Litigation Finance in Family Law
In the United States (and many other countries), divorce lawyers may not receive a contingent fee. There are powerful reasons for this prohibition. Significant sums of money may be allocated between the spouses in a divorce judgment or settlement. If a party could pay for its legal fees by pledging a portion of his or her recovery, there would be a strong motivation to litigate as long as possible rather than reaching a quick settlement. And because divorce litigation can be so emotionally traumatic for all involved – especially for any children connected to the marriage – long litigation can exact terrible personal and social costs.
By the same token, the prohibition of contingency fees also comes with significant social costs. If one spouse seeks a divorce to escape abusive treatment, but if the other spouse controls most of the wealth in the family, it can be difficult or impossible for the victimized spouse to pay the hourly rates over the course of protracted litigation. In this situation, the prohibition on contingency fees can perpetuate the abusive relationship and serve the interests of the abuser.
Litigation funding offers one way around the prohibition on contingency fees. When a spouse has a chance for a substantial recovery, and when a litigation funder concludes that that chance is sufficiently strong, it can provide funding that pays the divorce attorney’s hourly rates and permits the spouse to pursue a just result. Unlike the attorney, the litigation funder does not play a direct role in making decisions about when to settle or continue litigating, so it cannot be a direct cause of extending litigation.
In Great Britain, which also prohibits contingency fees for divorce lawyers, litigation funding has become more prevalent in divorce cases. Some British funders make ordinary loans to litigants at interest rates as high as 18%. But even on those terms, their business is brisk.
In the United States, financing litigation through ordinary loans can be legally problematic. But non-recourse funding can be an effective means of providing financial assistance to divorcing spouses because, in a non-recourse arrangement, the litigant has a duty to repay the funder only if he or she obtains a recovery. Thus, in divorce cases, as in other kinds of litigation, non-recourse funding from third parties can be an instrument for finding justice.
Topics: litigation finance, legal reform, third-party funding, litigation costs, legal costs, economics of law practice, family law, divorce, attorneys fees
Works Cited:
Financing Divorce: Till Debt Do Us Part, The Economist (Mar. 12, 2016) available at http://www.economist.com/news/business-and-finance/21694473-firms-who-lend-people-seeking-end-marriage-are-attracting-interest-inside?fsrc=scn/tw/te/bl/ed/insidethegrowingbusinessofdivorcefinancing
