Marital Property Agreements are agreements made before (prenuptial) or during (postnuptial) marriage or – although not recognised in Hong Kong – civil partnership, which seek to regulate a couple’s financial affairs during the relationship or to determine the division of their property in the event of divorce, dissolution or separation. Often referred to colloquially as ‘pre-nups’ (or ante-nuptial agreements) and post-nups or post-nuptial agreements and sometimes, in legal texts, collectively as “nuptial agreements”. Whatever term is used neither pre- or post-nups are binding on the courts in England or Hong Kong. Although – post Radmacher (see below) – they may now be seen as heavily persuasive if not conclusive, depending on how the contract was conceived between the parties and the facts of the case. For an excellent discussion of ‘pre-nups’ and marital agreements generally and how they are approached in other jurisdictions see Marital Agreements and Private Autonomy in Comparative Perspective, Jens M Scherpe (Editor), [Oxford: Hart Publishing, 2012, 532pp, hardback, US$120] ISBN 9781849460125 – and my review here.
Another excellent, more practical guide to marital agreements, is Richard Todd QC & Elizabeth Todd: Todd’s Relationship Agreements, Sweet & Maxwell ,covering, inter alia cohabitation, prenuptial and post-nuptial agreements and agreements in respect of children.
SPH v SA  3 HKLRD 497, (2014) 17 HKCFAR 364. This is a landmark judgment which brings Hong Kong into line with English law in regards to prenuptial agreements. Hong Kong courts must now follow the English prenuptial case, Radmacher v Granatino – the effect is that the family courts should honour any prenuptial agreement freely entered into by both parties, “unless in the circumstances it would not be fair to hold the parties to their agreement”.
The case of Radmacher concerned a wealthy couple who signed a prenuptial agreement in Germany but brought divorce proceedings in England. The agreement served to ringfence the assets of the wealthier wife in order to protect the family fortune. Radmacher established the principle that the court should give effect to an agreement into which the parties voluntarily and with full knowledge entered, unless the circumstances make it unfair to hold the parties to the agreement. At first instance, the trial judge found that the agreement should be given reduced weight for, inter alia, a lack of independent legal advice and disclosure and the preclusion of all further claims for ancillary relief. The agreement was taken into account as part of the circumstances of the case. On appeal, the Court of Appeal found that, in the prevailing circumstances, the agreement should be given decisive weight and the court was entitled by statute to adjust and update the factors it should consider: Radmacher v Granatino  EWCA Civ 649. On further appeal, the Supreme Court affirmed the decision of the Court of Appeal.
Factors detracting from the weight of an agreement. Parties are required to have a full appreciation of its implications and there must not be any material lack of disclosure, information or advice, although individual legal advice and full disclosure are not prerequisites. Each party should have all the information material to his or her decision. The parties must also have intended that financial consequences of their separation would be governed by the agreement. There should not be any vitiating factors – duress, fraud or misrepresentation. Undue pressure short of duress and exploitation of the weaker spouse’s position to gain an unfair advantage would decrease the weight of an agreement or vitiate it. Unfairness of the terms in light of the circumstances at separation is also a factor to reduce weight.
The foreign element could enhance the weight of an agreement. Foreign law under which the agreement was signed is relevant to the extent of showing that the parties did intend to be bound or otherwise, depending on the marital property regime and parties’ compliance with the procedural rules in the relevant foreign jurisdiction for concluding a binding agreement. For the purposes of this dissertation, the foreign element is not of general relevance.
Circumstances warranting the court to depart from the agreement. The agreement must be fair. The court gave three specific illustrations: (i) reasonable needs of any children must not be prejudiced; (ii) the distinction between matrimonial and non-matrimonial property will be particularly significant where the parties make express agreement as to the disposal of such property in the event of the termination of the marriage; (iii) an agreement which addresses the contingencies, unknown and often unforeseen, of the couple’s future relationship is more likely to be seen as unfair.
a different ruling as to the award to the husband should be given.
A two-step approach is needed to examine the state of the law: first, whether a prenuptial agreement should be enforceable as a matter of public policy; second, if prenuptial agreements may be enforced, how should the court give weight to them in their exercise of powers under s. 4 and s. 7 MPPO.
