In Praise of Pre-Nups
Someone recently told me that “nothing last forever.” They didn’t say this in the context of relationships or marriages, but considering that divorce rates continue to increase, the jaded side of me can’t help but think he might have had a point with regards to this oldest of institutions. Thus I am really surprised that the British courts still do not recognize pre-nuptial agreements.
Start with the end in mind when it comes to marriage
By Tim Harford
Published: March 5 2007 02:00 | Last updated: March 5 2007 02:00
For most of us, the most important contract we will ever enter into is marriage. It is a shame that nobody really seems to know what the contract says, and for obvious reasons it is considered poor form to ask.
These issues will be richly illustrated this week when the latest big-money divorce case reaches the Court of Appeal. The multi-millionaire insurance underwriter John Charman is arguing that his ex-wife Beverley, to whom he was married for 30 years, should receive £20m rather than the £48m he has been ordered to pay her.
With children grown and provided-for, £20m is more than Mrs Charman needs but £48m is substantially less than half of the assets built up during the marriage. In this sometimes-yawning gulf between an equal division and what the poorer spouse needs lies the zone of uncertainty in which divorce lawyers are gambolling, while politicians avoid the subject.
The judges are trying to make sense of it all as they go along. That is a shame. Their decisions do not simply affect the unhappy couple in front of them, but the incentives of others. It is often said that if divorce is a blank cheque for the poorer spouse, the rich will fear marriage with the less wealthy altogether. But it is also true that if divorcees expect no extra money as a result of their partner’s entrepreneurial efforts they will offer lacklustre support. Mr Charman has complained that his wife hesitated to let him use their home as collateral for a big business loan. Perhaps she realised that she might not enjoy all the rewards if the gamble paid off.
Every divorce is different. Should the length of the marriage matter? Or the extent to which the wealth was accumulated before the marriage began? Or who filed for the divorce?
It is possible to make a reasonable argument for many different positions and Mr Charman claims that he has paid lawyers on both sides of the argument almost £5m to do just that. But while it is hard for ordinary mortals to suppress their schadenfreude when the super-rich go through messy divorces, this uncertainty is unnecessary and counter-productive for us all.
Marriage is a market. There is a supply, there is a demand. Markets work better when contracts work too. Economists know perfectly well that one of the many reasons why marriage has always been popular is that it is economically efficient. It is based on the division of labour, Adam Smith’s pin factory and all that. One man straightens the pin, another whitens it. The Chinese make the fridges, the Americans make the software that designs them. So, too, in a traditional marriage: one spouse brings home the bacon, the other cooks it. It is a joint effort, an efficient one – and one under serious threat if the contract is ambiguous.
Life is full of arguments about who should get what. Contracts are a wonderful way to help solve them. There are arguments for “he gets it all” and there are arguments for “she gets it all”, but I do not find any of them nearly so compelling as those for “both get whatever they agreed to when the marriage began”.
Unfortunately, the British courts do not recognise pre-nuptial agreements. Perhaps engaged couples are presumed incapable of making big decisions.
But that is a strange position. The ideal time to think about divorce is before the marriage. At that stage, each should enjoy a similarly powerful negotiating position. If the man feels he is in a stronger position, why is he settling for the woman in front of him? Paul McCartney presumably felt the equal of Heather Mills when they were married. If he felt superior, perhaps he should have married Madonna instead.
A good pre-nuptial agreement should be able to specify one of the many reasonable ways in which things will be resolved if the marriage does not work out. If she is a financial powerhouse and he is a toy boy, marriage need not be beyond them: the pre-nup can fix compensation arrangements, by the hour if necessary. It is not romantic but neither is a messy divorce.
I will admit that it might be tricky to draw up a sensible pre-nuptial agreement. The government could at least supply us with a choice of three: equal division, fair needs, or everyone for him or herself. I can see all three possibilities having some takers. There should be no default option. Couples should have to choose. If they are not willing to discuss these awkward questions before they commit to a “lifetime” together, what responsible government would recognise their marriage?
The author, an FT economics commentator, is author of The Undercover -Economist
Copyright The Financial Times Limited 2007