Lawlink NSW: 6. The Background to Financial Adjustment: Disputes Between Married Persons

6.1 In Australia one system of law is applied to determine disputes relating to the financial affairs of married couples, and another to determine similar disputes between de facto partners. Disputes which arise between married couples when the marriage breaks down are generally heard by the Family Court applying the principles laid down in the Family Law Act 1975. This Act empowers the court to alter the interests of married couples in property owned by one, or both of them, if such an order is considered “just and equitable”. ¹The Act also permits the court to order one spouse to pay maintenance to the other in defined circumstances. ²By contrast property disputes between de facto partners are dealt with under State law. In New South Wales disputes between de facto partners are determined in accordance with principles that apply to property disputes between strangers. New South Wales law does not allow a de facto partner to claim maintenance from the other party on his or her own account although maintenance may be claimed on behalf of the children of the relationship.

6.2 As we have explained in Chapter 5, the fact that there are differences between the law affecting married persons and that affecting to de facto partners does not of itself justify change. However, a brief examination of the historical development of both areas of law assists critical evaluation of the modern law affecting de facto partners. We now make such an examination We deal first, with the development of matrimonial property law and then with the law of maintenance between married persons. We trace the development of the law of matrimonial property to the regime of “family property” embodied in the Family Law Act In the law of maintenance we note the shift in emphasis from a life-long obligation of support on the breakdown of a marriage, to a system that stresses the need for each party to become financially independent. We then explain the close and complex relationship between orders for the settlement of property and awards of maintenance under the Family Law Act and explain the key concepts of “contributions”, “needs” and “resources”.

6.3 Matrimonial property law has passed through three main stages: matrimonial unity, separate property, and family property.

6.4 At common law a wife, during marriage, had no legal existence independent of her husband Sir William Blackstone put it this way

A consequence of this was that the wife could not hold separate property of her own during the marriage. ⁴The husband became entitled to all freehold lands held by his wife at the time of marriage or during the marriage. He also obtained title to all chattels belonging to his wife at the time of marriage or acquired by her during the marriage. These principles applied even after the marriage broke down, further emphasising the wife’s subservience and vulnerability.

6.5 The principle that husband and wife were “one person in law” came under increasing criticism in the latter half of the nineteenth century. By a series of Acts, culminating in the Married Women’s Property Act 1882, married women in England became entitled to acquire, hold, and dispose of property in their own right as if they were unmarried. Similar legislation was passed in the Australian States. ⁵

6.6 “Separation of property” improved the legal position of a married woman who had property in her own name or who earned income. But it was of little assistance to women who had no assets or did not work outside the home. Under the prevailing division of labour the husband was usually responsible for earning income and acquiring property, while the wife remained at home to care for the house and rear the children. If the marriage broke down the wife had rarely acquired assets in her own name, and thus the principle of separation of property generally worked to her disadvantage. As one commentator has noted, the principle reinforced rather than reduced sex-based inequality. ⁶

6.7 In the years following the Second World War, the English Court of Appeal attempted to overcome the injustice inherent in the principle of separation of property. In a series of cases it was held that section 17 of the Married Women’s Property Act 1882 conferred a discretion on the court to vary the established property rights of the parties, if this were necessary to achieve a fair result between them. ⁷The high point of the “palm-tree Justice” line of cases (as they were called) was the statement of Lord Denning in Hine v. Hine:

6.8 For a short time it seemed that Australian courts, in interpreting equivalent legislation might follow the English approach. But in 1956 the High Court of Australia returned to a traditional view of the legislation In the leading case of Wirth v. Wirth ⁹the High Court held that it had no power to re-allocate the property rights of married couples. Property disputes between husbands and wives were to be determined by applying the same principles of property law as those which applied to unmarried partners. In the words of Chief Justice Dixon,

Ultimately, the view accepted in Australia was also adopted by the House of Lords in England. ¹¹

6.9 Later the English Court of Appeal adopted a different strategy and extended established principles of the law of trusts to achieve a more equitable distribution of property between married persons. For example, it held that a court could impose a trust independently of the parties intentions where this was necessary to recognise financial and non-financial contributions to the acquisition or improvement of property. ¹²

