Money, toil and trouble

Funding divorce proceedings is beset with hidden pitfalls not just for the party without personal finance but also for their solicitor, warn Philip Way and Edward Heaton

With a decline over the past few years in the availability of public funding, the financing of ancillary relief applications has become an increasingly important issue, both for clients and practitioners alike. Without funding, clients are faced with the prospect of conducting litigation without representation, while with no guarantee of being paid, solicitors are facing difficult decisions as to whether clients can be taken on and, if so, what steps they should take to protect their firms from overexposure.

While solicitors need to be able to advise clients of the various funding options available to them, into how much detail should they go? Where parties are unable to fund litigation but wish to have legal representation, the funding options available to them will broadly fall into one of four categories.

Public funding

Irrespective of whether practitioners provide publicly funded advice, they are under an obligation to consider the availability of public funding in respect of each of their clients.

In the decision in David Truex, solicitor (a firm) v Simone Kitchin [2007] EWCA Civ 618, the Court of Appeal disallowed the private costs of a solicitor beyond the initial interview on the basis that the solicitor in question had failed to advise the client of their eligibility to public funding.

In the judgment, reference was made to the 2002 Family Law Protocol in which it was made clear that solicitors have a 'professional duty to consider and advise clients on the availability of public funding, where clients might be entitled to such assistance' and that, 'accordingly, the solicitor should be aware of the levels of eligibility. . .'.

The decision emphasises the peril to the practitioner of failing to observe the protocol in this regard.

Third-party funding

Some parties find themselves in the relatively fortunate position of having a third party such as a parent or a friend who is prepared to support them financially during their case. There are a number of potential issues with such support, not only for the solicitor and the client but also for the third party.

With ever-tightening regulations relating to the management of funds received from or on behalf of clients, solicitors need to be alive to the dangers of receiving funds from unknown sources and take steps to identify where funds are coming from.

Further, there is the issue of the extent to which the third party could be held liable for the costs of the other party in the event of a costs order being made. While it seems that a third party who has simply provided funding with no other interest in the outcome of the case will not be held liable, the position is less clear where the third party is a close family member or a fellow shareholder. In such circumstances, the solicitor should consider whether it is appropriate for the third party to take independent legal advice so that they are aware of the risks that they run.

Commercial credit

The issue of credit needs to be treated with a great deal of care, and time needs to be taken to understand the applicable law and regulations. The past few years have seen exponential growth in the availability of credit, including litigation funding. It remains to be seen what the effect of the global downturn will be on the availability of such loans but, for the time being, some products remain available in the market.

The law has attempted to regulate the provision of financial services so that only authorised parties can provide them, but where does this leave the solicitor?

To what extent, for example, should a solicitor recommend a particular type of arrangement or institution to a client, and how far can a solicitor go to assist the client with the making of any applications for credit?

Furthermore, to what extent can a solicitor who is prepared to allow a client to postpone the payment of their fees or who is prepared to guarantee a commercial loan (through perhaps a facility set up by their firm with a bank) be said to have become a creditor?

The key relevant statutes with which the solicitor should be (or become) familiar are the Financial Services and Markets Act 2000 (FSMA) and the Consumer Credit Act 1974 (CCA).

The FSMA, in broad terms, details activities (regulated activities) that should only be undertaken by authorised parties. While the Act is not restricted in its applicability to solicitors, it clearly has direct relevance to the solicitor seeking to advise clients in relation to litigation funding.

'Regulated activities' for the purposes of the Act include:

(a) making arrangements for a person to buy or sell (or with a view to a person buying or selling) certain investments;

(b) making arrangements for a person to enter into (or with a view to a person entering into) certain types of mortgage contact;

(c) advising an investor or a borrower on the merits of buying such investments or entering into such mortgage contacts.

The CCA, again in broad terms, outlaws the provision of credit under a consumer credit agreement by parties who are not licensed. For the purposes of the Act, 'credit' includes not only the likes of a cash loan but may also include an agreement by which the payment of legal fees is deferred.

