19 February 2009

Privy Council decision means postnuptial agreements elevated to a new status


Julian Lipson
Partner | UK

Following the case of MacLeod v MacLeod on 17 December 2008, the ‘old rule' which provided that postnuptial agreements were contrary to public policy (for fear they would undermine the institution of marriage) has now been abolished. 

Although the Privy Council was not able to reverse the long-standing rule that prenuptial agreements are contrary to public policy and thus not contractually binding, they did acknowledge that Judges have become increasingly minded to implement the terms of prenuptial agreements provided they are fair. However it was felt that the difficult issue of validity and effect of prenuptial agreements should be left to Parliament to legislate. 

The Privy Council's decision recognising and upholding, in large part, a postnuptial agreement made by Mr and Mrs MacLeod may pave the way for couples to exert greater control over the division of their assets in the future by agreeing during their marriage what they think would be a fair outcome, should they split up. 

Facts of the case

The couple are American and were married in Florida in 1994 when the husband was aged 49 and the wife aged 27. The husband had amassed significant wealth prior to the marriage and, although he retired the following year at age 50, his assets doubled in value during the marriage. 

The parties moved to the Isle of Man in 1995 and they had five children during their 10 year marriage who were aged between 7 and 13 years at the time of the divorce hearing. 

The couple entered into a prenuptial agreements on the day of the wedding, (which would have been binding in Florida), which was subsequently varied by two postnuptial agreements. The second and final Deed (the “Agreement”) was entered after 14 months of negotiations (with the benefit of legal advisers), when the marriage was already ‘on the rocks' and the wife was in an extra marital relationship. The Agreement set out the financial provision that would be made for the wife, in the event of divorce, including capital totalling £1.8m. It did not restrict claims in relation to the children, but was otherwise deemed to be in full and final satisfaction of divorce claims.

Upon divorce, the wife argued that all three documents should be torn up and disregarded and in contrast to the provision made for her in the Agreement, she sought 30% of the husband's pre-marital wealth and 50% of the increase in his assets during the marriage; a claim totalling in the region of £5.6m. 

The husband argued that the provision for the wife, as set out in the Agreement should be upheld, although he conceded that an additional sum was needed to provide housing for the children (and the wife as mother), during their minority. However this was to be by way of Trust and not as an outright payment to her.

At the first hearing in the Isle of Man, the court held that provision for the wife should be in accordance with the Agreement. As to the children they ordered the husband to provide an additional lump sum of £1,125,000 to be paid to the wife, so that she could purchase accommodation sufficient to house her and the five children. Notably the lump sum was to be paid outright and without any restrictions as to how the funds should be invested. 

Both parties appealed this decision (the wife believing the award to be too low and the husband, although conceding the amount of the additional lump sum, having previously offered £750,000, arguing that it should instead be held on Trust). Both parties' appeals were unsuccessful. The husband then proceeded with his case to the Privy Council.

In considering the husband's appeal, the Privy Council considered all the circumstances of the case and found that there was nothing to stop a couple entering into contractual financial arrangements after their marriage governing their life together or the terms of any future separation. Such contracts would have full legal efficacy if entered into by deed following legal advice and in the absence of undue influence. Indeed, the ‘old rule' providing that postnuptial agreements were contrary to public policy was abandoned as contrary to modern legal thinking. 

The Privy Council acknowledged that although the Agreement may have lacked generosity of provision for the wife, being much less than she could have expected had there been no agreement, there was no basis for interfering with it. In making this decision, the fact that the Agreement was finalised and entered into by the parties just 13 months before they separated was highly influential.

However, the Privy Council did vary the terms of the parties' Agreement in relation to financial provision for the children, finding that it did not contain proper financial arrangements for them. It reversed the earlier decision of the Isle of Man Court that the additional capital provision for housing should go to the wife outright and instead provided that the housing fund be by way of trust, as the husband had contended. 

As to the weight to be attached to postnuptial agreements in an application for financial provision following divorce, the Privy Council said that the Court should be careful to make sure there was no change in the couple's circumstances in the light of which the financial arrangements previously agreed would be manifestly unjust.

The wife therefore is to receive approximately £3 million, rather than the £5.6 million which she was seeking, and of that, £1.25 million is to be held in trust as the husband sought.

Implications

The Privy Council's decision sets a precedent. If the wife had not entered into the Agreement, it is very likely she would have been awarded more money by the Court and the property for her and the children would belong to her outright and would not have been placed in trust.

The public policy objection to postnuptial agreements has now gone. This does not mean that all postnuptial agreements will be automatically binding, and the Family Court retains its discretion and overarching power to vary terms agreed between spouses. However this case means that such agreements are potentially binding and provided certain criteria are met and the terms are not manifestly unfair, they can be upheld as valid contracts. The Court does of course retain its overriding jurisdiction to determine that appropriate provision has been made for any child of the family.

In considering the efficacy of any agreement, the Court will be looking to see that certain legal safeguards are observed: terms will need to be recorded in a deed; both parties will need to have had independent legal advice; there must have been no undue pressure exerted on a party to sign and both parties must have complied with their duty of full disclosure. As in this case, the time lag between the date of an agreement and the date of separation will be crucial in determining whether the terms of the agreement remain fair in all the circumstances.

Importantly, the law in relation to prenuptial agreements has not changed. Although the Privy Council was invited to clarify the legal status of prenuptial agreements, they would not be drawn into the debate. This is because the Law Commission is currently looking into this issue and is due to report in 2012; and second, because they felt that considerations as to the safeguards that need to apply were a matter for Parliament to legislate on rather than the judiciary. 

Due to the elevation of the status of postnuptial agreements, some couples may want to take the opportunity to clarify the financial arrangements between them by entering into such an agreement. Those with an existing prenuptial agreement may want to consider trying to strengthen their position by entering into a postnuptial agreement now or in the future. There are advantages and pitfalls involved in negotiating and entering into a postnuptial agreement and raising the matter may of itself cause damage and disturbance to a relationship, and would need to be considered very carefully with specialist legal advice.

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