Davies v Davies

This appeal is brought by Mr Davies (hereinafter “the husband”), against the judgment of His Honour Judge O’Dwyer dated the 20^th September 2011 awarding Mrs Davies, (hereinafter “the wife”), a lump sum of £2.2 million in addition to the final matrimonial home. Mr Duckworth on the husband’s behalf submits that the lump sum to which the wife is properly entitled is £1.5 million.

The husband is the owner and operator of a successful hotel in the Paddington area, the Cardiff Hotel. It occupies three adjoining houses in Norfolk Square. The Cardiff Hotel was started by his grandfather and in 1997/1998 passed from his father into his sole control. At the time the three houses in which the hotel business traded were jointly owned between the husband and his two sisters.

With the passage of time he bought out his sisters so that at the date of separation he was the sole owner of the properties as well as the business.

The ground for the issues contested at trial was laid in the statements filed by the husband and wife. The husband’s principal case was that the wife was no more than a receptionist who had been employed intermittently in his business during the years of co-habitation and marriage. The marriage itself was short and her entitlement was therefore modest.

His alternative case was that the assets available to satisfy the wife’s needs hardly extended to the hotel business which came to him from earlier generations and was not the product of any shared endeavour.

The wife’s case was that the status of the hotel had risen almost dramatically as a result of her energy, enterprise and marketing skills.

At the trial on the oral evidence, the wife succeeded to a high degree. Her evidence was preferred where it conflicted with her husbands. His capacity to recall past events in an ordered manner was labelled deficient. Her contribution to the increase in the family’s net worh was held to be exceptional.

In advance of the final hearing, expert valuation had proved problematic. It was common ground that the single joint accountancy expert had not done a satisfactory job. The judge then had to decide between two valuation experts, one called by the husband the other by the wife. He preferred the evidence of the wife’s valuer. Thus and thereafter it was possible for him to prepare a precise inventory and valuation of the family assets. However, the experts were unable to assist the judge with a valuation of the business as at the date of transfer from father to son. However, there were available trading accounts for the year of transition as well as the years preceding and following transition. The husband’s case was that the accounts demonstrated that the hotel business was of substantial value at the date of transfer.

Mr Duckworth asserts that it was not until Mr Jonathan Cohen QC’s final submission that he heard the assertion that the business was of nil value at the date of transfer. He accepts that at that point he had the opportunity to protest, and with the advantage of hindsight, he further accepts that he should have taken it.

The seeds sown by Mr Cohen took root and appear in paragraph 36 of the judgment as follows:-

“In oral evidence the Wife told me that they would, in the initial stages, both be working very long hours 16-17 hours per day. She was doing this because she had fallen in love and it was part of that life. It is significant that at the commencement of the relationship the net assets in the company apart from the hotel buildings themselves were effectively nil. The husband of course has his one third share in the ownership of the hotel and shortly after took over the business from his parents after they resigned as directors.”

Between the end of the trial and the hand down there was a considerable period during which both counsel were making representations to the judge which sought the variation of the draft judgment.

Again, Mr Duckworth accepts that he might have taken objection but instead filed an appellant’s notice. Which course to pursue was, he submitted, a matter of professional judgement.

Perhaps Mr Duckworth’s greater criticism is of paragraph 95 of the judgment in which the judge stated:-

“95.

The Husband brought to this relationship his 1/3 interest in the hotel property. Shortly after the relationship commenced his parents effectively transferred over the hotel business to him. The wife made a very high contribution to the success of that business at least as much if not greater than H’s. It would be impossible to identify differing fractions of contribution and the value of each fraction as Mr Duckworth urges me to do. From their joint efforts monies were raised to accumulate capital, increase the value of the hotel, and acquire the remaining shares from the sisters. It is not possible to identify with accuracy historical values (although some valuations on a limited basis were undertaken to establish the shares of the sisters) but in my judgment it is fair to accept the wife’s argument that in broad terms 1/3 of the assets should be attributed to the husband and excluded from the sharing principle and the remaining 2/3 having in mind the contribution of the wife both before and after marriage divided between the parties. My figures differ slightly from 1/3 but I am satisfied they are within the appropriate range. ”

The effect of that paragraph submits Mr Duckworth, is to deny the husband proper relief from the more general sharing principle to reflect the derivation of the substantial part of the available assets from family inheritance and inter-generational transfer. The judge should have identified the value of the “inherited” assets, ring fenced them and removed them from the tally of assets properly available for division by the court in the exercise of its discretionary powers under s. 25 of the Matrimonial Causes Act 1973.

