The Principle of Compensation in Divorce

What Is the Principle of Compensation in Divorce?

In UK family law, the principle of compensation is one of three key doctrines used to determine financial settlements, alongside needs and sharing. It applies in cases where one spouse has suffered a significant economic disadvantage due to decisions made during the marriage - typically for the benefit of the family.

Legal Foundation:
Lord Nicholls stated in the case of Miller; McFarlane, compensation “is aimed at redressing any significant prospective economic disparity between the parties arising from the way they conducted their marriage”.  

When Is Compensation Awarded?

The concept of compensation recognises that one of the parties may have seriously damaged their own ability to earn money, for the greater good of the family, with an obvious impact on their ability to achieve independent living. For example, it may be awarded when:

• One spouse gave up a high-earning career to raise children or support the other’s career.
• The economic disparity is not adequately addressed by needs-based awards.
• The sacrifice has a long-term impact on earning potential and independence.

In most cases, the principle of compensation is rarely relevant or significant; instead, this disparity is typically addressed through an award designed to meet the party’s needs. 

Case Example: TM v KM [2022] EWFC 155

The 2022 case of TM v KM presented a family court’s decision to award compensation in addition to her sharing award to a wife in financial proceedings, expanding on what may constitute the ‘truly exceptional’ circumstances warranting a compensation award. 

• TM v KM concerned a 17-year marriage in which the wife sacrificed her highly successful career in finance to raise the parties’ two children.
• Before the divorce proceedings, the couple had two children and lived in the United States, the United Kingdom, and the Middle East. The wife completed an MBA and had a lucrative career in investment finance and before the birth of their first child in 2008, while the husband also had a highly successful career in investment finance, earning a gross annual salary of approximately $2 million. 
• In 2003 and 2004 while working in the United States, the wife earned an income of $800,000 per annum. After moving to the United Kingdom in 2006, the wife earned £505,000 and then £325,000 in 2007.
• In 2008, the wife took maternity leave and was later made redundant by the English bank, after which she did not return to work in the investment finance sector. 
• The husband argued that the events of 2007 and 2008 demonstrated that the wife had lost her way and her potential as a high-income earner.

However, the judge was not satisfied and had little doubt that the wife lost her position due to relationship-related sacrifices. The judge was satisfied that the wife would have continued to earn a good income if she had not relocated to England and become pregnant and further cited two more "relationship-generated" factors that limited the wife’s earning power: the birth of the parties’ second child in 2011 and the family’s relocation to the Middle East between 2010 and 2016. 

In establishing this argument, the judge referenced a letter the husband sent to his employers in 2011. In negotiating his financial package, the husband claimed to his wife as having "generously agreed to give up her (very successful) career and travel to the other side of the world" to allow him to pursue his career, despite her being a "career woman".  

As a result, the wife was awarded compensation in addition to a sharing award, recognising her sacrifice.

Recent Developments: AT v BT [2023] EWHC 3531 (Fam)

This case signalled a potential revival of the compensation principle.

AT v BT [2023] concerned a wife who was a top-earning partner in private equity and left her role due to conflict-of-interest concerns after marriage.

The court acknowledged her career loss as a relationship-generated disadvantage and compensation was considered to neutralise the departure from equal sharing due to non-matrimonial assets. Mr Justice Francis reasoned that:

• The wife had been forced to leave her job because of her relationship with her husband which ended a “glittering career” (regardless of whether leaving her career was the wife’s choice).
• The wife’s first pregnancy had been difficult.
• The wife had assumed full-time care of her daughter and son.
• The parties had relocated to England after marrying.

In explaining his decision, Mr Justice Francis said:

“This is not just a case of somebody having had a good school career and a good degree, with good prospects; this is a case of somebody with a proven track record of excellence and achievements where her career was brought to a grinding halt for reasons entirely connected with the marriage. In my judgement, if this is not a marriage-generated disadvantage, then that concept has no place in our law… to ignore compensation in this case would, in my judgement, be an affront to the proper application of the compensation principle.”

How Courts Assess Compensation Claims

Courts consider:

• The nature and extent of the sacrifice
• Whether the sacrifice was made for the benefit of the family
• The long-term impact on earning capacity
• Whether the disparity can be addressed through needs or sharing

Compensation is not about punishing one party - it’s about fairness and redress.

Need Legal Advice?

If you believe your earning potential has been affected by sacrifices made during your marriage, our expert solicitors can help assess whether the principle of compensation may apply. We offer a free initial consultation to qualifying individuals.

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