the family court will very occasionally consider offering one of the  parties an agreed compensation for the loss they suffered because of the relationship.  The case of AT v BT [2023] EWHC 3531 (Fam) is a prime example.  Some feel Mr Justice Francis’ decision may be a sign that there could be a revival in the application of the compensation principle in divorce settlements.

What is the compensation principle in divorce?

The compensation principle in the UK is one method of addressing any significant financial differences between the parties in a divorce. 

It is based on the idea that one party may have sacrificed their ability to earn money for the benefit of the family.  For example, one spouse may have given up a well-paid job to care for their children or one spouse could have been leveraged for more pay.  This in turn would impact on the impacted spouse’s ability to provide the income they need to maintain their and their children’s lifestyle when they return to living independently after their divorce. 

It is a form of compensation, however, that the courts are often reluctant to award.  It is, therefore, rarely applied unless the court considers the circumstances to be exceptional.  To determine if the compensation principle is applicable, the court is likely to consider two principles:

1. ‘Sharing’, i.e. both spouses should share what has been earned during their marriage equally.

2. ‘Needs’, i.e. what does each party genuinely need in terms of future income and capital. 

If the court does decide that compensation should be awarded, it will usually be split between a lump sum and an agreed share of the total matrimonial assets. 

Why could AT v BT [2023] EWHC 3531 (Fam) signal the return of the compensation principle?

In the case the husband (61) and wife (53) had met while both worked in private equity.  They initially cohabited (although it could not be established whether they had actually started living together in 2003, 2005 or 2006) before marrying, with a pre-nuptial agreement in place, when the wife was four months pregnant.

Once they’d married, the wife left her job despite being both the firm’s youngest and highest paid female partner.  Her departure was imposed because her employers were worried about a potential conflict of interests with her husband.  The husband had originally worked for the same firm but had since moved to a senior position with a direct competitor.

Divorce proceedings began in 2020 before financial proceedings were launched in 2021 alongside an action over the ongoing arrangements for their children, then aged 15 and 13.  Although the child arrangements were settled with custody  being  given to the husband and the wife receiving only limited contact with the children, the financial proceedings  rumbled on.

The wife wanted an award of £9.145m, arguing this was a ‘sharing’ case.  Among the marital assets she felt should be shared was £7m in trusts.  The husband disclosed these as being pre-marital assets but the wife argued they had been matrimonialised and should, therefore, be divided equally in the financial settlement.

The judge found that while some of the assets had been matrimonialised, some were non-matrimonial.  As a result, the husband offered his ex-wife £3.545m.

What was the decision in AT v BT [2023] EWHC 3531 (Fam)?

At this stage the compensation principle was applied – arguably somewhat against expectation – by Mr Justice Francis who reasoned:

• The wife had been forced to leave her job because of her relationship with her husband which ended a “glittering career” (regardless of whether leaving her career was the wife’s choice).
• The wife’s first pregnancy had been difficult.
• The wife had assumed full-time care of her daughter and son.
• The parties had relocated to England after marrying.

In explaining his decision, Mr Justice Francis said:

“This is not just a case of somebody having had a good school career and a good degree, with good prospects; this is a case of somebody with a proven track record of excellence and achievements where her career was brought to a grinding halt for reasons entirely connected with the marriage. In my judgement, if this is not a marriage-generated disadvantage, then that concept has no place in our law… to ignore compensation in this case would, in my judgement, be an affront to the proper application of the compensation principle.”

The judge ruled that the fairest way to resolve the issue and reduce the risk of the couple returning to court was to bring all assets “on schedule” so that the £7m in trust and all the husband’s other tax liabilities were included in the ‘pot’, even though it was highly likely some assets would be transferred to the wife offshore. 

This meant both parties received just under £6.9m each.

Although the wife pleaded the £6.9m would not meet her needs, the judge refused her argument stating the total was “more than sufficient” as after £2.5m had been spent on a home, the wife would have £175,000 a year to live on given her likely life expectancy. 

We now wait to see if Mr Justice Francis’ approach prompts other judges to opt to take a similar route to settling high net worth financial proceedings, even in cases that had up to the final stages would appear to be heading in a very certain direction.

If this blog has raised any concerns regarding a divorce case you are involved in and you would like to discuss the compensation principle or any other area of family law with one of our barristers, please contact us today.