PI Brief Update

Is Your Client’s Pi Award at Risk on Divorce? - Margaret Hatwood, Anthony Gold Solicitors

01/07/13. The short answer to this is, yes, and now more so than ever before. The fuzzy discretion of the family courts has now intruded into the personal injury lawyer’s arena. A recent award has been so generous to the spouse of a personal injury claimant to the extent that over half his personal injury award was paid to his wife. To put it another way could a personal injury lawyer be negligent if he or she does not protect his client’s damages, or advise a client to seek advice from a family law specialist?

Quite possibly, can be the only response to that question.

Background

Although the family courts have for many years regarded damages for personal injuries as part of the matrimonial pot available for division historically the awards made have been relatively small in terms of both amount and percentage. However a recent case has changed all that. This article will first deal with the general principles the court has to grapple with in dividing family assets. It will then look briefly at some older decisions before moving on to deal with the recent case of Mansfield.

Then some possible solutions will be looked at which may be of use in legitimately protecting your client’s damage awards or ensuring they receive family law advice.

Inevitably individuals who have suffered serious personal injuries are even more likely than the average person to suffer relationship breakdown.

Introduction to the law on the division of financial assets in divorce, judicial separation or dissolution of civil partnership.

Under the Matrimonial Causes Act 1973 (“MCA”) the family courts in dealing with the division of assets have to have regard to the factors contained in S25 MCA. The court has a primary duty to consider the welfare of any minor children of the family. There is then a statutory checklist which requires the courts to consider factors such as the income and earning capacity, the needs, the obligations and responsibilities of the parties, the length of the marriage, the standard of living, any physical or mental disabilities, the parties’ contributions and in exceptional cases only conduct and of course, all the circumstances of the case. Apart from having to give any minor children’s welfare priority no S25 factors trump the others.

The courts pride themselves on creating a bespoke solution for each case. Since the case of White v White 2001 AC 596 the court has had to check any award against a cross check of equality. In many cases the search for justice starts and ends with need. Complications arise in those cases where there is some surplus of assets available for distribution. Since the case of Miller v Miller; McFarlane v McFarlane 2006 UKHL 24 to achieve fairness the court has regard to “sharing”, “compensation” and “need”. In many cases the courts look at an equal division of family assets. However in more modest cases the paramountcy of the welfare of the children may mean that the wife, if she is the primary carer receives substantially more than 50% of the available family assets.

How have the family courts historically dealt with the division of personal injury awards?

In the case of Daubney v Daubney 1976 All ER 453 the Court of Appeal had to divide assets of £16,000 including two properties one the former matrimonial home (“fmh”) and the other a flat owned by W. Both H and W had received damages in a serious RTA. H £4000 and W £3625. W invested her damages in the flat which was worth £7800 by the time of the hearing. Unfortunately H lost his award in a business venture. W argued that the flat should be disregarded as it was a product of her damages. H said it should be taken into account and he should retain the whole of the fmh which had equity of £8000. H and W had 2 children aged 16 and 18 both of whom lived with W. H had a new partner who had a child by H. At the first hearing the fmh transferred to H with a charge of 30% in favour of W. The court agreed that the W’s damages i.e. the flat should be left out of account. The fmh was not to be sold until the H’s child by his new partner was 18. H and W each appealed. On appeal W’s share in the fmh was reduced to 15%. In addition she was to keep the flat in her name. W did receive more than 50% of the assets. The Court of Appeal made it clear said that the W’s damages would be taken into account. however the courts would not deprive someone of all their compensation. W received 15% of H’s damages and retained all her own damages. This was a slightly unusual case in that both spouses had been injured in the accident and had received an award of damages.

Wagstaff v Wagstaff 1992 1 All ER 275

A 9 year marriage, 5 years into the marriage H had a serious accident and became paraplegic. W had two children from previous marriage which H had assumed responsibility for. His damages award was £418,000. By time of divorce £291,000 remained. W was awarded £32,000 and retained the fmh. H appealed saying that his disability should be the court’s paramount consideration. On appeal W’s award reduced to nil. W then appealed herself seeking £64,000 the Court of Appeal reinstated the original award of £32,000. The court made it clear that the damages award was not “sacrosanct”. Even compensation for pain and suffering and loss of amenity were part of a spouse’s financial resources for the purposes of determining an application for financial relief. The size of the award and the circumstances in which it was made are relevant factors to take into account under S25. In most cases these would temper or exclude the sharing of such capital with the other party. However in this case to refuse an award to W would leave a disparity in the parties’ financial circumstances. W would be left with no secure housing and to support the child alone. In this case the court felt H could afford to make a capital payment to W without it adversely affecting his quality of life and £32,000 was a fair award. W received 13.48 % of the husband’s original damage award.

