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"Sea Changes in New Zealand Couples' Property Rights".

An Address given by Justice Tipping of the Court of Appeal of New Zealand at Freshfields Bruckhaus Deringer on Thursday 16 May 2002


Introduction

The principal focus of my address will be on the changes brought about in New Zealand by the amendments to the Matrimonial Property Act 1976 effected by the Property (Relationships) Act which came into force on 1 February 2002. One of the features of the amending legislation is that the head Act is now called the Property (Relationships) Act 1976. In other words, the amendments were both to the substance and to the title of the legislation which hitherto had governed the position as regards married couples. The symbolic effect is not without significance in that in broad terms the legislation now makes no distinction on account of the matrimonial status of cohabiting couples or their gender or their sexual orientation. Broadly, all cohabiting couples are treated alike for property purposes on the breakdown of their relationship. The statutory provisions apply not only to Jack and Jill but also to Jack and Jack and Jill and Jill.

Before I give you a description of the new legislative landscape in New Zealand, I have been asked to address the previous position at common law and in equity in New Zealand and briefly compare it with the current position in England which still relies on Judge-made law.

The former New Zealand law

At the end of de facto relationships disputes over property can often arise. In the absence of statutory intervention the Courts were required to devise solutions by developing existing principles. The challenge was to combine flexibility with principle and reasonable certainty. The equitable concept of constructive trust was at the heart of the developments in this area.

The law in New Zealand concerning the property rights of de facto couples was previously to be found in two decisions of the New Zealand Court of Appeal. They were Gillies v Keogh [1989] 2 NZLR 327, and Lankow v Rose [1995] 1 NZLR 277. In these cases the Court founded the imposition of a constructive trust mainly on the notion of reasonable expectations: see Gillies v Keogh [1989] 2 NZLR 327 and Phillips v Phillips [1993] 3 NZLR 159.

I participated in the second of these cases and wrote one of the main judgments. McKay J agreed with my judgment and although there were different shades of meaning and emphasis in the judgments of the other members of the Court (Cooke P, Hardie Boys J and Gault J), the views of McKay J and myself were usually perceived as constituting the ratio. As a convenient summary of the position prior to the new legislation, I base what follows on my own judgment in Lankow v Rose from page 293.

Canadian law

The Canadian Courts have used notions of unjust enrichment to underpin the imposition of a constructive trust: see Pettkus v Becker (1980) 117 DLR (3d) 257; Sorochan v Sorochan (1986) 29 DLR (4th) 1 and Peter v Beblow (1993) 101 DLR (4th) 621.

Australian law

In Australia the underpinning has come from notions of unconscionable conduct: see Muschinski v Dodds (1985) 160 CLR 583 and Baumgartner v Baumgartner (1987) 164 CLR 137. The unjustness of the enrichment has been seen as leading to the proposition that to deny an interest to the claimant would amount to unconscionable conduct on the part of the party attempting to do so. The various roads which have been identified have different signposts but, as I ventured to suggest in Partridge v Moller (1990) 6 FRNZ 147, 153, they all lead to Rome.

English law

English jurisprudence appears still to be concerned with notions of express or imputed intention or understanding: see Lloyds Bank plc v Rosset [1991] 1 AC 107; Grant v Edwards [1986] 2 All ER 426 and Hammond v Mitchell [1992] 2 All ER 109 per Waite J at pp 118-119. That approach, essentially contractual or quasi-contractual, is in my view unnecessarily artificial. It is better to acknowledge openly that a constructive trust is being imposed in equity without the intention or the consent, express, implied or imputed, of the constructive trustee. The trust is imposed because equity will not allow the legal owner to deny the claimant a beneficial interest.

In the usual case in this field the legal title belongs to one only of the former de facto partners. That partner, the defendant, seeks to retain not only the legal title but the whole beneficial interest. The other partner, the claimant, seeks a beneficial interest in the property in recognition of what she has done during the relationship. Putting it another way, the claimant seeks a beneficial interest in return for her contributions in and to the former relationship.

