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The hidden costs of divorce – lawyers beware the price tag!

26 October 2015. Published by Laura Stocks, Partner

As a result of the Supreme Court's decision on 14 October 2015 in the cases of Sharland and Gohil, parties in divorce proceedings are now able to re-open their financial settlements where there is evidence of fraudulent non-disclosure.

In both cases, the wives were permitted to set aside the financial order made on their divorce after it was revealed that their husbands had misled the court by fraudulently concealing some of their assets. Mr Gohil failed to provide full financial disclosure in relation to his resources. Mr Sharland misled the court as to the value of his software business by giving evidence that no IPO was planned when in fact, the company was being actively prepared to float. Importantly, both wives were able to show that they had accepted lower settlements than they would have done if their husbands had provided full and frank disclosure as they were required to.

Ms Sharland's and Ms Gohil's claims will now go back to the High Court to be re-assessed.

"Fraud unravels all"

In family proceedings the parties have a duty to give full and frank disclosure in the exchange of information leading up to a financial order being made. Whether such an order can later be set aside depends on whether a party has been guilty of fraudulent misrepresentation or non-disclosure. As Briggs LJ said in his dissenting judgment in the Court of Appeal in Sharland, "fraud unravels all".

Where a party is guilty of fraudulent non-disclosure, a presumption arises that proper disclosure of the parties' financial affairs would have led to a different financial order being made. The original order will be set aside unless the fraudulent party can show that the misrepresentation or non-disclosure would not have influenced a reasonable person to agree to the terms of the settlement nor would it have caused the court to make a significantly different order. The burden of establishing this lies with the perpetrator of the fraud.

Caught in the crossfire

How will the Supreme Court's decision affect solicitors acting for parties in divorce proceedings?

A more thorough investigation of parties' financial positions may now be required to ascertain whether assets are being concealed, although this may prove difficult where parties' budgets are limited. Solicitors should also fully advise on the party's duty to provide full and frank disclose of their assets when preparing Form E financial statements and warn of the potential risks (and cost consequences) of not doing so.

Family lawyers have warned that the Supreme Court's ruling could "open the floodgates" and lead to a rise in the number of challenges to existing divorce settlements. This could have a knock on effect on the number of professional negligence claim against family lawyers, where parties to re-opened financial settlements seek the additional costs and/or losses arising out of those proceedings.

Lawyers acting for the innocent party face the risk of claims arising out of the failure to undertake sufficient investigations into the spouse's financial situation. Those allegations should be defendable on the basis that it is reasonable for the solicitor to assume that the spouse has made full and frank disclosure in the proceedings (unless there are matters which otherwise put the solicitor on notice).

Likewise, solicitors acting for the fraudulent party could also face allegations that they failed to properly advise on the duty to give full and frank disclosure and the consequences of failing to do so. This type of claim is likely to be defeated on the grounds of illegality.

One thing is certain, if parties to divorce want finality it pays to tell the truth!

Sharland and Gohil cases