Nigel Sheperd, Family law specialist
Advisor to Ampla Finance
Litigation Funding – A Guide for Expats
Separation and divorce can prove one of the most difficult and stressful life experiences. Working out the best arrangements for your children and how to divide up the family wealth can be daunting when you’re also having to deal with the inevitable emotional consequences of the breakdown of your relationship.
Expert legal advice, representation and support can be critical to achieving a fair and lasting settlement of all the issues you face, particularly where there is an international element adding to the complexity, but if one of you has access to funds to pay legal fees and the other doesn’t then there isn’t a level playing field. That’s where litigation (or third party) funding comes in.
How litigation funding works – the basics
There are in practice three main models of litigation funding. All involve the lender advancing funds for the legal and associated fees on the basis that they will be repaid from the eventual settlement. All are likely to involve an arrangement fee.
The first model is where the loan is made in the expectation of “free” funds (eg cash/investments/private pension) being invested with the lender in a long term professional financial relationship. The benefits that come from having the borrower’s funds under management for years means that interest charged by the lender in this model will usually be quite low.
The second approach is where the lender takes a percentage of the recovered proceeds. This option tends to be used where the risk is high and the percentage will reflect this.
The third, and most common, is a straight loan at a fixed rate of interest, although that rate may vary from case to case with some lenders depending on complexity and risk.
Third party funding of this kind is not available for family proceedings in all jurisdictions but is now well established where the financial issues are being dealt with under the law of England & Wales. This is demonstrated by the fact that, although it is possible under the governing legislation in England & Wales for one party to apply to the court for an order for the other party to provide funds to ensure fair legal representation, a prerequisite for such an application is that the applying spouse must first have tried and failed to get funding elsewhere, including from third party lenders.
How litigation funding works – in practice
In the same way that there are different lending models, the way litigation funding works in practice will vary from provider to provider. However, there are certain common features that you can expect to see.
- The lawyers dealing with the case will have a formal contractual relationship with the lender governing the terms under which they can apply for funds. The key aspects of these agreements will be the provision of accurate information about the case at the outset and as it progresses, so that risk can be assessed and kept under review, and requiring settlement funds to be paid to the lawyers so they can repay the loan.
- There will be a formal separate contractual agreement between the lender and the borrower that complies with consumer protection and financial legislation and regulations.
- The borrower will almost always have to take independent legal advice. The borrower, not the lawyers, will ultimately be responsible for repaying the loan if the eventual settlement is insufficient so it is crucial that the legal and consumer credit aspects are understood fully.
- There will have to be a clear route to repayment. This means that there will be a detailed assessment of risk and loan to value requirements to ensure that there will be sufficient funds at the end of the case.
What can litigation funding be used for?
To ensure that the loan can be repaid there has to be a financial element to the case. Most lending is for financial issues on divorce, but, where there is this financial element, funding can be provided for advice to deal with children proceedings and even in some cases to meet essential maintenance needs.
There do not necessarily have to be formal proceedings. Some lenders will provide funding to cover legal fees for negotiations, mediation, collaborative practice and family arbitration.
Choice of litigation funder
There are a number of lenders in the market. Their rates, terms of business and probably most importantly levels of service vary. You and your lawyer will want to choose a provider who is fair, transparent, responsive and flexible.
Having streamlined processes for the initial application (for example a portal that enables the relevant information and documentation to be provided easily) and for the provision of the independent legal advice (having a panel to choose from) and for drawing down on the loan to meet the fees as they are incurred will enable decisions to be made quickly, minimise the work the lawyers have to do and as a result will keep costs down.
Litigation/third party funding has an increasingly important role to play in ensuring that those without their own resources to pay for legal costs can get the advice and representation they need to achieve a fair outcome in their divorce.