However, it was not enough for the claimant to show a contribution to the relationship. In order to be awarded a beneficial interest in property owned in law by the defendant, the claimant had first to show some contribution, direct or indirect, to the property at issue. A contribution to the relationship did not qualify unless it was also, as was often the case, a contribution to that property. This was not as restrictive an approach as it may have appeared. I will return to the ambit of qualifying contributions a little later.

The second thing the claimant had to establish was that she expected an interest in the property. If, for any reason, she had no such expectation, a constructive trust could not be imposed in her favour. Thirdly the claimant had to show that her expectation of an interest was reasonable in the circumstances. The fourth step was for the claimant to show that the defendant should reasonably expect to yield her an interest. The fact that the defendant was not willing to yield an interest or did not expect to have to do so was no bar to her claim if he should reasonably have expected to do so. In that respect the Court stood as his conscience.

The imposition of a constructive trust in such circumstances could be seen as a development of the concepts of resulting trust and proprietary estoppel. A resulting trust arises when property is owned at law by one person and another person has provided all or some of the consideration for its acquisition. Traditionally a resulting trust did not arise when one person improved the property of another: see the speech of Lord Reid in Pettitt v Pettitt [1970] AC 777 at p 794B. The reason why the person with the legal title was required to yield a beneficial interest to the claimant was that equity would not allow the owner of the legal estate to deny the claimant a beneficial interest. In equity the conscience of the legal owner was required to acknowledge the other party's beneficial interest in the property. A refusal to do so was regarded as unconscionable conduct on the part of the legal owner justifying the intervention of equity.

This, in my view, was the most convincing rationale for the intervention of equity in this field. Equity could not alter or interfere with the defendant's legal estate. However, on the premise that the defendant was acting unconscionably by denying the claimant a beneficial interest, equity treated the defendant as a constructive trustee of the legal estate to the extent of the claimant's assessed interest. By this means equity required the defendant to account to the claimant for her interest.

The constructive trust so imposed could be executed, ie put into practical effect, by such means as the justice of the case required. The two most likely means were either a vesting order or an order for the payment to the claimant of the assessed value of her beneficial interest. I did not myself regard it as necessary to classify such a payment as equitable damages or equitable compensation. I regarded the payment as the means whereby the constructive trustee was required to implement the trust. The payment satisfied the trust.

The question of contributions in the previous New Zealand regime

Clearly a direct financial contribution to the acquisition of property qualified. Counsel submitted that indirect contributions should not qualify. I could not see why not. There may be greater difficulties of proof and assessment when the contributions are indirect but, once established, they were, to my mind, as real as direct contributions. At the simplest level one partner might have paid for all the groceries with the other servicing and reducing the mortgage. That was an indirect contribution by the former, no less real than if the roles were reversed.

I was prepared to allow as a contribution any payment or service by the claimant which either:

(1) of itself assisted in the acquisition, improvement or maintenance of the property or its value or

(2) by its provision helped the other party acquire, improve or maintain the property or its value.

To make a rigid cut off at direct contributions ignored the realities of life and put an unreal premium on the way de facto partners allocated responsibilities, financial and otherwise, in their relationship. On this basis contributions in the home could qualify as contributions to the home.

My perception of the English approach is contained in what I have just gone through. The state of English law on this subject is well illustrated by the introductory words of Peter Gibson LJ in his judgment in Drake v Whipp [1996] 1 FLR 826, 827:

"PETER GIBSON LJ: Yet again this court is asked to rule on a dispute between a man and a woman, who cohabited but were not married to each other, as to their respective beneficial interests in a property which they purchased to be their home but which was put into the man's name only. The usual lengthy litany of authorities as well as more recent additions have been recited to us and, as is notorious, it is not easy to reconcile every judicial utterance in this well-travelled area of the law. A potent source of confusion, to my mind, has been suggestions that it matters not whether the terminology used is that of the constructive trust, to which the intention, actual or imputed, of the parties is crucial, or that of the resulting trust which operates as a presumed intention of the contributing party in the absence of rebutting evidence of actual intention. I therefore, like Waite LJ in Midland Bank v Cooke and Another [1995] 2 FLR 915, 916, welcome the announcement earlier this year that the Law Commission is to examine the property rights of home-sharers (Item 8, Sixth Programme of Law Reform: Law Com Paper No 234)."

