Rachel Osgood | 12th August 2019

When is an earning capacity not an earning capacity?


Rachel Osgood | 12th August 2019

When is an earning capacity not an earning capacity?

That was the central question in O’Dwyer v O’Dwyer , an intriguing case which popped up in my in-box and demanded immediate attention.

What was so intriguing? Partly it was the series of strange peripheral facts. For example, the fact that the judge at first instance shared a surname with the parties! That alone needed two readings and a fact check. Then there was the fact that the appeal was heard exactly one year to the day after the judgment, which also required a double-take. I refer to the “judgment” for there was no sealed order to appeal, and that alone has to be pretty unique. (The judge at first instance had never handed down either a perfected judgment or a sealed order.) There was also the “Huh?” moment, when you read something and think, “Is it me?”. Then you decide it must be you and quickly gloss over it, hoping it will be unimportant.

What was the appeal? The husband was appealing the periodical payments order, which required him to pay £150,000 per annum to the wife for the next 6 years – basically until retirement. He thought he should pay significantly less, and it turns out he was right. It was reduced to £68,000.

Why was he right? It wasn’t so much that the husband was right; it was more that the judge was plainly wrong when he identified the income stream from the family business as matrimonial property which was capable of being shared. Why, asked the judge, should only Mr O’Dwyer continue to live well upon the income when clearly that income is the product of matrimonial endeavour? Why? Because the law says so.

What law? The law in question is primarily the decision in Waggott, which itself caused quite a stir earlier this year. In that case, Moylan LJ delivered a clear and unequivocal answer to the question of whether an income or earning capacity could be treated and shared as a matrimonial asset, and that answer was a resounding “No”, because:

  • to extend the sharing principle to post-separation earnings would undermine the court’s statutory obligation to effect a clean break where that is possible;
  • ongoing financial support should be governed by the principle of need (or, somewhat mythically, to compensation), and not be dished out just because it’s there.

What were the facts? Apart from the weird ones alluded to above, the relevant facts were simple: it was a long marriage, spanning about 30 years, there were four adult children, and each party had contributed fully, albeit in different ways – the husband in the business and the wife at home. In her Form E, the wife had put her needs at not less than £10,000 a month, later increased to £15,000 per month. She was 60; he was 62. The net assets, including the business, totalled nearly £6m and they both agreed that it was a paradigm case for sharing; thus they each exited with capital of just under £3m. Henceforth, she would have her share of the capital and whatever maintenance was ordered; he would have his equal share of capital and the income from the business.

Was that fair? Given that the business was developed through their joint endeavours over a very long period of time; given that the husband at some point would sell the business but the wife would never be able to sell their adult children; given that she would have to live off her capital but he would be able to preserve his, I couldn’t help scratching my chin. Luckily for the husband, he had a much better judge in Mr Justice Francis.

So why was it fair then?

  • Of course, the husband always held the trump card: the clean break requirement. That didn’t completely satisfy me. Regardless of need, it seemed to me that if an income stream has been created through joint endeavours over a long period of time, then it ought to be shared (subject of course to compensating the husband for his continued management of the business). In order not to offend against the clean break principle, could not the wife’s share of the income be capitalised? And if it isn’t possible to capitalise the income, why is it fair that the husband gets to keep it all? To me, although I could see that the law is clear, the outcome still seemed unfair. Furthermore, the court is required to “consider” whether a clean break is possible; it is not required to prioritise a clean break over a fair sharing of the resources.
  • The “clear enunciation of the law”, says Mr Justice Francis, does not permit the sharing of an income for sharing’s sake, and he relies on Waggott, which in turn relies on Charman, Miller; McFarlane and others. However, there’s nothing in the Matrimonial Causes Act 1973 which prohibits the sharing of future income. If it is the duty of the court to find a fair outcome, then it might at least be possible that in some cases it might indeed be necessary to share future income.
  • That said, Mr Justice Francis accepted that it might be unfair to expect the wife to start living off her capital straightaway, which he said was “the inevitable and direct consequence of the fact that an earning capacity is not subject to the sharing principle”. (“Aha!” thought I, “Gotcha!”). However, he addressed this by allowing her to preserve her capital intact for the remaining years until the husband’s retirement. To that extent, she would be on an equal footing to the husband. All she had to do was to use the income from her capital (after meeting her capital needs). This was assessed at £52,000 net per annum. All the husband had to do was to top her up by £68,000 in order to meet her need, which the judge assessed at £120,000.
  • This, said the judge, struck the right balance between “NOT sharing income, which is proscribed, and applying my discretion in the wife’s favour as respects amortisation”. (He didn’t accept that this would be the right approach in every case.)

Was he right then? Yes, clearly, he was right in light of the law as interpreted in Charman and its descendants. As it stands, it is surely beyond question that an income or earning capacity cannot be regarded as matrimonial property which is capable of being shared independently of need. And his approach in this case, in which he attempted to strike a balance between the unfairness of the husband keeping all the future income and his capital intact on the one hand and what the law says on the other hand, is the right one.

But wait. Apparently, the husband’s income was £400,000. After payment of maintenance, he gets to keep about £330,000, and the wife has £120,000. Remember, they each contributed fully to the accrual of the means of generating that income. Of course the husband’s ongoing contributions need to be recognised, but is sufficient regard given to the wife and her contributions over many years?

Hang on though – she gets half the value of the business though, right? She does, as a capital asset. But it is also an income stream. Without her efforts, would there be a future income stream to argue about?

But what about other cases?

Other cases might involve a higher-earning husband employed in someone else’s business. Should the same sort of sharing apply to his income stream? Again, the law is clear, and there is no question of sharing unless there is need (and even then only for a limited period of time). These cases are different though: there is no underlying asset which is capable of (passive) growth until sale, and the husband isn’t relying on capital generated partly as a result of the wife’s contributions in order to generate income.

So who won?  They both did, to an extent. The husband’s maintenance liability was significantly reduced, so he won. But the wife was allowed to preserve her capital intact for as long as the husband can preserve his, so she also won.

Huh? I referred above to the “huh?” moment when I glanced at the case synopsis. The judge at first instance had decided that treating the income stream as matrimonial property leads to “a true determination of the reasonable needs of the wife”. In other words, if one accepts that she is entitled to share the income, then that also means that her needs are equal to her share of the income. Huh?

Thankfully, I was not alone. Mr Justice Francis described this approach as incomprehensible. So don’t worry, needs are still to be assessed by reference to a budget, not by reference to what might be available if you share the income.

What’s the conclusion then? Despite my ramblings and reservations, the case is a nice, neat consolidation of how the law stands with respect to future income of one of the parties: it is not matrimonial property, and the extent to which it will be shared will depend on need, not on sharing. Furthermore, with a flexible approach, as adopted here, a balance can be struck between need (in this case £120,000 per annum) and fairness (keeping capital intact when there is perhaps no obvious need to do so).

So when is an earning capacity not an earning capacity? When it’s matrimonial property. And when is that? Never.

Footnote: Sadly, there was also in this case the tragic and untimely death of the husband’s counsel, the late Valentine le Grice, just a few days after the appeal was heard, with the appeal judgment itself beginning with a tribute to him. That in itself is pretty unique. I didn’t have the privilege myself of knowing him, but he was a well-known and clearly warmly-regarded lawyer, and his success in this case was one of many over a long and distinguished career.