6.10 The Australian courts, in dealing with disputes between married persons, continued to take the traditional view that a spouse who claimed a beneficial interest in property held by the other spouse had to show that the parties had an actual intention that such an interest would be obtained, or that he or she had made a direct financial contribution to the purchase price of the property (see paragraphs 7.6-7.14). ¹³However, the effects of the apparent inflexibility of orthodox common law and equitable principles in relation to matrimonial property disputes were ameliorated by the enactment of the Matrimonial Causes Act 1959 (Cth), which came into force in 1961.

6.11 The Matrimonial Causes Act 1959 introduced a national divorce law and conferred power on the court to make such orders for the settlement of property as it considered just and equitable. ¹⁴The relevant provision appeared to abandon the strict principles of property law as a basis for determining matrimonial disputes. Initially, however, it received a conservative interpretation as courts concentrated on direct financial contributions in deciding whether to make an order for the settlement of property. ¹⁵Gradually the courts began to attach greater significance to non-financial domestic contributions to the matrimonial relationships, ¹⁶such as a child rearing and homemaking, thereby grappling with one of the obvious deficiencies of the separate property regime. ¹⁷

6.12 The Family Law Act 1975, which replaced the 1959 Act continued to permit the courts to re-allocate the property rights of the parties, but specified more detailed criteria for the exercise of the judicial discretion. The philosophy which now governs re-allocation of property rights has been described as a combination of “compensation for past contributions” and “allowance for future needs”. ¹⁸As a first step the court considers the parties’ respective financial and non-financial contributions to the acquisition conservation and improvement of the property in dispute, including contributions made in the role of homemaker and parent. ¹⁹As a second step, the court considers factors relating to the parties’ financial resources and future needs, including their age, state of health and earning capacity and their responsibilities to children and other persons. ²⁰The Chief Judge of the Family Court has said that in directing contributions to be taken into account, the legislation was designed to recognise domestic contributions

This has led some judges to suggest that, in certain circumstances, equality is the appropriate principle to apply:

6.13 Despite this recognition of domestic contributions, the Family Law Act does not go so far as to treat marriage as a full economic partnership as in community of property regimes, under which each party may be entitled to an equal share of the family assets when the relationship comes to an end. Section 79(4) (b) of the Act still appears to require a link between the “acquisition conservation and improvement of the property” and the “contribution made in the capacity of homemaker or parent’. Early cases under the Family Law Act tended to interpret this provision literally, but later decisions have not necessarily required an identifiable connection between the contribution and a particular asset. ²³The wording of the subsection has been criticised by the Joint Select Committee on the Family Law Act, and proposed amendments to the Act remove the link. ²⁴However, even if these amendments are made, the Act will differ from many community property regimes, the major characteristic of which is that a party to the marriage has an automatic share in the other spouse’s property, either during the marriage or when it breaks down. By contrast, under the Family Law Act, the shares to be awarded to each party depend on the exercise of the courts discretion.

6.14 Recently it has been suggested that Australian matrimonial property law should move closer towards the “economic partnership” view of marriage, possibly accepting a system of division of the matrimonial property by reference to fixed shares. The Joint Select Committee on the Family Law Act, for example, acknowledged the advantages of such a system and recommended that the Family Law Act provide for a presumption of equal ownership of the matrimonial home. ²⁵A number of other jurisdictions have moved towards acceptance of the concept of economic partnership as the basis for a distribution of matrimonial property. Over the last decade, New Zealand and the Canadian common law Provinces have passed legislation establishing a prima facie rule of equal sharing in matrimonial property. ²⁶The Scottish Law Commission has recently recommended a general principle of equal sharing of matrimonial property including business property, ²⁷while in England, in 1978, the Law Commission recommended that husband and wife should be given equal rights in the matrimonial home. ²⁸ It is understood that an Australian inquiry into matrimonial property is to be held at federal level and this may provide further impetus towards recognition of the concept of an economic partnership between spouses.

