Third-party litigation funding – TPF

Empowering plaintiffs in high-stakes cases

Have you ever wanted to take another party to court but felt unable to contemplate litigation due to the cost? The pursuit of justice can be an expensive and daunting endeavour and the financial burden may present a barrier to accessing justice. If you have a very strong case, particularly if you are a private individual who has been wronged by a large organisation, suffered medical negligence, or are part of a class action suit, you may find a lawyer who will represent you on a contingency basis. They will only levy their fees if you win your case, known as a “no win, no fee” arrangement. (If you’ve seen the Netflix drama “Toxic Town”, based on a true story, you’ll be familiar with this.) This type of agreement is legal in South Africa and is regulated by the 1997 Contingency Fee Act.

However, working on a no-win, no-fee basis is risky for attorneys, and it may be difficult to find a firm willing or able to take your case. An alternative to contingency fees is litigation funding, a financial vehicle that is transforming the legal industry. Known in South Africa as third-party funding of litigation (TPF), this innovative solution enables plaintiffs to level the playing field against well-funded opponents.

What is third-party funding of litigation?

TPF is a mechanism that allows a third-party funder to provide financial support to plaintiffs in exchange for a portion of the settlement or award if the case is successful, ensuring plaintiffs can cover legal fees, court costs and other expenses without risking financial ruin. If the case is lost, the plaintiff owes the funder nothing. This form of financing is particularly valuable in high-stakes cases, such as commercial disputes, intellectual property claims, class action suits, and personal injury lawsuits, where legal costs can skyrocket and the plaintiff may have very limited resources.

TPF in South African law

TPF is legal in South Africa but, while we have the most developed TPF market in Africa, it is immature compared to global markets. TPF is not yet regulated by legislation, unlike contingency arrangements. However, there is case law precedent from 2004 from a dispute between PriceWaterhouseCoopers Inc and National Potato Co-operative Ltd, which significantly developed the law on TPF. Much more recently, in 2020, another case (De Bruyn v Steinhoff International Holdings NV) inspired the High Court to reflect on the fairness and reasonableness of a TPF arrangement. It concluded that a TPF arrangement should:

• Be necessary to facilitate access to justice
• Be fair and reasonable and protect the interests of the other party as well as its client
• Allow the provision of meaningful access to justice
• Not overcompensate the funders
• Not interfere with the legal professionals or their ability to act in the best interests of their clients
• Not interfere with the funded party’s control over the litigation

The funders also have a right to terminate the funding agreement if they feel the chances of success are remote; but they cannot do so without consultation with the funded party’s lawyers, who must at all times be independent of the funders.

In 2021, the Arbitration Foundation of South Africa (AFSA) incorporated TPF into its Rules. Article 27 governs third-party funding arrangements for international arbitrations administered by AFSA. It requires the identity of the third-party funder to be disclosed to the other parties to the arbitration as well as the arbitral tribunal and the AFSA Secretariat when the funding arrangement has been concluded.

Benefits of TPF

There are obvious benefits to potential litigants in choosing TPF. While the funder’s entitlement to a share of the claim reduces the amount the funded party will receive (often 60/40 litigant/funder), they might otherwise receive nothing due to the unaffordability of litigation. Therefore, TPF allows a private individual without financial resources to pursue a claim or a small business to do so without taking on huge commercial risk.

In many cases, defendants are large corporations or organisations with deep pockets. They can simply outspend plaintiffs, who give up the fight because they run out of money. TPF ensures a fairer legal process by removing the use of attrition as a strategy. Legal battles can also take years to resolve, and the costs spiral. TPF allows plaintiffs to focus on their case rather than worrying about mounting bills.

Reputable funders typically invest in cases with strong merits, as their income depends on successful outcomes. This helps to prevent litigants bringing frivolous or trivial claims in the hopes of (possibly undeserved) windfall payments, providing a sort of legal quality control.

Drawbacks to TPF

Despite its benefits, TPF is not without controversy or drawbacks. Roles and responsibilities must be clearly delineated and agreed before the litigation begins, and the litigant should be allowed discretion in settlement decisions. The funding agreement requires careful negotiation. For example, if the case goes to appeal, is the funder still on board? How do disclosures to the funder impact on lawyer–client privilege? A TPF agreement must be entered into with due diligence and care, but in general the advantages of TPF are likely to outweigh the risks. And regulatory frameworks are evolving to improve accountability in the industry.

The future of TPF

The legal profession, like all industries, is in a state of rapid change. Advances in technology, such as AI, are enabling funders to assess cases more accurately. This will make third-party legal financing more common and more accessible to a broader range of plaintiffs. As more individuals and businesses explore this option, the legal system will become more equitable, and financial constraints will cease to dictate the outcome of high-stakes cases.

For individuals and small businesses, litigation funding can mean the difference between pursuing a claim and abandoning it. By providing the necessary resources, TPF gives everyone a fair shot at legal redress.

SD Law can help

At SD Law, we are always looking for ways to improve our service to you, our clients. While litigation funders are entirely independent of attorneys and have a direct relationship with the plaintiff that excludes the law firm, we can assess your case and explain the process of litigation and third-party funding to you. If you have a legal matter you’d like to discuss, contact Simon on 086 099 5146 or email sdippenaar@sdlaw.co.za for a confidential, personal discussion.

SD Law

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