Love in the time of Radmacher

Monday, 01 October 2012
The status of prenuptial agreements in England and Wales post-Radmacher.

For many years, individuals with a high net worth have tried to find ways to protect their wealth upon marriage. Most commonly, such individuals have entered into prenuptial agreements (contracts upon marriage stipulating how a couple’s assets should be divided on any future divorce). Prenuptial agreements are viewed as binding in many countries, including most of continental Europe, the US, Canada, Australia and New Zealand. However, this is not the case in England and Wales.

The courts in England and Wales (the English courts) have historically based their opposition to prenuptial contracts on two main principles. First, because it would be against public policy to allow agreements that anticipate divorce before marriage has even been entered into. Second, because these agreements seek to exclude the courts’ jurisdiction that has been given to them by Parliament – namely that the courts should decide how assets should be divided upon divorce in accordance with s25 of the Matrimonial Causes Act 1973 (MCA).

When deciding how to split assets on divorce, the English courts have regard to ‘all the circumstances of the case’, with particular consideration to a list of discretionary factors found at s25 of the MCA. In the circumstances, while prenuptial agreements are not binding in England and Wales they can be taken into account and influence a financial settlement that is awarded on divorce. We have seen an increasing amount of weight being attached to them over the past decade and the position has now been taken one step further by the Supreme Court in the landmark case of Radmacher v Granatino [2010] UKSC 42 (Radmacher). This case redefines how the courts will approach prenuptial agreements. In Radmacher the Supreme Court stated clearly that the English courts should give effect to a nuptial agreement freely entered into by each party with a full appreciation of its implications, unless in the circumstances it would not be fair to hold the parties to their agreement.

Radmacher

The specifics of Radmacher were as follows. Ms Radmacher was a German heiress and Mr Granatino, born in France, worked in the banking industry. Before getting married the couple entered into a German-style prenuptial agreement (a marriage contract) drawn up by a German notary, which excluded any potential claim by either spouse in the event of divorce. Ms Radmacher’s family has required the marriage contract to be put into place to protect their daughter’s inherited wealth. Mr Granatino declined to take the opportunity to obtain independent legal advice and did not seek disclosure from his wife, although he was aware that she came from a very wealthy family.

At the time of their marriage Mr Granatino had a high-paid job in the banking sector, while Ms Radmacher was yet to inherit the majority of her wealth. They were married for eight years, during which time they had two children. At the time of their divorce, the parties’ respective financial positions had effectively swapped: Ms Radmacher had inherited her fortune, thought to be in excess of GBP100 million, and Mr Granatino had given up his high-paid job in order to study biotechnology, and had no assets of his own.

On divorce, Mr Granatino sought around GBP7 million to maintain the lifestyle afforded to him during his marriage. Although the High Court initially awarded him GBP5.56 million, the Supreme Court upheld the subsequent Court of Appeal decision, which substantially reduced his award. Mr Granatino was given the use of a GBP2.25 million home until his youngest child was 22, when the house would return to Ms Radmacher, and a reduced lump sum of GBP1 million, which was allocated to him to give him an income for 15 years, at which point his financial responsibilities for his daughters would come to an end.

The Supreme Court said: ‘The court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would be unfair to hold the parties to their agreement.’

It therefore follows that a prenuptial agreement can be binding, unless unfair.

Developments since Radmacher

Following this landmark decision, lawyers have been waiting to see how lower family courts will apply the ruling.

In B v S [2012] EWHC 265 (Fam) (Financial Remedy: Matrimonial Property Regime), the parties had tacitly agreed to be subject to a Catalonian matrimonial property regime. There had been no discussions between the spouses, and neither party had taken independent legal advice as to whether the agreement would have been influential or binding upon the English courts. As such, no weight was accorded to this regime and the usual division of assets occurred in accordance with s25 of the MCA.

