Pre-nuptial agreements after NG v KR [2008] – are they worth it?

We consider the recent case of NG v KR (Pre-nuptial contract) [2008]

Practitioners are more frequently being approached to prepare pre-nuptial contracts.  While our first statement to our client is ‘they are not legally binding in this jurisdiction’, this statement is swiftly followed by ‘but if we do x, y and z, then the court is likely to give the agreement weight when considering a division of assets upon divorce’.  The case of NG v KR was decided in the High Court of Justice, Family Division on 28 July 2008 and reinforces the position adopted by the courts in Crossley v Crossley [2008] and K v K [2003].

The case

The estimated wealth of the wife is £100m. The wife was concerned lest a man choose her for her money rather than for her personal virtues. She sought to protect herself against any mercenary motives by entering into a prenuptial agreement in the country of her birth, Germany. The husband was born in France. Prenuptial contracts are enforceable in Germany and France.

The couple met in London and were later married in England in 1998. They separated in 2006 and have two children. They entered into a pre-nuptial agreement almost three months before the marriage. The husband was once a hedge fund manager in the city but embarked on an academic career during the marriage. The wife asserted that it was her understanding that this return to academic study in the field of biotechnology was a means to a substantial financial end. She had not anticipated that the husband would not return to, or indeed surpass, his previous levels of earnings as a hedge fund manager of some £328,000 at its pinnacle. The husband by the time of the final hearing said he could not return to work in the field of banking and his future was as an academic with a salary of £30,000.

Prior to the final ancillary relief hearing before Mrs. Justice Baron there were contested Children Act hearings that resulted in a shared residence order with the children living with their mother for two thirds of their time in Düsseldorf and one third of their time with their father in England.

The wife set out her position as follows:

The husband had no entitlement to ancillary relief because he, a man of commerce, entered into a German Pre-nuptial contract (PNC) which provided for a separation of assets upon marriage and no provision for either spouse upon divorce. The wife employed Miss Cherie Booth QC to argue that to ignore the PNC was a breach of her human rights. This PNC was described as being a ‘magnetic feature’ of the case and its impact as having a ‘knock-out blow’.

Without prejudice to her case, the wife, by the time of her closing submissions, in recognition that the husband was the father of her children, amended her position to offer as follows:

1. A property in this jurisdiction for the husband for £1 million ‘on a Schedule 1 of the Children Act basis’ in which the husband could reside for life
2. A property in Düsseldorf for a value up to €500,000 to be owned by the wife with exclusive occupation by the husband until the children attain their majority
3. Periodical payments to the husband of £18,000 per annum per child until completion of secondary education
4. Periodical payments of £35,000 per annum for the husband

Her primary position in every other respect was that her husband should stand on his own two feet. But without prejudice to her primary case her position was that there should be a periodical payments order in his favour until the younger child finished secondary education to cover any shortfall between the court’s assessment of his earning capacity and his needs. Her submission was that his total reasonable needs were £60,000 per annum independent of his costs of seeing the children, and as he could earn £25,000 per annum net as an academic the shortfall was £35,000 per annum.

The husband’s position:

He sought a conventional order based upon his needs. He did not seek independent advice before signing the pre-nuptial contract and was not given any disclosure of the wife’s wealth before he signed it. The PNC made no provision in the event of the birth of a child and it was manifestly unfair that it made no provision for either party in the event of divorce.

He sought capital of £9.009 million in order:

1. To purchase a house in England (at a cost of £2.825 million inclusive of costs)
2. To cover his capital needs put at £146,000
3. To cover his debts, the bulk of which arose as a result of ancillary relief and Children Act proceedings
4. To cover his income needs a lump sum put at £5.458 million as a Duxbury fund based on his annual budget of £266,000 per annum.

This was 9.7% of the wife’s fortune.

Findings

Justice Baron was clear that it was agreed that a pre-nuptial contract was drawn up so that neither party was to gain in the event of a divorce. The Judge found that the wife only showed the husband a final draft a week before the signing of the contract. The document was in German and in accordance with German law, and the wife only went through it briefly, not line by line, with the husband before he signed it. The husband never took independent legal advice and did not get the document translated before signing it. The Judge accepted the husband’s account that his wife told him that this document was drawn up at the behest of her father.

Written evidence from two German experts and one French expert that the contract was binding in their respective jurisdictions was considered. It is of note that the Judge commented that German Courts could make provision for spouses in exceptional circumstances when the pre-nuptial agreement would cause injustice.

The Judge found that the PNC fell foul of the safeguards encapsulated in the Green Paper, Supporting Families (4th November 1998) as follows:

• There was no disclosure of the parties’ assets
• There was no independent legal advice
• Whilst the husband was a man of commerce and knew that under the PNC he could make no claims under German law, that knowledge, his background, and the information he was given are not the same as understanding the full legal consequences of his decision or its later enforceability
• There was no provision for either party in the event of birth of children
• Neither party took any steps in England to investigate the enforceability of the agreement

She further commented that the most obvious unfairness of the PNC is that it provides no prospect of financial settlement even in the case of real need.

Yet, in explaining her reason why the PNC could not be disregarded in light of the above and referring to the case of A v T (Ancillary Relief: Cultural Factors) [2004], Justice Baron commented:

Mr Mostyn QC argues (for the husband) that I should effectively ignore the fact that the wife is German and had a pre-nuptial agreement which was/is valid and enforceable in the land of her birth. Equally, he asks that I ignore the fact that the husband is French and that, even in his country of origin, the PNC would be accepted and enforced. To my mind to give no weight to these factors would be both unfair and unjust. The points are obviously matters which should be in the proper analysis of the appropriate outcome because the Act enjoins me to consider all the circumstances of the case.

