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Negligence and financial settlements on divorce following the Supreme Court’s landmark ruling in Sharland

The appellant wife to divorce proceedings was allowed by the Supreme Court to re-open her financial settlement with her husband because of his fraudulent non-disclosure of his financial position during the divorce.  Whilst it is not uncommon for financial settlements to be re-opened in the event of fraud, this case is notable because the husband's fraud arguably made no material financial difference to the ultimate settlement, and the Supreme Court overruled both the High Court and the Court of Appeal in allowing the wife's appeal. The case may have repercussions for family lawyers’ liability.

Background

Mr and Mrs Sharland married in 1993 and had three children, the eldest of which had severe autism that required care from Mrs Sharland throughout his life.  Mr Sharland was an entrepreneur who had a substantial shareholding in a software business, AppSense Holdings Ltd ("AppSense").  They separated in 2010 and subsequently sought a divorce, with Mrs Sharland bringing various financial claims against Mr Sharland.

Facts

In the financial proceedings between Mr and Mrs Sharland on their divorce, the husband's shareholding in AppSense was the principal matter in dispute.  Experts were instructed and financial valuations were produced on the basis that there were no plans for an Initial Public Offering ("IPO") of AppSense, and at the final hearing Mr Sharland gave evidence to the Court that there was no IPO "on the cards today".  Mr and Mrs Sharland then reached a settlement of their financial claims that the Judge approved and was embodied in a draft Consent Order.  However, before the Order was sealed by the Court Mrs Sharland learned that AppSense was actually being prepared for an IPO with an expected value far in excess of the expert valuations that had been obtained.

Mrs Sharland immediately invited the Judge not to seal the Consent Order settling her financial claims and applied for the hearing to be resumed.  Whilst the Judge found that Mr Sharland had been dishonest, by the time that the hearing had been resumed the IPO had not taken place and no IPO was now in prospect.  The Judge therefore declined to set aside the parties' settlement, following the House of Lords decision in Livesey (formerly Jenkins) v Jenkins [1985] AC 424.  The Judge concluded that only in cases where the absence of full and frank disclosure had led the Court to make an order “substantially different from the order which it would have made had such disclosure had taken place” would an order be set aside.

By a majority, the Court of Appeal refused to set aside the Consent Order either and followed the same reasoning as the Judge.

Mrs Sharland therefore appealed to the Supreme Court.

Findings

The Supreme Court unanimously allowed Mrs Sharland’s appeal.  It considered that the decision in Livesey had been misinterpreted and that Mr Sharland's fraud undermined the whole basis on which the Consent Order was made.  The general principle of "fraud unravels all" should lead to setting aside a Consent Order procured by fraud.  The only exception is whether the Court is satisfied that, at the time when it made the Consent Order, the fraud would not have influenced a reasonable person to agree to it, nor, had it know then what it knows now, would the Court have made a significantly difference order, whether or not the parties had agreed to it.

Lady Hale considered that the Court would not have made the Consent Order that it did, when it did, in the absence of Mr Sharland’s fraud.  Although it subsequently transpired that the IPO did not happen, at the time that the parties asked the Court to seal their Consent Order there were active plans to progress the IPO, which would have stopped the Court making the Consent Order at that time if it had known about them.  Lady Hale endorsed Lord Wilson's judgement in the related case of Gohil v Gohil [2015] UKSC 61, where the appellant wife was also allowed to re-open her financial settlement with her husband.

Mrs Sharland had therefore been deprived of a full and fair hearing of her claim.  Lady Hale determined that the Consent Order should not be sealed and that Mrs Sharland’s application for financial relief should to return to the High Court for further directions.

Comment

This decision has attracted significant media interest and is of particular relevance to family lawyers, but it is also of interest to the insurers of those lawyers and the potential for clients to claim that their divorce settlements were negligently concluded.

In one sense the Supreme Court said nothing new because it is settled law that a financial divorce settlement can be re-opened in the event of sufficient non-disclosure (Boker-Ingram v Boker-Ingram [2009] EWCA Civ 412), fraud or a supervening event (Barder v Barder [1987] 2 FLR 480).  However, in this case the husband's fraud arguably caused the wife no financial prejudice because it did not result in him retaining money that she would otherwise have received; although the husband lied about the IPO, it did not take place and so the value of his shareholding was not actually affected by it.

Nevertheless, the Supreme Court focused on the fact that the husband had been fraudulent and emphasised the over-arching principle that any settlement based on fraud should be set aside.  The only exception that the Supreme Court allowed was where the fraud would not have influenced a reasonable person to agree to it, nor would the Court have made a significantly different order if it had known what it now knows.

Despite some media reports, it seems unlikely that this decision will result in a flood of spouses seeking to re-open their financial divorce settlements as the decision is contained to the relatively rare situation where a settlement is reached on the basis of fraud by one spouse, and is likely to be of relevance in" big money" cases of which there are relatively few.  However, it may encourage some Claimant solicitors to try their hand at alleging that financial settlements were negligently concluded where one spouse feels misled by what the other said about their financial position at the time; and it could encourage claims against solicitors where fraud is discovered in a financial settlement but it is difficult to pursue the fraudulent spouse.

Contact

For further information please contact Sheona Wood, Partner on +44 (0)20 7280 8804 or Jonathan Hyde, Senior Associate on +44 (0)20 7280 8927.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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