Drafting a pre-nup carries high financial risk for practitioners

Thursday, 22 May 2014
Practitioners working in the relatively new field of marital property agreements could be exposed to massive professional negligence claims if they recommend pre-nups or post-nups that later go wrong, say two experts.

Pre-nuptial and post-nuptial property agreements were legitimised by the UK Supreme Court's October 2010 decision in Radmacher v Granatino, which essentially ruled that the English courts should enforce such agreements except where they are unfair.

But despite the Radmacher ruling (or perhaps because of its 'unfairness' get-out clause), courts in England and Wales are still unpredictable in their attitude to marital property agreements. In January 2012, the England and Wales High Court overrode a post-nuptial agreement made between Boris Agrest and Janna Kremen, on the grounds that the agreement was 'grossly unfair' on her. Mostyn J decided she had not entered into the agreement with a full appreciation of its implications – one of the most promising grounds under which such an agreement can be challenged.

And earlier this year, in Luckwell v Limata (2014 EWHC 502 Fam), the same court nullified a pre-nuptial agreement between a wealthy heiress and her impecunious ex-husband, because he needed GBP1.2 million to re-house himself.

However, in two other recent disputes – BN v MA (2013 EWHC 4250 Fam) and SA v PA (2014 EWHC 392 Fam) – the High Court upheld the pre-nuptial agreements.

Because such agreements are usually made where substantial assets are at stake, the financial consequences of losing a dispute are high. So, accordingly, are the costs of associated professional negligence litigation if the unlucky spouse blames the practitioner who drafted or advised on the agreement. Because of this, at least one leading silk in the field simply refuses to advise on nuptial agreements, say Andrzej Bojarski and Rhys Taylor of 36 Bedford Row.

The principal source of uncertainty is the one cited in the Agrest case – that the agreement must have been 'freely entered into by each party with a full appreciation of its implications'. This test implies full disclosure by the wealthier party, but the Supreme Court did not insist that it implies independent legal advice for each party. Thus every case where legal advice was not given must be decided on its own merits – a recipe for unpredictability and therefore risk, although in the Kremen v Agrest case Mostyn J suggested that in practice the law would normally demand independent legal advice.

According to Bojarski and Taylor, the nature of that advice and the advisor's duties are not spelt out in the matrimonial case-law decided to date. There are some related precedents in cases of commercial loans and mortgages to which husband and wife are both parties, one of which claimed to have signed under the other's undue influence. The parallels are not exact, but such cases have influenced the wording of some standard forms of nuptial agreements now being used. The experiences of other jurisdictions, especially Australia, have also been adapted into English nuptial agreements.

However, say the authors, the matters of financial prudence addressed in such agreements are often beyond the expertise of the average family lawyer, and may even be outside their professional indemnity cover. The experience in Australia was that many family lawyers refused to offer such advice or to provide a suitable certificate to the signing parties, and so the form of the certificate had to be amended to allow them to do so without fear of litigation.

Even so, the lawyer 'will be expected to evaluate the particular circumstances of the case and consider what the consequences of the agreement might be for the client in the future not only based on what is known at the time the agreement is entered into but also anticipating foreseeable changes in circumstances in the future,' say Bojarski and Taylor. This is not an easy task, especially as the couple's wealth may grow very significantly during the marriage and thus make the precise liability impossible to determine at the point of preparing the agreement. It is not even clear which time limitation applies to the lawyer's liabilities, and at what point the limitation clock should start running.

There are, however, some methods to minimise the liability risk for negligent advice. The easiest way is to decline to either draft marital agreements or to advise clients in relation to them.

Alternatively, the practitioner can take out adequate professional indemnity insurance. Given the unlimited nature of the potential liability, this is likely to be either expensive or impossible to get. Moreover, say the authors, it is hard to anticipate the prudent level of insurance for advisory work 'whose mettle may not be tested until the chickens come home to roost many years in the future'.

A third option is to require a waiver or indemnity from the client, and/or limit liability by contractual terms. Some barristers and full-service law firms, as well as commercial solicitors and accountants, routinely include such clauses in their terms of retainer. But few family law solicitors do. Bojarski and Taylor's suggestion is that they seriously consider the idea, though they will have to ensure that any such waiver does do not fall foul of the Unfair Contract Terms Act 1977 or the Unfair Terms in Consumer Contracts Regulations 1999.

Yet a fourth option is for the solicitor to seek the advice of a barrister, since case-law suggests that a good defence to a claim for negligence is that the defendant solicitor relied upon the advice of counsel. However, this is not very helpful for barristers themselves.

'Both branches of the legal profession may, to date, have been too casual in their approach to the attendant risks of undertaking this kind of work with the associated risk of unlimited liability', say Bojarski and Taylor.

Sources

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