You now have the New Zealand Judge-made background and the comparable English background against which we can turn to consider the specifies of the changes which came into effect in New Zealand on the 1 February 2002.

The reforms effected by the Property (Relationships) Act

The new legislation contains in Part I an outline of the Act, couched in what it is fashionable to call plain English. For example, Section 1C is headed "What this Act is about", and subsection (1) says that the new Act is mainly about how the property of married couples and couples who have lived in a de facto relationship is to be divided up when they separate, or one of them dies. This description incorporates the expression "de facto relationship" which is defined in Section 2D. The definition provides that a de facto relationship is a relationship between two persons (whether a man and a woman, or a man and man, or a woman and a woman) who (a) are both aged 18 years or older; and (b) live together as a couple; and (c) are not married to one another.

This of course introduces the notion of two people living together as a couple and the section, that is Section 2D, gives a list of the various circumstances which are to be taken into account in determining whether the two persons are living or have been living together as a couple. The list is derived substantially from the earlier case law of which the case of Ruka v DSW [1997] 1 NZLR 154 and my own earlier decision in Thompson v DSW [1994] 2 NZLR 369 were probably the best known examples. The relevant factors are:

(a) the duration of the relationship,

(b) the nature and extent of common residence,

(c) whether or not a sexual relationship exists,

(d) the degree of financial dependence or inter-dependence, and any arrangements for financial support, between the parties,

(e) the ownership, use and acquisition of property,

(f) the degree of mutual commitment to a shared life,

(g) the care and support of children,

(h) the performance of household duties, and

(i) the reputation and public aspects of the relationship.

This list is without prejudice to the Court's obligation to consider all the circumstances of the relationship. The legislation expressly provides that no finding in respect of any of the matters on the list or in respect of any combination of them is to be regarded as necessary and the Court is entitled to have regard to such matters and to attach such weight to any matter as may seem appropriate in the circumstances of the case. The section then goes on to make the obvious point that a de facto relationship ends after the de facto partners cease to live together as a couple or one of them dies.

Reverting now to Section 1C, which tells us in plain English what the Act is about, the next statement is that the Act applies differently depending on the length of the marriage or the de facto relationship. It says, as was the case previously, that special rules apply to marriages of less than three years and provides that in the case of de facto relationships the Act similarly applies only when the de facto partners have lived together for at least three years but also that it may apply to shorter de facto relationships in certain circumstances.

That takes us to Section 14A which introduces the notion of a de facto relationship of short duration which corresponds to the notion of a marriage of short duration. A de facto relationship of short duration is defined in Section 2E as one in which the de facto partners have lived together for a period of less than three years or, as has always applied to married couples, if the Court, having regard to all the circumstances of the de facto relationship, considers it just to treat the de facto relationship as one of short duration despite it being longer than three years in duration. That introduces qualitative as well as quantitative considerations.

There is, however, something of a trap for the unwary here. In the case of a de facto relationship of short duration, an order cannot be made between the couple under the Act for the division of relationship property unless either there is a child of the relationship or the applicant has made a substantial contribution to the de facto relationship and in either event the Court is satisfied that failure to make the order would result in serious injustice. Thus even though the de facto relationship may be one of short duration, the Court is empowered nevertheless to make an order under the Act if there is a child of the relationship and failure to make an order would result in serious injustice. Therefore it is wise to take the view that the Act applies (a) to de facto relationships of more than three years, and (b) to de facto relationships of less than that duration where there is a child. This of course is a little loose but what a lot of people may fail to appreciate is that where there is a child you don't have to live together for three years in order to become subject to the Act's regime. The position is the same if one partner has made a substitution contribution to the relationship.