The majority in Radmacher stated that the reasons applied in MacLeod v MacLeod  AC 298 in rejecting the public policy argument regarding postnuptial agreements were applicable to prenuptial agreement. The public policy objection was based on an obsolete rule that the husband and the wife had a duty to live together and the disappearance of that rule means that the public policy is no longer supported by any sensible justification. In both cases, the rejection of the public policy was obiter only. However, it is argued that in the future, the public policy objection is unlikely to have a meaningful role to play.
The public policy argument consists of two components: (i) the public had an interest in disallowing prenuptial agreements because they undermine the institution of marriage by encouraging people to divorce and (ii) may leave a spouse on social welfare while the other spouse had more than enough for him- or herself.
The first component is defeated by the majority’s preference for private autonomy over paternalism in Radmacher. It was not appropriate for the court to impose its view on parties. In V v V  EWHC 3230 (Fam), a case applying Radmacher, the trial judge was found to have erred in giving too little weight to private autonomy. Thus, the more popular view now is that parties’ decisions would be given more importance than the public function (if any) of marriage. Moreover, the view that the public has an interest in maintaining marriage seems to be impracticable in view of the climbing divorce rates and discordant with the present state of the law that couples may seek divorce consensually. Parties’ free choice appears to be a more important guiding principle than the public’s interest in marriage.
The second component is now only a theoretical objection. In reality, it would be very unlikely that the court would violate the policy of protecting the public purse because an agreement which renders the financially weaker spouse in real need would be seen as unfair and unenforceable. The court is obliged to take care of a party’s needs. Therefore, although the striking down of the public policy argument was obiter dicta, it is clear from the Supreme Court’s reasoning that the public policy argument will not have much significance in the future. This view has also been endorsed by the Law Commission of England and Wales: see The Law Commission Consultation Paper No. 198.
The need for pre-nuptial agreement.
The principle was to ensure a public policy not to allow such agreements to undermine the concept of marriage as a life-long union.
This is an agreement signed before the parties getting married. In the agreement, the parties agreed how to deal with the distribution of their assets if they have to divorce.
Why Pre-nuptial agreement becomes desirable despite it is not enforceable in Hong Kong?
DD v LKW – case where the principle of fairness applies.
“Of the three strands identified in White’s case and Miller’s case, it is the first two, needs and compensation, which can most readily render it unfair to hold the parties to an ante-nuptial agreement. The parties are unlikely to have intended that their ante-nuptial agreement should result, in the event of the marriage breaking up, in one partner being left in a predicament of real need, while the other enjoys a sufficiency or more, and such a result is likely to render it unfair to hold the parties to their agreement. Equally if the devotion of one partner to looking after the family and the home has left the other free to accumulate wealth, it is likely to be unfair to hold the parties to an agreement that entitles the latter to retain all that he or she has earned.
In the UK Gazette dated 27 Feb 2014, it reports on the UK Law Commission proposing that pre-nuptial agreements should be legally binding.
In February 2014, the Law Commission has advised the UK Government to give pre-nuptial agreements legal force in divorce settlements in England and Wales.
If prenuptial agreements can be upheld in HK, two practical consequences may follow. First, parties may enter into an agreement to ring-fence third parties’ assets for the purpose of distribution. Secondly, it is anticipated that it will be less likely for HK courts to stay proceedings based on a foreign prenuptial agreement.
An issue with the calculation of parties’ assets is whether and when the court could take into account third parties’ assets when assessing a spouse’s financial resources in the s. 4 and s. 7 exercise. Such third parties may include: (i) trustees holding assets on trust which may be distributed to, but is not beneficially owned by, a spouse; (ii) family members, such as parents, who provided constant financial support for a spouse; (iii) companies which are controlled or owned by a spouse, such that the spouse has unlimited access to the assets owned by the company. The first two instances involve the concept of ‘judicious encouragement’: the encouragement of third parties to provide financial resources as a result of an order made against the spouse which he cannot pay off with his own money: Thomas v Thomas  2 FLR 668; FMFT v HKWE  1 HKC 134; X v Y FCMC 536 of 1997. The third instance involves the question of whether the court may look behind the corporate veil to treat the company’s assets as the party’s: Prest v Petrodel Resources Limited  UKSC 34.
