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The famous eighteenth century Scottish philosopher and economist Adam Smith introduced us to the metaphor of the invisible hand. It was originally used to describe the onset of greater unintended social benefits and public good that are brought about by individuals acting in their own self-interest. In recent years, however, the metaphor has been applied to any action taken by an individual that has unplanned and unintended consequences. If readers will indulge me to expand the metaphor further, I think we can see it applied on two separate instances by HHJ Hess in YC v ZC [2022] EWFC 137.

Facts

The case, which was heard in October 2022, involved a husband who was 60 years of age by the time of the final hearing and a wife who was 59. The parties met in 1983, became engaged in 1985, cohabited in 1988 and were married the same year. There were two grown up children. The husband was a businessman and an entrepreneur who was also the managing director of a company that apparently was capable of paying him a salary of £100,000 pa until he reached retirement age. The wife on the other hand was predominantly the homemaker and the fact she had no meaningful earning capacity was uncontested at trial.

The marriage took a disastrous turn on 28 July 2019, when the wife discovered what was described as a 'burner' mobile telephone that indicated the husband had been regularly visiting prostitutes in the months and years leading up to that point (para [12]). Elsewhere in the judgment it was suggested that the husband may have spent as much £300,000 on prostitutes, and indeed the husband sent the wife a text message inviting her to take that sum of money out of the parties’ joint bank account. Pausing here, it is obviously important not to minimise the impact of this discovery on the wife and the family on what may well for her have been a perfectly happy and healthy marriage and relationship.

The husband for his part had received £450,000 in June 2019 from an insurance payment following some 'significant cardiac issues in early 2019' (para [11(i)]). Upon discovery of the burner phone, the wife transferred this sum of money out of the joint account and, after a series of transfers to family members and back again, the judge was satisfied that to all intents and purposes this sum of money was spent in its entirety. It seems there was a brief attempt at reconciliation in October/November 2019, but in the end that proved fruitless and the parties had remained permanently separated since then.

Proceedings

Divorce proceedings were issued by the wife in July 2020 and decree nisi was ordered on 29 January 2021, which at the time of the judgment had yet to be made absolute. Financial remedy proceedings were issued on the 3 November 2020, but were said to have not proceeded smoothly, with four directions hearings as well as three abortive attempts to conduct a financial dispute resolution appointment. Notwithstanding some health concerns of the wife, the judge was pretty critical at what he regarded as her 'failure to engage properly in negotiation over a long period' and that she 'preferred to incur a grossly disproportionate level of legal costs pursuing combative litigation' (para [21]). Costs would prove to be a standalone issue, as will be seen later.

Assets

Unusually the ’bricks and mortar‘ properties in the case do not seem to occupy much of the judge’s time and analysis. There was a property in Spain worth approximately £416,000, which on both parties’ cases was to be transferred into the husband’s sole name. There was then a jointly owned property worth £2,150,000, which was to be sold. There was also £2,000 in a joint bank account that presumably once contained a far larger amount when the husband received his insurance pay out. Arguments were had over the nature of the husband’s business, but in the end it was held to be an income producing stream only and not a capital asset, so it fell outside the asset table.

There seem to have been three pensions, all of which were defined contribution: the husband had pensions with Royal London (cash equivalent (CE) value £413,820) and Scottish Widows (CE value £88,471). The wife had a pension with Prudential (CE value £57,832). Percentages to equalise income were obtained through an actuary’s report and at first glance this seemed to be straightforward. However, on the first day of the final hearing (4 October 2022), the husband’s barrister informed the judge that his client had recently discovered that his Royal London pension had a guaranteed annuity rate of 9.45%, which if cashed in at its full amount would produce a guaranteed income of £30,898 pa. The actuary’s report had worked on an annual return of 4.417% pa, albeit that would have been higher around the time of the final hearing (the turbulent UK economic and political environment during the summer/autumn of 2022 pushed gilt levels and annuity rates up). Nevertheless, it was the fact the pension had a guaranteed annuity rate that had the greatest impact on the judge’s exercise – it made the framework for equalisation as set out in the actuary’s report effectively redundant (the percentages were calculated on a different basis), but also the mere existence of a pension sharing order would be unduly destructive since the portion transferred externally would not have the highly beneficial guaranteed annuity rate. Consequently, the judge determined that the best way of dealing with this was to make a lump sum payment in cash in order to leave the Royal London pension alone.

