Has the Sign on the Blind Alley Been Lifted? The Possible Return of Compensation
Published: 03/07/2023 08:00
The concept of compensation in financial remedy proceedings has, since its inception in 2006, been a divisive principle. On the one hand, it is a principle that underpins the very reason that the justice system exists: to compel restitution; on the other hand, it can be seen to be a double counting exercise that does not sit comfortably with the principle of fairness. TM v KM  EWFC 155 marks the second case in as many years where a litigant was given an award based on the principle of compensation. One cannot help but wonder, are we seeing a resurgence in claims for compensation?
Those reading will no doubt be familiar with the introduction of the compensation principle in the seminal authority of Miller v Miller; McFarlane v McFarlane  UKHL 24 and in particular the speeches of Lord Nicholls and Baroness Hale. On compensation, Lord Nicholls said at :
‘the parties may have arranged their affairs in a way that has greatly advantaged the husband in terms of his earning capacity but left the wife severely handicapped so far as her own earning capacity is concerned. Then the wife suffers a double loss: a diminution in her earning capacity and the loss of a share in her husband’s enhanced income [ ] women may still suffer a disproportionate financial loss on the breakdown of a marriage because of their traditional role as home-maker and child-carer.’
Therefore, the double loss suffered by the wife in this scenario is required to be taken into account when considering a fair division of the assets. Lord Nicholls warns of double-counting at  emphasising that ‘they are distinct concepts, and they are far from co-terminous. A claimant wife may be able to earn her own living but she may still be entitled to a measure of compensation’. Baroness Hale highlights that what may distinguish compensation from needs is that ‘the economic disadvantage generated by the relationship may go beyond needs, however generously interpreted’ (at ).
In practice, however, compensation has been a battleground of debate with many prominent members of the judiciary voicing their disagreement with the principle.
First, in RP v RP  EWHC 3409 (Fam), Coleridge J famously said that freestanding compensation claims were a ‘blind alley at the mouth of which a “no entry” sign should now be planted’ (at ). This was in circumstances where the wife gave up work to care for children while the husband continued to work, both parties made a life-choice and both contributed equally to the marriage, for which both would be entitled to the ‘full share of the combined and equal contribution’ (at ).
In VB v JP  EWHC 112 (Fam), Sir Mark Potter remarked that while compensation provided an exceptional caveat in scenarios of relationship-generated unfairness where a needs-based award would not suffice, ‘it is no more than an aspect of fairness, important to be identified as a strand or step in the thinking of the court’ ( at ). Sir Mark Potter went on to say that in cases where ongoing periodical payments are required, compensation should be dealt with by a generous assessment of needs ( at ).
In SA v PA  EWHC 392 (Fam), Mostyn J disagreed with the principle of compensation both conceptually and legally. In that case, a wife gave up her career as a solicitor to care for her family but there was no record of her working for an appreciable period of time during the marriage, thus making a reasoned estimation of her earning capacity a difficult exercise. On his difficulties with the theory of compensation, Mostyn J said that the House of Lords refer to ‘hardship’, ‘handicap’, ‘sacrifice’ or ‘disadvantage’ in a situation where the person who has been disadvantaged has been a willing and active participant in their own relationship-generated disadvantage. The willingness of the party to give up work, Mostyn J says, is the dominant factor for consideration (at ) and that should not be ‘characterised as a loss “suffered” by entitling her to an award in excess of her reasonable needs’ (at ). Furthermore, Mostyn J highlighted that the exercise to be undertaken by the court when determining whether an award for compensation should be made requires the court to enter into ‘extremely dangerous territory’ (at ) dealing in hypothetical scenarios ‘which is not based on any kind of hard evidence but usually on hunch, guesswork and speculation’ (at ). Mostyn J went on to say that not only is the exercise ‘highly arbitrary’ (at ]31]), but also one that is ‘extremely difficult to compute rationally, let alone predictably’ (at ]31]) as a premium element on top of a needs-based claim.
Whilst there have been some instances of compensation awards being made, see for example Baron J in Lauder v Lauder  EWHC 1227 (Fam), the principle of compensation has been mired in controversy since 2006. It seemed that making successful claims in compensation would be limited to only the most fact-specific of circumstances with quantification of such claims remaining a real difficulty.
The implications of Waggott v Waggott  EWCA Civ 727 on the principle of compensation
The decision of Waggott and the exclusion of earning capacity as a resource capable of being shared on divorce shook up the debate as regards compensation.
On compensation, the wife argued that the husband had the benefit of a relationship-generated advantage by way of his earnings and that the judge at first instance had failed to take this into account when making the award. Similar to previous objections of Mostyn J in SA v PA  EWHC 392 (Fam), the Court of Appeal struggled to reconcile how the court would quantify a claim for compensation in such terms since such quantification would require a hypothetical analysis of what a career would, or indeed would not, have looked like and whether it would have been, or indeed not have been, enhanced or disadvantaged by the marriage (at ).
It seemed, therefore, that the bar to proving compensation was unattainable. If the court was required to conclude that the disadvantaged party’s earnings, had they not given up work, would have resulted in the parties having greater resources than those awarded on a needs or sharing basis, then surely compensation was effectively now extinct. Similarly, if future earnings are not available to share, then any claim for relationship-generated disadvantage being supplemented by a compensation-based award could not, in principle, extend beyond the date of separation.
