English Court of Appeal follows US case example in deciding earning capacity is not a matrimonial asset to be shared

20 April 2018

London is often seen as “Divorce capital of the world“ by wealthy expats, usually the wives, wanting a generous divorce settlement, but this latest UK case shows there are limits.

The English Court of Appeal issued an emphatic “No” in April 2018 to an attempt by a wife to argue that her husband’s earning capacity is capable of being a matrimonial asset, to which the sharing principle applies and in the product of which, as a result, she had a continuing entitlement to share.

The case (Waggott v Waggott [2018] EWCA Civ 727) involved Karen Waggott, ex-wife of successful businessman William Waggott, FD of TUI Travel, attempting to increase her annual maintenance payment. Mrs Waggott had received some £8.4m of capital resources in her divorce settlement and her former husband some £7.8m, after a contested final hearing. She received an additional £1.4m comprising deferred remuneration earned by the husband so that her total settlement came to £9.76m. She was also awarded continuing maintenance to bridge the shortfall between her assumed net income (£60,000) and her annual income needs at £175,000. Both parties appealed.

The main plank of the wife’s argument on appeal was that an earning capacity is “an asset referable to or the product of marital endeavour and should, therefore, be divided between the parties by application of the sharing principle as with other marital assets”. It was argued that a different outcome would not be fair due to its discriminatory nature.

The idea that an earning capacity is capable of being a matrimonial asset is not, however, a new one. Often on an appeal of this sort and at this level, legal representatives will look at the state and development of the law in other countries and jurisdictions and the United States is a particularly rich source with its 50 different states all with their own laws, precedents and court systems. Take the State of New York for example. In 1985 the case of O’Brien came up for adjudication. Mr and Mrs O’Brien married in the US and then moved to Mexico so that the husband could go to medical school and get his licence to practice as a doctor. They then moved back to the US so he could finish his medical training and get his licence. Some two months after he did so and filed for a divorce. New York’s highest court held that his medical degree could be divided if the wife could show she contributed to the process of obtaining it. The case of O’Brien remained good law in New York for some 30 years until 2015 when the New York Legislature effectively reversed it, stating that the court should not consider the value of a spouse’s enhanced earning capacity (e.g. arising from the licence, degree, celebrity goodwill or career enhancement) as marital property subject to distribution.

Life is rarely, in fact, quite so simple and in the vast majority of cases, the earning capacity of one or both spouses is available and divisible because it generates the income in a marriage upon which any children are likely to depend, if not in addition, the non-earning spouse for probably many years ahead. Not only did Mrs Waggott fail to persuade the Court of Appeal that her husband’s earning capacity was capable of being a matrimonial asset and therefore, available for division, but the Court then allowed his appeal on the basis that the trial judge had failed to give sufficient weight to the clean break principle and it went on to order that what had previously been a joint lives order (providing for the wife to receive £175,000 p.a.) should be terminated on 21 March 2021.

So nice try by Mrs Waggott but no doubt about it, the Court of Appeal Judgment was emphatic in its rejection of any attempt to prolong a financial connection between the parties and that a full, clean break of both parties’ financial claims remains the ultimate objective on divorce.

First published by The American magazine, April 2018

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