6.15 The law of maintenance between spouses has a long history and is now undergoing significant change. At common law a husband had a life-long obligation to support his wife according to his means, although in practice this obligation was impossible to enforce because the wife could not sue her husband. ²⁹The common law was displaced by legislation at a relatively early stage in Australia. Colonial legislation which heavily influenced family law until the second half of the twentieth century, ³⁰recognised and reinforced the dependent role of women and also gave effect to the principle of matrimonial fault. An “innocent wife”, who had, “without just cause or excuse”, been left by her husband without adequate means of support was generally able to obtain maintenance. The wife was not expected to seek employment and hence could be described as “without adequate means of support”, even if she were capable of entering the workforce. But a wife who was guilty of desertion or adultery had no right to maintenance even if she was destitute. In these circumstances it was said that her husband had “just cause or excuse” for his failure to maintain her. State legislation therefore, reflected the view that an innocent wife was entitled to be supported for her lifetime even if she was capable of becoming financially independent, and even if the marriage was terminated by divorce. By contrast, a husband was either unable to claim maintenance from his wife at all or was able to do so only in the rare case where, through no fault of his own, he could not maintain himself and his wife had the means to support him.

6.16 The Matrimonial Causes Act 1959 governed all maintenance claims which were ancillary to proceedings for principal relief (such as divorce). Section 84 of that Act empowered the court to make such order for the maintenance of a party to the marriage or of the children of the marriage as it thought proper, having regard to the means, earning capacity and conduct of the parties to the marriage and all other relevant circumstances. Unlike State law, the Act made no formal distinction between the maintenance obligations of husbands and wives, although in practice it was usually the wife who lacked independent means and sought to recover maintenance from her husband. As in the case of the State legislation it was not necessary to show that the wife was in need before she was entitled to maintenance. The fact that a woman was capable of working and supporting herself did not deprive her of a right to maintenance but might affect the amount of the order. The conduct of the spouse was relevant in determining a claim for maintenance, although a “guilty” spouse was not always debarred from obtaining maintenance. The result was that a marriage could give rise to an indefinite obligation to Support an ex-wife, despite the fact that, after the divorce, the husband had acquired a new wife and children and even though the ex-wife might be capable of learning new skills and re-entering the work-force. ³¹

6.17 The Family Law Act 1975 governs all maintenance claims between spouses and imposes reciprocal and identical obligations of support on both parties to a marriage. However, the Act reflects an important shift in policy in that it departs from the notion of a life-long right to support and accepts the desirability of both parties becoming financially independent. The obligation to support arises only where the other spouse cannot support himself or herself, whether because of age, or mental or physical incapacity for employment, because he or she is caring for a child of the marriage under 18 years, or for any other reason considered adequate by the court. ³²

6.18 The court is directed to take a number of factors into account in determining whether an order should be made and in fixing the amount of the order. Broadly speaking, the factors relate to the needs of the parties (for example, their age, and state of health); the financial resources of the parties (including their mental and physical capacity for employment and any eligibility they may have for a pension or benefit); and their financial obligations and responsibilities (including whether or not they have the care and control of a child of the marriage under 18 years, and whether or not they have the responsibility to support any other person). The court is also directed to consider factors such as the duration of the marriage, its effect on the applicants earning capacity, and the extent to which the party seeking maintenance has contributed to the income, earning capacity and financial resources of the other party. ³³

6.19 The court must also take into account the terms of any property order which has been made or is proposed to be made. This provision is designed to ensure that a spouse will not be able to “double up” on the advantages conferred by separate property and maintenance orders. ³⁴Consistently with the abandonment of the principle of matrimonial fault in the Family Law Act, the moral conduct of the parties during the marriage is not generally a relevant factor in determining whether a maintenance order should be made. ³⁵The rehabilitative function of maintenance is recognised by the statutory direction that the court should consider the extent to which the payment of maintenance will increase the applicant s earning capacity by enabling him or her to undertake a course of education or training or to establish himself or herself in a business. ³⁶

