In the PwC case, the court ruled that providing financial support to litigation in return for a portion of the proceeds was not against public policy. The court justified this, however, with the fact that TPF agreements must not constitute an abuse of proceedings. Therefore, TPF must not facilitate frivolous or annoying litigation and must not be used for ulterior motives that prejudice the other party – for example, when the funder has no serious claim but intends to use the litigation to inflict financial or other harm on the other party .
Flexibility in third party fee arrangements
South Africa recognizes the principle of “pacta sunt servanda”: when a contract is clear and unambiguous, its meaning takes effect and the parties are bound by the contract. The only exceptions to this principle are that the terms of the funding agreement are unclear or ambiguous. or if the agreement would violate public order.
In the 2020 De Bruyn v Steinhoff International Holdings NV case, the High Court considered some of the factors that would determine whether a TPF agreement is fair and reasonable. These are:
- The TPF regulation should be necessary to enable access to justice.
- The TPF agreement should be fair and reasonable, including protecting the other party’s interests.
- The access to justice provided by funding must be meaningful.
- The TPF agreement must not overcompensate the donors for assuming the risks of the litigation.
- The financing arrangements must not interfere with the lawyers’ duty to act in the best interests of their clients. and
- The funded party must be able to issue instructions and exercise control over the litigation in their best interests.
The court also examined in detail the termination rights of the third-party funders within the framework of the TPF agreement. She took the view that funders should be entitled to lawfully terminate the TPF agreement if the dispute has no reasonable chance of success. However, the court further ruled that a decision to terminate should not be made without the independent advice of the funded party’s lawyers. This would provide sufficient guarantees that funding pledges “cannot be capriciously withdrawn and that funds are still available to maintain access to justice”.
Features of financing agreements with third parties
Does a party have to disclose that it is funded?
A party does not need to disclose that it is funded under a TPF agreement. However, a court may force disclosure of the agreements if questions arise as to whether it is fair and reasonable, as was the case in the De Bruyn case.
A court can also join a third party funder as a participant in the proceedings. In this case, the funder may be held liable for the costs of the litigation.
Is communication with a third party funder privileged?
In South Africa, the litigation privilege includes communication between a litigant or his lawyer and third parties, provided that the communication is for the purpose of pending or contemplated litigation. Accordingly, communication between the litigant and the third party funding provider would be privileged if there are pending or contemplated legal disputes.
Will a third party funder be liable for the costs of another third party?
In 2013, the High Court ruled that a third-party funder could be involved in proceedings. If so, he could be held liable for the costs. The aim was to counteract possible abuses that could result from the earlier recognition of the validity of TPF agreements by the Supreme Court of Appeal.
The Supreme Court of Appeal continued to deal with this issue in 2014 in the case of Naidoo against EP Property Projects Pty Ltd and confirmed the decision of the lower court not to adopt a “de bonis propriis” cost decision against a third party funder, nor to be a party to the Procedure. In making its decision, the court found that:
- The involvement of the third party financier in the proceedings was substantial and meant that the proceedings were fully taken over.
- The third-party funder was able to benefit from a favorable award. and
- The third party financier’s conduct was found to be fraudulent and malicious.
The third party funder was not a “pure” commercial funder and therefore became a party, although it was not named as such.
The court has not established the criteria by which to determine when the level of involvement of the funder in the proceedings and the level of support for a malicious claim will result in the courts granting this type of exceptional remedy.
In another example, also in 2014, the court held the third party financier jointly and severally liable with the litigant for the other party’s costs. In this case, the court concluded that the funder had essentially controlled the proceedings for a variety of reasons.
Co-authored by Emma Selfe, Julian Loe and Angela Lawrence, third party funding experts at Pinsent Masons.