Understanding conduct in financial divorce proceedings

The conduct of separating couples seeking financial orders from the court can have a serious impact on the final determination of the division of their assets. However, applicant’s arguments must meet a high threshold in order to successfully plead conduct, with recent case law providing detailed insight into the court’s interpretation of what constitutes conduct that warrants financial sanction against a party.

The statutory test for conduct is found in Section 25(2)(g) of the Matrimonial Causes Act 1973 (MCA), which states that when considering the exercise of its powers in relation to a financial order the Court shall in particular have regard to ‘the conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it’.

At the beginning of the year the judgment in DP v EP [2023] EWFC 6 was handed down by Her Honour Judge Reardon. The assets in the case were around £1.46 million. The wife was seeking a 50/50 split but agreed to bear some of her own debt, leaving the proposed division of assets 55/45 in the husband’s favour. The husband was seeking a capital division of 63/37 in his favour.

A unique factor in the case was the husband’s illiteracy, and it was his position that the wife had exploited this and that she was living a ‘double life’. The husband was running an ‘add back’ argument, stating that the wife had recklessly or deliberately dissipated assets from the parties’ resources and had not disclosed assets derived from the fund which she had diverted and hidden over the course of the relationship. As such, he contended that the wife’s conduct amounted to economic abuse under section 1(4) of the Domestic Abuse Act (DAA) and that it would be inequitable to disregard her conduct under section 25(2)(g) of the MCA.

With regards to the law on conduct, HHJ Reardon set out her analysis within paragraph 27 to 34 of the judgment. In particular she focused on OG v AG [2020] EWFC 52, where Mostyn J identified four scenarios in which conduct may be considered in financial remedy cases:

• Gross and obvious personal misconduct - this will only be taken into account in very rare circumstances and will only be reflected where there is a financial consequence to its impact.
• Wantonly and recklessly dissipated assets – leading to the ‘add back’ jurisprudence.
• Litigation misconduct – where a party should be heavily penalised on costs.
• Non-disclosure of assets – resulting in inferences being drawn as to the existence of assets from a party’s conduct in failing to give full and frank disclosure.

After undertaking her analysis HHJ Reardon made a finding of economic abuse against the wife pursuant to section 1(4) of the DAA and she found that the wife’s behaviour did meet the high threshold for conduct under Section 25(2)(g). She concluded that the husband’s illiteracy meant the wife held a dominating position over the husband, which she exploited by buying and selling assets and deliberately concealing them from the husband. This resulted in a capital division of 53/47 in the husband’s favour.

Then followed the judgment of Mr Justice Peel in Tsvetkov v Khayrova [2023] EWFC 130 and [2023] EWFC 131 (costs). It was a 10-year marriage with substantial assets of roughly £48 million. The wife sought a 50/50 split, and the husband sought a 60/40 split of the assets in his favour on account of the wife’s conduct. In conclusion, Mr Justice Peel ordered that there was to be an equal division of assets as he did not consider the 60/40 split proposed by the husband to be a fair outcome. However, the wife was penalised on costs for her litigation conduct.

In his approach when determining conduct Mr Justice Peel also endorsed the analysis of OG v AG [2020] EWFC 52. At paragraph 43 to 44 he set out in his judgment what a party must prove to run a successful conduct argument and divided it into two stages.

Within Stage 1 a party must prove the facts relied upon, and if the facts are established that they meet the threshold for conduct which is set at a high or exceptional level. Then it must be proved that there is an identifiable – not necessarily measurable – negative financial impact upon the parties which has been generated by the alleged wrongdoing – a causative link between act/omission and financial loss is required.

If Stage 1 is established, then the case moves to Stage 2 where the court will consider how the misconduct and its financial consequences should impact the outcome of the financial remedy proceedings, while taking into account the usual section 25 factors.

Importantly, Mr Justice Peel also highlights at paragraph 45 the increasing tendency for parties to fill in box 4.4 reserving a party’s position on conduct or make prejudicial comments which clearly do not meet the high threshold. In his view “these practices are to be strongly deprecated and should be abandoned”.

At paragraph 46 he then sets out the procedure which should be followed if running a conduct argument:

• It must be pleaded. Conduct is a specific section 25 factor, and it is not appropriate for conduct to be a part of the general circumstances of the case.
• Conduct must be pleaded at the earliest opportunity and in doing so a party should a) particularise the allegation, b) state how the allegations meet the threshold for a conduct claim, and c) identify the financial impact caused by the alleged conduct.
• If conduct is relied upon the allegations should be clearly set out in Box 4.4 a party’s Form E.
• The court is duty bound by FPR 2010 1.1 to have regard to the overriding objective.
• At the First Appointment the court should case-manage the alleged misconduct. Under FPR 2010 1.4 the court is entitled to prevent a party wishing to plead conduct from relying on it if they are satisfied that the threshold is not met. The court should also consider whether it is proportionate in the case to allow the allegation of conduct to proceed, and whether even if proved it would be material to the outcome.
• Conduct issues may arrive after the filing of the Form E – if so, this must be brought before the court as soon as possible.
• Again, conduct must be pleaded, usually by way of a short, focused narrative statement. Page limits should be used, and the statement should set out clearly a) the facts asserted, b) how the threshold is met, and c) the consequential financial loss.

We as practitioners need to therefore be considering very carefully whether we plead conduct, and that will start at the point of completion of box 4.4 of a client’s Form E. Our experience at the First Directions Appointment (FDA) is that parties are being asked to confirm if they wish to run their conduct argument and if so to prepare a statement, with this being responded to prior to the Financial Dispute Resolution hearing. It is therefore important prior to the FDA that you are taking full instructions from your client and determining if the facts are likely to reach the threshold.

If conduct is pleaded unsuccessfully, costs awards may be made so clients need to be warned of this possibility. A cost risk analysis should also be undertaken to assess whether it is proportionate for a conduct argument to be run when looking at the assets in the case, and consideration should be given as to whether being successful in a conduct argument would actually make a difference to how the assets overall will be divided.

Sarah Jane Lenihan is a partner and Rebecca Taylor is a solicitor at Dawson Cornwell