Accordingly she ruled that the husband’s award should be at the lower end of the bracket of any possible award, and that it should be based upon his needs as judged against the lifestyle that the parties lived in addition to the fact that the husband agreed he did not intend to seek any financial award if the marriage ended. Baron J:

His decision in 1998 was stark and so, even if it was flawed in the sense that he did not have disclosure or separate legal advice, it is worthy of note and must be taken into account in the appropriate disposal of his claim.

An infringement of the wife’s Human Rights?

It was submitted that the agreement had been nullified by no reason other than the parties’ move from one EU jurisdiction to another, and that such interference constituted a vertical inference by the State in the parties’ freedom to contract. However, by the commencement of the hearing Miss Booth had altered her stance so that she was no longer seeking a declaration of incompatibility. Instead, she submitted that the wife’s human rights were of central and highly persuasive importance to ‘boost’ the agreement and make it the focus/starting point of any discretionary exercise. She further argued that the agreement fell within Section 34 and was therefore a valid maintenance agreement.  In her judgment, Baron J found that the wife’s rights had not been breached and concluded that the agreement did not fall within the Section 34 point, as it had not been made during the continuance of the marriage.

Order

Section 25 factors were considered and resulted in the following provision being made for the husband:

• £2.5 million to buy a home in England as a base for himself and his daughters. Interestingly the Judge incorporated the husband’s acceptance that the property will be passed to his daughters upon his death as a recital to her order
• €600,000 to purchase accommodation in Düsseldorf to be owned by the wife, exclusive occupation by the husband until his youngest child completes full time higher education, on a Schedule 1 of the Children Act basis
• £700,000 lump sum to cover husbands debts – it should be noted that the vast majority of these related to husband’s legal costs, of which a figure was discounted in respect of an earlier costs order made in favour of the wife
• £70,000 per annum maintenance in relation to husbands costs for the children
• A Duxbury fund of £2.335 million on the basis that he has needs of £100,000 per annum, it is noteworthy that the Judge considered £125,000 per annum was a reasonable sum but given the overall factual matrix of this case then that sum would not represent a fair result especially as she considered that a clean break had merit in this case

The husband’s overall capital settlement, excluding the Düsseldorf housing fund, was £5.56 million, considerably less than he sought. The question of marital acquest was considered in detail. As the wife’s wealth emanates from the industry of her father and his forebears then her assets were classed as non-matrimonial (as per Miller and McFarlane) and the husband’s claim was decided purely on a needs basis.

Where this case sits in the context of K v K and Crossley

K v K set out clear guidance for the practitioner about what conditions need to be adhered to in order to create an enforceable pre-nuptial agreement. Crossley demonstrated the impact of a carefully entered into agreement. I refer the reader to the practical advice given by Helen Marriot in her article Before the storm in the October 2008 edition of the Family Law Journal.

How do we guide our clients in this changing and increasingly globalised landscape?

While PNCs are not binding, the law continues to be intuitive in its responses and the section 25 factors remain the overriding principles upon which we guide our clients through marital breakdown. Therefore, if the contract has the overriding element of fairness and, we suggest, takes section 25 factors into account, then a carefully entered into pre-nuptial contract will strongly impact upon the wide discretion that can still be exercised. If your client is from, and/or may reside in, another jurisdiction, advise them to obtain specialist legal advice in respect of any other relevant jurisdiction. It is good practice for PNCs to contain term and change of event review clauses in such circumstances as a change of domicile.

Conclusion

As in the cases of MacFarlane and Miller, the case of NG v KR involved the kind of money that we do not frequently see in day-to-day practice. Nevertheless, it is highly applicable to all cases that in spite of falling foul of the fairness test the existence of a PNC in NG v KR impacted greatly upon the award. What is interesting in the 44-page judgment is the detailed record of judicial thinking about pre-nuptial agreements. Baron J:

To our mind, independent scrutiny of these agreements remains as necessary in modern times as it was in the last century because of the vulnerability of parties involved at times of high emotion where inequality of bargaining power may exist between them.

The youth of the parties (they were in their early twenties when they married) I consider is a significant factor in the case. Baron J:

The young couple were deeply in love and, as they saw it, this piece of paper was much less important than pleasing the family and making preparations for their wedding. It is for this sort of reason, amongst others, that the English Courts have been reluctant to enforce pre-nuptial agreements per se.

The Law Commission’s Tenth Programme of Law Reform (which runs from 1 April 2008) will consider Marital Property Agreements. If they decide to make pre-nuptial contracts binding, they could draw up a draft Parliamentary Bill by 2012. What is interesting to me in the judgment is the run-through of judicial thinking on the issue of pre-nuptial contracts. The historic position has been that a PNC is against public policy on the basis that it undermines marriage. However, with marriage on the decline we now have the reverse position – that by giving legal status to PNCs more people may be encouraged to marry or enter into civil partnerships.

Property agreements, whether marital or otherwise, offer certainty to couples. They are attractive to the older client, perhaps those who have children from a previous relationship and/or who have been married before. Pre- nuptial agreements are legally recognised in the US, Australia, New Zealand, Canada, South Africa, Scotland, France, Belgium and, of course, Germany. It may only be a matter of time before they are recognised in England and Wales. I conclude that a carefully drafted pre-nuptial contract is certainly worth entering into.

Cases referred to:
NG v KR (Pre-nuptial contract) [2008] EHWC 1532 (Fam)
Crossley v Crossley [2008] EWCA Civ 1491
Miller v Miller and MacFarlane v MacFarlane [2006] UKHL 24
A v T (Ancillary Relief: Cultural Factors) [2004] 1 FLR 977
K v K (Ancillary Relief pre-nuptial agreement) [2003] 1 FLR 120
This article originally appeared in the Family Law Journal

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.