In P v P (Treatment of costs in sharing cases) [2022] EWFC 158 Deputy District Judge Hodson offered some helpful guidance on how legal costs should be borne in sharing cases.
The facts were straightforward and unremarkable. The wife was 69 and the husband 70. They had been married for 40 years and had two independent adult children. The available assets by the time of the final hearing were worth between £800,000 and £900,000. It was agreed that the assets should be shared on an equal basis, which would adequately provide for each party’s needs.
The husband acted for much of the proceedings in person and raised unmeritorious arguments concerning a potential modest inheritance by the wife of property in India and jewellery. DDJ Hodson considered that the pursuit of these arguments amounted to unreasonable conduct and made a costs order against him.
The interesting aspect of the case arose from the parties’ legal costs. Although the husband acted in person by the time of the final hearing, he had previously paid £16,500 to lawyers, and owed a further £8,000 in legal fees. The wife had incurred much more: just over £100,000 already paid with a further £28,500 owed. The payments which the parties had made to their lawyers had come from matrimonial assets. The issue was how to account for those legal costs when trying to achieve an equal division of the matrimonial assets.
Outstanding Costs
DDJ Hodson dealt with the outstanding legal costs first. He summarised the issue as follows:
If the outstanding costs are deducted before the marital pot is assessed and then the pot is shared equally, one party is in effect funding or subsidising the costs of the other. That seemed to me to be inconsistent with the expectation that the marital partnership assets, acquired during the marriage, should be divided equally.
He went on to state that generally in sharing cases he would expect each party to take responsibility for their own outstanding legal costs, rather than that those outstanding costs be deducted before division. However, in the instant case, he had included the outstanding costs as part of the sharing partnership before division, reflecting the fact that the wife (as applicant) would have had to make more of the running to get the case into a state of play for settlement. He observed that the wife might consider herself fortunate that this had been his conclusion.
Incurred Costs
DDJ Hodson went on to consider the incidence of the parties’ incurred costs. He framed the issue as follows:
In a sharing case, where one party has taken significantly more out of the marital pot for their own legal costs than the other party, is it fair to divide up the pot net of those costs already withdrawn predominantly by one party or is it fair only to do the division once those costs have been notionally brought back in? In this case, the former wife had taken almost precisely £84,000 from the marital pot more than the former husband. If that was added back in, he would have an additional £42,000. Is that fair?
He observed that it is very common for one party to use matrimonial assets (e.g. joint savings, or savings in their sole name which are none the less matrimonial having been accrued during the course of the marriage) to fund their legal costs, and went on:
English law almost seems to give tacit encouragement to parties to the invasion of marital savings in the relatively confident knowledge that it may well be all glossed over, lost in the wash, by the time of the final settlement or hearing. That cannot be right. It is accepting, through silence, unilateral conduct, perhaps sometimes by the party more willing to contemplate this sort of action. If the FDR or final hearing court doesn’t give it much attention, the aggrieved party definitely does because they feel the other party has gained a distinctive advantage by their conduct in respect of the marital finances from separation until settlement.
The wife’s barrister argued that accounting for legal expenses already paid amounted to an add back, and the high threshold of wanton spending was not met when the sums had been spent on legal fees. DDJ Hodson rejected this approach, on the basis that he was not adding back for wanton dissipation, but in order to make sure that he had a fair and appropriate amount in the marital pot for equal sharing.
He justified his approach by giving the following simple examples:
- If the marital assets are £100 and neither party has incurred legal costs, an equal division provides £50 each.
- If the marital assets are £100 and each party has drawn £6 from the assets to fund their legal costs, an equal division provides them with £44 each.
- If the marital assets are £100, one party has drawn £6 to meet legal costs and the other has drawn £26, an equal division of what was left would leave each with £34.
The difference between situations (ii) and (iii) lay only in the uinilateral actions of one of the parties. How, the judge questioned, could it be fair for the other party to receive substantially less when they have no control over those actions? If such costs are deducted before sharing the balance equally, a ‘no order as to costs’ provision is meaningless because the ‘innocent’ party ends up bearing a share of the other party’s legal costs without any analysis of whether they have been reasonably incurred.
He went on:
To provide for the outstanding costs of one party in the substantive award and then simply to say no order as to costs is, bluntly, disingenuous, ignoring or even acknowledging the fact that a costs order has indirectly been made.
He therefore concluded:
The costs, precisely known from their lawyers, which either party draws down from the marital partnership assets to fund their legal costs in the resolution of the marital partnership dispute shouldn’t be theirs alone, safeguarded from the division process and consequently meaning there is less in the pot for division. But more in the way of an advance from the marital partnership assets due to them on the division, whether by agreement, at an FDR or by ADR settlement or by judicial adjudication. As an advance, perhaps even an agreed advance to help fund legal costs in the partnership dispute, it is to be brought into account in the division. That taking into account, partnership funds already received, is not to be characterised as an add back in the way that the authorities refer to wanton dissipation. The fact that it is brought back in the arithmetic calculation should not be a reason for legal confusion with the so-called add back principle. It is more by way of an advance, a payment out, on account, from the marital partnership resources.
A helpful decision to deploy when faced with an opponent who has spent substantial sums of matrimonial savings on their legal costs!
A transcript of the judgment can be found here: https://www.bailii.org/ew/cases/EWFC/HCJ/2022/158.html
Tim Jacques accepts instructions in family financial remedy cases. His experience includes disputes about: farms; overseas assets; company and pension valuation; the enforceability of settlement agreements; disposal of assets. He seeks to provide clear, pragmatic advice to his clients at every stage of the court process.