Those critics who consider London to be the divorce capital of the world have been given further impetus for their claims in recent weeks, as it was revealed in October that, for the first time, a woman is having her divorce funded by a private investment company.
Litigation Funding
Before the financial crisis, private banks were often willing to lend money to fund a divorce on the basis that they would be repaid the funds plus interest whether or not they were to reach a favourable settlement. However, as the value of assets plummeted, so did the appeal of this kind of arrangement, particularly involving stay-at-home wives who had no means to repay the loans other than from settlement monies. While litigation funding by specialist firms has become increasingly prevalent in recent years in commercial litigation, the case of Michelle and Scot Young has marked its first foray into the field of divorce.
Michelle Young and Harbour Litigation Funding
Michelle Young has sought assistance from Harbour Litigation Funding to pursue her case against her estranged husband, Scot Young, who was valued at £400m three years ago. He is now claiming to be £27m in debt, and has thus far failed to give any explanation for how such an enormous amount of money has been dissipated. It is the wife's case that he still has access to some, if not all, of this money, and Harbour is confident enough in her claims to have staked investment funds to back the case. The arrangement works on a no recourse basis: for those cases that meet its criteria, Harbour agrees to pay the legal costs of a case until its conclusion, provided that they are paid a fixed percentage of any settlement.
However, if litigation results in the recovery of no money, or not enough to cover all the costs, Harbour will be left bearing the loss. In order to minimise the risk of this, there are four criteria that the firm seeks to satisfy before accepting a case: creditworthy defendant; good legal merits; proportionate costs; and experienced legal team. Funding claims from a minimum of £3m to an uncapped maximum, the firm clearly has a lot at stake in each case, and therefore these criteria are apparently stringently adhered to. This arrangement therefore provides a virtual contingency fee arrangement in an area in which the lawyers are currently barred by statute from offering such a facility.
Litigation funding in divorce in the future
It is yet to be seen whether litigation funding in the field of divorce will reap the financial returns seen in other areas of commercial litigation. Susan Dunn, head of Harbour's litigation funding, has said the Harbour team has funded 66 commercial cases. She says Harbour views divorce cases as sharing the same elements as a commercial dispute, however, this is not a view shared by all in the litigation funding industry. Some industry commentators are concerned that, although all litigation has the potential to bring out an irrational streak, matrimonial disputes can involve such high emotional temperatures that even experienced legal teams cannot always prevent anger and frustration from clouding economic judgment.
Clearly the initiative will only appeal to those firms who have an appetite for a certain degree of risk, but it does beg the question of whether high street banks will be tempted to re-enter the market as they see how potentially lucrative it can be, with firms receiving up to 30% of settlements. In the past, banks have made litigation loans to temporarily impoverished divorcing parties less for the modest sums to be made from the commercial terms of the loan itself than for the opportunity to build a relationship with the borrower in the hope of winning investment business once a settlement has been reached, or an order imposed.
Whether banks will want to offer a contingency fee arrangement is open to question. Perhaps more interesting is the possibility that they may offer funding on the basis of a contractual agreement to invest a certain proportion of any lump sum settlement paid to the borrower on the conclusion of proceedings. If that is a route they take, how will lawyers seeking funding for matrimonial clients safeguard their independence: how can the circle of finding funding without inadvertently giving investment advice be squared?
John Nicholson is a partner and Abigail Nott is a trainee solicitor at Speechly Bircham