The answer to this question is now clear: the court has a broad power by s. 7(1)(a) of the MPPO to look beyond the assets to which a party is absolutely entitled into third parties’ assets because it is empowered to look at ‘other financial resources which each of the parties…has or is likely to have in the foreseeable future’. The rationale is this: if the party is likely to have the source of financial support as he has enjoyed in the past, or is likely to receive distribution of property under a trust if he so requests, these resources fall within the scope of resources described by s. 7(1): KEWS v NCHC  2 HKC 146. Similarly, according to Prest v Petrodel, based on s. 25(2)(a) of the Matrimonial Causes Act 1973 i.e. s. 7 of the MPPO, for cases involving a company, if a party is effectively able to extract or use property of a company due to his control or ownership of it, the property owned by the company is deemed to be covered by s. 7(1).
There are slight differences between how the court exercises the power to include assets of types (i), (ii) and (iii) of third parties. For (i) and (ii), the court may only take third party assets into account if it is more likely than not that the party will have access to such resources. The court would consider two factors: the extent of financial assistance provided by third parties to the spouse and the likelihood of such financial assistance continuing in the foreseeable future. Past conduct will be a useful guide: KEWS v NCHC. For (iii), the court’s power is a tool to counter concealment of assets by the wealthier party, hence the court looks at whether the spouse has unrestricted access to the company assets: Prest v Petrodel.
The court’s power to include third parties’ assets is applied as an evidential tool. A third party is not ordered to transfer property or pay any sum of money directly to the applicant for ancillary relief. For cases involving financial assistance, once the test of likelihood is satisfied on the facts, the court will make an order on the presumption that the assistance will be provided. For example, a lump sum may be ordered at the amount promised by a parent: D v D  HKCU 1870; an assessment of periodic payments may be ordered on the presumption that funds would be provided by the liquidation of trusts: M v W (Ancillary Relief)  EWHC 1155. However, by no means is the third party pressured by the judgment to provide financial assistance. Family members may refuse to provide assistance and trustees may refuse to exercise their discretion in favour of the spouse (in fact, it would be a breach of duty to distribute funds to the spouse if the trustee would not have done so but for the order). For this reason, the notion of ‘judicial encouragement’ is mere fiction: it is no more than a restatement the statutory power of the court and adds nothing new to the law: KEWS v NCHC. If the third party refuses to continue the financial support, the spouse may apply for a modification of the court order: Howard v Howard  P, per Lord Greene MR.
In the case where the court finds that the spouse has uninhibited access to a company’s assets, the court is entitled to take judicial notice of the inherent probabilities when deciding what the richer spouse is trying to conceal and make an order by calculating the spouse’s assets on that basis. The order may be for a sum of money or the transfer of shares owned by the richer spouse in the company or, where the property of the company is in fact held on trust for that spouse, the transfer of such property to the other spouse. The court is however not empowered by the MPPO to simply order a transfer of the company’s property directly to the other spouse where the property beneficially belongs to the company: S. 6(1)(a), equivalent to s. 24(1)(a) of the MCA 1973; see also Prest v Petrodel. This is to preserve the order laid down by the existing company and insolvency law and avoid making the wife a secured creditor with priority over third parties that deal with the company concerned. In this sense, Prest shows that the inclusion of company assets is merely for evidential purposes and the corporate veil is not disregarded.
The starting point is the same: the court should uphold the agreement unless it is unfair to do so. The first step is that the agreement must fulfil the Radmacher requirements so that it would be fair for the court to uphold it. Similar to other situations, in third party assets cases the court would look at (i) whether any vitiating factors are present; (ii) whether the parties intended to be bound and any foreign element which enhances the weight of the agreement; (iii) whether the agreement is substantively fair. Therefore the agreement must show that the parties had made an informed decision and has intention to be bound. Substantive fairness requires the agreement not to deprive a party of reasonable needs or legitimate compensation. It also requires the terms of the agreement to be fair in light of all circumstances of the case. As such, whether a prenuptial agreement purporting to ring-fence third party assets can legally do so highly depends on the facts of the case. For example, on the facts of KEWS, the husband’s monthly income alone would most likely fail to satisfy the wife’s (ie. the weaker party’s) reasonable needs taking into account her high standard of living during the marriage. If a prenuptial agreement had been signed by the parties purporting to prevent the wife’s access to the financial support provided by the husband’s parents, such an agreement would very likely flout the fairness principle. On the contrary, if the husband was able to satisfy the wife’s needs or to compensate her for her contributions to the marriage, it is highly likely that the agreement would be able to exclude third parties’ financial assistance. However, as in the facts of Prest, if a spouse exhibited bad faith and obstructive behaviour, the court would be entitled to find that the innocent party need not be held to the terms of an agreement and might make a more favourable order for the innocent party.
