Margaret Hatwood
Family Law Journal - April 2007
The Family Proceedings (Amendment) Rules 2006 (SI 2006/3520) introduce a new r 2.71 to the Family Proceedings Rules 1991 (SI 1991/1247).The starting point under the new rules, which apply to those cases where petitions were issued after 3 April 2006, is that ‘the court will not make an order requiring one party to pay the costs of the other party’ (r 2.71(4)(a)). As someone who has inwardly groaned when complex family cases are at last concluded only to be
followed, in some extreme cases, by months of litigation about costs, I initially regarded the rules as a well-timed birthday present from the Department for Constitutional Affairs (DCA). But (and, there is always a but), the rules go on to say that the court can make an order for costs at any stage ‘where it considers it appropriate to do so because of the conduct of the party in relation to the proceedings (whether before or during them)’ (r 2.71(4)(b)
This rule refers specifically to litigation conduct as opposed to marital conduct. It may include conduct before proceedings, for example, premature issuing without giving a reasonable chance to settle and attempts to defeat claims, or otherwise thwart the powers of the court.
It is possible therefore that, with this wide definition, there will be more costs orders than before in relation to litigation misconduct. At present clients and their solicitors are often dismayed when one party issues prematurely and without giving a chance for voluntary disclosure and negotiations to take place. It is difficult to convince an intelligent client that the opposition’s failure to comply with the pre-action protocol will probably not be punished by any costs or other sanctions, which has been the writer’s experience to date. If the change in rules leads to greater observation of the Law Society’s Family Law Protocol then that will be no bad thing.
However, many commentators believe that the overall effect of the new rules is that there will be far fewer orders for costs.
INTERIM LUMP SUMS
The inability of the courts to award interim lump sums is a major lacuna in the courts’ powers. Such a device would be useful to re-house a spouse in those cases where a matrimonial home is sold prior to the financial relief proceedings being concluded. However, an added bonus is that the ability to award interim lump sums would give the courts power to award lump sum orders for costs. It was hoped by some commentators that when the new costs rules
were introduced, the power to award an interim lump to pay costs would be introduced. The lack of this power means that, in the absence of a conduct based costs order, the party with the deeper purse (or, more likely, deeper wallet) is put in a much better position to litigate than the other party. The wealthier party can engage in a number of tactics knowing that each letter written and each interlocutory application puts their opponent under pressure and deprives their opponent of funds for the final hearing. In the past there were risks to such a course of action by well judged Calderbank offers. However, it is likely that under the new rules what would have in the past been privileged offers cannot be made openly for fear of prejudice at trial. It is probable that the economically weaker party will continue to be at a disadvantage. When similar costs rules were introduced some time ago in Australia the power to order interim lump sums was also given to the courts.
The DCA supports the implementation of such a power but regrettably has not done anything about it. Until 1970 wives could obtain orders against their husbands for security for costs. However the ‘agency of necessity’ was abolished by s 41 of the Matrimonial Proceedings and Property Act 1970. With the wide availability of legal aid many wives were not severely prejudiced until the eligibility for public funding was cut back when an important amendment to the public funding eligibility rules was made so that assets in dispute were not disregarded in assessing entitlement.
An earlier attempt to introduce the power to award interim lump sums (not limited specifically to lump sums for costs) by s 15(3) of and Sch 2 to the Family Law Act 1996 was never enacted. It would have added a s 22A to the Matrimonial Causes Act 1973 (MCA 1973). A much-needed judicial attempt to introduce interim lump sums in Barry v Barry [1992] 2 FLR 233 was overruled by the case of Wicks v Wicks [1998] 1 FLR 470. However, s 23(3)(a) of the Matrimonial Causes Act 1973 provides that an order can be made that a party to a marriage shall pay a lump sum to the other party for the purpose of enabling that party to meet any expenses or liabilities in maintaining themselves or a child of the family before making an application for an order under this section in his or her favour. It is clear that it is intended that this should be in addition to the court’s normal powers to award a lump sum (which of course is limited to one order although there can be more than one lump sum). However, in line with s 23(1) this order cannot be made before decree nisi.
It appears that the only case in which this little used power has been used is in the unreported decision of Askew Page v Page mentioned in November 2001] Fam Law 794, a decision by His Honour Judge Meston in the Bath County Court on 12 October 2001 where this subsection was used, not to fund legal costs, but to provide a lump sum of £900 for the children of the family. However, it has been suggested there seems to be no reason in principle why this provision could not be used to fund a lump sum for legal costs.
HOW TO FUND CASES FOR THE ECONOMICALLY DISADVANTAGED PARTY?
