27 February 2014

Prenuptial agreements should be legally binding in divorce settlements, but only after the needs of the separating couple and any children have been taken into account, the Law Commission has recommended.

In a report on the reform of matrimonial property laws, the commission calls for the introduction of standard formulas to help resolve disputes over financial settlements and publication of official guidance on what constitutes legitimate "financial needs".

British courts already recognise prenuptial agreements as enforceable under British divorce law. The principle was established by a case in 2010 involving German heir Katrin Radmacher, who sought to protect her £106m fortune in the event of a marriage breakdown.

The commission, a statutory independent body that advises on law reform, recommends that "prenups" should become legally binding subject to stringent qualifications. One requirement is that at the time of signing both parties must disclose material information about their financial situation and have received legal advice.

A further restriction, under the commission's proposals, is that agreements would only be enforceable "after both partner's financial needs, and any financial responsibilities towards children, have been met".

The report states: "It will remain open to spouses to make agreements about financial needs, but such terms will not be contractually enforceable and will be subject to the courts' scrutiny for fairness as they are at present. A qualifying nuptial agreement will not remove the parties' ability to apply for, and the courts' jurisdiction to make, financial orders to meet their financial needs."

The change would match the practice in other European jurisdictions where contracts relating to ownership of property are common "but where it is not possible to contract out of the courts' jurisdiction to decide issues of maintenance" payments.

Introducing prenuptial agreements without protection of the parties' needs "would be very damaging", the commission warns. That key proviso suggests tortuous legal disputes over the fairness of maintenance payments and financial needs would still have to be brought before courts.

Pre-nuptial agreements are likely to remain of greater relevance to the wealthy where financial assets significantly exceed lifetime maintenance needs, which include requirements for housing, childcare, education and income.

The commission has called on the Family Justice Council, whose members include judges and lawyers, to produce "authoritative guidance on financial needs" to enable couples to reach an agreement that recognises their financial responsibilities to each other.

The government, the commission said, should also fund a "long-term study to assess whether a workable, non-statutory formula could be produced that would give couples a clearer idea of the amounts that might need to be paid to meet needs". It added: "Formulae are already used successfully in other jurisdictions such as Canada, where they produce a guideline range of outcomes within which couples can negotiate."

The Law Commission's proposals will be sent to the Ministry of Justice, which will examine whether it wishes to draw up legislation on the basis of the suggestions. Past governments have shown reluctance to revise marriage laws.

Professor Elizabeth Cooke, Law Commissioner for property, family and trust law, said: "Pre- and post-nuptial agreements are becoming more commonplace but the courts will not always follow them and lawyers are therefore not able to give clear advice about their effect. Qualifying nuptial agreements would give couples autonomy and control, and make the financial outcome of separation more predictable."Suzanne Kingston, a family specialist with the law firm Withers, said: "These recommendations represent a welcome stride towards greater autonomy and certainty for couples. If implemented, then a pre-nup fulfilling certain conditions will be legally binding. However, it will not be possible to avoid meeting the financial needs of partners and children and, as always, the question is what falls under the definition of 'needs'?"

Jane Keir, at the law firm Kingsley Napley LLP, said: "Qualifying nuptial agreements should be enforceable whilst limiting a judge's discretion over any change to the intended outcome. Never before has English law gone quite so far. We urge parliament not to miss this opportunity to allow couples greater certainty and pre-agreed financial control should their relationship disintegrate."