IQ Legal TrainingAlphabiolabsHousing Law WeekBerkeley Lifford Hall Accountancy Services

Home > Articles

FDR privilege and the risk to litigation funding after LS v PS

James Roberts QC, MCIArb of One King's Bench Walk considers the judgment in LS v PS [2021] EWFC 108 and the possible consequences for litigation funding in family cases.

James Roberts QC, MCIArb of One King's Bench Walk

A recent judgment, LS v PS [2021] EWFC 108, handed down by Mrs Justice Roberts on 21 December 2021, dealt with various issues surrounding the privilege which attaches to a Financial Dispute Resolution ("FDR") hearing and more particularly a private FDR appointment and the privileged documentation that is generated for these appointments. Within the family proceedings a litigation lender ("Q") is seeking to recover a debt of £1 million, which was originally borrowed by the applicant wife under the terms of various loan agreements, to pay for family law litigation in which she was engaged with the husband.

By virtue of an award made by Mrs Justice Parker in July 2018, the applicant wife within the financial remedy proceedings was to receive a lump sum of £3 million. That capital award was based upon an assessment of her future needs in the light of a finding by the judge that the respondent husband's resources were c.£9 million.

This outcome was appealed by the respondent husband and the case was set for a retrial.

At a private FDR in February 2021, in which the applicant wife was initially represented but became unrepresented during the course of the day, the parties ultimately agreed to an order leaving the applicant wife with no assets of her own, merely a life interest in a property owned by the respondent husband's trust.  This consensual arrangement seems to have left her with no way to repay her significant debt to Q and facing inevitable bankruptcy. 

Very shortly after the private FDR, Q applied to be, and was, joined to the financial remedy proceedings as an intervenor.  Some three weeks after the joinder, the final order in the financial remedy proceedings was sealed.  Shortly afterwards it transpired that the respondent husband's solicitor had emailed the allocated s.9 judge directly, with a copy of the draft consent order together with the relevant documentation in support.  Nothing appears to have been sent to the court through formal channels. The Family Office at the Royal Courts of Justice was not notified that a draft order had been submitted informally for the judge's approval. No formal application was issued, and no fee paid. Q was not informed that this step had been taken and the s.9 judge was not informed that Q had already been joined as a party for the sole purpose of objecting to the making of a final order. The D81 which was sent to the judge's chambers wrongly stated that the applicant wife was earning £31,000 per month (as opposed to per annum) and made no mention of the trust assets from which housing provision for the applicant wife was to be made.

The sealing of the final order in this way meant that, rather than Q being heard first and the matter dealt with rather more quickly, Q needed to apply to set the order aside. That set aside process is contested by the respondent husband.

It is Q's case that the compromise of the financial remedy proceedings amounted to an act of bankruptcy and a statutory fraud within the meaning of s. 423 of the Insolvency Act 1986. In order to fully evidence its claim, and one imagines, though it is not clear from the report, provide a basis for actual recovery rather than merely set aside, Q was seeking to rely on privileged material from the private FDR (offers, position statements, asset schedules and even the Zoom recording of the meeting).  Mrs Justice Roberts felt bound by paragraph 6.2 of PD9A FPR 20101  and did not permit reliance on the privileged material, stating that the court would, in any case, have ample evidence to decide whether or not the order should be set aside, without the need for privileged material to be before the judge dealing with the set aside application. In discussing paragraph 6.2 of the practice direction Mrs Justice Roberts noted that Sir James Munby in V v W [2020] EWFC 84 had reached a similar conclusion (though no fraud had been alleged in that case) in relation to the privileged status of the FDR and the materials deployed within it.

Of interest in relation to the status of private FDRs, the judge saw no good reason for drawing any distinction, for the purposes of paragraph 6.2 of PD9A, between an FDR hearing which takes place before a judge and one which takes place away from the court before an agreed evaluator.

In the final paragraph of the judgment headed "Footnote", Mrs Justice Roberts specifically states that the rules may require revisiting by the Family Procedure Rule Committee for them to consider whether the issues raised by the "absolute bar" (as Sir James Munby described it in V v W) on disclosure of FDR material in this case justify the introduction into proceedings of otherwise privileged material.

