By Jon Silverman Legal affairs analyst

Julia McFarlane's case raised need, compensation and contribution

Given that judges in England and Wales exercise considerable discretion in assessing the division of assets in contested divorces, the Law Lords ruling was badly needed.

Now, a legal template has been established to guide future settlements.

Three elements have to be considered:

• Need - which is the maintenance cost of running a home and supporting a family

• Contribution - which is what a party brings to a marriage to create joint wealth

• Compensation - which is the amount required for financial redress to a party who is disadvantaged as a result of the marriage break-up

One factor which is explicitly ruled out of any calculation in high earning marriages is what has been called "legitimate expectation".

This is the belief that entering the union should guarantee future wealth or economic wellbeing.

In his lead judgment, Lord Nicholls said "hope and expectations are not an appropriate basis on which to assess financial needs."

He also squashes the idea - which had provoked considerable interest and speculation in the case of the Millers - that the size of a settlement should be influenced by the conduct of either party.

The conduct of Melissa Miller's spouse should not have been a factor

The Appeal Court had taken Mr Miller's adultery into account in awarding his wife a £5m settlement.

Lord Nicholls says this approach is "erroneous" and remarks that "some highly experienced judges are beginning to depart from the criterion laid down by Parliament."

This admonition will be keenly felt by the lower judiciary and means that, only in circumstances where one party's behaviour is "obvious and gross" (in the words of a previous ruling ) should it be considered in dividing the spoils.

In overturning the Appeal Court's ruling in the case of the McFarlanes, the Law Lords set out clear principles for determining "periodical" payments when there are insufficient assets to fund a clean-break settlement.

The lower court limited the payment, of £250,000 a year, to a five-year period.

Lord Nicholls says that the Appeal judges seem "not to have had the distinction between needs and compensation in mind."

'Exciting'

In other words, Julia McFarlane was entitled to a lifetime award not merely for maintenance but also to compensate her for the financial disparity suffered in the marriage break-up.

Divorce lawyer Helen Marriott called it an "exciting and ground-breaking" judgment and predicted that it would lead to a rise in demand for pre-nuptial agreements - even though they are not legally binding.

It is certainly one of the most comprehensive judgments issued by the Law Lords - with opinions being given by four of their lordships.

One, Lady Hale, a former chair of the Law Commission, lays down a set of general principles. Another law lord, Lord Hope, specifically examines the position of Scottish law and suggests that the practice of awarding periodic allowances for a maximum of three years is in need of reform.