6.20 The provisions of the Family Law Act indicate a marked shift from a philosophy that marriage imposes a continuing and possibly life-long obligation of support on the husband, to one which restricts the maintenance obligation by reference to needs and resources, and emphasises its rehabilitative function. ³⁷A number of arguments have been put to justify the departure from the principle of life-long support. First, the duty of life-long support was based on the assumption that marriage would normally continue until the death of one party. The increasing incidence of divorce has made this assumption invalid. Hence it is no longer realistic to impose a maintenance obligation which will continue long after a marriage has come to an end. Secondly, the notion of a continuing obligation of support rested in part on the view that an innocent party was entitled to “compensation” if the other party’s action brought the marriage to an end. This view has become irrelevant with the abandonment of matrimonial fault as the sole (or indeed, any) ground for divorce. Thirdly, it is recognized that most divorced partners remarry or establish new relationships. In practice it is often impossible for a re-married partner to support both a former and a present partner. In this situation any maintenance obligation to a former spouse may cause hardship to the second family, and may the success of that relationship. Fourthly, it is argued that the concept of a life-long support obligation is based on the traditional division of labour between husbands and wives. With the increasing participation of women in the workforce, many women now attain financial independence within marriage. Thus, there is less justification for treating women as dependents. Moreover, even where a woman has played the traditional role of wife and mother before the marriage breakdown she may benefit socially and psychologically if she is encouraged to re- enter the workforce and sever her financial ties with her ex-husband. Long-term periodic maintenance may induce an attitude of dependence and helplessness on the part of the recipient. Fifthly, a continuing obligation to pay maintenance over a long period increases the likelihood of acrimony and disputation between ex-spouses and may impede the ability of the spouse paying maintenance to form new relationships. Finally, there is a high rate of default under periodic maintenance orders after a relatively short time, making the goal of life-long maintenance largely unattainable in practice. ³⁸

6.21 These arguments have led to increasing support for the rehabilitative model as the basis for an award of maintenance. Proponents of this model accept that marriage may be the principal cause of a spouse’s financial dependence as, for example, where a wife gives up employment opportunities in order to care for children. In this situation it is argued that maintenance should be awarded for a temporary period in order to enable the dependent spouse to take steps towards regaining economic independence. The Scottish Law Commission, for example, took the view that periodic maintenance should be designed to “enable a spouse to adjust within a relatively short period, to the cessation on divorce of any financial dependence on the other spouse”. Under the Commission’s proposals, maintenance would cease three years after divorce, although the court would have a discretion to continue maintenance beyond the three year limit in order to ensure fair sharing of the economic burden of caring for a child of the marriage, or to relieve grave financial hardship. ³⁹Similarly, the Law Commission in England has recommended that the importance of each party taking steps to become self-sufficient should be formulated in terms of a positive legislative principle. The Law Commission supports the view that, in appropriate cases, periodic financial provision should be primarily concerned to secure a transition from the status of marriage to the status of independence. ⁴⁰

6.22 Under the Family Law Act there is a very close relationship between orders for the settlement of property and maintenance awards. In assessing the amount of maintenance that should be awarded, section 75(2) instructs the court to take into account (among other things) the parties’

When determining whether an order altering property rights should be made under section 79, the court is directed to consider,

An order for settlement of property may therefore be based entirely on contributions, entirely on needs, or on a combination of both. Similarly, a maintenance order could include both a needs and a contribution element.

6.23 In proceedings with respect to property and maintenance, section 81 of the Act imposes a duty on the court

This “clean break” principle causes the court to lean in favour of orders for lump sum maintenance or settlement (transfer) of property, in lieu of a continuing maintenance obligation. ⁴³In some cases, of course, it is not feasible to terminate the parties’ financial relationship. For example, a lump sum order based on the capitalisation of an obligation to pay future maintenance may be unsuitable where the respondent has no capital from which a lump sum payment can be made, or where the length of time during which periodic maintenance will be necessary is uncertain. ⁴⁴In such circumstances periodic orders may be appropriate.

