The court’s unpredictable approach means alternative resolution could be the logical choice, argue Kim Beatson and Victoria Brown
In divorce and civil partnership dissolutions, the court can capitalise maintenance provision by making certain lump sum, property adjustment or pension sharing orders in place of an earlier periodical payments order (Matrimonial Causes Act 1973, ss 31(7A)–( ); Civil Partnership Act 2004, Sch 5, Pt 11, paras 50–62). Capitalisation cannot be used in nullity proceedings, judicial separation or to adjust orders made in favour of children of the family.
When capitalising maintenance, the court must:
In exercising its capitalisation powers the court can substitute the following in place of the original maintenance order:
The court can also direct that the recipient of the original discharged/varied award can neither bring any further application for periodical payments (secured or unsecured), nor apply for an extension of the term ordered by the court.
While the following cases offer guidance on the issue of capitalisation, the court’s approach is generally regarded as unpredictable, making litigation a very risky process. Couples facing these issues should consider dispute resolution processes instead.
Vaughan v Vaughan
In deciding Vaughan v Vaughan  EWCA Civ 349,  All ER (D) 04 (Apr), which involved a 13-year childless marriage, the Court of Appeal considered how to deal with a second wife’s hypothetical claims in the context of a capitalisation application by the husband’s first wife.
A combination of a deed of separation and subsequent court order provided the wife with annual maintenance of £27,175. After 20 years, the husband applied to terminate the maintenance. He was 71 years old at the time, had remarried and had two children by his second marriage. He lived with his second wife in their jointly-owned home worth over £3m net, but it was accepted that this property should be sold to increase income by releasing capital. He also owned a property in Wales and other smaller investments. While previously being a successful barrister, the husband suffered ill health and, at the time, his main income was a private pension fund which he was electing to receive as an annuity. This would continue to be payable at the same rate to his widow after his death at roughly £100,000 gross per annum.
The wife was aged 66 years and cross-applied for a capitalised sum of £560,000. She lived alone in her home worth just over £1m. She owned an antique desk worth £300,000, had an annual gross pension income of roughly £5,000, and £380,000 inheritance from her parents.
At first instance, the judge considered the hypothetical financial claims of the husband’s second wife and reduced the husband’s capital and income. This allowed the husband to succeed in applying for the arrangements to be revoked and for the maintenance order to be discharged. The judge decided the wife could adjust to life without maintenance by relying on her inheritance and falling back on capital to produce income, including the mortgage-free home and saleable chattels.
In allowing the wife’s appeal, the Court of Appeal decided the judge had attached too much weight to the second wife’s hypothetical claims and ordered the husband to pay a capitalised lump sum of £215,000 based on notional annual periodical payments of £14,000.
The Court of Appeal held that when deciding whether to substitute maintenance for a lump sum order, the court must:
Yates v Yates
In Yates v Yates  EWCA Civ 532,  All ER (D) 209 (Mar), the consent order provided the wife with maintenance for a three-year term with no bar to extension. She also received a £978,000 lump sum which was partly intended to help discharge the £451,000 mortgage on the matrimonial home. The wife chose not to discharge the mortgage and, instead, purchased a non-income bearing bond by re-mortgaging the home for around £100,000.
She later applied to extend, increase and capitalise the maintenance. She was successful at first instance when the judge extended the maintenance order to 15 years and capitalised the payments by reference to her monthly income needs, including the mortgage payments.
In the Court of Appeal, the husband successfully argued the mortgage payments should be excluded from the wife’s budget as her need to pay them arose from her own decision of not using the original lump sum as it was intended. The court reduced the wife’s income needs by the amount of the mortgage repayments and, in doing so, revised the capitalised sum according to Duxbury. Thorpe LJ also noted, obiter, the guidance in Fleming v Fleming  EWCA Civ 1841,  All ER (D) 215 (Nov) that term orders should only be extended in exceptional circumstances and it was highly unusual for a three-year term order to be extended so liberally.
Grocholewska-Mullins v Mullins
In Grocholewska-Mullins v Mullins  EWCA Civ 1121, when the parties divorced in 1992 the wife received a £50,000 lump sum and joint lives annual maintenance of £24,000. The maintenance was reduced to £12,000 per annum when she later cohabited, but when that cohabitation ceased, she then applied for an upwards variation and capitalisation.
At first instance the judge decided the maintenance should revert to the original amount of £24,000, plus £1,000 per annum for inflation. Maintenance was then capitalised and the husband was ordered to pay a series of lump sums according to the sale of his business: namely £47,500 by March 2013, £25,000 by January 2014 and a further £225,000 by December 2014.
The Court of Appeal rejected the wife’s argument that the judge had calculated the Duxbury figure incorrectly and was not persuaded that the capitalised sum was too low. The wife also failed to argue that the judge had wrongly ignored Retail Price Index (RPI) increases. However, she successfully obtained permission to appeal the potential unfairness to her of receiving the capitalised award as a series of lump sums in circumstances where the first lump sum would discharge all her debts but leave her with virtually no income until the second payment was made.
H v H
In H v H  EWCA Civ 1523,  All ER (D) 41 (Dec), there had been a joint lives order for spousal maintenance of £90,000 per annum, which was later increased to £150,000 per annum to include a compensation element following McFarlane v McFarlane  UKHL 24,  All ER (D) 343 (May).
Shortly before the husband’s retirement, he applied to terminate the spousal maintenance. The trial judge replaced the maintenance with a lump sum of £400,000 to be paid upon his retirement.
The wife appealed, arguing that her existing capital fund of £1m in savings would produce an annual income of £28,000 per annum, assuming a rate of return of 3.75% gross. Her income shortfall, given the existing annual maintenance sum of £150,000, would be £122,000. This would require a Duxbury fund of £2.6m. Alternatively, the wife argued that if the judge applied a rate of 3.75% gross to the capital fund, that would produce a lump sum of £746,000 and not £400,000.