It is not uncommon for parties who married in other jurisdictions to seek divorce in HK. It is suggested that once HK courts adopt Radmacher, it will apply the same test of fairness to prenuptial agreements entered into in other jurisdictions. The practical implications to couples who seek divorce in HK are that, first, the foreign element would give the agreement more weight than before. If an agreement would be binding in the other jurisdiction, parties are taken to intend to be bound by it for the purpose of the HK proceedings. It follows that the judicial advantage / disadvantage argument to apply for stay of proceedings in HK would become more unfavourable because it would be more difficult to argue that there would be a significant discrepancy in the weight given to the agreement by HK and foreign courts. Thirdly, nonetheless, it should not be forgotten that different jurisdictions do apply different approaches to prenuptial agreements; for example, binding agreements may be subject to some degree of judicial review or exclude the jurisdiction of the court entirely. Therefore, it is advisable that parties specify the jurisdiction of divorce proceedings in the prenuptial agreement.
The law on prenuptial agreements at present, like other areas in family law, does not offer absolute certainty. However, complying with the steps outlines below would help secure with higher certainty an enforceable prenuptial agreement. A clearly drafted agreement may benefit the parties in saving time and costs in the long run in the event of separation.
Independent legal advice, although not necessary for upholding an agreement, is highly recommended. According to the Law Commission Consultation Paper No. 198, independent legal advice is direct evidence to show that both parties understood the legal effect of the prenuptial agreement and made an autonomous decision to be bound. As a procedural safeguard, independent legal advice may also protect the agreement from vitiating factors such as mistake, misrepresentation and duress.
It is advisable to hold a meeting between parties with their lawyers as far as practicable to clarify any questions and disagreements as to the terms of the agreement.
The agreement should include clear acknowledgement by both parties that they understood the legal effect of the agreement and that they either received legal advice or willingly took no legal advice.
Clients should be advised to give thought to whether the form of payment should be limited, such as a lump sum, maintenance or periodic payments. Relevant concerns may be whether clients anticipate themselves to desire a clean break, require constant financial support or whether they would be caring for members of the family who might require constant financial support.
Clients may opt to identify the amount of property to be given corresponding to contingent events in the long term such as a material change in financial circumstances of the parties or the birth of children. However, terms addressing contingencies in the long term run the risk of being regarded as unfair by the court. In the alternative, clients may be advised to review their agreement periodically during marriage to ensure that the agreement keeps up with the development of circumstances. However, it is accepted that this option is highly impracticable considering that a married couple are in an intimate relationship rather than a commercial-like relationship at arms’ length.
Clients should be advised to consider the agreement and the level of financial provision in the context of potential but unexpected and difficult circumstances that may occur in the future. Such circumstances may include: extramarital affair of the other spouse; child birth; significant increase in wealth of the other spouse; severe illness of the other spouse. It is also advisable to include a list of matters which are crucial to the client’s decision and which should be disclosed, e.g. any extra-marital affair: see Jayne Hewett v First Plus Financial Group Plc  EWCA Civ 312 and The Law Commission Consultation Paper No. 198.
Both parties should be given sufficient time to consider the suitability of the agreement.
For clients who wish to protect third parties’ assets, the agreement should set out clearly the source(s) of the asset, the name of the third party, the extent of exclusion. Clients should be reminded that exclusion of third parties’ assets may not go so far as excluding provision for the reasonable needs of the other spouse. Clients who wish to exclude their assets from distribution by giving them to a third party (such as a wholly controlled company) should be advised that it is unlikely to yield any effect in light of KEWS and Prest.
Clients may be advised to consider jurisdiction clauses to indicate the choice of forum for divorce proceedings as there are other jurisdictions which may offer higher certainty in dealing with prenuptial agreements.