The compensation principle has made a surprising reappearance in the recent case of TM v KM [2022] EWFC 155, as HHJ Hess made an order for the wife to receive £500,000 by way of compensation for the 'relationship-generated sacrifice' [76] that she made in giving up her lucrative career in investment banking.

There has been limited successful case law implementing the compensation principle, and perhaps the strong emphasis on the other meta-principles of ‘needs’ and ‘sharing’ has meant that compensation has been side-lined as a basis for making an award.

Compensation in context

The principle of compensation and acknowledgement of the existence of relationship-generated disadvantage was firmly established in Miller; McFarlane [2006] UKHL 24. In considering how the (somewhat elusive) concept of ‘fairness’ should be achieved when dividing the assets of the parties, the House of Lords identified the three major meta-principles of ‘needs’, ‘compensation’ and ‘sharing’. Compensation was highlighted by Baroness Hale (as she then was) and Lord Nicholls as a useful mechanism with which to rectify relationship-generated disadvantage in the form of ‘significant prospective disparity’; [13]. Baroness Hale explained the rationale behind compensation at [140]:

‘Indeed, some consider that provision for need is compensation for relationship-generated disadvantage. But the economic disadvantage generated by the relationship may go beyond need, however generously interpreted. The best example is a wife, like Mrs McFarlane, who has given up what would very probably have been a lucrative and successful career. If the other party, who has been the beneficiary of the choices made during the marriage, is a higher earner with a substantial surplus over what is required to meet both parties’ needs, then a premium above needs can reflect that relationship-generated disadvantage.’

Lord Nicholls noted that ‘although less marked than in the past, 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’ [13] and stated that ‘compensation and financial needs often overlap in practice, so double-counting has to be avoided. But 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’; [15].

Although gender roles in partnerships may of course vary, career sacrifice and any consequential economic disadvantage primarily affects women, who often pause or terminate their careers in order to become primary child-carers and homemakers. The latest ONS statistics reveal that despite the theoretical dismantling of traditional gender roles and modern flexible work arrangements, men tend to remain the primary earners in families with dependent children. For example, in April to June 2021, 44.1% of these families had a man employed full-time and their partner part-time, and only 3.0% had a woman working full-time and their partner part-time. In SS v NS [2014] EWHC 4183 (Fam), Mostyn J acknowledged that ‘for many women the marriage is the defining economic event of their whole lives and the decisions made in it may well reverberate for many years after its ending’; [30].

Judicial engagement with the compensation principle

Despite this increased awareness, the compensation principle has only been successfully applied in a small number of cases, and judges have been hesitant to apply it in practice. Remarkably, in RP v RP [2006] EWHC 3409, Coleridge J went so far as to suggest that compensation claims represented a ‘blind alley at the mouth of which a ‘no entry’ sign should be firmly placed’; [62]. Arguably, there are two main reasons for this. The first is that the concept itself is controversial. Second, in practice, the acquisition and quantification of a compensation award is an ambiguous exercise. It was observed in VB v JP [2008] EWHC 112 (Fam) that attempts to isolate and quantify the income or earning capacity sacrificed ‘constitutes a search for precision which is to be discouraged’; [52]. The case itself did not lay down any cogent criteria as to how to approach this nebulous concept. To make matters hazier, the reluctance to apply compensation arguments has resulted in a general retreat from the concept, which, in turn, means that judicial development of the principle is staggered. The usual ebb and flow of jurisprudence that works to refine legal principles and their practical application has therefore been stunted, in this instance. H v H (Periodical Payments: Clean Break) [2014] EWHC 760 refrained from delving into this strand, arguably because of its complex and potentially controversial nature. Consequently, the parameters of its application are ambiguous.

Not only is the principle complex, but discussion of compensation elicits particularly loaded terminology, and cases are littered with references to ‘sacrifice’, ‘giving up’, ‘handicap’ and ‘suffering a loss’. As is to be expected, upon hearing these charged terms, many will furrow their eyebrows and ask the vexed question; is giving up a career to have a family a ‘sacrifice’, or a ‘choice’? This inspires a frenzy of debate. Whilst everyone will have a different opinion on this matter (largely shaped by personal values and beliefs), how should a court answer this question? The judicial interpretation of compensation as an element of ‘fairness’ promulgates a particular view of marriage. But how far will courts go to rationalise this? Delving into the somewhat murky territory of compensation inevitably requires judicial comment on these gender-related, sociological questions about our perception of marriage and homemaking. Courts are understandably hesitant to engage with this.

