On 9 November 2021, the Supreme Court released its judgment in Preston v Preston. This was the first time the Supreme Court has looked at section 182, the Family Proceedings Act 1980, since Clayton v Clayton [1] in 2016 and since the Law Commission’s Report [2] in 2019.
Section 182, Family Proceedings Act 1980
Section 182 gives the court wide powers to vary nuptial settlements [3] to remedy the consequences of a failed marriage. It can therefore only be applied for after divorce and is not available to de facto couples nor can it be utilised during the first two years of separation where division of relationship property may be occurring under the Property (Relationships) Act 1976. This was heavily criticised by the Law Commission in its report, who ultimately recommended its repeal. The provision is mostly applied to discretionary family trusts, as this has become the most used wealth and estate planning tool in New Zealand over the past decade.
Pathway to Preston
Clayton and Ward
The first time the Supreme Court considered section 182 was in Ward v Ward [4], in 2009. It would not do so again until 2016, in Clayton v Clayton, where it followed Ward, but in addition, established a two-stage test. First, to determine if the arrangement in question is a nuptial settlement [5]. Second, should the court exercise its discretion to provide relief, and if so, how?
In Clayton, the Supreme Court identified some non-exhaustive factors that may be considered, as well as clarifying that the purpose of section 182 is to remedy the difference between the position of the applicant spouse at the date of dissolution and what the position would have been if the marriage had continued. The Court used the diagram following to illustrate this paradigm, where A is the date of the nuptial settlement, B, the divorce and C, continuation of the relationship. The question being whether there is a difference between the claimant’s position had the marriage continued, as opposed to it ending on divorce. This is a general and forward looking comparison, designed to assist future courts in exercising their discretion in line with the purpose of section 182.
Following Clayton
In the years since Clayton, the lower courts have at times differed in their approach to section 182, unsure how to balance the need for modernization of the provision, which originated in the 19th century, whilst still maintaining the integrity of the provision. For example, see contrasting approaches in Bethell v Bethell [2018] NZHC 3171, Little v Little [2020] NZHC 2612, Dyer v Gardiner [2020] NZCA 385, and Preston v Preston [2020] NZCA 679.
Preston v Preston [2021] NZSC 154
This somewhat inconsistent approach by the courts, coupled with the lack of legislative reform, left a vacuum and a need for clarification on how section 182 was to be applied post-Clayton and the Law Commission’s Report of 2019. This was addressed by the Supreme Court in November 2021.
The Supreme Court found:
1. The Court of Appeal had erred in its approach in three ways:
(a) by over reliance on the lower courts’ assessment of the disparity (difference between B and C above); and
(b) by overemphasising Mr Preston’s financial contributions and in so doing, failing to recognise Mrs Preston’s non-financial contributions, all of which it held, should be viewed equally; and
(c) by treating the source of the trust assets as decisive in determining whether the court should exercise its discretion.
2. The 2-stage test in Clayton should be extended to include a third stage.
3. If a disparity between B and C above exists, then the court must exercise its discretion.
4. Whilst there is no general presumption of equal sharing under section 182, in cases analogous to Clayton and Ward, (both in the length and circumstances of the marriage), equal sharing is inevitable.
5. Each case is to be determined on its own facts.
6. Flexibility is key.
7. Section 182 must be applied in a 21st Century context.
The new third stage
One of the most significant changes to come out of the Supreme Court’s decision in Preston was the splitting of the second stage under the Clayton test into two stages. The result is the first stage remains the same threshold test of whether the arrangement is a nuptial settlement. However, the second stage now involves an assessment of whether a disparity exists between the factual and counterfactual (B and C above). If a disparity exists, then the third stage is invoked, requiring the court to determine how, not if, it should exercise its discretion.
See also Ross’ earlier commentaries – Clayton v Clayton – the last chapter? and Clayton v Clayton – the last chapter? What does it mean?
[1] Clayton v Clayton [2016] NZSC 30.
[2] Review of the Property (Relationships) Act 1976, report 143, published June 2019.
[3] Following Ward v Ward [2009] NZCA 139, what may be classified as a settlement is broad and can include many different types of arrangements. See [23].
[4] Ward v Ward [2010] NZSC 125, where the Supreme Court upheld the Court of Appeal’s decision in Ward v Ward [2009] NZCA 139.
[5] A nuptial settlement is one that “makes some continuing provision for both or either of the parties to a marriage in their capacity as spouses”, which the Supreme Court held is a test that requires a generous approach, meaning only a connection or proximity between the settlement and the marriage is required for the threshold to be met.