6.24 The Family Court has considered the inter-relationship between property and maintenance orders and between the contributions and needs criteria specified in the Family Law Act Recent cases have suggested that an order for settlement of property under section 79 should be assessed before the question of entitlement to maintenance (within the meaning of section 72) is addressed. ⁴⁵In determining the appropriate property order, the court undertakes what has been described as a “dual exercise”. ⁴⁶The first part of the exercise is to ascertain the value of the property of the parties and to make an assessment of the extent of each party’s contributions to that property. The second step is to consider the financial resources (for example, income) and needs of the parties and other matters specified in section 75(2). In some cases allocation of a share of the property in recognition of the contribution entitlement may leave no outstanding needs or other factors under section 75(2) to be considered. In others it may be appropriate for the property order to contain a needs (maintenance) element as where a seriously ill spouse or a custodial parent receives a greater share of the matrimonial home than would be justified by contributions alone. ⁴⁷Even an applicant who is not entitled to be maintained by the other party within the meaning of section 72, maybe entitled to rely on the factors specified in section 75(2), to obtain a greater share of property than contributions alone would warrant. ⁴⁸

6.25 Once the court determines the nature of the property order (if any) to be made, it then considers any claim to maintenance based upon the applicant s inability to support himself or herself As noted above, it may be that the property order will satisfy the needs of the applicant so that an order for maintenance is unnecessary. ⁴⁹If not, an order for periodic maintenance may be made or, taking into account the “clean break” principle embodied in section 81, an order for lump sum maintenance. The inclusion of a maintenance or section 75(2) component in a property order does not prevent the court awarding periodic or lump sum maintenance. ⁵⁰

6.26 In this Chapter we have traced the development of the current law governing financial adjustment between married persons. We have briefly examined the three main stages of the law of matrimonial property; matrimonial unity, which prevailed until the late nineteenth century, separate property, which prevailed until the Matrimonial Causes Act 1959; and the current family property regime, which is itself in a state of flux. We have also referred to important changes in the law of maintenance, where the emphasis has shifted from a life-long obligation of support to a system that stresses the need for each party to become financially independent. We have canvassed these areas because the principles governing financial adjustment between married persons constitute essential background material to an assessment of the current law governing de facto relationships. Many of the issues dealt with in the Family Law Act are similar to the issues we face. Developments in Commonwealth family law provide the context in which we must make our assessment of these issues. We stress, however, that the purpose of this Chapter is not to suggest that the principles embodied in the Family Law Act should necessarily apply to financial disputes between de facto partners. As will be seem our approach is similar to that of the Act but there are important differences.

4. W. Holdsworth, History of English Law (6th ed, 1934), vol.3, pp.520-533. Equity modified the common law to a limited extent through the concept of the separate estate and the restraint on anticipation: Bromley’s Family Law (6th ed. 1981). pp.413-415.

5. In New South Wiles the legislation was the Married Women’s Property Act 1893. See now Married Women’s Property Act 1901, s.5.

7. See eg. Rimmer v. Rimmer [1953] 1 QB 63. Section 17 created a summary jurisdiction in the court to hear any question between husband and wife as to the title and possession of property and allowed the judge to make such order with respect to the property as he thought fit.

12. See eg. Falconer v. Falconer [1970] 1 WLR 1333; Hazell v.Hazell [1972] 1 WLR 301; cf. Gissing v.Gissing [1971] AC 886.

15. See eg. Ackland v. Ackland [1961] NSWR 1149; Van Liif v. Van Liif [1967] 1 NSWR 102.

16. This trend appears to have commenced with Sanders v. Sanders (1967) 116 CLR 336, at p.381 per Windeyer J. See also Dunn v. Dunn [1973] 1 NSWLR 590, at p.596: Pytlowany v. Pytlowany [1974] VR 105, at p.111. For a discussion of this change of attitude see K J Gray, note 6 above, pp.55 ff.

17. Legislation passed in England in 1970 also gave the court power to reallocate the resources of the partners, taking into account contributions made by each party to the welfare of the family Matrimonial Proceedings and Property Act 1970 (Eng), s.5(1)(f). See now Matrimonial Causes Act 1973 (Eng), s.25(1)(f).

