Compensation payments on divorce – how are they treated?

We are all aware of medical negligence claims or national tragedies, such as the Grenfell Tower fire, and here at CFLP, we are sometimes asked how annual grants to victims or beneficiaries from charitable, or other, trusts or compensation payments following personal injury cases, are viewed on divorce.

Before dealing with this in detail, we set out a brief recap of the main principles which guide the Family Courts when making financial orders; the main factors are set out in s25 Matrimonial Causes Act 1973 (MCA), but  the overlying principles, following decisions made in the higher Courts, are:-

  1. The Sharing principle –established in the case of Miller/McFarlane, that the starting point is that each party is entitled to an equal share of the assets built up during the marriage, unless there is a good reason to the contrary;
  2. The Needs principle – as set out in legislation – generally meaning the housing and other needs of the parties;
  3. The Compensation principle which aims to redress any significant prospective economic disparity between the parties arising from the way in which they conducted their marriage, (for example if one party gave up a career.)

Awards based on the Compensation principle are rarely used other than in ‘big money’ cases (as giving up a career is usually subsumed by the needs principle given that individual will have a lower earning capacity), and therefore the main principles are sharing and needs.

This week we will cover grants/compensation payments in relation to capital claims on divorce, for example claims for lump sum payments.  Income claims will be considered in the next blog.

In general if the grant from a trust/charity is a compensatory award, it will (a) be treated as a resource of the beneficiary on divorce; and (b) not be ring-fenced for that beneficiary’s sole use. The crucial factor is whether the parties’ resources, excluding the grant, are sufficient to meet both parties’ needs (e.g for housing). If they can, then the Family Courts are unlikely to share the grant with the ex-spouse.

The broad approach of how the Family Courts treat a compensation payment was set out in a 1992 case of Wagstaff. In that case the husband suffered an accident rendering him paraplegic and he was awarded damages of £418,000 relating to his injuries. The husband used the funds to purchase a property, adapt it, to start up a business and he invested the balance.

In that case, the Judge made it clear that:

“the capital sum awarded is not sacrosanct nor any part of it secured against the application of the other spouse…the reality of course is that the compensation is a financial asset which….has to be taken into account when the court comes to exercise its powers in accordance with section 25 of the Matrimonial Causes Act 1973”

Having said that, the Court is concerned with the purpose of the award. If, for example, an annual award is made with reference to a specific need of the recipient, then the Court may be more reluctant to interfere with such a payment or see it as a resource of the beneficiary. The beneficiary will likely be in a stronger position if there is a paper trail relating to these payments – eg identifying a specific need of the beneficiary and awarding a sum to meet that specific need – rather than it being unrestricted as some awards may be.

In summary: personal injury damages are treated in a very similar way to non-matrimonial property in general. The court will have recourse to the damages when this is required to meet the parties’ needs, but will also make efforts to ensure that where possible, the source of the property is reflected in an appropriate departure from equality in the beneficiary’s favour. How this departure is achieved will depend on the specific facts of the case.

If you have any questions or concerns relating to your award or compensation payment, and how you might be able to protect this in the event of future relationship breakdown, please contact us on 01223 443333 and speak to one of our partners: Tricia, Simon, Gail, Jeremy, Adam or Sue.