The two enigmas – RC v JC  EWHC 466 (Fam) and TM v KM  EWFC 155
The post-Waggott era has seen two cases where arguments for compensation have been successful. Both exceedingly similar on their facts, it may be that there is a factual exception to the now general rule that compensation is a blind alley at which a ‘no entry’ sign has indeed been firmly placed.
First, RC v JC  EWHC 466 (Fam). The husband was 48 and a partner in a well-known law firm, the wife was 45 and a homemaker. The wife qualified as a solicitor and ‘had a very good chance’ (at ) at partnership, with particular reliance placed on appraisal reviews, but had not practised for some time. On becoming a full-time wife and homemaker, the wife ‘gave up the chance, as opposed to the certainty, of far higher remuneration’ (at ) and thus, extinguished her earning capacity. On divorce, the wife sought a compensation award by way of periodical payments of £360,000 per annum in addition to her equal share of the liquid assets and a pension sharing order of 20.5% against the husband’s pension to equalise pension assets. Moor J found that whilst she may be able to earn in the future, any money earned would simply enable her to live to a higher standard (at ). Moor J awarded the wife £4.85m to meet her housing and income needs. In addition, he made a compensation award of £400,000, i.e. an additional 8.25% of her lump sum award, which stood as £100,000 per annum for the next 4 years. As regards the total assets in the case, the wife received 54%.
Secondly, TM v KM  EWFC 155. The husband aged 48 had a very successful career in the Middle East as an investment banker earning approximately US$2m per annum. The wife was aged 50 and previously had a very successful career in the USA, earning at the height of her career US$800,000 per annum as an investment banker. The wife relocated twice during the marriage, each time following the husband’s career first to London and then to the Middle East. HHJ Hess found on the facts that the wife had suffered a relationship-generated hardship as she had followed the husband to London, then to the Middle East and her departure from employment to become a full-time carer for the parties’ children. Taken cumulatively, had these events not happened, the wife would have continued to be a very high earner (at –). HHJ Hess found it unlikely that after 15 years out of employment and aged 50 the wife would be able to return to earning at a comparable level to previously. He did however assign her an earning capacity of circa £50,000 per annum gross. The wife was awarded a lump sum of £2,592,126 and an additional compensation award of £500,000. On the total realisable assets, the wife received a 54.3% share. HHJ Hess was explicit in his quantification of the compensation award, stating it was awarded on the same methodology as Moor J in RC v JC.
There have now been two cases in which compensation awards have been made in as many years since Waggott. Can it be said, therefore, that there is a re-emerging case for compensation in financial remedy cases? Or are cases of compensation seemingly confined to cases of wealth, where there is a clear factual pattern of one party being ‘fledged’ before adopting the role of homemaker?
In this author’s submission, the law as it concerns compensation is confused, fraught with conflicting authorities that condemn the House of Lords’ adoption of the principle. It is a principle in desperate need of clarificatory appellate authority. Only litigants with significant assets are likely to be able to afford to litigate a compensation argument, and in reality there are likely to be factual scenarios that walk the tightrope between a potential claim for compensation, and one confined to principles of needs and sharing. The risks and costs of litigating compensation are such that many are likely to err on the side of caution. Caution is also more likely to be adopted when considering, more widely, that litigating compensation requires the court ‘to indulge in a detailed and lengthy retrospective involving a general rummage through the attic’ (per Coleridge J in G v G  EWHC 1339 (Fam) at ). What is clear from RC v JC and TM v KM is that one must be able to show a demonstrable career which has then been subsequently compromised. Therefore, only the rarest of factual scenarios are likely to result in a compensation award being made.
Whilst many baulk at the principle of compensation, surely we must address the reason behind its existence. We, as a society, have evolved on the understanding that women are to conform to their traditional biological roles upon having children, whereas men are able to continue working full-time. Whilst Mostyn J is correct that the decision to leave work is a choice, made freely by those able to do so, the reality is that the majority of women still struggle to balance a successful career with the crushing pressures that society places on them to be a present and active parent. That is not to say there is no pressure on men to do the same, it is however still very much a legacy of the past that women should be at home. The COVID-19 pandemic, in this author’s opinion, marked a huge step forward in changing wider societal attitudes towards child-caring responsibilities. The ability to work from home has taken away the stigma of leaving the office early to do the school run without the pressures of office culture interfering. But more must be done. Until we, as a society, cut the tension between the need to choose between a career and parenthood, the more likely that claims for compensation will continue. A clear resolution to the tension would be to reduce the crushing costs of outsourcing childcare. Another solution would be to address the painstakingly little parental leave available in this country, when compared to countries such as Sweden. In Sweden, both parents may take a combined 480 days’ parental leave for their first-born child, with an additional 180 days granted following the birth of each additional child. Removing the archaic biological tradition that women are homemakers and men are breadwinners is surely the only way to ensure that arguments based on compensation become defunct.
In conclusion, one cannot fail to notice that the law as it relates to compensation seems confined to the most specific factual circumstances of relationship-generated disadvantage. Perhaps it is the case that RC v JC and TM v KM are mere exceptions to the widely accepted and general rule that compensation claims no longer have a place in financial remedy proceedings. Until such a time as we have further appellate authority on the issue of compensation, and wider issues of childcare are addressed in society, the law is, and will remain, confused; where seemingly only the most specific of factual patterns will yield a successful claim for compensation.