I return again to Section 1C, which tells us what the Act is about. The third general proposition is that in most circumstances couples' property is to be divided equally between them. Thus married and de facto couples are broadly equated in general terms. The rules relating to married couples apply in similar fashion to de facto couples.

Section 1F, which is still within the plain English Part I, tells us which of the Act's provisions apply to division of relationship property while both partners are alive, and which provisions apply following the death of one of the partners. Reference is made to provisions which apply when one of the partners is declared bankrupt, and also to what happens if proceedings are commenced while partners are alive and one of them dies before the proceedings are completed. I do not propose to go into the details of these matters but it can be said that they too broadly apply the regime which earlier applied just to married couples to de facto couples as well.

Part 4 of the Act is described in Section 1G as setting out how the property of the partners is to be divided when they separate and cannot agree. It deals with matters like the basis on which the relationship property is to be divided, what happens if the partners have been living together for less than three years (a subject already touched on), whether the Court can do anything to address disparities between the income and living standards of the partners after the relationship ends, and how the different contributions of the partners are to be
assessed.

The new legislation introduces in Sections 15 and 15A provisions entitling the Court to make lump sum awards or orders requiring transfer of property to redress economic disparities. This is new both in respect of marriages and de facto relationships. If, on the division of the relationship property, the Court is satisfied that after the marriage or de facto relationship ends, the income and living standards of one partner (party B) are likely to be significantly higher than those of the other partner (party A) because of the effects of division of functions within the relationship when the parties were living together, lump sum or transfer orders can be made. The section provides that in determining whether or not to make such an order the Court may have regard to the likely earning capacity of each partner, the responsibilities of each partner for the ongoing daily care of any children, and any other relevant circumstances, and the Court is given a general discretion, if it considers it just for the purpose of compensating party A, to order party B to pay party A a sum of money out of party B's relationship property or to order party B to transfer to party A any other property out of party B's relationship property. This is quite a substantial development from the earlier law. What should be noted, however, is that the compensatory order is confined to party B's relationship property, ie. there is no power to order party B to pay compensation to party A out of party B's separate property.

There is also a rather more broadly expressed provision, in Section 15A, based on the same criteria as Section 15, ie. party B's income and, living standards being likely to be significantly higher than those of party A. The Court may order lump sum payments from B to A or the transfer of property from B to A out of both relationship property and separate property, if party B's separate property has increased in value and that increase was attributable wholly or in part, and whether directly or indirectly, to the actions of party B while the partners were living together.

Although the legislation speaks in this last respect of party B, I think it must have intended to refer to party A because if party B's separate property has increased in value as a result of actions of party B him or herself, there is no logic in having a power to compensate by ordering party B to pay party A a sum of money, or transfer to party A a specified property.

There are now express provisions dealing with compensation for contributions made after separation (Section 18B), and the earlier general provision, making misconduct largely irrelevant save when it has been serious and has affected the extent or value of the relationship property, has been carried forward (Section 18A). Equally the new Act carries forward the proposition that there is no presumption that a contribution of a monetary nature is of greater value than a contribution of a non-monetary nature (Section 18(2)).

Contracting out under the Act

De facto couples are allowed to contract out of the Act, save where their intention is to defeat creditors. The contracting out may relate to specific assets or other specific factors or it may be general. As with the earlier legislation affecting only married couples there are certain requirements before a contracting out agreement is valid. If the requirements, which are set out in Section 12F are not met, the agreement is void. The Court may set aside a contracting out agreement even though it complies with the necessary formalities if, having regard to all the circumstances of the case, the Court is satisfied that giving effect to the agreement would cause serious injustice (Section 21J). Equally the Court may give effect to the agreement even if it does not strictly comply with the necessary formalities if it is satisfied that the non-compliance has not materially prejudiced anyone.

