Thursday, February 05, 2009

Money in misery

Divorce (another opening salvo from my new secondary beat as legal-affairs correspondent)

Feb 5th 2009
From The Economist print edition

International marriages are crumbling with the global economy, revealing unseen pitfalls in cross-border divorce law. Good news for lawyers

Tim Marrs
Tim Marrs

MARRIAGES that thrive on money may wither with thrift. That is a depressing lesson from the world economic crisis, which has brought a surge in business for divorce lawyers in former boomtowns such as London and New York. When one or both spouses is from a foreign country, divorce is not just sad but complicated too—especially when most assets may be in a third country, a pension in a fourth, and offspring in a fifth.

Globalisation has made binational marriages, once exotic, much more common among high-earning, highly mobile families. When they stop being high-earning, life gets tricky. Louise Spitz of Manches, a London law firm, has observed an “exceptional” period since September. “With the redundancies in the City there has been a concomitant wave of marital upheaval,” she says. “Families used to living on huge bonus income are unable to continue with the commitments they have taken on—housing and school fees and the cost of living the high life.” Manches has taken on eight more divorce lawyers to cope with the extra work. A high proportion, Ms Spitz and other lawyers reckon, of the once-rich couples now breaking up include at least one foreign spouse.

So who sues whom for divorce and where? How much money will be awarded to whom? Will it be collected? And how? The answers are far trickier than most non-lawyers would imagine. Take, for example, this lightly disguised but real-life example: a wealthy philandering Texan banker with a French wife. Formerly resident in New York, with a recently-lost good job and rented house in London, he now plans to move back to Texas. His wife, newly suspicious and with no money of her own, wants to take the children home to France. She needs her family, she says. What she actually needs is urgent, specialist legal advice.

A London divorce settlement might give her many millions: a house, school fees and maintenance until the children are adults, or even indefinitely. An English court may well disregard a prenuptial agreement, particularly if one of the parties did not have independent legal advice. And it will tend to care more about immediate needs than about whether assets were acquired during the course of the marriage, or predate it, or are the result of an inheritance. All assets are likely to be divided. If the wife is lucky, she may even be able to collect her share.

In the wife’s native France, things will look very different. In her favour is that conduct counts—so adulterous spouses will be penalised. In most other Western countries, divorce courts have given up attributing blame. Even domestic violence is often ignored, though it still counts heavily in some jurisdictions, such as Florida.

But in the typical French divorce, any alimony (also called maintenance) will be less and for eight years at most; any prenuptial agreement will be binding. Only assets acquired during the marriage are up for grabs. If, in our example, the American husband moves to France, he will be expected to play an equal part in bringing up the children—a requirement that would delight some fathers, but by no means all.

If the errant husband has the divorce filed in Texas, the tables are turned even more dramatically. The wife risks being left penniless. In Texas state law, alimony is usually minimal and temporary—though child support, thankfully, is a federal matter. In America, the law varies hugely between states. Most exclude from the settlement assets acquired before the marriage (but Michigan and Colorado don’t). Most exclude inherited property (but Massachusetts and Oregon don’t). In most states, judges will enforce prenuptial agreements (but they often won’t in Alaska).

If the Texan husband decides to file in New York, however, he may find the outcome startlingly expensive. As in some English court rulings, New York courts may award one party a share of a spouse’s future earnings—assuming that they are based on a qualification, such as an MBA or medical degree, that was earned thanks to a joint effort in happier times. Yet New York law has one big catch: unless the parties have signed a formal separation agreement it requires proof of cruelty, adultery or abandonment, whereas other states allow “irreconcilable differences” as grounds for a divorce. So binational couples in New York who want to end their marriage may find themselves unable to do it there, and squabbling about alternatives. Rules differ, too, on what constitutes residency in a particular jurisdiction. In hedonistic Las Vegas, six weeks is enough.

According to Jeremy Morley, an international divorce lawyer based in New York, hiding assets from a spouse is also much easier in some countries than in others. California, at one extreme, requires complete disclosure of assets. At the other extreme, Austria, Japan and many other countries require very little disclosure. A California court recently ordered a husband to pay $390,000 in costs and penalties to his wife because he did not disclose some significant financial information. In another jurisdiction, the assets could have stayed hidden.

Cash and kids may pull in different directions. Countries that are “man-friendly” (shorthand for favouring the richer, usually male, partner) when it comes to money may be “mum-friendly” when it comes to custody. Japan, for example, is quick and cheap for a rich man—unless he wants to keep seeing his children. English courts are ferocious in dividing up assets, even when they have been cunningly squirrelled away offshore. But compared with other jurisdictions, they are keen to keep both divorced parents in touch with the children.