Outcome

Pensions

As mentioned above, the working CE value of the husband’s Royal London pension was £413,820, although by the time of the final hearing this had decreased in value to £326,764 (the rise in gilt markets in the summer/autumn of 2022 coincided with a fall in pension CE values). However, to deal with the drastically different annuity rate, the judge felt empowered to attribute a much higher value of the Royal London pension for asset table purposes, and indeed he increased the value by 1.5 times to enter a figure of £490,146 (para [43]).

Legal fees

The judge was highly critical of the size of the wife’s legal expenditure; she had incurred £463,331 on fees (albeit on a number of different solicitors), of which £154,416 was still outstanding. Conversely the husband had spent £159,044 on his solicitors, all of which was paid. The judge felt that there was a 'grossly disproportionate level of costs for this case' (para [42(iii)]) and that it was hard to see why the wife’s legal costs were so much higher (notwithstanding that changing solicitors would have involved some extra costs in reading in time). Practitioners will be familiar with how legal fees are treated in matrimonial financial cases – they invariably form part of the asset table and broader analytical exercise on the basis that they need to be paid back from the available resources. The judge noted that the effect of this is that the distribution exercise amounts to something similar to an inter partes costs order where there is such a disproportionate amount of legal fees between the parties. In this case he felt that the wife’s legal bill as against the value of the assets was 'grossly disproportionate spending and [that] she must bear a burden for this poor decision making'. Consequently, the judge added back £200,000 to the wife’s side of the asset schedule to reflect this imbalance and to redress any perceived unfairness.

Profligate spending

As mentioned earlier, the wife had spent the entirety of the husband’s £450,000 insurance payment. The judge accepted that some expenditure would have been on routine matters, but he did consider that the majority was on 'luxuries and unnecessary purchases' (para [38(ii)]). Counter balancing this was the fact that the husband had spent possibly up to £300,000 on prostitutes. It was nevertheless open to the judge to make an adjustment in the asset table to reflect the events that took place (known as a Norris add-back, after Norris v Norris [2002] EWHC 2996 (Fam), [2003] 1 FLR 1142), but in the event he decided not to as effectively the poor decision making process on either side cancelled each other out.

Conclusion

The judge’s final order was more of a postscript to the analysis set out above, but the end result worked out to be a 55%/45% split in the wife’s favour on a clean break basis after the family home was sold (the judge was concerned at the prospect of further litigation which would have been a live issue had ongoing periodical payments been ordered, which was probably sensible). However, practitioners should take careful note of how the judge dealt with the pensions and the legal costs in particular and I suspect the pension enhancement may be a bit of a one off considering the very unique and drastic fluctuations in the gilt market in 2022. Given more stability I would expect there would not be as dramatic a change in CE value figures between actuary reports and final hearings, albeit of course in this case the mere fact of the guaranteed annuity rate seems to have been missed altogether.

It is the add-back given to the wife’s side of the balance sheet that we should all take note of given the size of her legal fees as there will always be differences in legal costs between parties to proceedings and naturally different solicitors will charge different rates. Nevertheless financial remedy proceedings do provide plenty of opportunity for the parties to disclose their legal costs at every hearing and I think in the future we can come to expect far more scrutiny of these fees. Expectations need to be managed extremely carefully as a result if it is felt that costs are starting to increase disproportionately high since there is a risk that these will at point be held against one party or another.

Pulling the camera back, I sometimes question whether the direction of travel in family court proceedings may become more aligned with civil litigation and its price capping/fixed fees/costs budgeting, but that would be the subject of a further article in itself. Ultimately cases like YC v ZC may move the dial a bit closer in that direction. So maybe one final application of the invisible hand? I wonder what Adam Smith would think of that sort of legacy!