Maintenance Pending Suit
It is now well settled that the court will award maintenance pending suit which includes an element to allow a party to pay legal fees. In A v A (Maintenance pending suit: Provision for Legal Fees) [2001] 1 FLR 377 the wife had been in receipt of legal aid but, following the making of maintenance pending suit, her legal aid certificate was discharged and by the time the issue of a maintenance pending suit for legal costs came to court, her unpaid legal costs were £40,000. Holman J said that the wife was in ‘acute need of good legal representation for which the husband could afford to pay’. The award made was £3,750 per month towards general living expenses and an additional £4,000 per month on the wife’s undertaking that she would pay it to her solicitors.
A v A was an especially challenging case where there were issues about the validity of the marriage. The wife’s legal team was careful to formulate and pitch its application at a level which could be regarded as periodical payments, not as a lump sum or series of lump sums. The husband’s legal team argued that ‘Costs are costs and the proper way to deal with them is at the conclusion of the case when the outcome is known’. The judge was unimpressed by this argument, especially as the husband’s team were at the same time asking for the release of funds frozen by the court to enable their legal costs to be paid. From a practitioner’s point of view, Holman J is to be congratulated on his approach which is very in tune with the commercial realities of life. He said:
‘We live in times of high overheads and a close eye on cash flow. There is a real risk that if wives (for it is usually wives) cannot obtain some funding as they go along solicitors simply will not be willing to act for them at all.’
In Al-Khatib v Masry [2002] EWHC 108 (Fam), [2002] 1 FLR 1053 a similar order was made in a case where the wife was faced with expensive litigation to seek the return of her children. In Moses-Taiga v Taiga [2005] EWCA Civ 1013, [2006] 1 FLR 1074 the wife received £25,000 per month maintenance pending suit £15,000 of which was to fund the costs of litigation. The husband appealed saying that the court had no power to include legal costs under s 22 of the MCA 1973. The Court of Appeal disagreed. Where a spouse had no assets to secure borrowing or no other source of funding other than to approach the courts, it was proper for maintenance pending suit to provide for payment of legal costs. Thorpe LJ commented:
‘In the 1970s a petitioner who had no assets and whose only prospect of affluence lay in the outcome of her application for ancillary relief could easily find specialist solicitors who would pursue her claim on legal aid. That world has long since gone.’
Sadly, it was stressed that an order for periodical payments for legal costs should be used only in substantial asset cases.
In Charman v Charman [2006] EWHC 1879 (Fam), [2007] FLR (forthcoming) the Coleridge J in the Family Division gave Mr Charman the option of either paying his wife maintenance pending suit of £360,000 per annum or a capital sum of £5 million. Perhaps surprisingly Mr Charman opted for the latter. Coleridge J said: ‘In my judgment this optional approach is the best way of dealing with interim financial provision’. Although not expressed to be for legal costs, no doubt Mrs Charman’s legal team breathed a sigh of relief given the complexity of the proceedings with divorce proceedings having being commenced in England and subsequently in Bermuda and also the wife’s application for Letters of Request directed to the trustees of a valuable trust. Mr Charman has appealed against this decision. As this article goes to press a judgment by the Court of Appeal is imminent.
In TL v ML and Others (Ancillary Relief: Claim Against Assets of Extended Family) [2005] EWHC 2860 (Fam), [2006] 1 FLR 1263, Nicholas Mostyn QC, sitting as a deputy High Court judge, said for the court to exercise its power to order maintenance pending suit in part for legal costs:
(1) the applicant should have no assets;
(2) the applicant should be unable to give security for borrowing;
(3) a Sears Tooth deed is not possible.
It is submitted that point (3) is an unwelcome extension.
Lump Sum
Minwalla v Minwalla and DM Investments SA, Midfield Management SA and CI Law Trustees Ltd [2004] EWHC 2823 (Fam), [2005] 1 FLR 771 was an especially complex case where the judge described assessing the husband’s assets as a ‘Sisyphean labour’. The judge assessed the wife’s needs at £3.685 million, but awarded an additional £500,000 for future legal costs as the husband was threatening to ‘pattern bomb’ the wife with litigation, such was his animosity towards her. The additional lump sum awarded at the ancillary relief hearing was a separate and additional instalment payable only after the rest of the lump sum and costs orders had been paid.
Sears Tooth Deed
This is a deed of assignment of rights to financial provision which was established in the case of Sears Tooth (ST) v Payne Hicks
Beach (PHB) [1997] 2 FLR 116. In that case the wife was originally represented by PHB but she subsequently instructed ST, leaving fees unpaid to PHB. In order to be able to continue her litigation, the wife at ST’s invitation entered into a deed of assignment whereby she agreed to assign to PHB that part of her rights and interest in the ancillary relief proceedings as would settle their outstanding fees. In October 1995 ancillary relief orders were made against the
husband. In November 1995 PHB obtained judgment against the wife for their outstanding costs and some months later a garnishee order was granted. It was held that such an agreement was not champertous (champerty is the notion of sharing in the fruits of litigation). It was held that such a deed could be valid subject to the client entering into the deed being advised to seek independent legal advice before entering into it and that the court be notified of its existence. On the particular facts of this case the deed was ineffective. It is submitted that Sears Tooth seeds are of limited assistance because they will not pay disbursements such as counsel’s fees.