The judgment acknowledges (as do several other authorities the judge cites) the fact that litigation lenders provide a "valuable function" in achieving the equality of arms that fairness and justice require.

This case throws up some major public policy concerns.  If the rules, as drafted, effectively sanction private FDRs as a forum in which not just negotiations are protected but also, as an unintended consequence, potential "skulduggery" such as collusion to fraudulently avoid paying a creditor, or misrepresentation, with no recourse, then it may be fair to say that those businesses who provide legal costs funding in family cases may well consider exiting the market. This could have a devastating impact upon access to justice in the family system. This is against a backdrop of a number of big players in the lending market, such as Quanta Capital, Ratesetter and Novitas, having already pulled out or ceased lending.  The role of litigation lenders in the family court, providing access to justice where it might otherwise be out of reach, is well understood. Provisions within a practice direction which serve to provide significant obstacles to proper recovery may very well be considered to be undermining of this important objective.  Paragraph 6.2 of PD9A FPR 2010 also puts litigation lenders in the family sphere in a very different position from that of their counterparts in the civil sphere.

If lenders in this field do not pull out of the market altogether, then one can envisage a scenario where, in order to mitigate risk, they may no longer be prepared, for example, to fund FDRs or private FDRs, instead offering funding only for final hearings. Such a situation would be extremely damaging to the FDR process at, and away from, court.  It may have a significant impact upon the number of cases coming to trial and the overall costs burden on both sides.  

As a wider point, perhaps we need to question what value the seemingly enhanced privilege of FDRs / private FDRs (Sir James Munby's "absolute bar") provided by paragraph 6.2 of PD9A actually has.  The exceptions to the without prejudice rule are clear in law, Unilever being the most widely known (and Rose v Rose being a well-known illustration in family case), where the public policy of admitting relevant evidence for the purpose of dealing with cases outweighs the public policy of maintaining the privileged status for the purposes of encouraging negotiations and settlements. 

Were it not for the "absolute bar" embodied in PD9A para 6.2 (and which Mrs Justice Roberts, in her judgment, suggests needs revisiting) the court may well have sanctioned the disclosure of the privileged material sought to be obtained. The issues surrounding the "absolute bar" also extend beyond the specifics of this case. What is brought into sharp focus is the issue of being able to rely upon anything disclosed at the private FDR / FDR. This "absolute bar" could function to make relying upon such a disclosure extremely high risk. For example, if it transpired that any fact relied upon by a party during an FDR were to be untrue, there is, on this construction of paragraph 6.2 of PD9A, no remedy for a party who has placed reliance upon the disclosed untrue fact, since anything said in the FDR context would be inadmissible for all purposes including for the purpose of establishing misrepresentation.

One hopes that Q will have the appetite to seek to appeal this decision; they may not. In any event, no doubt the Family Procedure Rule Committee will consider the issues raised in Mrs Justice Roberts' footnote at the earliest opportunity.  It can be seen that the present state of the law as exemplified in this case may have a very serious, and possibly terminal, impact upon the family litigation lending market as a whole. The area is one which is already considered to be more risk laden for lenders than the other areas in which litigation funders are active conventionally. An absolute bar on disclosure of material which would otherwise be allowed in other divisions will only increase the risk. This conflicts with recent judicial comment which has been supportive of lending within family proceedings.  The loss of such litigation funding, or its severe curtailment, has the capacity to undermine, in a significant cohort of cases, any talk of "equality of arms" for the more economically vulnerable party. 

25th February 2022 

1 "In order for the FDR to be effective, parties must approach the occasion openly and without reserve. Non-disclosure of the content of such meetings is vital and is an essential prerequisite for fruitful discussion directed to the settlement of the dispute between the parties. The FDR appointment is an important part of the settlement process. As a consequence of Re D (Minors) (Conciliation: Disclosure of Information) [1993] Fam 231, evidence of anything said or of any admission made in the course of an FDR appointment will not be admissible in evidence, except at the trial of a person for an offence committed at the appointment or in the very exceptional circumstances indicated in Re D."