C v C 1996 FCR 283

In 1986 H, W and the child of the family were all injured in a serious RTA. H sustained the most serious injuries, with brain damage and impairment to his mobility and communication. An interim payment of £21,000 was made to H paid to W as his next friend. Unfortunately the payment was not used for H’s benefit. W commenced divorce proceedings in 1989. H’s claim settled in 1991 for £5m with increasing annuities for life. H moved to Cyprus to live with his family who were to care for him. W’s claim for a lump sum and maintenance were dismissed with her rights to make a claim under the Inheritance (Provision for Family and Dependant’s) Act 1975 dismissed. An order for maintenance for the child of the family was made. The court said that the court’s obligation was to balance the needs of the parties and give first consideration to the welfare of the child of the family. W appealed but her appeal was dismissed. H had no realisable capital and it would be unrealistic to impose obligations which he could not afford. Whilst the court agreed that following Wagstaff the source of and the reason for the award could not be ignored having regard to H’s extreme needs the court felt that the inequality in the award was justifiable. The award of maintenance for the child was not interfered with.

Unusually in this case W did not receive anything from the H. The writer considers it is likely that the lack of award was influenced by the W’s conduct in misusing an interim payment designed to meet H’s needs for her own benefit.

So up to this point it appears that the courts have balanced the statutory criteria in the Matrimonial Causes Act in a way which meant only relatively modest sums of capital from personal injury awards have been awarded to the spouse seeking an award by the family courts. However this all changed radically in the recent case of Mansfield v Mansfield 2011 EWCA Civ 1056.

H received damages of £500,000 in 1998 before he met W. H and W married in September 2003 after 18 months’ cohabitation. The total duration of their relationship was 6 years. Significantly the couple had 2 children aged just 4 at the time of the Court of Appeal hearing. Inevitably therefore under the guidelines in the MCA the court had to give priority to the children’s needs.

H invested his damages in 2 properties a bungalow called The Orchard and a two bedroomed flat which was let out. The primary property had been adapted for someone with his needs. Thorpe LJ commented “No doubt that was a thoroughly sensible investment since the primary property provided a suitable home for a man with his disabilities including a prosthesis, and the investment property provided a rent” In 2008 W left taking the children with her. W had invested C £30,000 in the improvement of The Orchards which she had contributed to from the proceeds of sale of a flat which had been her pre marital home. W was awarded £285,000 by the county court judge. The judge gave H 3 months to raise the lump sum and in default ordered the sale of The Orchards. Moreover the District Judge had refused H’s request for a chargeback in his favour.

An appeal to the circuit judge failed. The case then went to the Court of Appeal.

However, to a degree, the Court of Appeal looked at matters afresh. The wife was represented by Leading counsel and a junior. The husband acted in person. The Court of Appeal considered they had two questions to consider firstly whether the sum of £285,000 was the correct figure. And secondly whether there should be a chargeback under which the husband would receive some money back once the children of the family had ceased full time education.

The Court of Appeal decided that the District Judge did consider the wife’s needs carefully and had considered it was likely that the Orchards, a property specially adapted for the husband’s needs would have to be sold and they did not interfere with the capital award. Although they commented that the award was on the high side. However they did decide to convert the award into a Mesher order. (A Mesher order is a postponement of the exercise of the trust for sale until a specified event occurs).

The court said the rationale for this was that for the immediate future the wife and children’s needs had priority and she needed a substantial share of the family assets. The court felt that the wife’s need to provide a primary home for the children would terminate on their majority or the conclusion of the twins’ tertiary education.

Thorpe LJ who gave the leading judgment said:

“So it seems to me that the exceptional factor in this case, namely the origin of the family capital or the vast majority of the family capital makes it particularly suitable for the application of a Mesher order. Accordingly, I would quantify the extent of the husband’s reversionary interest or residual interest, at one third of the capital awarded to the wife…”

The decision was unanimous.

