Costs and cash flow

Divorce is a stressful process for anyone but it can also be rife with practical difficulties for advisors as well as their clients where one party to a divorce needs assistance but is struggling to fund legal advice.  Whilst always keen to help, lawyers have to keep a close eye on their own business needs; with lock-up a particular concern in the present economic climate.  Cashflow rules in business; the same can be applied to divorce where there is often little liquidity and cash is tied up in the main assets, a house, business or pensions.

New rules, introduced on 1 April 2013, may prove helpful for both practitioners and their clients. Family courts can now use a new remedy called a legal services order.  This provides that one party should make provision for the other’s legal costs. The order could provide, for example, that the spouse with a higher income should pay a lump sum or instalments to their non working spouse to enable them to seek legal advice relating to a divorce. More than one order can be made within the same proceedings. It is a significant change, but how much difference it will make in reality remains to be seen.

The court has to consider various factors when making a legal services order including the financial circumstances and conduct of both parties. However, the court must not make this order unless satisfied that without it the applicant would not reasonably be able to obtain legal advice for the proceedings.  For example, the court must be satisfied that the applicant is not able to secure a loan or borrow against assets to pay for the services and the ability of the party seeking assistance to raise a loan will be crucial to the court when considering an application.  With poor credit ratings and the reluctance of institutions to lend, that may not be easy.

The need for a loan to fund divorce costs has led to the growth of specialist lenders who are offering to provide facilities to fund litigation.  These are ideally suited to parties who stand to receive a settlement at the conclusion of proceedings but who do not have the funds to meet legal costs during the case. However it is essential that the client scrutinises the terms of the agreement from such a lender as they may be onerous.   From the lender’s point of view, there are speculative elements – the assets may not be in the applicant’s name, the other party may not be cooperating, perhaps the assets are not even known – and they are left taking a punt on whether the applicant will recover sufficient at the end to repay.  A specialist lawyer will see the compliance risks and take care not to overstep their role between the two; are they being asked to give an undertaking about the outcome or to indemnify the lender if the loan is not repaid?  Do they risk giving financial advice to the client?

The court will expect parties to explore these third party options before applying for an order.  One of the considerations will be whether the terms of the loan offered seem reasonable or not.  A high rate of interest or onerous terms could justify a party seeking an order instead.

It is likely that the hurdles set up to obtain a legal services order will be high and its effectiveness remains to be seen.  In the meantime, lawyers need to be creative about all options for meeting their client’s needs with fixed and capped fees and different payment options.

Wolferstans can assist where parties need advice about funding the legal advice they need.  For further information contact Rebecca Giles on 01752 292304.

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