“What's mine is mine and what's yours is mine"

Introduction

Thompson v Thompson  [2014] CA 117 is a case about relationship property and specifically relates to a post-separation payment made to one spouse under a restraint of trade covenant in a business sale agreement.  The Court of Appeal had to determine whether that payment was to be treated as separate property or as relationship property.  The case considers the nature of the restraint of trade covenant and, in doing so, the question of to what extent the post-separation payment reflected business goodwill or whether it was compensation for personal skills and attributes.

Facts of the case

Following the dissolution of their marriage in 2005, Mr Thompson, (the appellant), and his wife, Mrs Thompson, (the first respondent), agreed on the division of their considerable assets.  These included the family home, a holiday home, various chattels, and the proceeds of the sale of the business, Nutru-Life Health & Fitness (NZ) Ltd (Nutra-Life) and its holding company, Health Foods International Limited (HFI). Both companies had been transferred to the M L Thompson Family Trust (the MLT Trust) some 10 years earlier.  The second respondents were the trustees of the MLT Trust.  The parties were unable to agree on their respective entitlements to a payment of $8 million, made to Mr Thompson under a restraint of trade covenant entered into in December 2006.  This payment was made over four years after the parties first separated in 2002.

Upon their separation in August 2002, Mr and Mrs Thompson had been married for nearly 31 years and had five children together (now all adults).  Mr Thompson had many years experience working in the health foods/dietary supplements industry. In December 2006, the trustees of the MLT Trust sold the business assets of HFI and two other entities to companies associated with Next Capital Health Ltd (Next). The purchase price was $72.3 million. The sale agreement was conditional upon, among other requirements, Mr Thompson entering into a restraint of trade covenant.  Upon entering into the covenant on 21 December 2006, Mr Thompson received a payment of $8 million. It is common ground that the sale of HFI Group was at a very good price, and a significant factor in achieving that price was Mr Thompson’s agreement to enter into the restraint of trade covenant.

The Family Court decision

Mrs Thompson’s claim to half of the $8 million payment was first determined in the Family Court.  The Family Court held that the payment was the separate property of Mr Thompson because the payment was received some four years after the parties had ceased living together as husband and wife.  Therefore the Court found that it was not just to treat any portion of the payment as relationship property.  Mrs Thompson appealed to the High Court.

The High Court decision

According to the High Court, the restraint of trade covenant and the payment raised two separate considerations.  Firstly, the Court considered whether the restraint of trade covenant was given to protect the value of the HFI business.  Therefore it was necessary to focus on the value of restraining Mr Thompson from certain activities for a specified period.  The second consideration was that the covenant restrained Mr Thompson from using his personal skills and attributes.  The Court held that, as the payment for business goodwill was incorporated in the total purchase price, the payment for the restraint of trade covenant had to have been for Mr Thompson’s personal goodwill. 

The High Court agreed that the payment was the separate property of Mr Thompson, however the Judge still decided to use her discretion under s9(4) of the Property Relationships Act 1979 to treat part of the restraint of trade payment to Mr Thompson as relationship property. The Court considered that there was a connection between the restraint of trade payment and efforts made during the marriage.  However the evidence before the Court was insufficient to allow the Court to apportion the payment between the amount pertaining to Mr Thompson’s business performance during the relationship and the amount of compensation for the loss of Mr Thompson’s future earnings. The Court held that if the parties failed to reach agreement on apportionment, additional evidence would be required at a further hearing.   Mr Thompson appealed to the Court of Appeal.  

The Court of Appeal decision

The two main issues for the Court of Appeal were as follows:

Is the $8 million payment relationship property or separate property?

The Court of Appeal considered that the sum of $8 million as consideration for the restraint of trade covenant reflected the loss of Mr Thompson’s future business opportunities along with the other burdensome commercial obligations he undertook as part of the agreement.   The Court of Appeal held that the payment of $8 million was Mr Thompson’s own separate property and accordingly there was no basis for concluding that part of the business goodwill could be said to be attributable to Mrs Thompson and be available as an item of relationship property.

Should any portion of that payment be treated as relationship property under Section 9(4) of the Act?

The Court of Appeal stated that the starting point for the ascertainment of property resulting from a marriage partnership is the date of separation.  Property acquired after that date is usually considered the separate property of the acquiring spouse.  The key factor in deciding whether such property should be shared is to determine whether there is a link between the relationship and the benefit or burden of changes in assets and liabilities after separation.  There are strong policy reasons behind the differentiation between changes in the relationship property and changes brought about by the actions of one of the parties after separation.  The Court of Appeal held that “we see no principled basis upon which it would be just to treat any part of the $8 million separate property as relationship property”.

Implications of decision

The Court of Appeal decision of Thompson v Thompson endorses the “clean break” policy behind the Property Relationships Act that separate property is not required to be shared with the non-owning spouse. If a spouse could claim against future efforts or attributions of the other spouse then each party would continue to have a stake in the conduct and fortunes of his or her ex-partner, despite the dissolution of the relationship.  It could also unnecessarily promote the malicious post-separation consumption of relationship property, while discouraging the “energetic party” from acquiring or improving assets and repaying debts after separation.  This is because the benefits of these efforts would then have to be unfairly shared with the other party.  The recognition of and the giving of effect to separate property is as much a policy of the Property Relationships Act as the general policy of equal division of relationship property. In other words, the Property Relationships Act recognises that, in some cases, what’s mine is mine and what’s yours is yours.

If you would like further information please contact Daniel Shore on 07 958 7429.