08 Jun Litiation Funders and Litigation Lenders – Spot the difference
A great article from our own Alexander Hulbert clarifying the differences between “Litigation Funders” and “Litgation Lenders”. We encourage your comments or questions and would love to know more about your own experiences utilising litigation finance support for your clients. #litigationsupport #londonlawyers #litigationfinance Alexander Cooke #divorce #litigation #lawyer #familylaw
Litigation Lending and Litigation Funding in the Family Division
I’ve recently been hiring for some new solicitors to join the Schneider Financial Solutions team. During those interviews, it was clear that there is still misunderstanding amongst some family lawyers about the difference between litigation lenders (think Schneider Financial Solutions or, say, Novitas) and traditional litigation funders (for example, Therium or Burford Capital).
Arguably, until recently this is something that family lawyers have probably not had to think too much about. However, after the judicial blessing of Tatiana Akhmedova’s litigation funding arrangement with Burford Capital in June last year, it is worthy of bearing in mind.
A bit of background
In the past, matrimonial clients had three ways of paying their lawyers:
(a) Privately out of their own pockets;
(b) On a Deferred Fee Agreement (aka a Sears Tooth agreement) if their solicitor felt generous; or
(c) Legal Aid, if you qualified.
If you were a civil or commercial litigant, you may also be offered:
(d) A contingency based agreement, for example a Conditional Fee Agreement (“CFA”) or (more recently) a Damages Based Agreement (“DBA”). Both models involve the solicitor deferring some or all of their fees until the end of the matter, at which point they receive their regular fee plus an uplift, based either on their cost exposure or the quantum of their client’s damages.
Option (d) has, of course, never been available for matrimonial litigants: s.58A of the Courts and Legal Services Act 1990 specifically excludes CFAs from proceedings brought under MCA 1973, while s.58AA(4)(aa) copies across the same exclusion to DBAs. This is a long-standing public policy consideration rooted in the centuries-old rules against champerty and maintenance.
This meant that matrimonial clients without ready cashflow, even if they were balance-sheet wealthy, were left with few options for paying their legal fees.
Enter around eight years ago the litigation lending industry, businesses like the one I work for, which provide personal loans to matrimonial litigants at a set interest rate, repayable at the conclusion of the proceedings from their award. This sort of consumer credit regulated litigation lending is common and well known to most family lawyers by now.
These types of litigation loan are known in the industry as “full recourse”. This means that, like a credit card or standard loan from a bank, the loan is repayable come what may.
Litigation funders are a very different type of animal, of which the biggest and probably best-known is Burford Capital, listed on the AIM with some $2.7bn under management. As noted, Burford Capital are the funder behind Tatiana Akhmedova’s enforcement proceedings in trying to secure her £453m divorce award.
Litigation funders have a very different risk profile to litigation lenders. In simple terms, their funding agreements are usually “non-recourse”, which means that if you lose your case, you do not have to pay your funder anything. Indeed, these losses are built into the litigation funder’s business model. However, in the case of a “win”, the funder’s return is not a simple interest rate, but normally the greater of:
(a) A multiple of the costs deployed (usually 2-3x +) or
(b) A % of your award (usually around 30% +)
This is generally significantly more expensive than a lending model and represents the way in which litigation funders cover the costs of their losses and still turn a profit overall, factoring in the far greater level of risk they hold in not being paid at all.
Litigation Funding in the Family Division?
At this point, you might well be thinking: “that sort of speculative lending in return for an inflated return at the end sounds a lot like the returns under a CFA or DBA, but you just told me CFAs and DBAs aren’t allowed in the Family Division?”
That was precisely one of the points in issue raised by Temur Akhmedov (the parties’ son) and decided upon by Mrs Justice Knowles in the June 2020 Akhmedova judgment: Akhmedova v Akhmedov and others  EWHC 1526 (Fam). He sought to challenge Burford’s involvement in the case as falling foul of these rules.
The court, however, did not agree with him. Para 70 of Mrs Justice Knowles judgment is worth quoting:
“70 – It seems to me that I should be very cautious in accepting the analogy that, because conditional fee agreements are prohibited in family proceedings, public policy prohibits third-party funding in family proceedings. That analogy seems to me to be misplaced because the different treatment afforded by the courts to contracts with lawyers is obvious. There is a clear concern about a person’s lawyer having a financial interest in the outcome of proceedings which might improperly influence both the advice and the representation given. Those concerns do not arise in third-party funding arrangements where the lawyers conducting the proceedings have no financial interest in the outcome…”
In essence, the degree of separation between the litigation funder’s financial interest, and the interests of the solicitors running the case was deemed to be sufficient not to be a “champertous” relationship. We do, however, seem still to be a long way from direct solicitor CFAs and DBAs in the Family Division.
Does this all mean that we are going to see traditional litigation funders appearing more and more in the family division?
In my opinion, not to any great extent as things stand.
It is worth remembering that by the time Burford Capital became involved the main suit was over, the quantum of the award known, and the only issue being recovery which on a global scale was concerned as much or more with civil and commercial law than matrimonial.
To make the kinds of returns they are interested in, and with billions of pounds under management, the reality also is that the Family Division does not generally offer the size of exposure that is attractive for a traditional litigation funder.
While cases like Mrs Akhmedova’s come along now and again, and are likely to be of interest to some litigation funders, they are in my opinion not common enough for Burford, Therium, IMF Bentham et al, to become household names amongst family lawyers.
Nevertheless, the litigation funding industry as a whole is booming and innovating all the time, and it pays for family lawyers to keep an eye on the wider market to ensure they have all the tools available to advise their clients fully on financing options. I hope this note helps you in that endeavour.
Alex Hulbert – COO Schneider Financial Solutions
If you are interested in a career boost and joining my underwriting team of leading family law solicitors then please send your CV to my colleague email@example.com or visit our website for the full job description. www.schneiderfs.com/careers