Out-Law / Your Daily Need-To-Know

Third party funding in South Africa litigation

Out-Law Guide | 23 Mar 2021 | 5:13 pm | 4 min. read

Although South Africa is the most advanced market for third party funding of litigation (TPF) in Africa, it is still in its infancy when compared to global markets.

TPF is permitted under South African law due to case law precedent. However, it is not currently regulated by legislation. Contingency fees such as 'no win, no fee' arrangements are regulated by the 1997 Contingency Fee Act. These differ from 'pure' TPF arrangements or non-legal practitioner funding.

The 2004 Supreme Court of Appeal case of PriceWaterhouseCoopers Inc. v National Potato Co-operative Ltd significantly developed the law on TPF. Before this case, South Africa allowed TPF arrangements where:

  • the third party funders were not purchasing the subject matter of the dispute;
  • the third party funders were deriving some benefit from the subject matter of the litigation;
  • the TPF agreement was entered into in good faith to assist the litigant in exercising its rights; and
  • the TPF agreement was 'fair', with funding provided in exchange for a share of the proceeds.

In the 2004 decision, the Supreme Court of Appeal recognised that access to justice is often limited for financial reasons, with TPF arrangements providing an avenue to assist in this regard. Further, the court considered it to be a greater injustice if the right to access to justice – as held under the South African Constitution – was denied to litigants due to financial constraints.

In the PwC case, the court held that financial assistance for litigation in return for a share of the proceeds is not contrary to public policy. However, the court qualified this by saying that TPF arrangements must not amount to an abuse of process. Therefore, TPF must not enable frivolous or vexatious litigation and must not be used for ulterior purposes that prejudice the other party - for example, where the funder has no bona fide claim but intends to use the litigation to cause financial or other prejudice to the other party.

Flexibility of third party funding fee arrangements

South Africa recognises the principle of 'pacta sunt servanda': where a contract is clear and unambiguous, effect is given to its meaning and the parties are bound by the contract. The only exceptions to this principle are where the terms of the funding agreement are unclear or ambiguous; or where the arrangement would be contrary to public policy.

In the 2020 case of De Bruyn v Steinhoff International Holdings NV, the High Court considered some of the factors which would determine whether a TPF arrangement was fair and reasonable. These are:

  • the TPF arrangement should be necessary to provide access to justice;
  • the TPF arrangement should be fair and reasonable in doing so, including protecting the interests of the other party;
  • the access to justice provided by the funding must be meaningful;
  • the TPF arrangement must not overcompensate the funders for assuming the risks of the litigation;
  • the funding arrangements must not interfere with the duty of the lawyers to act in the best interests of their clients; and
  • the funded party must be able to give instructions and exercise control over the litigation in its best interests.

The court further considered the third party funders' termination rights under the TPF arrangement in detail. It held that the funders should be entitled to lawfully terminate the TPF arrangement where the dispute lacks reasonable prospects of success. However, the court further held that any decision to terminate should not be made without the independent advice of the funded party's lawyers. This would create sufficient safeguards that funding commitments could not be "capriciously withdrawn and that funding will remain available to maintain access to the courts".

Features of third party funding arrangements

Must a party disclose that it is funded?

It is not mandatory for a party to disclose that it is funded under a TPF arrangement. However, a court may compel the disclosure of the arrangements where questions arise over whether it is fair and reasonable, as happened in the De Bruyn case.

A court may also join a third party funder as a co-litigant in the proceedings. If this happens, the funder could be held liable for the costs of the litigation.

Are communications with a third party funder privileged?

In South Africa, litigation privilege covers communications between a litigant or their attorney and third parties, provided the communication was made for the purpose of pending or contemplated litigation. Accordingly, communications between the litigant and the third party funder would be privileged provided they concerned pending or contemplated litigation.

Will a third party funder be liable for another party's costs?

In 2013, the High Court held that a third party funder may be joined as a co-litigant in proceedings, in which case it could be held liable for the costs. The purpose of doing so was to counter any possible abuses that could arise from the Supreme Court of Appeal's earlier recognition of the validity of TPF agreements.

The Supreme Court of Appeal further dealt with this issue in 2014, in the case of Naidoo v EP Property Projects Pty Ltd, where it upheld the decision of the lower court granting a 'de bonis propriis' costs order against a third party funder who was neither joined nor a party to the proceedings. In reaching its decision, the court considered that:

  • the level of involvement of the third party funder in the proceedings was substantial, amounting to a complete takeover of the handling of the proceedings;
  • the third party funder stood to benefit from a favourable award; and
  • the conduct of the third party funder was found to be fraudulent and in bad faith.

The third party funder was not a 'pure' commercial funder, and therefore became a party even though not cited as such.

The court did not set out the criteria from which it could be determined when the level of involvement by the funder in proceedings, and the level of aiding a claim in bad faith, will result in the courts granting this kind of exceptional remedy.

In a further example, also in 2014, the court held the third party funder jointly and severally liable with the litigant for the costs of the other party. In this case, the court concluded that the funder had substantially controlled the proceedings on various grounds.

Co-written by Emma Selfe, Julian Loe and Angela Lawrence, third party funding experts at Pinsent Masons.