Pre-Nuptial Agreements

NO GUARANTEE AS TO HOW THE ASSETS WILL BE DIVIDED ON SEPARATION

It is important to realise that pre-nuptial agreements are not binding in England and Wales. However, they can make an enormous difference to the outcome in a case.

In the past English law did not give effect to pre-nuptial agreements, but a case in 2010 called Radmacher introduced an entirely fresh approach. The Supreme Court said this:

"The court should give effect to a nuptial agreement which is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement." (emphasis added)

This changed the law in relation to pre-nuptial agreements in England giving them far greater strength and impact than ever before. Now, if the court has to determine whether parties should be held to their agreement, it will consider:

  • Were the circumstances at the time of entering into the agreement such that each party was able to enter the agreement freely, with a full appreciation of its implications?

In order to decide if the circumstances at the time of entering the agreement were such that each party was able to enter the agreement freely, with a full appreciation of its implications the court will consider the following:

  • Was the agreement freely entered into? There must be no question of either party being under pressure to enter the agreement. If it is signed the last minute, the financially weaker party could say that they had no choice but to sign. You should discuss the matter well in advance, take advice and negotiate the terms before your invitations are sent.

  • Did both parties have a full appreciation of its implications? In order to fully understand the agreement, both parties must be independently advised by a solicitor. Advice should also be taken in other relevant jurisdictions. Full financial disclosure is also required so that you both fully understand the implications of the agreement.

  • At the time of the divorce, is it fair to hold the parties to the agreement?

The court will look at whether they feel the agreement can still be considered fair at the time of the divorce.

As a minimum, the agreement must make provision for the parties' needs. The court will not leave a party to a marriage in a predicament of real need where the other party has more than they need.

This means writing an effective pre-nuptial agreement requires a fair amount of crystal ball gazing – what is likely to be fair in 5, 10 or 20 years?

If the agreement is not properly entered into – for example there is a misrepresentation or duress, the contract is vitiated. It will have no effect.

Similarly, if one party does not understand the impact that signing the agreement will have, i.e. that it will regulate financial provision on divorce, then they will not be held to it. This is why it is crucial for there to be independent legal advice and full financial disclosure.

But what if the agreement was properly entered into, and the parties understood its implications, but the court does not consider it fair to hold the parties to the agreement in the current circumstances?

The court will not simply tear up the agreement – it will make provision for the weaker party's financial needs. This is demonstrated by the case of Luckwell v Limata.

The parties had been married for nine years and had three young children. The wife's father was extremely wealthy and as a result, a pre-nuptial agreement was signed before the marriage. This provided that each of them would keep their own wealth, including any gifts they received during the marriage. Following the parties' marriage, significant gifts were made to the wife by her father. At the time that each gift was made, further agreements were entered into, re-affirming the terms of the pre-nuptial.

When looking at dividing up the assets on their later divorce, the judge was clear that very great weight should be given to the pre-nuptial agreement, and those later agreements that supported it. However, their weakness was that they did not provide the husband with any financial support at all.

He had no home, no current income, no capital and considerable debts. In contrast, the wife had capital over more than £6.5m.

For this reason, the wife was ordered to provide the husband with a housing fund of £900,000, around half of which would revert to her when their children had grown up, and the remainder of which would revert upon the husband's death. She was also ordered to pay him a little under £300,000 in order to meet his debts.

Although this may seem a significant award in the husband's favour, he would have received substantially more had there not been a pre-nuptial agreement, and the money would have been given to him outright, rather than reverting to the wife.

RULES THAT CAN BE PUT IN PLACE IN A PRE-NUPTIAL AGREEMENT

Pre-nuptial agreements usually fall into one of the following categories:

  • Separation of property: the pre-nup states that each party keeps what they own before the marriage or inherit or earn during the marriage - and neither partner can claim against the other on a divorce. This is a good option if both you and your partner already have significant assets.

  • Stepped provision: The pre-nup states that the wealthier spouse agrees to make certain payments to the other on a divorce. They will pay enough to deal with needs, which would normally increase as the marriage goes on for longer, or for instance on the birth of children. This is a good option if one party in your relationship has significant wealth.

  • Sharing of fruits of matrimonial partnership: This agreement will mean that what assets each partner had before the marriage will return to them on divorce, but assets acquired or earned during the marriage will be shared. Where one parties' assets are limited, the agreement will also set out that if the poorer spouse is unable to meet their reasonable housing and income needs from their own property or their share of the marital property, then these will be provided for by the wealthier spouse on divorce.

The pre-nuptial arrangements are not limited to just these three. There is huge scope for variations, including for example putting restrictions of what might amount to reasonable needs, to putting a cap on the overall sums the poorer spouse might receive or to limiting to a % of the other party’s overall wealth.

It is crucial for both parties to get proper legal advice on both the terms and the drafting of a pre-nuptial agreement.

In addition to the financial terms, there are a number of other factors which must be considered.

ADDITIONAL QUESTIONS TO CONSIDER WHEN ENTERING INTO AN INTERNATIONAL PRE-NUPTIAL AGREEMENT

If you or your partner are from outside the UK, or live abroad there is more you must consider. In international cases, you must also discuss with your lawyer:

  • The inclusion of a choice of law clause (You may wish to raise the following questions with your lawyer: The law of which jurisdiction will govern your agreement? Which options are available to you? What are the main differences between the solutions provided by different national laws to the same legal problems?)

  • The inclusion of a choice of court clause (You may wish to raise the following questions with your lawyer: In case of a dispute arising out of your agreement, the courts in which jurisdiction will decide over it? For example, you can choose the courts of England and Wales or somewhere else. What options are available to you to choose from? What alternative dispute resolution methods, for instance arbitration, you may choose?)

  • Whether there should be just one agreement, or whether there should be other agreements in other relevant jurisdictions, for example the country where you or your partner live or plan to live in the future or the country of your nationality or the country of your partner’s nationality.

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