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Mr Justice Francis recently gave judgment in O’Dwyer v O’Dwyer [2019] EWHC 1838 (Fam), an appeal against an order made by HHJ O’Dwyer at the Central Family Court following a Final Hearing in financial remedies proceedings held in July and November 2017. The husband appealed HHJ O’Dwyer’s order that he pay periodical payments to the wife of £150,000 p.a., a decision which had been made on the basis that the parties should share the husband’s income stream and so, the husband contended, was contrary to the decision of the Court of Appeal in Waggott v Waggott [2018] 2 FLR 406. The Court of Appeal had not given judgment in Waggott at the time that the present case was determined, and so it had not been available to the judge at first instance.

The husband (‘H’) and wife (‘W’) married in 1988, before separating in 2016. They had four adult children together. W was an American citizen, and had returned to live in the US following separation.

For many years, H ran a business as a McDonald’s franchise. At Final Hearing, the parties agreed that the net value of the business (after CGT, capital expenditure to improve the appearance of the restaurants, etc.) was £2.409m. Both parties accepted that despite H owning 90% of the business, due to the length of the marriage and both parties making full contributions, this was a sharing case. At first instance, the judge accepted the schedule of assets and liabilities put forward by W, and ordered that each party should leave the marriage with 50% of the capital, totalling £2,932,739. Accordingly, H paid W a lump sum of just under £3m. Neither party sought to disturb the capital distribution on appeal.

In determining the level of periodical payments that W would receive, HHJ O’Dwyer referred principally to the sharing principle. He noted in his judgement that the business had produced (and would continue to produce) an income of c.£1m annually, and asked himself ‘why after divorce should only [H] continue to live well upon it when clearly it is the product of matrimonial endeavour?’ Later, he went on to describe the future business income as ‘matrimonial property’, and stated that in his treatment of the businesses, he would consider ‘not only the capital value at this point but also the income that they will produce over the coming years.’

H appealed against the periodical payments order, arguing that following the decision in Waggott, the sharing of an income stream is unprincipled and that payments should be ordered only to meet needs (or in rare cases, compensation.) The Court of Appeal had been clear and unequivocal in their decision that an earning capacity was not a matrimonial asset that could be subject to a sharing claim. Francis J accepted that it was now settled law that an earning capacity was not a matrimonial asset available for sharing and periodical payments must be calculated on the basis of need, although he conceded that the judge would still be left with a significant margin of discretion as to how generously the concept of need would be interpreted.

W argued that her case could be distinguished from Waggott on a number of grounds: the length of the marriage (12 years in Waggott, 30 years in the present case), the fact that the income is paid from a family partnership built up over the marriage, and that the court was concerned with fixed term profits from a family partnership being prepared for sale as opposed to an earning capacity. Francis J rejected these arguments. He held that the length of the marriage was irrelevant, that the law was very clear that ‘the sharing of an income for sharing's sake in the circumstances of the instant case’ was impermissible, and that while it would have been possible for the court to order that W be paid a balancing payment in the event that the business sold for substantially more than the agreed value, or even to adjourn the lump sum claims, the judge had correctly concluded that it was desirable to resolve the case now.

W’s counsel had made reference in his skeleton argument to the fact that W would suffer a relationship-generated disadvantage if H’s income was not shared. Francis J rejected this, on the basis that W had never claimed that the compensation principle applied, and the judge at first instance had not considered this possibility either. He further held the ages of the parties to be irrelevant, and rejected W’s attempt to rely on the fact that in Waggott, the wife had received a share of the husband’s bonuses. This was appropriate in Waggott because the bonuses were referable to work done during the marriage, albeit not paid out until after the marriage had ended, and so were a clear example of matrimonial property. In the present case, the circumstances were more akin to bonuses earned after the breakdown of the marriage, and would only fall to be shared if need or compensation required them to be.

W argued that in Waggott, the first instance judge had failed to give proper weight to the clean break principle, which could not be said of HHJ O’Dwyer’s approach (he had imposed a 5-year term with a s28 (1)(A) bar.) Francis J rejected this however, stating that ‘I cannot read into the judgment in Waggott that even a short period of sharing of income can be justified other than by reference to the doctrines of need and compensation.’

Above all, Francis J noted that HHJ O’Dwyer had made a finding of fact that there was insufficient evidence to support the contention that the business value would increase significantly once the capital improvements to improve the appearance of the restaurants had been carried out. W had not sought to challenge this finding of fact, but a successful challenge of it seemed to be fundamental to many of the defences that she was attempting to raise.

HHJ O’Dwyer had erred when he stated that by applying the sharing principle to H’s future income, ‘this approach also leads to a true determination of the reasonable needs of the wife,’ with Francis J finding such a statement to be ‘incomprehensible.’ The task of the judge is to assess the reasonable needs of the parties and then determine whether the capital provision is sufficient. Only if the answer to this question was no should the court go on to consider periodical payments. The judge would have a broad discretion as to how to assess the parties’ needs, and to what extent the parties should be expected to amortise their capital to meet said needs.

H’s appeal on the grounds that HHJ O’Dwyer had applied the wrong test when determining periodical payments to W was successful. It then fell to Francis J to consider what would be appropriate periodical payments. As an earning capacity could not be subject to the sharing principle, the ‘inevitable and direct consequence’ was that W would have to begin living off her capital provision immediately, whether or not on an amortised basis, while H would not.

As to the level of periodical payments, Francis J noted that while HHJ O’Dwyer had arrived at the figure of £150,000 p.a. on the basis of sharing, he had also sought to justify this sum by reference to W’s needs. Francis J held that while the judge was entitled to be generous in his interpretation of W’s needs, he was not entitled to simply take a round number with no arithmetical justification or consideration of factors such as W’s needs, the income that her capital would generate, and amortisation. Francis J sounded a cautionary note for judges, commenting on the crucial importance of setting out how a particular figure had been reached: ‘parties who conduct these cases up and down the land, often without the benefit of legal advice, need to know how judges alight upon a particular figure for periodical payments. Otherwise, discretion gives way to a risk of disorder or even chaos with people not knowing how or whether to settle.’

The parties had accepted that of her capital provision, W would be left with c.£1.732m after she had purchased a property and a new car, and allowing for currency fluctuation and other expenses. Francis J applied the Duxbury formula to calculate that this would generate c.£52,000 p.a. for W (after she had paid tax in the US, where she was living.) Were W to begin amortising her capital immediately, she would have £100,000 p.a. in round terms, but the question of whether or not a spouse should be expected to amortise their capital would depend entirely on the unique facts of each case. In the present case, given that H continued to enjoy such a large income, and that this was a long marriage in which both parties had made full contributions, Francis J concluded that it would be fair to order that W did not have to amortise her capital for a period of time – in this case, during H’s continued employment.

Francis J was highly critical that there was no forensic analysis of W’s budget in the first instance judgment, despite significant cross-examination on this point. He was clear that there is a judicial obligation to analyse the budgets that the parties put forward, and this was inexplicably lacking from the first instance judgment. H argued that W had presented a number of different budgets, with W’s alleged monthly expenditure increasing from £10,000 to £15,000 between Form E and Final Hearing. H proposed that £75,000 p.a. was a reasonable and generous budget for W going forward, but Francis J instead substituted a budget of £120,000, which was the figure given in the Form E, and which appeared to be well-reasoned and thought through. As Francis J held W’s net return on capital is £52,000 p.a., there was a shortfall of £68,000 p.a. which should be met by periodical payments, substituting the original order’s periodical payments of £150,000 p.a.

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