This was an attractive presentation which had earned Mr Duckworth a hearing before the full court when he presented his permission application to myself and Rimer LJ, on 16 February 2012. On that occasion he accepted that, to the extent that he might have contributed to the judge’s error by not challenging Mr Cohen’s closing submission, he might be vulnerable in costs arguments in this court.

I conclude that the judge did fall into error in paragraph 36 of his judgment in accepting that the business itself was of no value at the date the husband’s acquisition. However, I am not persuaded that the result ultimately ordered by the judge is in infected by that error.

I am impressed by Mr Cohen’s point that on the wife’s behalf he had conceded that one third of the total net assets should be extracted and protected from the wife’s claim. He further demonstrated that the judge had acted on that concession without which the judge’s award might well have exceeded £2.2 million. Cross checking for fairness, the effect of the order was to give the wife approximately one third and the husband approximately two thirdsof the total available assets. Such a percentage fairly reflected the derivation of the hotel and its trade. Given the resounding nature of the judge’s findings in the wife’s favour anything less than a third would have been plainly unfair.

Mr Duckworth argued his appeal with skill, authority and conviction. However, in the end I was persuaded by Mr Cohen’s response, which stood back from detail and presented the broader picture and the broad outcome.

For those reasons I would grant permission but dismiss the resulting appeal.

I have not found it altogether easy to resolve the issue raised in this appeal but I am persuaded that the only realistic conclusion is that proposed by Lord Justice Thorpe, namely that the appeal should be dismissed.

The judge below accepted that the matrimonial assets should be subject to the sharing principle, particularly given the significant contribution made by the wife to the business. However, he appears to have accepted, as the courts frequently do in relatively short term marriages of this kind, that the assets of the husband acquired before the relationship was established should not be treated as part of the matrimonial assets subject to distribution. Accordingly, because the husband had a one third interest in the freehold of the hotel property before they married or co-habited and the wife had none, this interest had to be valued and subtracted from the assets available for distribution. The husband’s complaint is that precisely the same principle should have been applied to the hotel business which he had been given by his parents very shortly after co-habitation had started, yet no specific credit was given for this.

It is not entirely clear to me whether credit was given or not. In paragraph 36 of his judgment, the judge seems to have concluded that the business was virtually worthless. He said that “the net assets in the business apart from the hotel buildings themselves were effectively nil.” The judge found that the husband and wife had equally contributed to building up the business and therefore should share the increase in its value. On this analysis, there was nothing to credit.

However, at paragraph 95 (reproduced by Thorpe LJ at para. 13 above) the judge accepted the wife’s concession that one third of all the assets, including the matrimonial assets, should be excluded from the pot available for distribution. This was partly because “it is not possible to identify with accuracy historical values” which might suggest that the judge accepted that the hotel business would have had some value, albeit difficult to assess.

Mr Cohen QC, counsel for the wife, submits that the judge did in fact have evidence on which he could properly reach the conclusion that the hotel business (treated separately from the freehold buildings) was virtually worthless. But in any event the wife’s concession secured the husband a greater portion of the matrimonial assets than he ought to have received on the sharing principle, and in rough and ready terms this secured a fair and equitable outcome, as the judge stated. The matrimonial assets were significant and included certain holdings of gold bullion which amounted to almost £1.8 million.

In my view there was some evidence to support the judge’s conclusion that the business had effectively been developed from nothing. This was what the wife herself had contended, and the husband also asserted that the business was in a particularly parlous state in 1994. The husband now contends, however, that giving no value to the business was wholly at odds with the profit and turnover information. This suggested that the value of the business remained much the same after the marriage as it had before it.

Although the judge had the profit and turnover information available to him, the focus of the husband’s case below does not seem to have been that the business always had considerable value, as he now asserts; rather he was contending that the wife had never been more than an efficient employee and that she should only be rewarded on that basis, and that it was his entrepreneurial skills that had been responsible for building up the business.

