Relationship Property - What is fair?
What is RSS?
Nov 2006Western society has come a long way in the past century in terms of recognition of the equality between men and women and in particular the recognition of equality between married partners or couples living in relationships in the nature of marriage. However, recent decisions of the House of Lords in England and our own New Zealand Court of Appeal have shown that judges are still grappling with equality and fairness in the division of relationship property on the breakdown of a relationship.
The recent House of Lords decision of Miller v Miller involved a marriage of short duration (2 years and 9 months) and assets worth approximately £17.5m. The Law Lords had to decide what would be a fair division of relationship property in light of English case law, which like the New Zealand Property (Relationships) Act recognises that short marriages can result in an exception to the principle of equal sharing of relationship property. Lord Nicholls of Birkenhead said:
"Marriage, it is often said, is a partnership of equals… This is now recognised widely, if not universally. The parties commit themselves to sharing their lives. They live and work together. When their partnership ends each is entitled to an equal share of the assets of the partnership, unless there is a good reason to the contrary. Fairness requires no less.”
In our New Zealand context, principles of fairness and equality are enshrined in our Property (Relationships) Act 1976 ("the PRA").
Section 1M sets out the purpose of the Act which includes:
"…b. to recognise the equal contribution of husband and wife to the marriage partnership…
… c. to provide for a just division of the relationship property between the spouses or partners when the relationship ends by separation or death…"
Section 1N sets out the principles which are to guide the Court in achieving the purposes of the Act. These include:
" a. the principle that men and women have equal status, and their equality should be maintained and enhanced;
….b. the principle that all forms of contribution to the marriage partnership … are treated as equal;
c. the principle that a just division of relationship property has regard to the economic advantages or disadvantages to the spouses or partners arising from their marriage or de facto relationship…."
These principles of equality and justice have recently been considered by the New Zealand Court of Appeal in the case of M v B . This article looks at one particular issue which arose from that case, being the potential for economic disparity between partners at the end of a marriage or relationship.
Economic Disparity – Section 15 PRA
A simple 50/50 split of relationship property assets does not always result in an outcome that is fair to both parties. This is particularly so when one party to the marriage or relationship has been the main bread winner and the other party has sacrificed a career in order to fulfil homemaking and childcare obligations. At the end of the marriage or relationship the partner who has been working is able to continue earning a good income and therefore building up more assets, while the partner who has been out of the work force is often left on a very low income without great prospects of any real increase.
When the Matrimonial Property Act 1976 was amended in 2001 to become the Property (Relationships) Act, section 15 was added in order to try to overcome such problems and inequalities. Section 15 provides that the Court may award lump sum payments or order the transfer of property if:
"… on the division of relationship property, the Court is satisfied that, after the marriage, civil union or de facto relationship ends, the income and living standards of one spouse or partner (Party B) are likely to be significantly higher than the other spouse or partner (Party A) because of the effects of the division of functions within the marriage, civil union or de facto relationship while the parties were living together."
The section goes on to set out various factors that the Court may have regard to in determining whether or not to make an order under the section. Essentially, the two main arguments that a partner or spouse seeking an award under section 15 would have to convince the Court of are:
1. that there is a significant disparity of income and living standards between the partners at the end of the marriage or relationship; and
2. the disparity is because of the effects of the division of functions (the roles taken) within the marriage, civil union or de facto relationship while the parties were living together.
When section 15 was introduced many lawyers expected that it would open the floodgates to a vast number of claims and would result in large financial awards for clients. However, the cases have not been as numerous as expected and the awards to date have ranged from around $16,000 to around $140,000 depending on the level of the parties' incomes and the amount of property involved in each case. The M v B case caused some interest among family lawyers because of the large section 15 award that was sought by the wife and how that claim was dealt with by the Court.
The M v B Case
This case involved a husband who is a partner in a large Auckland law firm and a wife who was highly qualified and had worked in various jobs from the time the couple met in 1979 until their first child was born in 1993. The evidence was that prior to this, the wife had been successful in the area of market research and had held a relatively senior position in a pharmaceutical company earning a good income. After her two children were born she had some part time work outside the home but, primarily, she worked at home as the principal care giver of the children. Meanwhile the husband had become an equity partner in his law firm.
In the High Court judgment in December 2004 Justice Allan noted that it was "common ground" that the wife's part time earnings were less than 5% of the husband's recent income. There was no dispute that there was a "significant" disparity in income between the parties. There was some dispute about the degree to which this disparity was caused by the parties' roles in the relationship. The wife argued that her role had not only assisted the husband to progress in his career but had also resulted in a sacrifice of her own career. The High Court judge was not convinced that the wife's role had been a cause of the husband's success but was convinced that her role had led to a sacrifice in her own income earning ability. He awarded $75,000 to the wife under section 15 on the basis of the evidence as to her potential earnings had her career outside the home continued.
The section 15 award needs to be viewed in light of the major arguments in both the High Court and the Court of Appeal as to what the relationship property pool comprised. The family home (worth approximately $800,000) was owned by mirror trusts and did not form part of the relationship property pool. However, there was still debt of $188,000 in respect of the home owed by those trusts to the parties, which they agreed was relationship property. One of the major issues in the case was whether there was any relationship property "interest" in the husband's future earnings from his law firm. Justice Allan in the High Court found that there was not.
The wife appealed and in the Court of Appeal, she was successful in arguing that there was relationship property value in the husband's partnership in his law firm. There was much evidence presented by forensic accounting specialists and other lawyers as to what value was attributable to the partnership interest. The Court of Appeal found that there was a level of "super profit" in the interest in the law firm. This is based on the difference between the husband's actual earnings (in terms of his own skill and effort and the fees he brought into the firm) and his total share of the annual profits of the firm. That difference could be valued in accordance with accepted accounting methodology and the Court of Appeal found that it was relationship property. By allowing the wife's appeal on this point the Court increased the pool of relationship property assets to be divided equally between the parties by about $900,000.
In the Court of Appeal, the wife also sought an increase in the section 15 award to over $500,000. Her counsel argued that this was on the basis of fairness and represented the difference in the income of the parties over a period of years. She also argued that once the jurisdictional requirements of section 15 have been met, the Court has an unfettered discretion as to whether or not an order is made and the size of such an order. An award under section 15 must be made out of relationship property, and because the pool of relationship property was increased in this case, the wife's counsel argued that the Court had a discretion to make a much larger section 15 award. This argument was rejected. The Court of Appeal found that section 15 does not give judges an absolute and unfettered discretion in making awards that significantly readjust an equal division of relationship property. They found that the larger pool of relationship property should not materially affect the judge's exercise of discretion and they were convinced that the High Court award, based on the expert accounting evidence as to the parties' income earning abilities, was appropriate. They dismissed the appeal on the section 15 point and upheld the High Court award of $75,000.
In summary, the wife's appeal in this case was successful on one of her major arguments, namely, that the husband's partnership in his law firm had relationship property value. However, she was unsuccessful in arguing for a greater award under section 15. From a practical perspective, it is possible that the section 15 award she received would have barely covered the legal costs and the costs of the expert witnesses involved in all aspects of this case.
Conclusion
The principles of "fairness", and "equality" are enshrined in our relationship property legislation. Section 15 of the PRA was specifically designed to overcome inequality in income and living standards at the end of a relationship caused by the division of functions within a marriage or relationship. However, the Court of Appeal has shown in M v B that a spouse or partner who sacrifices a career in order to maintain a home and raise a family should not expect to receive a large financial award as compensation under section 15.
