Sarah Higgins, partner and head of the family team at law firm Charles Russell, examines wholesale divorce funding – the recent trend of investors putting up money to help fight divorce cases for a share of any resultant financial rewards.

Funding the costs of a settlement is something which divorcing spouses have to take seriously if they are to have equality of bargaining power. In the past, costs have been paid for by family or friends, by bank loans, or where the client qualifies, by legal aid. Now legal aid is likely to be cut back further, and many Central London family practices do not have a legal aid franchise. Furthermore, in the current climate banks are less willing to lend.

Clients can make an application against their spouses for legal fees to be paid on an interim basis out of income, but this may not be satisfactory, as the court is unlikely to order that all of the costs should be paid, and this is not effective where spouses don’t disclose their assets (non-disclosing spouses) or one is without a clear source of income. There are also further legal costs.

Some solicitors will operate on the basis of a so-called “Sears Tooth” charge. This means that the client formally assigns to the solicitor sufficient funds from the final settlement received from the other spouse to settle the legal fees. This is normally only done after the client has paid something towards the costs and has in effect run out of money.

Where one spouse has good reason to believe that the other is hiding significant wealth, the stakes are high. The non-discloser may be hoping that the other will have to give up if there are no funds available to fight on, putting the non-discloser in a good bargaining position if attempts are made to negotiate a low settlement.

Redressing the balance

So how does the poorer spouse redress the balance? There are specialist lenders who will provide money for costs. In this case, the lender will want to know what security can be offered. This can be difficult if there is nothing in the spouse’s name, or if there is property in joint names but the other spouse will not cooperate.  

Lenders may charge around 20 per cent interest, often with an arrangement fee. The attraction to a wealth institution is the opportunity to build up a good relationship with the borrower, with a view to becoming an ongoing client after the case is over and a lump sum has been received to invest. In this case, the lender has to rely on the solicitors’ advice as to what the settlement is likely to be, and would normally have a binding agreement with the solicitor that the costs would be paid back immediately when received from the paying spouse.

Other forms of financing legal action

Other forms of funding which have been in the news include hedge funds investing in divorce cases by putting up the funds to pay the legal fees in return for a percentage of the final settlement; this has to date been an unusual arrangement. Normally, although total costs can be high they should only be a fraction of the total assets in the case. Some cases are difficult and time-consuming (if there are issues with disclosure for instance, or valuation, or if the parties will not settle) and the costs may not  be in proportion to the amount of the assets, but may have to be incurred to enable the applicant spouse to obtain a fair settlement.  Solicitors charge on a time basis rather than as a percentage of the assets. It may not be apparent, at least until some of the costs have been incurred, what the total of the assets is.

If an investor agreed to fund the case for a percentage of the settlement, then (depending on the percentage, of course) the investor may make much more than the legal costs, which will be limited broadly to the time spent. From the client’s point of view, this may be acceptable if without the investment it would have been impossible to obtain a settlement at all. This would be an unusual scenario as most family cases are not “all or nothing”. This would however apply if one party was arguing that there were no assets, and the other was alleging that they were significant. One of the factors which the court has to take into account is needs, and so if an applicant had to give away a percentage of the settlement it may mean that needs are not met, depending on the figures. The risk to the investor is that the other spouse genuinely does not have any funds,  that the funds were not found, or that the order was unenforceable. The other risk is that the parties reconcile, in which case there will probably be no settlement. In a high-conflict case this is not perhaps very likely, but it does happen.