Perhaps this was the reason why the valuation experts were not pressed to provide a valuation of the business. We were informed that these experts had said that the evaluation would be impossible and highly speculative, although we were not told why they took that view. In the absence of such expert assistance, it would have been an extremely difficult job for the judge to assess the value of the business with any confidence at all.

I would accept that in the light of the financial information available, the business would have had some value. We heard no argument about how that should be assessed (save that counsel submitted that it would be a function of profits) and nor did the judge. In the circumstances I make observations on that question with considerable diffidence. But it seems to me that there is considerable force in the wife’s submission that her concession may well been as beneficial to the husband as the method he is now proposing for determining the wife’s share. In my view the following considerations make the valuation exercise a particularly daunting and speculative one, and indeed suggest that the value of the business was probably considerably less than the applicant now submits.

First, the value of a hotel business of this kind will depend principally on the goodwill, but that is in part located in the premises and in part it is a personal goodwill generated by the way in which the owners run the hotel: see the well known discussion by Scrutton LJ in Whiteman Smith v Chaplin [1934] 2 KB 35. The husband is now contending that the profits have remained much the same quite irrespective of who has been running the business which, if true, would suggest that the goodwill lies principally in the premises themselves.

Second, the goodwill attached to the place was only capable of exploitation by the hotel business itself once it had taken a lease of the premises. Without some possessory title allowing the husband, through his company, to exploit the business, it would have been worth very little since at any time the business could have been forced to close at the whim of the owners of the premises. We were told that the business had in fact entered into a lease for twelve years, although with no right to renew, apparently some time after the parties began to co-habit. That was not referred to by the judge and indeed it is not clear to me that this evidence was even before him. This lease gave some security to the business and will no doubt have increased its value, but it was a wasting asset. Moreover, the rental for the lease would, I assume, have been paid for from the profits generated by the business, to which the wife made a significant contribution. Furthermore, at the time of the divorce the period of the lease would largely have expired and the business, treated independently of the premises in which it was located, would have had a very limited value indeed.

Third, given that the judge had found that the wife contributed markedly to the day to day operation of the business, her input would have been a very significant contribution to such goodwill as was personal. That would be so even if she was not able to improve significantly on the goodwill generated by earlier owners, perhaps because they had earned personal goodwill as a result of their commitment to running a client-friendly hotel. Once the former owners had left the business, however, their personal good will would have dissipated quickly. The wife (together with the husband) had to show commitment and drive to ensure that it was not lost.

Fourth, whilst the lease would have contributed to the value of the business, it would at the same time have reduced the value of the freehold itself, and to that extent would have had an adverse impact on the husband’s one third holding. He could not have claimed the right to have both a third of the freehold valued (as it was) on the basis that the freehold was unencumbered and at the same time claim to have the full value of the business with the leasehold interest.

For these reasons I doubt whether the value of the business itself, treated independently of the hotel building, was as significant as the applicant suggests, and the commitment of the wife played an important role in maintaining such value as it had. As I have said, I would accept that it would have had some value. But since the husband benefited from the wife’s concession which allowed him to take one third share of the assets generated after the marriage before the equality principle came into play, I am far from convinced that he would have been better off if a more rigorous approach to the distribution of assets had been adopted.

I would not, therefore, interfere with the judge’s assessment of the appropriate split. I agree with Thorpe LJ that we should grant permission to appeal but I would dismiss the appeal itself.

I have had the advantage of reading in draft the judgments of Thorpe and Elias LJJ. I too would grant the husband permission to appeal but would dismiss his appeal.

The journey to that decision has caused me some anxiety. Mr Duckworth’s careful submissions went a good way towards persuading me that the judge was wrong to treat the hotel business that the husband brought into the relationship as virtually worthless. On the other hand, I also had a distinct impression that this aspect of the case was presented to us with markedly more emphasis than it was to the judge. Moreover, there was no expert evidence before the judge as to the value of the hotel business at the start of the relationship and, as Elias LJ explains, the making of any such valuation would probably have been a difficult exercise. Even assuming that the judge was wrong in his dismissive assessment of the value of the hotel business at the outset of the relationship, this court is in no better position than he was to embark upon an assessment of its value. Like my Lords, I am not persuaded that the wife’s one-third concession which they have described did not in practice achieve fairness as between the parties in the division of the assets. In my view, there is no sound basis upon which this court can interfere with the judge’s order.