The children’s fate, even more than family finances, can be the source of the hottest legal tussles. The American State Department unit dealing with child abduction has seen its caseload swell from an average in recent years of 1,100 open cases to 1,500 now. In Britain, the figures rose from 157 in 2006 to 183 in 2007, according to Nigel Lowe of Cardiff Law School.

Of the cases reported worldwide, mothers are the main abductors when a marriage breaks down. They are cited in 68% of cases. Ann Thomas, a partner with the International Family Law Group, a London law firm, says child abduction has increased “dramatically” in the past three years or so. A big reason is freedom of movement within the European Union, which has enabled millions of people from the new member states to live and work legally in the richer part of the continent. That inevitably leads to a boom in binational relationships, and in turn more children of mixed marriages. Ms Thomas notes that when a relationship between a foreign mother and an English father breaks down, the mother often assumes that she can automatically return to her homeland without the father’s permission. That may be a costly legal mistake.

Tim Marrs
Tim Marrs

Most advanced industrialised countries, plus most of Latin America and a sprinkling of others, are signatories to the 1980 Hague Convention, a treaty which requires countries to send abducted children back to the jurisdiction where they have been living previously. That is fine in theory: it means that legal battles have to be fought first, before a child is moved. It is a great deal better than a fait accompli which leaves one parent in possession, while the other is trying to fight a lengthy and expensive legal battle in a faraway country.

But in practice things are very different. Views on the desirability of children being brought up by “foreigners” vary hugely by country; so do traditions about the relative roles of fathers and mothers in bringing up their children after divorce. In most Muslim countries, for example, the assumption is that children over seven will be brought up by the father, not the mother, though that is trumped by a preference for a local Muslim parent. So the chances of a foreign mother recovering abducted children from a Muslim father are slim. Apart from secular Turkey and Bosnia, no Muslim countries have signed the Hague Convention, though a handful have struck bilateral deals, such as Pakistan with Britain, and Egypt and Lebanon with America.

Japan has not signed it either—the only member of the rich-country G7 not to have done so. Canada and America are leading an international effort to change that. Foreign fathers, in particular, find the Japanese court system highly resistant to attempts even to establish regular contact with abducted and unlawfully retained children, let alone to dealing with requests for their return. Such requests are met with incomprehension by Japanese courts, complains an American official dealing with the issue. “They ask, ‘Why would a father care that much?’” Countries edging towards signing the Hague Convention include India, Russia and mainland China. But parents whose ex-spouses have taken children to Japan should not hold their breath: as Ms Thomas notes, even if Japan eventually adopts the Hague Convention, it will not apply it retrospectively.

Moreover, even signatory countries may be bad at abiding by the convention, especially when it means enforcing the return of children to a parent alleged to have been abusive. The annual State Department report to Congress on observance of the Hague Convention lists Honduras as “non-compliant” and nine other countries (Brazil, Bulgaria, Chile, Ecuador, Germany, Greece, Mexico, Poland and Venezuela) as showing “patterns of non-compliance”. Anyone in a wobbly marriage with a citizen of these countries might bear that in mind before agreeing to let the children go on holiday there.

But America is not blameless either, particularly if parents try to recover their children through state rather than federal courts, where judges may be unaware of the Hague Convention’s requirements. “Except in Florida, New York, California and Texas, a judge may only hear one Hague case in his career,” says a State Department official. Judges who get it wrong can be overruled on appeal, but it takes time and money: the Hague Convention aims to make proceedings quick and cheap, thus making abduction less likely. Whereas Britain offers automatic legal aid to the foreign parent trying to recover the children, in America they must rely on their own resources or a pro bono lawyer.

Making wily choices about possible jurisdictions is often criticised as “forum shopping”. But the stakes are high: ending up in the wrong legal system, or with the wrong approach, may mean not just poverty but misery. Mr Morley says the differences between one divorce jurisdiction and another are far more than, say, playing a sporting fixture at home or away. As the table shows, totally different rules apply.

So it is understandable that a disillusioned spouse, and his or her lawyer, will try hard to get the most favourable jurisdiction. Yet that can all too easily lead to each party starting, or even finishing, a divorce in a different country. Sorting out these cross-border legal wrangles can be colossally expensive. A tussle between jurisdictions usually starts in six figures, in dollars, euros or pounds; when all four legal bills, of both sides’ costs in both countries, are totted up, it easily shoots into seven figures. And it is hugely time-consuming. The children involved may reach adulthood before the final verdicts are given.

