Standard Contracts Would Improve Litigation Funding’s Reputation

Standardized agreements can play a pivotal role in improving transparency in litigation funding. To solve this challenge, the focus has historically been on standardizing the documentation itself. That’s natural, given how the syndicated loan market has grown thanks to the work of the Loan Syndications and Trading Association in the US and the Loan Market Association in Europe.

However, this isn’t the only approach. In the derivatives market, the International Swaps and Derivatives Association created a master agreement—a framework under which all derivative contracts globally could be transacted, followed a standard set of definitions and terms. This framework still retained flexibility to retain the bespoke nature of derivatives. In the spirit of creating frameworks, other practical standards were also agreed among market participants. Applying the same approach seems far more suitable for the litigation funding market.

Visualizing Standardization

To understand how this could work, the credit default swap market provides a useful reference point. Initially governed by the 1999 ISDA Credit Derivatives Definitions—updated in 2003 and 2014—standardized definitions and practices reaped enormous gains in market efficiency and transparency.

A CDS is a contract where one pays a quarterly premium for the term in return for the other paying the notional amount if the referenced corporate entity—e.g., Ford or GE—defaults during the same term. For example, pre-2003, a CDS didn’t define clearly whether a restructuring event constituted a default.

The ISDA’s 2003 update clarified restructuring into three categories that parties could select as appropriate, depending on the nature of the underlying risk. This removed any confusion around restructuring as an event of default, thereby making CDS contracts more credible and transparent.

An example of a practical standard agreed among market participants was the contract term where pre-2003, a CDS was traded to the anniversary of the trade date—i.e, a five-year CDS traded on Nov. 16, 2000, had a term date of Nov. 16, 2005.

However, the same CDS traded on Nov. 18, 2000, wasn’t a perfect match because of the two-day difference, causing significant market inefficiencies. CDS contracts were globally harmonized to trade only to the 4 IMM (standard FX futures and option market) dates of March 20, June 20, Sep. 20, and Dec. 20.

A CDS traded on Nov. 16 or 18, 2000, now had the same Dec. 20, 2005, maturity date, simplifying the market and bringing significant efficiencies immediately.

Parallels to Funding

Numerous areas of litigation funding and insurance documentation, not just in the US but globally, could be similarly standardized and subsequently evolved over time to enhance the market’s global credibility, legitimacy, and transparency. Just immediately, a few key basic concepts—among many others—come to mind that could be applied regardless of jurisdiction:

• Proceedings, commonly referred to as legal action, proceedings, litigation, or claims, the latter which often creates confusion with insurance policy wordings as claims refer to claims made under the policy.
• Funder profits, referred to as funder returns, success fees or funder commission, made even more confusing by the fact some funders calculate profits net of fees and taxes, while others don’t.
• Reduced prospects, in particular the process to determine if the merits of the case have deteriorated, as this often gives the funder rights to terminate the LFA and the insurer rights to cancel the policy.
• Termination events and default provisions, which should be made consistent across all LFAs and policy wordings, giving courts and tribunals the confidence to know when LFA contracts may be terminated.
• Successful outcome, especially around partial settlements and success on liability-only trials, in addition to whether the trigger is a successful trial or a successful recovery of monies.
• Drawdown processes, which could be harmonized so there is one industry process globally.
• Waterfalls/priorities agreements, for example a menu of five standard waterfalls that could be picked.

And as the market evolves, more concepts will become obvious candidates for standardization.

Standardization Benefits

Harmonizing key terms and definitions would produce immediate benefits such as execution efficiencies—economic theory suggests these become savings passed onto plaintiffs. This approach would add significant credibility and sustainability by creating a deeper, more robust, global market, as it did for the syndicated loan and derivatives markets. It would also encourage openness and transparency, which is a major tool in removing rogue funders.

Most interestingly, it would address the supposed influence some argue foreign governments exercise through litigation funding. Although foreign governments have a stake in swathes of corporate America, litigation, with its connection to matters that have already occurred, is backward-looking in nature.

The litigation funding market’s youth, size, and lack of structure probably creates the fear of interference. Standardization would bring a level of maturity that brings the market structurally closer to other financial markets. This framework would also provide the same constructive practical mechanisms that make the market no more vulnerable to foreign government influence than other financial markets.

An established trade body from the financial markets, such as ISDA, would be ideal. Alternatively, the International Legal Finance Association, along with the litigation and contingent risk insurance industry, could provide a great platform to drive such an initiative.

With the increasing range of professionals entering the litigation funding and insurance markets, this seems eminently more plausible and possible than even only three years ago.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Tets Ishikawa is managing director at LionFish Litigation Finance Limited.

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