Monday, 14 February 2011

Richardson v Richardson [2011] EWCA Civ 79: unknown unknowns

There is surely no more tragic case than that of Barder v Caluori, from 1988.  The Barders agreed a clean break divorce settlement through which Mr Barder gave his ex-wife the matrimonial home.  Five weeks later she killed their children and committed suicide.  Mr Barder was able to appeal the divorce settlement – even though he had agreed to it – because the point of the clean break, i.e. to ensure provision for their children, was now no longer needed.  What the case did decide, though, was that you could overturn divorce settlements if something extraordinary happened after the decree nisi.

This is what happened in the Richardson case.  The Richardsons were in their seventies when they divorced, and they split between them a property portfolio worth £40m gross, but highly leveraged, to the extent that there was “only” £10m of equity in them.  Problem was that one of the liabilities was an insurance claim against their property partnership; a young girl had fallen out of a window and was bringing a personal injury claim.  Worth up to £3.2m.

They didn’t take this into account on divorce, because they both believed that it was covered by insurance.  Problem was twofold.  One, the insurance cover was only worth £2m.  Two, the insurance company, post-divorce, voided the policy.

Mr Richardson, post-split, had taken on the liability.  Suddenly he was faced with wipeout.  So he sought to amend the settlement along Barder lines.  The Court of Appeal had a look at it, and gained inspiration from the unlikeliest of sources; Donald Rumsfeld.

There are known unknowns, the Court said, and unknown unknowns.  The known unknowns were the value of the claim and the insurance limit.  Those were things that the Richardsons could have investigated, but chose not to do so.  In which case the loss lies where it lies.  If either was overly bothered about them, they would have got evidence in to assess its value.  If you want to turn a known unknown into a known known, it’s up to you to do so.  If you don’t, you stand the risk of ignorance.

The unknown unknown was the voiding.  The Court held that this was a very different situation.  The first either could have known about the policy voiding was 4 months after the divorce agreement was signed up.  No investigation would have dragged that out of the insurer.  And despite the respondent’s assertions (Mrs Richardson had died not long after, so her estate was involved) that Mr Richardson knew about the claim, there was no reason why he should have been on notice that this would have stymied his insurance cover. 

So the Court of Appeal decided it was fair to look again at the settlement.  This was not quite a Barder situation because the Court was at pains to argue Barders should be very, very rare indeed; however, it was a vitiating mistake – which has pretty much the same effect.  The parties had proceeded to a divorce on the supposedly solid presumption that they would have zero liability for the girl’s accident.  The voiding risk was definitely a mistake and it is fair to go back and re-look.  Not least because Mrs Richardson took her divorce share largely in cash; the girl’s family would maybe seek to execute any judgment against Mrs Richardson’s assets rather than Mr Richardson’s highly-mortgaged hotel chain.  Mr Richardson was therefore ordered to pay a million of the amount otherwise due to Mrs Richardson’s estate into Court.  Where it could sit, accumulating interest, waiting for the verdict in the girl’s claim (and in Mr Richardson’s dispute with the voiding insurer). 

Ironically, by emphasizing how tight the Barder criteria are, the Court may have opened the door to the vitiating mistake.  Certainly it will form a useful backdrop argument to the desperate party trying to Barder their way out of a bad divorce deal.

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