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Potanin v Potanina – an increase in preliminary litigation?

Posted on 31 January 2024

The Supreme Court has today handed down judgment in the case of Potanin v Potanina [2024] UKSC 3, with their decision providing welcome clarity on the threshold to be applied to granting permission where a party seeks a financial order after an overseas divorce. However, this decision may potentially lead to a significant increase in litigation at the initial stages of an application.

What was the issue?

Usually, in order to bring a financial claim on divorce in this jurisdiction, the divorce must take place in England and Wales. English law is renowned for being generous to the financially weaker party, leading many spouses with the ability to obtain a divorce in more than one country to engage in litigation about which country the divorce should take place in, before the divorce process even gets under way.

Part III of the Matrimonial and Family Proceedings Act 1984 (MFPA) provides a limited exception to the usual rule that the divorce must take place here, in that it permits a spouse, in certain circumstances, to make an application for a financial remedy to the English court even where the divorce has taken place abroad. In order to avail themselves of the court's powers under Part III, a spouse would need to show that they were habitually resident or domiciled here, or that the parties had a matrimonial home here (in the latter case, the claim would be limited to the value of that home). An application cannot be made without the permission of the court and permission will not be granted unless the court considers that there is a substantial ground to do so. The closer a connection the parties have to England and/or Wales, the more likely it usually is for the court is to find a "substantial ground".

The Family Procedure Rules 2010 provide that an application for permission will usually be made without the respondent being made aware of that application, in part to filter out wholly unmeritorious claims without putting the respondent to undue expense. The practice that had been in place since 2011 (following a previous Supreme Court decision[1]), was that once permission was granted, the respondent to the application could apply to set aside the permission, but to do so usually required them to show a compelling reason to do so (in practice that the court had been misled by the applicant, or a decisive authority overlooked) and it was often said that the respondent would need to show a "knockout blow" to the applicant's grant of permission for an order to be set aside. The practical result was that most respondents to applications under Part III would reserve their arguments as to whether permission should have been given to be heard at a final hearing, along with their overall submissions on the merits of the case.

The Potanin case

The case of Potanin v Potanina concerned a wife who sought permission to bring a Part III application following the parties' divorce in Russia. The marriage had been a long one and very substantial wealth had been generated during it (estimated as over US$20 billion). However, in the Russian proceedings, the husband's corporate and trust interests were not taken into account and the wife received what was descried as a "tiny fraction" of what she might have done had the divorce taken place here (where the court can consider any assets or interests of the parties, no matter what the structure is within which they are held).

The Judge who initially heard the wife's permission application (as usual, without notice to the respondent), gave her permission to bring a Part III application. The husband applied to set permission aside and the Judge did so following a two day hearing on the question. He considered that the wife had given a misleading impression of her connection with England and, further, that she had breached the high duty of candour required during hearings that occur on a without notice basis. Her application was therefore dismissed. The wife appealed to the Court of Appeal, who considered that the Judge had erred and reinstated the wife's permission to bring her Part III application. The Court of Appeal allowed her appeal, reiterating the well known position that, in order to set aside permission, the husband would firstly need to show some compelling reason to do so and that that compelling reason needed to be demonstrated by a "knock-out blow".

Decision of the Supreme Court

The Supreme Court, by a majority of 3 – 2, allowed Mr Potanin's appeal . It considered that "Rule one" for any judge is that, before an order requested by one party is made, the other party must be given an opportunity to object. Where a decision was made in the absence of one party, the other must be given an opportunity to argue that the order should be set aside or varied. It considered that the practice of requiring a "compelling reason" or "knockout blow" violated this fundamental principle. Instead, where permission had been granted without notice, the respondent has an unconditional right to apply for that permission to be set aside, and, on hearing that set-aside application, the court should consider permission afresh, with the burden being on the applicant to show why permission should be granted. Although the current practice arose from comments in a previous case, that case had been dealing with the principles to be applied when making an order under Part III and had not been fundamentally about the grant of permission.

The Court also considered the threshold for the grant of permission. It confirmed that when considering whether there was a "substantial" ground for bringing a claim, this equated to "solid". The threshold is higher than merely satisfying the court that the claim is not totally without merit or abusive. However, it did not need to be as high as "good arguable case". Rather, the test would be more akin to there being a "real prospect of success", similar to the test applied in reverse summary judgment applications in civil claims. In making this assessment, it will be necessary to take into account whether there is a real prospect that further material supporting the applicant’s case would later emerge, through disclosure or otherwise, if the case were to proceed to a substantive hearing. The Supreme Court considered that comments by previous courts that set-aside hearings could be listed for less than an hour were unrealistic, albeit the total of three days taken in the present case was too long.

What does it mean?

The Part III jurisdiction is unusual, in that, in certain circumstances, it permits a spouse to effectively re-litigate the division of assets on divorce. It operates as an important level of protection where e.g. a spouse who has spent the majority of their married life here, and who may have brought up the children here, finds themselves being awarded a significantly lower sum than they would otherwise have been entitled to, due to their ex manoeuvring to obtain the least generous available order in another jurisdiction. 

Where a party was seeking to bring an application under Part III, the granting of permission was generally seen to be a relatively low hurdle for an applicant to meet, designed to filter out unmeritorious cases, with the substance of the dispute to be resolved at final hearing.

It also potentially factored into some spouses' decisions whether or not to litigate the question as to where the divorce should take place, on the basis that, even if they agreed to the other jurisdiction for the divorce, provided they had substantial grounds, they might subsequently bring proceedings here if financial provision in the other country proved inadequate. Given that litigation as to where a divorce is to take place can often take 2 – 3 days of court time with all the attendant cost, for some, this may have been a pragmatic way to deal with matters.

While the Supreme Court's clarification of the threshold required to obtain leave is welcome, and will enable prospective applicants to more realistically assess their likelihood of success, the procedural route to permission (whereby the applicant will first potentially need to seek permission without notice and then fully argue the same application at a contested hearing) is likely to lead to a significant increase in litigation regarding whether permission should be granted. Given that it is usually the respondent who is the financially stronger party, there will be an incentive for some to try and use the additional costs of preliminary litigation to pressure the applicant into withdrawing their application or accepting a lesser outcome than they might have otherwise been entitled to. It may also lead to a greater number of spouses feeling compelled to litigate the question as to where the divorce should take place, potentially leading to increased satellite litigation before the divorce proceedings themselves are even properly considered.

The Supreme Court expressly declined to comment on the general approach by the courts to Part III applications, albeit they noted that it was something "ripe" for consideration. It therefore seems that, at least for the moment, the overall approach of the courts to the merits of a Part III application will remain as before.  

[1] Agbaje v Agbaje [2010] UKSC 13

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