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  1. Wealth
July 20, 2022updated 11 Aug 2022 6:46am

Could this be the end for litigation funding?

By Chris Hawes

A dramatic case threatens to ‘torpedo’ the litigation funding industry. Chris Hawes explains how it all began

In the final scene of The Merry Wives of Windsor, the bungling hero Sir John Falstaff finds himself unable to pay his debts. Demanding repayment, his creditors go after Falstaff ’s horses, only to later discover that they have gone missing from the stables.

Today, a modern (though still somewhat Shakespearian) version of this drama may be unfolding in the courts. Its conclusion is likely to have a significant impact on family law and the way big-money divorce battles are fought; if things go one way, ‘divorce support as we know it will be torpedoed’, warns James Stewart of Penningtons Manches Cooper.

The story began in 2018, when Real Housewives of Cheshire star Lauren Simon won a £3 million payout following her divorce from property tycoon Paul Simon (not to be confused with the musician of the same name). When Mr Simon appealed, a retrial was set. Ms Simon, the financially weaker party in the marriage, turned to Level, one of London’s leading litigation funders, to help pay her lawyers’ fees.

So far, so typical – litigation funding is a £2 billion industry in Britain and is widely seen as a positive force that helps to ensure that ‘equality of arms’ is possible in divorce hearings where one side might otherwise be able to afford stronger legal representation than the other.

Litigation funding works on the basis that if someone cannot afford the necessary legal representation, a third party provides a loan to cover the costs in the expectation that the debt – and a hefty chunk of interest – will be paid once the proceeds are recovered. At least, this is the theory.

The story of the Simon divorce took a twist in February 2021, when both parties met online for a financial dispute resolution (FDR). It appears that an agreement was made that would see Ms Simon forgo the £3 million she had previously been awarded and instead receive the right to reside in a property held by Mr Simon’s trust.

The details of how this agreement was reached are obscured by the absolute privilege afforded to private FDRs. However, in an article written for Family Law Week, James Roberts QC points out ‘that this consensual arrangement seems to have left [Ms Simon] with no way to repay her significant debt to [to Level] and facing inevitable bankruptcy’.

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Perhaps fearing that it would not recoup the money it had lent, Level applied to be joined to the financial remedy proceeding as an ‘intervenor’, and was successful.

On the face of it, this might have been enough to provide the litigation funder with an opportunity to prevent the agreement from being ‘sealed’ and coming into effect. But it appears that before the judge was aware Level had been joined to the case for the purpose of objecting, he received an email from Mr Simon’s solicitor with the relevant documents, and the couple’s reconfigured financial settlement was sealed.

According to Roberts’ article, the documents sent to the judge included major inaccuracies. Instead of stating correctly that Ms Simon was earning £31,000 per year, the documents claimed she was earning that a month. Roberts noted that no mention was made of the trust assets from which the housing provision was to be made.

Level has pushed for the sealing of the order concerning the reconfigured financial settlement to be set aside. If successful, the company might have another shot at recouping the money it lent. But this won’t necessarily yield fruit. Richard Todd, a barrister acting for Mr Simon, has pointed out that ‘the husband and wife cannot be compelled to litigate their financial remedy claim if they don’t want to’.

At the time of writing, the motion is being challenged by Mr Simon’s lawyers. Paradigm Law, the firm representing Mr Simon, has declined to comment as the matter is still going through the courts. Level and its lawyers also declined to comment on the situation.

Regardless of the outcome of the dispute, the very fact it has occurred casts doubt over the continuing viability of litigation funding in divorce hearings. Litigation funding may become ‘very hard to come by’, says James Stewart. If litigation funders believe recouping their money is likely to be more difficult in future, loans ‘are only going to be given to people who can provide some sort of collateral. Of course, that is not something financially weaker parties often have access to.’

In a ruling made last December, Justice Roberts determined that the privilege afforded to the parties directly involved in private FDRs trumps the right of third parties to access it. Unless the Family Procedure Rules are reviewed, the details of the agreement between Mr and Ms Simon will remain obscured.

Justice Roberts’ ruling is not without precedent. In 2020, now-retired judge Sir James Munby ruled against an applicant looking to get their hands on materials protected by FDR privilege. The judge determined that the privilege constituted an ‘absolute bar’. A further question may yet have to be answered before the future of litigation funding becomes clear. Should the ‘absolute bar’ hold in all situations? What if the privacy afforded to the participants in private FDRs were used to mask underhand tactics, illegal activity or other wrongdoing?

On one hand, FDR meetings are private for good reason. According to Stewart, dividing financial assets fairly is possible only if people feel able to discuss intimate details of their lives without fear of it leaking into the public domain. On the other hand, in order to lend someone money, creditors will want assurances that they have – and will retain – access to the facts that might affect the likelihood of a resolution.

Debate around the application of privilege to financial dispute resolutions has flared. ‘It can not have been the authors’ intention for the Family Procedure Rules to be used as some sort of cloak you can hide fraudulent activity behind,’ says Alex Hulbert, chief operating officer at Schneider Financial Solutions, a litigation funder. For example, he asks, what would happen if the cloak of private FDRs were used to defraud HMRC?

Justice Roberts acknowledged the competing concerns in a December ruling on another case, suggesting that ‘given the importance of litigation funding to the system’, the case ‘might provide a basis for revisiting when, and in what circumstances, that bar might be lifted where a case can be established for justifying the introduction into proceedings of material covered by the FDR privilege’.

But Alex Cooke, CEO of Schneider, thinks it would be difficult to prove an agreement made in an FDR hearing was fraudulent, or an ‘undervalue’ in legal speak. ‘It isn’t like a car where I can say, “It’s worth this amount and therefore I owe you this,”’ he explains. ‘It’s a divorce, so what is an undervalue?’

If the Family Procedure Rule Committee rules that the ‘absolute bar’ must indeed hold in all instances, it is likely to provide the litigation funding industry with pause for thought.

Several litigation funding firms have already left the market. At the end of last year, Novitas, one of the biggest lenders, announced that litigation funding was ‘no longer compatible with our long-term strategy and risk appetite, particularly given the recent credit performance of the business.’

If others follow suit, James Stewart believes the buck will pass back to the courts as more people push for ‘legal services funding orders’ and interim financial provision – creating a greater administrative burden that will have to be borne by judges and a courts system that is already under considerable strain.

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