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Should nuptial agreements be made available to all?

Date:9 JAN 2015
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Simon Thomas, Head of the Michelmores Family Team

Nuptial agreements are not defined or recognised in legislation. Their status has been determined by case law, most significantly by the 2010 landmark case of Radmacher v Granatino, which ruled that appropriate weight should be given to the terms of a nuptial agreement, so long as it was freely entered into by both parties and upholding the agreement would still be fair in the circumstances as they prevail at the time of separation or divorce.

As the law currently stands in England and Wales, nuptial agreements, whether entered into before or after marriage, are not binding. However, the Law Commission’s comprehensive report, Matrimonial property, needs and agreements: the future of financial orders on divorce and dissolution, published in March last year, recommends that the government consider making nuptial agreements (referred to by the Law Commission as Qualifying Nuptial Arrangements or QNAs) legally binding. By doing so, the Commission hopes to make the law clearer and more certain and thus more accessible to all.

Meeting and defining ‘financial needs’

The Law Commission report is quick to point out, however, that a Qualifying Nuptial Agreement has a number of prerequisites and must meet the financial needs of both parties and of any children of the marriage.

The draft legislation contained within the Nuptial Agreements Bill is very clear that an agreement which attempts to contract out of providing for a party’s needs on the breakdown of the marriage will fail as a Qualifying Nuptial Agreement and will be remitted to Court.

Most couples do not have enough capital to make a nuptial agreement legally viable, as the assets within the ‘matrimonial pot’ cannot meet the needs of both parties and of any children of the marriage.

As it currently stands, there is no statutory definition of financial needs. The principle of needs has been developed through case law, and its meaning is interpreted widely. Evidence suggests that judicial discretion is exercised inconsistently across the country, with judges in some areas interpreting needs at a more generous level than judges in others.

Financial needs may include, for example, the following:
  • Provision of a home - with the parent who primarily cares for the children being securely housed in priority to the other parent
  • Income or living expenses
  • Costs of childcare
  • Pension provision
  • Costs of working and retraining
The Law Commission notes that in most financial remedy cases, the limited resources available mean that for either party to be maintained for the rest of their life by the other to the standard of living which prevailed during the marriage is an unattainable aspiration.

Currently most nuptial agreements are entered into by wealthy couples, representing approximately 2%–3% of all divorcing couples.

The Law Commission concludes that the underlying law relating to responsibilities to meet each other’s ‘financial needs’ upon divorce or dissolution is not in need of statutory reform. However, it does recommend that the meaning of ‘financial needs’ is clarified in guidance to be published by the Family Justice Council.

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Is access to justice being restricted?

Nuptial agreements are usually, but not always, a way for a wealthier party to minimise the financial damage which they may otherwise suffer in the event of a divorce. Nuptial agreements are popular in the following situations:

  • Where money is passed down from parents to children. Often, parents will insist on a nuptial agreement being in place prior to any money being transferred, as was the case with Ms Radmacher’s family. 
  • Where there are family trusts which may fall into the matrimonial pot on the basis that they are nuptial settlements. A nuptial agreement can form an integral part of any wealth-protection strategy and is a way of ring-fencing the family trust and protecting it in the event of divorce. 
  • Where parties are entering into second marriages. Nuptial agreements are the obvious way of ensuring that property and other assets are preserved for children from a previous marriage or relationship.
  • To protect gifts and inheritance bequeathed to one party.
A common thread which runs through all of the above is the wish to ring-fence certain specified assets. Some nuptial agreements address only those assets, failing fully to consider future financial positions, which can result in a degree of uncertainty.

In analysing situations where nuptial agreements have been popular, it could be argued that the great majority of divorcing couples are being ignored in the proposed Bill. Their access to a legally enforceable contract (that circumvents expensive, protracted and acrimonious court proceedings) is being restricted because most individuals can rarely afford to set up and support two comfortable households following a divorce.

In many parts of the world, a nuptial agreement is an accepted part of the culture, with the obvious advantage of removing the uncertainty, expense and delay associated with court litigation. The main assets likely to be protected by a nuptial agreement are non-matrimonial property such as inherited wealth, assets acquired prior to the marriage and gifts.

In reality, a nuptial agreement is only likely to be enforced if the parties’ joint income and assets well exceed their respective financial needs. The view of the Law Commission is that this situation arises in only 2-5% of all divorces.

In 2013, there were 115,122 Decrees Absolute pronounced. Between January and June of 2014, there were 56,923 Decrees Absolute. The figures for the second half of 2014 are not yet confirmed. It is likely that the total, on the basis of an estimate of 56,923 x 2, will be very similar to the 2013 figure.

Between 2% and 5% of the 2013 figure translates into 2,302 to 5,756 cases. We are therefore talking of nuptial agreements being of relevance to no more than 6,000 couples a year, compared with the 110,000 or so couples per year who divorce. So are the remaining 100,000 plus divorcing couples being denied access to the full range of legal contracts and remedies?

For the vast majority of couples seeking a divorce or dissolution, a Qualifying Nuptial Agreement will have no relevance. Most couples are unable to meet the financial needs of both parties and of any children of the marriage (and of course one cannot contract out of this responsibility). In these circumstances a Qualifying Nuptial Agreement will never bite. For the majority of clients seeking a divorce or dissolution, the uncertainty surrounding potential court intervention will therefore remain.

Should the Bill have made nuptial agreements available to all, regardless of wealth?

At first sight, this argument appears attractive, as currently the Bill’s terms mean that only the very wealthy will achieve a reasonable level of financial certainty upon divorce. However, it seems nonsensical and, to use the Radmacher terminology ‘unfair’, to bind a couple in a situation where there are insufficient assets comfortably to support two separate households. Furthermore, financial and personal circumstances can change beyond recognition during a marriage. Mr Granatino began his married life as a wealthy banker and ended it as a research student.

Within a perhaps typical scenario of a 15 year marriage, two dependent children, husband working full time with a sizeable salary, wife working part time, possibly having made some career sacrifices to care for the family, comfortable family home with modest mortgage, reasonable pension provision for both and savings/investments of £50,000 – there would be insufficient wealth easily to enable both the husband and the wife to support two separate houses. Would it really be fair for the husband to ring-fence, via a Qualifying Nuptial Agreement, £20,000 that he received by inheritance some 20 years previously?

Access to justice is not in fact being restricted in this scenario. Negotiation, mediation, arbitration and, if necessary, litigation remain available to this divorcing couple to address and resolve the financial dispute. Every asset goes into the ‘matrimonial pot’ and the s 25 MCA factors can be applied with first consideration being given to the welfare of any child. Justice prevails.

It remains to be seen whether the government (and it will be the next government) does accept the Law Commission's draft Bill but, for the time being, the recommendations are important. Many practitioners are already taking into account the requirements of a Qualifying Nuptial Agreement. Adhering to these requirements and to the Radmacher v Granatino guidance, even at this stage, is therefore important to maximise the chances of a nuptial agreement being upheld by the court.