In Kremen v Agrest [2012] EWHC 45 (Fam) (Financial Remedies: Non-disclosure: Post Nuptial Agreement), the parties had entered into an Israeli postnuptial agreement during their marriage. It was held that there was no full appreciation by the parties of the implications of the postnuptial agreement and that the agreement seriously prejudiced the reasonable needs of the parties’ children, and as such no weight was accorded to it.

In Z v Z [2011] EWHC 2878 (Fam), the parties had entered into a French prenuptial agreement. The parties had not received any legal advice, but the agreement had been drawn up by two notaries. There had been no formal financial disclosure. Moor J upheld the agreement so far as it excluded the sharing principle set out in s25 of the MCA, because the wife had known precisely what was intended when she entered into the agreement. However, the wife still received an award of GBP6 million, based on needs, which represented 60 per cent of the assets.

In V v V [2011] EWHC 3230 (Fam), Charles J exercised the s25 discretion upon appeal, considering that too much weight had previously been given to a prenuptial agreement. However, he also departed from the usual equality principle set out in s25 to reflect the terms of this agreement.

As can be seen from these cases, Radmacher does not make all nuptial agreements binding. The courts will continue to depart from the terms of such agreements if they are deemed to be unfair.

Dos and Don’ts

To maximise the potential for any prenuptial agreement to be upheld, following the guidance given by the Supreme Court in Radmacher, there are several tips to bear in mind:

Do:

  • Ensure that each party receives independent legal advice on the nature and implications of the agreement. While in some cases the English court will uphold an agreement where there has been no independent legal advice but it is satisfied that the parties have understood the implications of the agreement, one should err on the side of caution and ensure full independent legal advice is obtained.
  • Ensure that each party gives full current financial disclosure. This minimises the chance of falling at the disclosure hurdle. As in Radmacher, there may be cases where full, detailed disclosure is unnecessary, as long as the clients have all of the material information.
  • Ensure that any children, or potential children, are provided for in the agreement.
  • Ensure that the financially weaker party will be provided for upon divorce. Reasonable needs should always be provided for.
  • Ensure that both parties are freely willing to enter into the agreement and that both intend to be bound by it.
  • Approach lawyers as long before the wedding as possible. The reason for this is that if one party is placed under pressure, e.g. due to shortness of time before the wedding, to conclude the agreement, that could undermine the agreement. In my experience clients frequently underestimate the time it takes to negotiate and conclude a prenuptial agreement. The courts may well view prenuptial agreements made ‘on the eve of the wedding’ as being unfair.
  • Ensure that the agreement is properly negotiated and consider incorporating a review of the terms in the event of a significant change in circumstances.

Don’t:

  • Put undue pressure on the financially weaker party to enter into a prenuptial agreement.
  • Try to leave assets out of the disclosure process. Duress, fraud or misrepresentation will negate the effect of the agreement.
  • Enter into an agreement in the hope that some parts of it will be unenforceable if it comes before the courts.

Postnuptial agreements

Sometimes the financial circumstances of a couple substantially alter after marriage, and a postnuptial agreement might be considered. These are likely to be judged in a similar way to prenuptial agreements and the considerations outlined above will still apply. The case of Kremen v Agrest highlights that a postnuptial agreement was not considered binding where it was considered that the parties did not have full knowledge of its implications. Therefore, full financial disclosure and a ‘fair’ agreement is likely to bind the parties.

The future: prenuptial agreements for all?

For many wealthy couples, a prenuptial agreement may be seen as something of a necessity in the future. As discussed, if parties receive independent legal advice, make full disclosure about their assets and enter into an agreement in an open and honest fashion, then provided that the agreement is not seen to be unfair, it is likely that it will be upheld. The Law Commission has carried out a Consultation on Marital Property Agreements to suggest changes to the law and clarify the position in this area. A report is awaited. Unfortunately, until parliament itself rules on the matter, the enforceability of prenuptial agreements will remain uncertain, and will remain partially dependent on judicial discretion.

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Tracey Dargan

Tracey Dargan is an Associate Solicitor at Irwin Mitchell LLP.

Section
STEP Journal
Region
England and Wales

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