Litigation funding – an option to consider

By 7th Nov 2019 Commercial Law

Litigation funding takes place when a third-party investor steps in to cover the costs of a court case, on the basis that if you win, a part of the award goes to the funder.

In South Africa, the legal position regarding litigation funding was clarified in the 2004 judgment in PriceWaterHouse Coopers Inc and Others v National Potato Cooperative Ltd (NPC) and Another[1].

In this case, National Potato Cooperative Ltd, with the help of a litigation funder, sued their auditors for failing to comply with their contractual obligations. This alleged failure in turn saw the NPC providing credit to farmers who were not creditworthy. The NPC was forced to write off farmers’ debts as irrecoverable. The amounts written off formed the basis for the damages claim against the auditors.

Litigation funding not contrary to public policy

The Court held that an agreement in terms of which a person/entity provides a litigant with funds to prosecute an action in return for a share of the proceeds of the action is not contrary to public policy.

The Court did however caution that litigation pursuant to such an agreement may constitute an abuse of process, which in appropriate circumstances a court may prevent, notwithstanding a litigant’s right of access to the courts enshrined in Section 34 of the Constitution.

The Please Call Me Case

The well-know “Please Call Me” case also relied on litigation funding. The case, involving a former Vodacom employee who claimed that he invented the lucrative “Please Call Me” service, went all the way to the Constitutional Court. In 2016, the Constitutional Court found that the employee, Mr Makate was indeed the inventor of “Please Call Me” and ordered Vodacom to negotiate with him in good faith to determine fair compensation for his invention.

Mr Makate and his former litigation funders have subsequently become embroiled in a dispute. This case highlights not only the value of litigation funding but also the importance of having a sound agreement in place should you make use of a litigation funder.

Does your dispute qualify for litigation funding?

Generally, litigation funders become involved where the stakes are high. Some of the key considerations in taking on a dispute include:

  • Recoverability – whether the debtor can pay;
  • Merits – whether the claim is good in law;
  • Time – how long it will take;
  • Costs – how much it will cost.

Some argue that litigation funding will lead to increased litigation in an already litigious society and reduce the pay-outs claimants receive. On the other hand, litigation funding provides an avenue for litigants to pursue valid claims which they would not otherwise have been able to do for lacks of funds, and allows litigants to share some of the risks inherent in litigation with a third party.

Burford Capital[2], a leading global finance firm, sums up the challenge faced by litigants, and the solution it provides as follows – “Pursuing a high-stakes commercial claim is costlier and more uncertain than ever. As a result, clients may be challenged to pursue even the most meritorious claims—because they lack funds or have more urgent needs for their capital. The result is lost value for their businesses and for the law firms that serve them. Litigation finance from Burford solves this problem.

[1] 2004 (6) SA 66 (SCA)

[2] See: https://www.burfordcapital.com/customers/litigation-finance/