We also now have the interesting provision that Section 21F, which lays down the requirements for a valid contracting out agreement, is not to limit or affect any enactment or rule of law or of equity that makes a contract void, voidable or unenforceable on any other ground. Hence if the agreement was obtained by undue influence or duress the fact that it complies with the statutory criteria does not immunise it from challenge.

The jurisdiction to administer the Act is vested primarily in the Family Court; albeit that Court may transfer proceedings to the High Court if certain criteria are met. Orders following the breakdown of a marriage must ordinarily be sought within 12 months after the final order of dissolution is made. When a de facto relationship breaks down, three years is the permitted time limit. In both cases the Court may extend time in its discretion.

Proceedings under the Act are not subject to the strict rules of evidence. There are restrictions on publication, and proceedings may be heard in private if either partner wishes. Appeals from the Family Court lie to the High Court, and thence by leave to the Court of Appeal and as far as the Privy Council, for as long as the Privy Council remains our final Appeal Court.

There are the conventional provisions to restrain dispositions and to set them aside if the interests of creditors are jeopardised, and there is an interesting provision in Section 44C allowing the Court to award compensation to one partner in respect of property disposed of by the other partner to a trust. In short, to get the compensation provided for in Section 44C, the applicant partner has to show that the disposition to the trust had the effect of defeating their claim. If the disposition was undertaken in order to defeat that claim, it can be challenged under the conventional rules. So now effect is caught as well as purpose.

There are corresponding provisions where property has been disposed of by one partner to what is described as a qualifying company. The Act also contains provisions (Sections 55A and 55B) dealing with the priority of claims as between a married and a de facto relationship, and as between two de facto relationships.

Part 8 deals with the division of property where one of the partners, either a married partner or a de facto partner, dies. I do not propose, during the course of this discussion, to go into that area save to say that the survivor is given the option either to take under the other partner's will or intestacy or to make a claim under the Act. Thus the awkward inter-relationship between dispositions in a will and what the survivor was entitled to under the old legislation is to a substantial extent alleviated.

Because this address is being delivered to an audience which is not at the moment living in New Zealand, I have left until last those aspects of the legislation which deal with the property to which the Act applies. The primary distinction here is between movable property and immovable property, essentially realty and personalty. Unless the parties otherwise agree in writing, the Act applies to immovable property only if it is situated in New Zealand. It does not apply to immovable property that is situated outside New Zealand. However, the Act applies to movable property situated both in New Zealand and elsewhere, if one of the partners is domiciled in New Zealand at the relevant time. That time is either the date of an application under the Act, the date of a relevant agreement, or the date of that partner's death. Even though the Court may otherwise have jurisdiction in respect of movable property situated outside New Zealand, the Court has a discretion to decline to make an order in respect of such property if the person against whom the order is sought is neither domiciled nor resident in New Zealand.

An example

So let us now consider the following hypothetical circumstances. Jack and Jill were a de facto couple. They are both lawyers. Jill is a New Zealander and is still domiciled in New Zealand although she was resident in London for three years. Jack is English and remains domiciled in England. They lived together in London for two years. They went to New Zealand and lived together there for another two years. A child was born to them in London six months before they moved to New Zealand. Their relationship broke down after two years in New Zealand and they are faced with dividing their property. There is no contracting out agreement of any kind. Jack still owns a flat in London which has been rented out to produce income. In New Zealand they own a house which is in Jill's name with a mortgage which Jack has been paying off while Jill looked after the young child. They also own a car and the usual domestic chattels and furniture. Jill still has $10,000 of a student loan to pay off. Both of them worked in London although Jill stopped work three months before the baby was born. Jack has worked throughout, both in London and in New Zealand. He has managed to save and put some money into New Zealand and Australian shares. Jill has a vested interest in the capital of a family trust, albeit one to which she is not entitled in possession for another two years when she turns 30. When they were both working they each contributed in an equal way to ordinary living expenses but from three months prior to the child's birth Jill has not earned income although she has had income distributions from the family trust which she contributed to general domestic expenses.