18. R J Bailey, “Principles of Property Distribution on Divorce-Compensation, Need or Community?” (1980) 54 Australian Law Journal 190; J H Wade, Property Division Upon Divorce (1982).

20. Id., s.75(2). For a description of the manner in which the court should proceed, see Pastrikos and Pastrikos [1980] FLC 90-897 (Full Court of the Family Court).

22. Potthoff and Potthoff [1978] FLC 90-475, at p.77,446, per Fogarty J. See also Wardman and Hudson [1978] FLC 90-466.

23. See Rainbird and Rainbird [1977] FLC 90-310: cf. Aroney and Aroney [1980] FLC 90-905; Mahon and Mahon [1982] FLC 91-242.

24. Joint Select Committee, Report on the Family Law Act (1980), vol.1; Family Law Amendment Bill 1983, cl.31. See also Family Law Act 1975 (Cth), s.75(2)(j) (“income, earning capacity, property and financial resources”).

26. Matrimonial Property Act 1976 (NZ); A J McLean, “Matrimonial Property - Canadian Common Law Style” (1981) 31 University of Toronto Law Journal 363.

27. Scottish Law Commission, Family Law: Report on Aliment and Financial Provision (Scot. Law Corn. No.67, 1981) paras.3.65 ff. The principle of equal sharing is not to apply in certain circumstances.

28. The Law Commission, Family Law: Third Report on Family Property: The Matrimonial Home (Co-ownership and Occupation Rights) and Household Goods (Law Com.No.86, 1978). The Law Commission did not recommend equal sharing for other items of matrimonial property. See The Law Commission, Family Law: The Financial Consequences of Divorce (Law Com No.112, 1981).

29. See M Finer and O R McGregor, “The History of the Obligation to Maintain” in Report of Committee on One-Parent Families (Cmnd.5629, 1974), vol.2, Appendix 5, pp.98 ff.

30. The first maintenance legislation was enacted in the colony of New South Wales. In the 1960s all States enacted “uniform” maintenance legislation although differences in detail remained. See, e.g., Maintenance Act, 1964. The uniform legislation was displaced as far as maintenance between spouses was concerned by the Family Law Act 1975 which permitted claims for maintenance independently of proceedings for principal relief.

31. Davis v. Davis [1964] VK 278, at p.282, per Barry J: Rodgers v. Rodgers (1964) 114 CLR 608, at p.618, per McTiernam Taylor and Owen JJ.

34. Id., s.75(2)(n); Aroney and Aroney [1979] FLC 90-709, at pp.78,790, per Nygh J; on appeal [1980] FLC 90-905.

35. Soblusky and Soblusky [1976] FLC 90-124. For situations where fault is relevant, see J H Wade, Property Division Upon Divorce (1982) pp.119-121, 129-135.

37. See, generally, The Law Commission, Family Law: The Financial Consequences of Divorce. The Basic Policy (Discussion Paper, Law Com No.103, 1980), paras.30-35; Scottish Law Commission, note 27 above, para.3.107; K J Gray, note 6 above; L N Browm “Maintenance and Esoterism” (1968) 31 Modern Law Review 121; S Cretney, “The Maintenance Quagmire” (1970) 33 Modern Law Review 662.

38. The statistics in Australia are sparse. See Family Law Council, Maintenance Enforcement under the Family Law Act (Working Paper 4, 1979), pp.22 ff.

40. Law Commission, Family Law: The Financial Consequences of Divorce (Law Com No.112, 1981), p.18. The Commission recognised the difficulty of giving effect to this principle, particularly where the wife was left with young children; Id., p.11.

45. Anast and Atiastopoulos [1982] FLC 91-201; Pastrikos and Pastrikos [1980] FLC 90-897; Albany and Albany [1980] 90-905.

47. Dow-Sainter and Dow-Sainter [1980] FLC 90-890; Dench and Dench [1978] FLC 90-469.