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Litigation funding in divorce

06/12/2018 Tracey Rodford, managing associate, Grosvenor Law,

One of the biggest issues for parties facing divorce and seeking to instruct representation is funding legal fees. Quite often one party - more commonly the woman - will have no source of independent income and may not have assets in her name against which she can borrow. When divorcing a high-net-worth individual, who has limitless resources, the effects of the disparity may be compounded.

There is an expectation that the party with access to family or independent wealth will pay both parties’ legal fees, but this is not obligatory, and it is common to find that the paying party will not agree. These tactics are often deployed to try to force a poor settlement on the financially weaker party.

The weaker party is then left with no option but to seek funding to carry on with a contentious divorce, or to issue an application for a Legal Services Order to fund ongoing legal costs. Such a divorce may last for many months, or even years, and the legal bills can escalate. Before the court will consider an application for such an Order, the party must have made at least two applications for external funding. Only when this is refused can they proceed, with any chance of success, to a court application. Furthermore, the process of obtaining an Order from the court is by no means straightforward and can inevitably lead to further costs. 

High demand

This situation has led to increased numbers of lenders to enter the divorce funding market. According to a recent report in the FT about the launch of a new divorce litigation fund, “the demand for lending is amazing”. And it is not just financial institutions cashing in on the demand. A high-profile law firm specialising in the resolution of matrimonial finances has also seen an opportunity in the market, and recently launched a loan fund. Entitled ‘Access to Justice Fund’, it enables clients to draw down on a loan from the fund to cover the costs of legal fees during the divorce. Repayment is deferred until settlement is received. 

From a commercial perspective, there is a business case for arrangements allowing a financially weaker party to continue to instruct a firm through litigation funding, particularly where returns on interest are so favourable. However, at an interest rate of as much as 24 percent, this will only be a realistic option in cases where it is clear that the settlement will exceed the loan amount. At such high rates of interest, these funding arrangements may also not offer a good option for the borrowing party. Moreover, the arrangement fees and interest costs will merely serve to reduce the total asset pot, which will be a particular consideration outside the context of high-net-worth divorce.  

Conflict of interest or client’s best interest?

Conflicts may arise in circumstances where a firm has an exclusive relationship with a lender. For example, when a case is prolonged and there is an offer to settle, and a solicitor advises that the terms are bad, how can the client be certain they are being advised correctly, when interest continues to clock up in the background on a loan? This could lead to a lack of confidence that a firm is acting in the client’s best interest or in sustaining interest in an ongoing loan.

Indeed, the Solicitors Regulation Authority states that when solicitors advise a client about a loan option, they must ensure that they do not put themselves in the position of being a credit broker. Solicitors must make it clear that the funding is not being recommended by them and is only one of a number of funding options available. Most litigation funding companies insist that a party take independent legal advice before signing the loan agreement. 

Gift or loan?

Given the potential hazards of solicitor funding, a better option may be a loan from family and friends. Where available, this will probably offer a more flexible source of borrowing and lower rates of interest, if any. However, these advantages are also the reason why these are sometimes considered to be soft loans. The other party may try to argue that these debts do not have to be repaid, where it is unclear if the loan is a gift and does not genuinely require repayment. This would mean that the loan is not recoverable in the financial proceedings and may be a reason for a party to opt for a commercial loan or litigation funding, where its validity is less likely to be challenged.

Other options 

Insurance may also be an option for some. Although it is not usual for general insurance policies to cover matrimonial litigation, it is worth a party checking their policy to be sure. 

Further options may include deferred payment agreement with solicitors, borrowing against jointly or solely owned assets, personal loans, and/or use of credit cards. Legal Aid may be available in a small number of cases where there is specific evidence in relation to domestic violence. 

In summary, litigation funding may be a final option for many where all other possibilities have been exhausted. They are an increasingly attractive proposition for investors, offering valuable returns. Time will tell whether the solicitor/lender exclusive relationship is one which will stand the tests of conflicting interests and priorities in the business of family law.

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