The limits of litigation funding

Many of you will be aware that the President of the Family Division of the High Court, Sir Andrew McFarlane, has spoken out about the repercussions of cuts to legal aid.

One of which is the difficulty that courts are encountering in finding experts to give evidence in family law cases. McFarlane was not exaggerating when he referred to this issue as an “acute problem”.

The evidence of such experts is of crucial value to judges when, for example, determining where and with whom a child should live, or whether a child has been subject to abuse.

As McFarlane put it: “The provision of high-quality professional expertise, where a court has held that such expertise is ‘necessary’ so that the issues relating to a child’s future can be determined ‘justly’ is plainly essential.”

In 2010, the new coalition government started making drastic cuts to public services in a bid to reduce the UK’s deficit. One of the deepest of those cuts was made to the Ministry of Justice, with its budget expected to fall in 2019/20 to 40% of what it was in 2010.

Legal aid, the system introduced in 1949 by the Legal Aid and Advice Act with the purpose of assisting society’s most vulnerable, has been crippled by the cuts.

Initially focused on divorce, the scope of the act rapidly grew until around 80% of the population was eligible for public funding in the 1970s and 80s. Post credit crunch, however, drastic changes were afoot and in April 2017 The Legal Aid, Sentencing and Punishment of Offenders (LASPO) Act removed legal aid from family litigation in all but a handful of cases.

The impact of LASPO

With hundreds of thousands of cases affected, in practical terms it means those unable to reach an agreement without the assistance of the court cannot access legal aid, even if they are unemployed or on a low income, unless they can demonstrate that they are the victim of domestic violence.

Unable to afford professional advice but with battles still to be fought, many are finding themselves with an unappealing choice to make – accept an outcome on unsatisfactory terms or to act in person.

Former high court judge Sir David Bodey said “I find it shaming that in this country, with its fine record of justice and fairness, that I should be presiding over such cases.”

In family law more than a third of cases involves litigants in person on both sides. This month, with its tabloid-friendly ‘Divorce Day’ headlines, is traditionally the busiest time of the year for family lawyers, and the pressure on family courts is intense.

It is critical that, against this backdrop, people are still able to access an appropriate method of paying their legal and, if appropriate, expert witness fees.

So what are the options for litigants who find themselves unable to fund their legal fees upfront?

1. It may be possible to obtain a loan from a parent or friend. This carries the potential disadvantage of appearing as a soft loan on the asset schedule and not being taken into account by a judge when assessing the fair division of assets.
2. Some solicitors will still offer a Sears Tooth agreement, although this is risky for the solicitor and also involves paying counsel’s fees and other disbursements upfront.
3. A bank loan or credit cards, which can often carry punitive rates of compounding interest and/or restrictive limits on borrowing.
4. An application for a Legal Services Order whereby one party is required to pay towards the other party’s legal costs. This can be an expensive process in itself, dragging out the litigation and usually not meeting costs in full. Historic and pre-existing costs are not necessarily covered by this type of arrangement.
5. Litigation funding, which comes in various different guises depending on the funder.

Specialist matrimonial litigation funding can be an extremely helpful tool both in terms of cashflow and strategy; however, it is not without its limits. Some non-specialist funders constrain their assistance to purely financial litigation and may not be interested in disputes relating to children or TOLATA claims.

Or in many cases there may be insufficient assets for funders to secure or take a view against and, in this case, litigation funding is highly unlikely to be an option, particularly if legal/expert costs are likely to become significant.

Funding options

Most funders have a minimum funding provision, for example £10,000, below which it may not be commercially viable to lend, given the specialist nature of the work involved.

Similarly, if the case involves matrimonial assets in a different jurisdiction or the party requiring borrowing lives abroad or has the potential to move abroad many funders will not lend due to ‘flight risk’. This, could of course, also apply to a borrowing party applying for leave to remove a child from the jurisdiction.

Where litigation funders can provide a suitable solution is in circumstances where there are sufficient assets to cover legal fees with a good level of headroom so that the lender can see a clear route to repayment and is satisfied that the borrower will be left with a decent sum after paying back their loan.

The role of litigation funders has become increasingly significant since the cuts to public funding were made. Traditionally the family litigation funding market was largely dominated by one provider, however, there has recently been an influx of new providers bringing new challenges for family solicitors when trying to decipher which funder is the most appropriate for their client.

The traditional charging structure, which usually consists of a relatively low set up fee and a 1.5% ongoing monthly interest rate, allows clients to take on a maximum facility and draw down from it as invoices become payable.

Interest is only charged on the amount they draw down and is rolled up to the end of the loan term, when they have received their settlement.

Because the client only pays for what they actually use and is not penalised for not drawing down on the full facility with large fixed costs, it is suitable for the notoriously unpredictable timeframes and costs associated with family litigation.

This has many advantages for both client and solicitor. Clients are able to access the advice they need in order to obtain the best outcome for themselves and their children and their case can progress more swiftly. Solicitors can move on with the strategy of the case without being hindered by legal services order proceedings or cash flow issues.

A level playing field is created where previously there may have been imbalance. Some providers are also able to loan money for living expenses. This enables litigants to avoid MPS proceedings and has a tactical advantage where a client wishes to demonstrate, for example, that he or she cannot live on a certain amount per month.

Of course, new providers come with different approaches, expertise, and charging structures. It is crucial that solicitors and their clients are aware of any potential pitfalls associated with this type of lending.

The key focus should therefore be on the ‘true cost’ to the borrower, which unfortunately is often more complex than just looking at the headline interest rate.

A good example of this is in circumstances where a case settles and repays within 12 months, or where the client does not draw down the full facility available, such as when a case settles at the FDR or via a consent order, a funder with a lower headline interest rate may not be the best value for a client.

A funder who charges 1% upfront and 1.5% per month on drawn money (18% per annum headline rate) is likely to be better value to the client in the scenario above compared to a funder who charges 2% upfront, 1% per month on what is drawn down (12% per annum headline rate) and a 1% redemption fee.

This is because the former structure has lower fixed costs and works on a ‘pay as you go’ basis. A further example is where funders do not deal directly with the client, meaning all correspondence during the term of the loan is carried out through the solicitor.

This itself builds in considerable potential costs to the client, not reflected of course in the headline rate of the loan. For complex cases, solicitors should consider approaching a funder with in house family law expertise who can grasp the complexities quickly and efficiently.

This means a quick turnaround can be achieved and the client does not incur unnecessary additional solicitor fees involved in a potentially protracted application process for a non-expert funder.

It is clear however, that while specialist family litigation finance has gone a long way to bridge the gap left by the government when they made their cuts to legal aid, unfortunately many circumstances remain where funders are unable to help, often leaving clients with no option but to act as litigants in person.

Katie Alexiou (pictured) and George Williamson are founders of Level, a litigation funder specialising in Family Law