The decision is, in the writer’s submission, an unhappy compromise. It is particularly unfortunate that the husband would almost certainly be forced to sell his specially adapted home. The wife could have received the two bedroomed flat which would, have least provided a sizeable deposit for a property for her and the twins, if not a home. If the twins were of the same sex (and there is no mention of whether they were) the flat might have been a suitable home for the wife and children. Although, of course that solution would have deprived the husband of a source of income.

It is also salient to note that in financial terms most of the family capital had been provided by the husband’s PI award of £500,000. The wife’s contribution seems to have been limited to £30,000. It should also be noted that the award was made notwithstanding the husband’s damages award was prior to the parties meeting and notwithstanding the fact that a civil court had assessed the husband’s needs at £500,000 for the purposes of the personal injury award. The District Judge made a finding that H’s needs could be met by his retention of the remaining £320,000. (However it is difficult to see how the District Judge arrived at that figure. H had proposed an award of £130,000. W had a mortgage capacity of £42,000.

Impact of the decision

The impact of this decision cannot be under estimated. This appears to be the first reported decision, of which the writer is aware, in which a significant proportion of a PI award has been transferred to the spouse of a person sustaining serious PI injuries.

Therefore prudent PI lawyers should now advise their clients to take advice about how best they can protect their award. There are a variety of mechanisms that can be employed.

Personal Injury awards structuring

A detailed examination of this area is outside the scope of this article. However many substantial awards are structured as a lump sum following by periodical payments, this may be preferable. A compensation protection trust may not suffice. For the purposes of a financial remedies in divorce a trust of any kind is not watertight. The court has powers to take into account trust assets.

Marital Agreements (pre nuptial agreements, post nuptial agreements)

These are now given a considerable amount of weight by the family courts. They are especially helpful in the case of short marriages, second marriages and where there are no children. They are often used to ring fence non matrimonial assets e.g. inherited wealth there is no reason why an award of personal injuries could not be ring fenced. In the 1998 Government Green Paper Supporting Families it was said that such an agreement would be likely to be given effect by the courts if:

1. there was a mutual disclosure of the parties’ circumstances;

2. both parties obtain independent legal advice;

3. the agreement is signed not less than 21 days before the marriage;

4. it would not be unfair to hold the parties to the agreement;

5. there are no children, or the agreement is reviewed if children arrive.

In the Supreme Court case of Radmacher v Granatino 2010 UKSC 42 a pre nuptial agreement whereby a husband agreed not to make any financial claims against a very wealthy wife worth £100m was largely upheld, and the husband was only allowed to make limited financial claims on behalf of the children despite the fact when the husband entered into the agreement there had been no mutual disclosure, he had had no independent advice, indeed he probably could not understand the agreement as it was in German and no translation was provided. Nonetheless he did realise the broad content of what he signed. . By the time of the divorce financial proceedings the husband was no longer a high earning banker but was in academic research on a very modest income.

The court said

“The court should give effect to 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.” If the award of damages occurs before the marriage then a pre nuptial agreement ring fencing the assets can be drawn up.

However if the damages award is during the marriage is it too late to act?

Many non family lawyers may not be aware that post nuptial agreements are now an option. Family lawyers are increasingly finding that post nuptial agreements are used in circumstances where there is a sudden change in financial circumstances, or where a marriage is in difficulties as in the case of NA v MA 2006 EWHC 2009 (Fam) * where a husband insisted his wife sign a post nup, limiting her claims when he discovered her affair. (The wife was not entirely bound by the post nup as she was under considerable pressure when she signed it. She had psychiatric evidence to support this contention. Nonetheless the award was constrained by the post nup).

It is now clear that pre marital and post nuptial agreements are given the same weight by the court. The status of any marital agreement in English family law is that the agreement is regarded as one of the circumstances of the case. However more agreements are being upheld.

Unmarried couples

Briefly, if there are children then the primary carer, often the mother is able to make a claim under Schedule 1 Children Act 1989 for a lump sum, property adjustment order for the benefit of a child. These awards can be significant. A cohabitation or separation agreement may help in such circumstances. Obviously such agreements cannot oust the jurisdiction of the courts however again such agreements carry increased weight.

Prudent Personal injury lawyers who obtain a significant damages award will now need to turn to their family department colleagues for advice how best to preserve their client’s damages.

Margaret Hatwood
Anthony Gold Solicitors
An edited version of this article was first published in New Law Journal (www.newlawjournal.co.uk

* The writer wrote an article on the NA v MA case which was published in Family Law November 2007

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