Schedule 1 Children Act 1989 Claims
In W v J (Child Variation of Financial Provision) [2003] EWHC 2657 (Fam), [2004] 2 FLR 300 Bennett J decided that the court had no jurisdiction under s 15 of and Sch 1 to the Children Act 1989 to order one parent to make a payment to the other parent to cover the latter’s legal fees in relation to litigation under the Act. However, in a recent case, Re S (Child: Financial Provision) [2004] EWCA Civ 1685, [2005] 2 FLR 94, Thorpe LJ indicated that although the decision in W v J was correct (as the application was unmeritorious), the court left open the issue of legal funding in an appropriate case. The court may, in short, be prepared to go down the A v A route. Orders made under this Act are made for the benefit of the child. It is hard to see how an order for costs in these cases could be anything but for the benefit of the child.
It should be noted that under Sch 1 lump sums can be made at any time. Thus it appears arguable that the court has power to make interim lump sum awards in respect of legal costs. Incidentally, the new Costs Rules do not apply to Sch 1 Children Act claims or proceedings under the Trusts of Land and Appointment of Trustees Act 1996.
Banks
For this section I am greatly indebted to our trainee Udo Onwere who kindly contacted the leading banks to obtain details of their lending criteria for legal costs for divorce cases. Each of the leading banks has differing criteria before making a decision on whether or not to lend money to a customer specifically for legal fees. All of them require, first, that the proposed debtor is a customer of the bank before a loan application is considered. All loans would be subject to the ability of the debtor to repay the loan. Also there are other criteria such as holding a mortgage for over 9 months, employed/self-employed, etc. The loans available would either be personal (unsecured) or secured:
National Westminster Bank plc
Personal loan: could borrow up to £25,000 limit. The account must be running for 3–6 months. Current interest rates are at 6.89%. Counsel’s opinion not required.
Secured loan: only possible if the debtor is a home-owner with positive equity and the debtor would need to transfer his mortgage over to Natwest (which may mean early repayment charges). Can borrow up to £100,000.
Lloyds TSB plc
Personal loan: would borrow up to £25,000 limit. Need evidence of 6 month salary slips. Individual circumstances would determine interest rates to be paid but currently the typical rate is at 7.9%. Counsel’s opinion is not a requirement.
Secured loan: need to be a home owner in positive equity and transfer mortgage to Lloyds.
Halifax Bank of Scotland
Personal loan: do not provide personal loan for legal fees.
Secured loan: lend up to 95% equity of the property (eg if a property is currently valued at £150,000, once the mortgage of £50,000 is discharged, Halifax would lend £95,000). The current rates are at 5.8%, Counsel’s opinion not a requirement.
HSBC Bank plc
Personal loan: up to £25,000. Need evidence of 3–6 months’ wage slips. Counsel’s opinion is a requirement, in the form of an explanatory letter.
Secured loan: need to be a home owner in positive equity and transfer mortgage to HSBC.
Barclays Bank plc
Personal loan: do not provide personal loans for legal fees.
Secured loan: lend between £15,000 and £100,000. Typical rate is 7.7% APR but actual rate is dependent on individual circumstances. Counsel’s opinion not a requirement.
Coutts (part of the Royal Bank of Scotland)
This bank is, of course, specifically for high net worth individuals and there is a prerequisite that each customer must have over £500,000 of liquid assets before an account is opened. Interest rates will depend on each individual portfolio. Both personal and secured loans are available for legal fees.
Most of the leading banks have a facility for lending money specifically for the purpose of paying off legal costs. However, most insist on evidence of income from the borrowing party which is going to be impossible for those wives who do not work. Whatever borrowing is undertaken, it would be good practice for solicitors to remind the borrowers of the perils of early repayments costs, fluctuating interest rates and consequences of failing to make the repayments. A recent survey of Resolution members established that 56.9% of respondents expressed a likely interest in making use of litigation loans for clients if they were available via Resolution (Survey of Members 2006 Full Report).
Margaret Hatwood is an Associate in Anthony Gold's family law team. She specialises in medium to high value financial cases involving both married and unmarried couples.
This article was published by Family Law (a publishing imprint of Jordan Publishing Ltd) in the April 2007 issue of the journal Family Law, at [2007] Fam Law 347.
