Last month, international law firm Brown Rudnick announced the launch of an initiative to create standardised documentation for the litigation funding market. Teaming up with numerous funders, insurers, brokers and other associated professionals, it made reference to the standardisation of documentation in the syndicated loan market, driven by the Loan Market Association (LMA), as an example of how this initiative could evolve.
However, also notable (although not surprising) was the list of absentees. Some market participants do not believe that standardisation of documentation is significantly important or achievable. One funder purportedly believes its documentation is superior to the rest of the market and wants no involvement. Whatever the reasons are though, it highlights the existence of the debate over whether the market should have standardised documentation and if so, whether the LMA approach is in fact the right one.
Why the comparison to the syndicated loan market?
The origins of the syndicated loan market go back to the 1960s, when banks started jointly making loans to borrowers. For medium and large sized markets, the syndicated loan market quickly became an important and significant source of finance from commercial lending banks. Not only was it less onerous than the public bond markets for borrowers to access, but by effectively creating a cost-effective mechanism for banks to diversify their loan portfolios, banks could lend more and borrowers could secure more finance more efficiently than by way of a series of clunky bilateral loan agreements.
By the mid-1990s, over $1 trillion per annum was being originated annually, but with each syndicated loan agreement being negotiated individually, the logic for creating standardised documentation grew, culminating in the LMA, with the British Bankers’ Association, publishing standardised documents in 1999.
At the time though, there was much resistance. Some didn’t see the need. Others thought few would conform. And many thought it would diminish their “edge”. But in practice, those who thought they were compromising their “edge” didn’t have one in the first place. Market leaders and those across the spectrum quickly saw the benefits of efficiency, cost savings, quicker turnaround and documentational robustness as ways to enhance their “edge”, not to diminish it. LMA documentation became market standard, it formed the backbone for the secondary trading market, and the rest, as they say, is history.
While the litigation funding market will never reach the sizes of the cross-sector syndicated loan market, it is clearly analogous. As a breed, litigators are poor at drafting contracts and with litigators accounting for the majority of the litigation funding industry workforce, litigation funding agreements have, by extension, vast scope for improvement. Each deal is also onerous to close, with documentation being so bespoke that there is very little scope to benefit from any of the operational efficiency gained from standardisation. In fact, most commercial lawyers experienced in LMA documentation don’t tend to react well to an average litigation funding agreement. Hence the comparisons to the LMA market and the opportunity for an experienced LMA lawyer to take the lead.
Progressive
In the same way that funders argue each situation is unique, so too is each market unique. And some in the industry fear that standardising documentation for litigation funding would in fact be restrictive and regressive, rather than progressive.
Unfortunately, such arguments lose weight very quickly. The legal industry is changing. This year’s unfortunate COVID-19 lockdown has highlighted that not only can the legal industry evolve, but it can quickly adapt if required. In fact, this year has highlighted that the historic lack of innovation in the legal industry was never really a function of ability or investment, but simply a deep-rooted resistance to change.
The litigation funding industry is going through the same process. Having become an established industry thanks to the great work of the early pioneers that were Burford, Harbour, Calunius and the like, the market now has to look forward and evolve further. Some in the industry stress the need to address and defend against those vested interests trying to undermine the litigation funding industry and instead protect the status quo of today. They point to Muddy Waters’ attack on Burford last year. Or the start of what seemed like regulation in Australia this year. And it has not gone unnoticed that some lawyers openly attack the litigation funding market.
But really, this misses the point. Muddy Waters’ attack on Burford was not an attack on the industry but a financial play typical of an activist hedge fund focused on the only industry player worth attacking at that time. The regulation in Australia was limited to capturing group litigation in the broad bracket of managed investment schemes, a consumer-focused regulatory framework. As for attacks on the litigation funding industry, many of the critics would not turn a blind eye to chargeable work made possible only because of litigation funding.
Standardisation is not an operational gimmick. It is about evolution and entrenchment in the landscape of global business. It raises standards, brings efficiencies (which improves margins and therefore profitability), cements operational robustness and places it firmly away from comparisons with cowboy industries (like the CMC world that some funders seem to constantly compare litigation funding too), instead elevating it closer to a level more often associated with large, professional and critically important markets like financial services, insurance and accountancy. Most importantly, it enhances all the efforts being made by the industry to establish the market’s credibility.
Standardisation will also grow the market. It might lead to lower margins, but it would be more than compensated for by the market growth standardisation could bring. And the possibility of a secondary market (a concept perhaps alien to most litigators and perhaps the most asked question by financial professionals looking into the litigation funding industry) could become a reality. Why is this significant? Because secondary market liquidity drives growth, entrenchment and establishment of any industry. Once upon a time, the syndicated loan market thought secondary trading was impossible. Now look at where it is.
Is the LMA approach the right one to take?
While the LMA approach may seem the obvious one to take, it is also worth considering the existence of other frameworks. The LMA approach is fundamentally a boiler-plate template for syndicated loan transactions, but this has its limitations. In particular, it only works for those corporates that fit into the boiler-plate templates that already exist.
For litigation funding where each deal may be far more bespoke and unique, a framework offering key concepts, definitions and principles may be better suited. I have previously written about the possibility of considering a framework more akin to the International Swaps and Derivatives Association (ISDA®). It’s similar to the LMA, but in the world of derivatives trading, which also started as a series of bilateral over-the-counter derivative contracts where each contract was separately negotiated, the ISDA Master Agreement (first launched in 1992 and therefore of even longer standing than LMA documentation) provides a standardised contract supported by various frameworks of definitions that have been published and regularly updated throughout the years. In doing so, it provides more flexibility than the boiler-plate LMA templates by allowing for building documentation using key concepts and terminologies around a much broader set of financial structures, much like Lego pieces can be used to build anything.
This, though, is not a question of one or the other. It is about creating what is right for the industry and, given its relative youth, it would be remiss of the industry not to take advantage of what already exists out there.
The ultimate goal
Perhaps the biggest challenge to any such evolution is the need for market participants to recognise a world beyond the legal industry. In a litigator-heavy industry that is short on both financial skillsets and experience, there is both reluctance and fear of looking at other more established industries to see how we can support the ongoing growth and establishment of the litigation funding industry. An increasing number of funders are embracing this concept but not all because some remain afraid of losing its “edge” for the betterment of the overall market. However, if history has shown one thing, a good operator with a real “edge” will not suffer, but thrive, in a bigger, more robust marketplace.