The CCA also regulates the 'brokerage' of credit, and solicitors need therefore to be careful about how far they go in introducing clients to '“ or indeed advertising the service of '“ people who provide commercial credit.

Again, while the Act is not restricted in its applicability solely to solicitors, it will be relevant in particular to a solicitor who is considering entering into an agreement with a client whereby the client is not required to settle their legal fees immediately or to a solicitor whose client seeks their advice and/or assistance in respect of securing a loan with a commercial lender for funds with which to cover legal expenses.

Neither the FSMA nor the CCA lend themselves to being summarised and a detailed analysis of the acts is outside the scope of this article.

Resolution has recently secured a detailed opinion of Mr Charles Marquand of Counsel as to exactly which activities are permitted for solicitors. Mr Marquand will be summarising his Opinion in a forthcoming edition of the Resolution Review.

A copy of the full Opinion is available on request from Resolution Central Office. The headline is that, subject to satisfying certain requirements and looking at each case carefully, the solicitor is able to assist the client in obtaining appropriate funding for his or her application for ancillary relief.

Funding provided by the other party

On a number of occasions in recent years, the court has addressed the possibility of, typically, the husband making interim provision for the wife, which will permit her to meet her costs as and when they fall due.

While the idea of an interim lump sum order being made against the husband without consent has been discredited (by the decision in Wicks v Wicks [1998] 1 FLR 40), it is now accepted that provision for the wife's legal fees to be covered can be made by way of an interim periodical payments order. This issue was considered in the case of A v A (Maintenance Pending Suit: provision for Legal Fees) [2001] 1 FLR 377. In his judgment, Holman J felt that the wife had 'an acute need for good legal representation . . . in circumstances in which her lawyers do not always have to be desperately economising relative to the husband'. In short, the issue was therefore one of a requirement for a level playing field to enable the wife to participate in the litigation effectively.

In Moses-Taiga v Taiga [2006] 1 FLR 1074, Thorpe LJ stated that a provision for interim periodical payments in relation to legal fees should only be made 'in cases that are demonstrated to be exceptional'. Wilson LJ considered the use of the term 'exceptional' in the subsequent case of Currey v Currey [2006] EQCA Civ 1338.

He asserted that the term obstructed 'the proper exercise of the jurisdiction to include a costs allowance' and stated that he did not think that it had ever been Thorpe LJ's intention that that should be the case.

While appearing to open the floodgates by suggesting that interim provision for legal fees should be available in cases other than exceptional ones, however, Wilson LJ went on to make it clear that the court had to exercise 'caution' as to both the 'amount' and 'duration' of the provision made, making it clear that a claimant should not expect such a provision to be made as of right. In the case in hand, the interim provision was limited in its duration up to the Financial Dispute Resolution hearing.

In his judgment, Wilson LJ also provided helpful guidance to the practitioner as to what a claimant would need to establish in order to secure an interim provision to cover legal fees. He said that 'the initial, overarching enquiry is into whether the applicant for a costs allowance can demonstrate that she cannot reasonably procure legal advice and representation by any other means'. He offered some further guidance:

(i) To the extent that a claimant has any assets, evidence should be provided to support the contention that they cannot reasonably be used directly or otherwise (for example as security for a loan) to cover legal fees;

(ii) Evidence should be provided to show there is no reasonable prospect of a charge being granted over capital that will ultimately be recovered as security for costs; and

(iii) The court should be satisfied that the likes of public funding required to provide the claimant with 'representation at a level of expertise apt to the proceedings' is not available.

A solicitor must therefore consider fully with his client all possible other ways of funding their litigation prior making an application for an interim provision. A judge will expect to see that all reasonable avenues have been explored before provision is likely to be made.

Many of these difficult considerations in relation to costs can be resolved pragmatically within the Collaborative Family Law process.

At an early stage in the process, a couple has the opportunity of discussing and agreeing how the costs of the process are to be funded as it progresses. In the current economic climate, this is a possibility, which many clients and practitioners alike will welcome.