We must now advise them how they stand under the New Zealand legislation on the basis that Jack is now resident in New Zealand but not domiciled there because the couple were simply living in New Zealand to see whether they liked it. Because Jack has not acquired a domicile of choice in New Zealand, his English domicile of origin still applies.

The first question is obviously whether the relationship is one of short duration. They lived together for two years in New Zealand and for a further two years before that in London. The total period is what appears to count under the legislation. There is no suggestion in the Act that cohabiting overseas does not count. The Act expressly says that living together before it came into force does count (Section 4C(l)(a)). In any event there is a child and that factor must, as earlier noted, be borne in mind. The failure of the Act to apply could well amount to a serious injustice and that would be another indicator that the relationship should not be regarded as one of short duration. So we will proceed on the basis that the Act applies.

The next step is to identify the relationship property. Jack's London flat, being an immovable situated outside New Zealand, is not property to which the Act applies and is therefore not relationship property. The New Zealand house in Jill's name is relationship property. It is an immovable situated in New Zealand and it is the family home. The family chattels, including the car, are also relationship property, so too are Jack's New Zealand shares but what of Jack's Australian shares. As Jill is domiciled in New Zealand the Act applies to the Australian shares and so they too are relationship property, all the shares having been acquired by Jack after the relationship began (Section 8(l)(e)). What then about Jill's vested interest in the capital of the family trust. That is her separate property through the combined effect of Sections 9 and 10 dealing as they do respectively with separate property and property acquired by succession, survivorship or as a beneficiary under a trust or by gift. Jack cannot claim to have contributed during the relationship to any increase in value of Jill's vested interest. Jack therefore has no claim to it or any part of it, and Jill has no claim under the Act to Jack's London flat. She may of course have some claim separately under United Kingdom law, but I think it highly likely that any English Court would bear in mind in the overall position the effect which the New Zealand legislation will have had on the couple's property. So in short, the relationship property, which falls presumptively for equal division under the New Zealand Act, comprises the house in New Zealand, the family chattels and the New Zealand and Australian shares. They are all to be shared equally under Section 11. There could not in these circumstances be any claim for unequal division on the basis of extraordinary circumstances rendering equal sharing repugnant to justice (Section 13).

We must now consider Jill's student loan. The position of debts is dealt with in Part 5 and the key distinction is between a personal debt and a relationship debt. Personal debts are all debts which are not relationship debts, the definition of which we will examine in a moment. The partner who owes a personal debt must bear the responsibility for discharging it out of their own property. Relationship debts, however, are discharged actually or notionally out of the relationship property before the balance is divided. In the present circumstances Jill's student loan would I think be her personal debt. I say this because the definition of a relationship debt does not seem to be fulfilled. A relationship debt means a debt that has been incurred, or to the extent that it has been incurred,-

(a) by the spouses or de facto partners jointly; or

(b) in the course of a common enterprise carried on by the spouses or de facto partners, whether alone or together with another person; or

(c) for the purpose of acquiring, improving, or maintaining relationship property; or

(d) for the benefit of both spouses or de facto partners in the course of managing the affairs of the household; or

(e) for the purpose of bringing up any child of the marriage or, as the case requires, any child of the de facto relationship.

We must finally consider the question of economic disparity in view of the new powers to compensate in this area. The hypothetical facts do not seem to me to justify any order for Jack to pay Jill any lump sum on account of economic disparity, ie. because his income and living standards are likely to be significantly higher than hers. But if, for example, there was evidence that because of child care responsibilities or other factors, such as health, she was likely to earn significantly less than him in the future, and this could be attributed to the division of functions within the relationship while they lived together, there might be grounds for her to claim a compensating sum



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