Litigation funding in divorce

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

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.  ...

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