International attempts to tidy up the law have made some things better, but not all. The European Union (where 875,000 divorces take place each year, a fifth of them binational) introduced a reform in 2001 called Brussels II. This has largely stopped “forum shopping”, with a rule that the first court to be approached decides the divorce.

The problem with this rule is that it encourages those in troubled marriages to end them, not mend them. Even if a marriage is doomed, the trend in family law is to resolve the dispute out of court, typically through mediation. A race to issue proceedings makes it much more likely that matters will get nasty, as well as lengthy and costly. David Hodson, an international family law specialist, notes sadly that “This law works against reconciliations and resolutions out of court. Cases can be won and lost by one spouse issuing a divorce a matter of minutes before the other spouse. That must be wrong.”

Tim Marrs
Tim Marrs

Brussels II also encourages some less scrupulous lawyers to behave badly, urging their clients to act fast and dirtily. A London divorce lawyer recalls a case where a husband from an overseas country had acquired his wife’s European nationality by marriage, living briefly in her continental home country before moving to London. Five years and two children later, the marriage was on the rocks, with the husband away working in East Asia. Without his wife’s knowledge, he filed for divorce in her country, one of the stingiest jurisdictions in Europe (from her point of view). His only connection with it was his marriage to the wife he was trying to dump cheaply. Had the case been heard in London, where both parties had much stronger links and had owned a home for years, she would have done far better.

To avoid such cases, a further EU measure, Rome III, tried to stipulate that a marriage should be ended only by the law that has governed it originally. That works fine in similar countries where divorce rules are highly codified, precedents do not matter and judges’ discretion is limited. It already applies in some northern European countries, so that Dutch courts, for example, will apply French law when dealing with a French couple whose marriage has ended during a posting in The Hague.

But such a rule works much less well when other systems are involved. English law is much more complex, and is based on intricate precedents and judges’ discretion that cannot simply be looked up and applied. Even greater difficulties arise when couples come from more distant countries. Would a Swedish court want to apply sharia law to a divorcing couple recently arrived from Saudi Arabia? Many Swedes flinched at that. Mr Hodson complains that it would mean that “the essence of a country’s community life found in its family laws is removed and replaced by the laws of another country.” In the United Kingdom, he says, it would be “entirely against [national] law and policy.”

Now that Rome III has been stymied, a group of nine countries, led by Spain and France, is going ahead under a provision in EU law known as “enhanced co-operation”. This allows like-minded countries to work together, leaving the unwilling behind. And still more international tidying-up operations are in the works. Another Hague Convention tries to harmonise arrangements on cross-border child-support payments—an area that tends to be a bit less contentious than divorce, where views of what is fair differ wildly.

Perhaps the biggest weakness of the system is the advantage that it gives to the richer partner when an international marriage breaks up. Experienced lawyers can operate, if necessary, with high speed to help the poorer spouse—for example, by putting the first hefty legal bill on the husband’s credit card before he is aware of what his wife is up to. In England, that may be followed by a swift move to initiate divorce proceedings, and then an emergency maintenance application that includes provision for legal costs. When the richer party has assets in that jurisdiction, a fair fight is possible. But Kerstin Beyer, a German-British divorce lawyer at the International Family Law Chambers in London, says the tables are often stacked against the poorer (and usually less knowledgable) spouse. Some husbands file for divorce abroad and simply fail to turn up at the English court, hoping that the cost and delay of enforcing the judgment abroad will lead their ex-wife to give up. A client of hers trying to gain the assets she had been awarded in Colorado was faced with a demand for a $15,000 upfront payment from a lawyer there: an impossible expense for someone of her means. Another has been pursuing, expensively and so far fruitlessly, assets in Luxembourg and Germany awarded by a London court. Pensions are particularly tricky. Some countries split them between divorcing couples as a matter of course; others regard such requests from foreign courts coldly.

More fundamentally, divorce arrangements in countries with English-style common law are still liable to be influenced by highly atypical fights between the super-rich, who can afford to take cases to the highest courts. In most marriages there is barely enough money to support one family in one country, notes Ms Spitz. Spreading that between two sides is a stretch, even without an expensive legal fight. As house prices plunge and savings shrivel, divorcing couples are fighting over a shrinking cake.


ih said...

Excellent starting point - I had initially wondered where this fitted in with East European affairs. But this leads me neatly to the point that many East European women have married British and other western European men (the so-called "Catalogue Brides" syndrome) and that invariably there is an imbalance between the pre-marital financial positions of husband and wife. The majority of these marriages may not be of the high-flyer type - yet another potential source of poverty and misery for the unwary when these marriages fall apart, as by their very nature their foundations may be thought of as financially based rather than anything else? (Thankfully not speaking from personal experience!)

sanjay said...
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