Compensation has therefore been sharpened into a barbed instrument, encumbered by problematic assumptions about the decisions made by families. For this reason, Mostyn J expressed in SA v PA (Compensation) [2014] EWHC 392 that ‘At the end of the day, however, what cannot be disputed is that the reason Mrs McFarlane gave up work was because she, an intelligent liberated autonomous adult woman, decided to give up work. I cannot see how that can be characterised as a loss “suffered” by her entitling her to an award in excess of her reasonable needs’; [28]. He went on to outline the principles concerning a compensation claim at [36]:

‘i. It will only be in a very rare and exceptional case where the principles will be capable of being successfully invoked;

ii. such a case will be one where the court can say without any speculation, i.e. with almost near certainty, that the claimant gave up a very high earning career which had it not been foregone would have led to earnings at least equivalent to that presently enjoyed by the respondent;

iii. such a high earning career will have been practised by the claimant over an appreciable period during the marriage. Proof of this track-record is key.

iv. once these findings have been made compensation will be reflected by fixing the periodical payments award (or the multiplicand if this aspect is being capitalised by Duxbury) towards the top end of the discretionary bracket applicable for a needs assessment on the facts of the case. Compensation ought not to be reflected by a premium or additional element on top of needs-based award.’

This confined the compensation principle to a restricted application, setting a high threshold for a claim to be successful. As a result, the principle was relegated in most financial remedy cases. Many judges did not hesitate to echo Mostyn J in emphasising that it would only apply in ‘in a most exceptional case’ (SS v NS, per Mostyn J at [46]).

Compensation suffered an even further blow in 2018 with Waggott v Waggott [2018] EWCA Civ 727, which went on to suggest that compensation should be absorbed into sharing or needs. Indeed, courts have tended to prefer assessing the element of compensation within ‘needs’ in low-income cases, such as Lauder v Lauder [2007] EWCH 1227 (Fam) and within ‘sharing’ in higher-income cases such as CR v CR [2007] EWHC 3334 (Fam). Consequently, the element of compensation appeared to have lost judicial favour. Judges had inserted may caveats on its use, with some believing that the concept was now at vanishing point.

Breathing new life into compensation: RC v JC [2020] EWHC 466

However, RC v JC [2020] EWHC 466 appeared to breathe new life into the concept of compensation, raising the possibility of its continued use. In that case, the wife was awarded £400,000 in compensation for giving up her career as a solicitor in a magic circle firm in order to look after the children of the family. Moor J held that she was on a clear path to becoming a partner at the firm, and accordingly, her high earning prospects had been curtailed by her resignation. The court struggled to justify a needs-based outcome greater than the sharing outcome, and so a discrete compensation award was made in her favour. However, Moor J noted that such compensation cases ‘will be very much the exception rather than the rule’, particularly because ‘it is rare to be able to make the findings of fact that I have made in this case’. As a result, he gave a warning to litigants who would consider pursuing claim for relationship-generated disadvantage, stressing that ‘they should not take this judgment as any sort of “green light” to do so unless the circumstances are truly exceptional’; [72].

TM v KM [2022] EWFC 155

Most recently, HHJ Hess determined that the circumstances of the case of TM v KM [2022] EWFC 155 made it ‘one of those rare and truly exceptional cases where a discrete compensation award is appropriate’; [76]. The facts of the case mirrored those set out in RC v JC, with the wife giving up a very lucrative career in investment banking (earning a gross annual income of $804,166 in 2003) to pursue her relationship with the husband. After moving from New York to London in December 2006 to be with him, her earnings saw a decline; she received £505,000 in 2006 and £325,000 in 2007. She then fell pregnant with their first child in 2008 and shortly after taking maternity leave, she was made redundant by the bank and never worked in this field again. Throughout the marriage, the parties relocated to suit the husband’s career. HHJ Hess observed at [64]–[65] that:

‘I have little doubt that the wife remained a potentially high earner and the reasons for the loss of her position were first the move to London to be with the husband and secondly the arrival of her first child in 2008 and her decision to devote herself to the child-care role – both in my view relationship-generated by the wife…. [her] ability to be a high earner was further inhibited by two further relationship-generated developments – the arrival of their second child in 2011 and the move to the Middle East between 2010 and 2016.’

As a result, HHJ Hess held that it was ‘unlikely at age 50 or even 15 years out of that field’ that she would receive ‘anything like the pay levels she used to receive’; [68]. He found that as a result, and in line with favouring a clean break, five tranches of £100,000 should be added to the wife’s award (totalling £500,000) to compensate her for relationship-generated disadvantage.

Conclusion

This successful compensation claim, when sat alongside RC v JC, has perhaps marked a shift in the judicial approach to the meta-principle of compensation. However, without a factual matrix or much clear guidance as to exactly how the compensation principle is to apply in practice, it is left open as to how this concept will evolve.

Perhaps due to the controversial nature of ‘compensation’ and the heated debates that it engenders, the courts appear to have shown reluctance to rigorously engage with the principle. The rejuvenation of the compensation principle in TM v KM [2022] EWFC 155 is therefore a most interesting development. However, whether or not the judiciary choose to further develop the compensation principle, or ‘sacrifice’ it altogether, is yet to be settled.