Litigation can be a very expensive procedure which may result in parties being dissuaded from litigating on what may have otherwise been a good claim. It also often happens that the party with deeper pockets can use the process to its advantage in a bid to pressure the party with shallower pockets to accept a settlement, or abandon their claim entirely. In a bid to counter the above and to obtain the funding to vigorously pursue claims, a practice has developed whereby parties use the potential value of their claim to attract funding in order to pursue it. This allows for an investment opportunity in so far as the funder could make a return on successful litigation by agreeing to fund the litigation.

These sorts of agreements, otherwise referred to a champerty agreement or pacta de quota litis, were previously considered unlawful and unenforceable as it was perceived that they encouraged speculative litigating and amounted to an abuse of the legal process. There were also concerns that the third parties funding of the litigation could sway the proceedings, inflate damages claims, and turn litigation into a commercial gamble.  

However, the law has evolved in this regard.

The first step in this process was the promulgation of the Contingency Fees Act 66 of 1997 which makes “no win, no fee” agreements between legal practitioners and their clients legally enforceable. This development appeared to indicate an acceptance by the legislature of a species of speculative litigation.  

In 2004, the Supreme Court of Appeal took this further in the matter of Price Waterhouse Coopers and Others v the National Potato Co-operative [2004] 3 All SA 20 (SCA) when it held that champertous agreements are no longer contrary to public policy. The Court held that the safeguards intrinsic in our civil justice system are strong enough to protect against the risks of champerty agreements and so the need for the rules against champerty have diminished, if not disappeared entirely. The Court was therefore willing to relook and reconsider the notion of whether or not champerty was against public policy. The Court found that, having considered the development of this same body of law in England, the benefit provided by accessing courts outweighed the potential risks of champertous agreements or speculative litigation. The Court held that this promoted the section 34 constitutional guarantee that every person has the right to access to courts and to having the matter heard before an impartial tribunal.

Not only did the court hold that such agreements are enforceable, the court held that even if such an agreement was unenforceable between the third party funder and the litigating party to the claim, this would not create a defence for the other party to the case at hand. In other words the other party to the claim would not be able to raise the excuse that the funding agreement was unlawful and thereby unsuiting the other litigating party.

However, the Court was careful to guard its inherent power to protect people before court against unlawful and prejudicial contracts. This means that not all champertous agreements will be enforceable as some may still fall foul of public policy. This would include agreements that are not legitimate claims and those that are brought simply to cause the other party financial harm.  

As regards the liability of the funder in unsuccessful litigation, we are not yet sure what course our courts will take on this matter. In English law a funder-for-profit is liable to pay a cost order to the extent of his contribution to the claim. However, in an unreported 2009 case between the same parties, Price Waterhouse Coopers and the National Potato Co-operative, in which an application to review and set aside the decision of the taxing master with regard to the costs was brought, the High Court stated that parties who receive funding for their litigation will not be treated differently from those who do not. However, how this will be fleshed out is yet to be seen.  

This development in South African law appears to open up opportunities for parties looking to access deeper pockets as well as for those investors looking to gain returns from such claims. However, before signing such an agreement all of those involved should ensure that they seek legal advice with regard to how to structure the agreement so that it is enforceable and offers adequate protection for the parties.