The Court of Appeal was clear that there was no industry standard. As the figure of 3.75% gross was the one discussed and considered during the hearing, it was not open to the judge to then pluck a figure out of thin air, as he had. The Court of Appeal also made clear that the compensation element remained relevant on an application for variation.
Mickovski v Liddell
In Mickovski v Liddell  EWCA Civ 251,  All ER (D) 19 (Jun), the court heard the husband’s application for permission to appeal against an order refusing his application to vary an order for periodical payments by revoking the same, and instead capitalising those payments at £34,000.
The 2013 financial consent order provided the wife with a lump sum of £555,000 and periodical payments for herself at the rate of £8,400 per annum for seven years, to be increased monthly in line with the RPI.
In 2015, the husband made an application to vary the periodical payments order on the basis that there had been a significant drop in his income, and a significant rise in the wife’s income following her return to full or near full time employment. The husband had remarried and argued that he was dependent on his second wife’s earnings. The husband retained an interest in the family home. The wife, who was cohabiting, said that she did not receive assistance from her cohabitee and that her earnings had plateaued.
At first instance, the judge refused the husband’s application and instead capitalised the periodical payments at £34,000. She found the husband to be ‘belligerent, unhelpful and dictatorial’ and that his evidence was ‘unclear…confusing…wholly unbelievable’ . The judge did not consider the husband’s lifestyle to have been in any way affected by his alleged decrease in earnings, that he had built up substantial credit, clearly had access to funds and was not reliant on his new partner to the extent argued. By contrast, the judge found that the wife received no real financial support from her cohabitee, worked hard to provide properly for the children and had reached a plateau in terms of her earnings.
On appeal, the husband’s overarching submission was that the judge at first instance failed to apply the correct legal framework to the application.
The Court of Appeal held that there would be no variation of the periodical payments. The judge was not unreasonable to consider the merits of capitalising the same. She was not bound by the wife’s open proposal to accept £30,000 and there was evidence that the husband had capital from which to pay the sum ordered. The sum of £34,000 represented a small decrease for accelerated receipt and the decision was well within a reasonable band of discretion. Further, assuming the wife would continue to require ongoing support at the same level was unobjectionable in the circumstances of the case. The husband’s appeal was therefore dismissed.
Harris v Harris
In Harris v Harris  EWHC 1836 (Fam) the High Court considered an appeal by the husband against an order for capitalisation of spousal maintenance and an increase in child maintenance.
There was a financial remedy order made in 2009 which provided for payment of lump sums, spousal maintenance of £1,250 per month as a term order and child maintenance at £850 per month. The husband then made an application in 2015 to vary downwards the order for spousal maintenance. An order was subsequently made providing for spousal maintenance ‘representing only childcare costs’ of £500 per month from the date of the order until 31 June 2017. It would then reduce to £250 per month until 31 June 2018, thereafter ceasing altogether with a bar on extension or further application. There was also provision for the wife to provide annual copies of her employment contract, breakdown of childcare costs, and estimated future childcare costs. When the wife failed to provide such documentation, the husband stopped making payments altogether from 1 June 2016 and made a further application to discharge his obligation to pay maintenance. The wife cross-applied seeking capitalisation of her spousal maintenance in the sum of £9,500, being the total sum that would have been due to her until June 2018 under the 2015 order.
Both applications were joined, and the trial judge concluded that the spousal maintenance should be capitalised in the sum of £9,500. He directed the husband to pay the capitalised maintenance by December 2017, ordered him to pay £250 per month until he met the capitalised maintenance order, and directed that there would be interest on the sum of £9,500. The effect of this was that a total of £11,693 would become payable by 30 June 2018. The trial judge also varied the child maintenance order upwards.
The husband appealed on several grounds and was granted permission on some. In respect of spousal maintenance, the appeal judge held that awarding the wife capitalised maintenance, continuing maintenance and also interest was double-counting. He considered that that the husband should pay a capitalised sum of £6,500, and there were then two alternatives: either spousal maintenance payments to continue at £250 per month until payment of the capitalised sum, or for interest to run on the arrears until payment of the sum if child maintenance were to be backdated to June 2017.
Given the expense and unpredictability of conventional litigation process, logic dictates that couples facing a variation/capitalisation should first consider dispute resolution: mediation, collaborative law, private judging or arbitration.
The unpredictability of outcome means that mediation may not be favoured by some and, since many couples will have been separated for longer than they were married, collaborative law may not be the natural choice. Private judging and arbitration are natural forums in which to resolve the issues of capitalisation in lieu of continuing maintenance.
This involves parties selecting a retired judge or counsel to help them reach a decision by presiding over a private hearing.
The private judge is actively involved in managing the process, which usually follows the same format as a financial dispute resolution appointment. After hearing all the arguments, reviewing the evidence and intervening where appropriate, the judge makes their finding, which the parties may agree to be bound by and convert into a court order.
It is particularly effective where the parties understand the benefits of an experienced and objective third party.
The court process is lengthy and prohibitively expensive for most, so arbitration seems like a natural option. Jointly agreeing the choice of arbitrator, directions, evidence and the involvement of experts are some of the advantages of the process. Speed, privacy and confidentiality are other benefits.
The decision of the arbitrator will be binding in accordance with the Arbitration Act 1996 Institute of Family Law Arbitrators Rules. An attempt to resile from an arbitrated award could be regarded as financial conduct.
Hopefully these cases will gradually fall out of the court system and into the dispute resolution arena. There are no advantages whatsoever to variation/capitalisation applications proceeding through the conventional route.
This article was first published by New Law Journal. Reproduced with permission.