Spotlight on Litigation Funding

Litigation funding has over the last few years played an increasingly important role in divorce cases and financial cases related to divorce. All family solicitors should encourage their clients to explore alternative forms of dispute resolution with a view to keeping them out of court and sparing them the expense of contested proceedings where legal fees can be high. The unfortunate reality is that not all cases can be kept out of the court arena and in those instances, unless the parties have sufficient income and/or assets and importantly access to it, they will be faced with the issue of settling an invoice from their legal representatives at the end of each month. This is where litigation funding can step in.

What exactly is Litigation Funding?

In simple terms, it is a loan from a company specialising in funding litigation to a party who cannot afford to pay their monthly legal fees but who will be able to settle a loan at the conclusion of their case. This could, for example, be a homemaker looking after children without an income of their own but who has a claim against substantial assets which have built up during the marriage and are in the sole name of the breadwinner.

If the homemaker cannot obtain an order that the breadwinner pays their legal fees or a personal loan (from a bank or family and friends) which would allow them to meet such fees then really the only avenue open to them is litigation funding, without which they would have no legal representation.

Within all areas of law, the phrase “equality of arms” is often repeated and it is centrally important in achieving a fair outcome in contested cases. In other words, if the breadwinner can afford to pay excellent lawyers and barristers and the homemaker cannot, who will get the most favourable outcome when complicated legal arguments are advanced before a judge? The answer is plainly obvious and is the reason why litigation funding is necessary for many people going through a divorce. But despite its need in the marketplace and the brilliant outcomes it has helped achieved for parties who had nowhere else to go, litigation funding has recently come into the spotlight with questions raised as to whether it is properly regulated.

What exactly is the problem?

There’s no conceptual problem with litigation funding in and of itself, but legal regulators are investigating complaints by some who felt they were pressured into contested proceedings and obtaining litigation loans with high interest rates. Some complainants say they even had to sell their homes to settle their loans at the conclusion of their case, whether that was at court at the end of financial proceedings or outside of court where a negotiated settlement was reached. This blog does not comment on specific complaints and in many cases selling the family home will be a necessary step anyway. It is also important to note that it is unclear whether the complaints being investigated have any foundations. Nevertheless, the fact there are complaints gives rise to the question what a person contemplating taking a litigation loan ought to be thinking of before they sign on the dotted line.

What should they be thinking of?

There are no hard and fast rules and each case is different but we think the following questions are some that ought to be contemplated:

1. Have alternative forms of dispute resolution which may result in settlement and cost less than court proceedings been fully explored?
2. Can legal fees be met by the other party? If so, can agreement be reached on the point? If not, has applying for a legal services order (which compels one party to pay the other’s legal fees) been properly considered? It should be noted that legal services orders will only be ordered by the court if litigation loans are unavailable to a party.
3. If borrowing is necessary, have all lower cost avenues outside of litigation loans been explored? Can a personal loan be arranged with the bank? If not, can a personal loan be arranged with family or friends with a properly drawn up loan agreement?
4. Have a range of litigation funders been suggested to you or is it just one? Like any loan, interest rates and terms vary from funder to funder and the only way of knowing whether you have got the best available deal is by exploring the market. Bear in mind that law firms are prohibited from providing financial advice and not responsible for finding the cheapest loans on the market and the onus is very much on the borrower.
5. Have you read the fine print about the loans under consideration and all the charges? Whilst the interest rate is probably the most important factor in determining how much a borrower will pay, focussing solely on the rate can be misleading. For example, if Lender A charges a flat rate of interest and Lender B charges a lower rate but with additional fees, which of the two lenders will work out cheapest in the long run?

Our view is litigation funding is only one avenue available to our clients. This is why we explore the full range of funding options available to our clients and work to find the best solution for them in their particular case. If you want to discuss any of the issues raised in this blog please contact us.