In South Africa third party litigation funders are increasingly playing an important role in assisting claimants in pursuing litigation both in respect of future legal expenses and costs already incurred.  And in particular for class actions, commercial litigation, consumer disputes, and medical negligence claims.

In certifying a class action the court must be told how the class action is to be funded and what arrangements have been made for the basis of the funding.

The question of litigation funding was usefully considered by the High Court in the Steinhoff matter.

The court said that of importance were the arrangements that had been secured to obtain third party funding and what had been disclosed to the court in that regard.

The funding arrangements must not compromise the requirement that the litigation is conducted in the interests of the class members.

The question to be considered on the facts is whether third party funding arrangements place at unwarranted risk on the interest of the class representative, the class members, the interests of the defendants or the interests of justice.

Our Supreme Court of Appeal has already in the Childrens’ Resources matter warned that third party funders, incentivised by profit, should not be able to take over litigation for their own benefit. (Price Waterhouse Coopers Inc & Others v National Potato Co-operative Limited 2004 3 ALL SA 20 (SCA)).

The attorneys for the claimants must be independent of third party funders and exercise that independence in the interest of the class.

The court referred to the Canadian case of Houle v St Jude Medical Inc 2018 ONSC 6352 as a helpful account as to how the court should assess third party funding arrangements.

The funding arrangements should be necessary to provide access to justice. They should be fair and reasonable in doing so, which includes protecting the interests of the defendants. The access provided must be meaningful; the arrangement must not over-compensate the funders for a single risk 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 class representative must be able to give instructions and exercise control over the litigation in the best interests of class members.

In Steinhoff the court said that it was unsatisfactory that the third party funding arrangements had not been disclosed in the founding papers and the relevant arrangements and details had to be disclosed and extracted under compulsion.

In considering the details of the arrangements as disclosed the court was however satisfied that absent the funding arrangements there was no basis to suppose that the proposed class action could proceed and that the arrangements were accordingly necessary to permit the class action to go ahead.

In considering whether the particular funding arrangements were fair and reasonable, whether the funders were compensated on a reasonable basis and whether the arrangements preserved the independence of the legal representatives and the ability of the class representative to carry on their duties, the court acknowledged that there is a conflict of interests.  The funder requires certainty as to the reward for taking the risk of the litigation and providing the funding.  The interests of the class members required that the trial court should retain the competence to determine what constitutes fair and reasonable reward for the funding provided and the risk assumed.

The funders must recognise that class certification cannot stipulate for the reward that will be due in the event of success. That is for the trial court.  The certification court can stipulate that a proposed reward is, a reasonable return for the risk assumed by the funder in funding the litigation.

The downside risk assumed by the funder is the lost cost of funding the litigation in the event that the litigation fails or yields a very modest award.

The certification court can and should indicate at inception what the reasonable reward for the funder should be. That figure will be taken into account by the trial court in determining the reward to be paid to the funder.

On the facts of the Steinhoff application, the court said that there could be no certification on the basis that the funders would be entitled to twenty-five percent of any settlement or award of damages.  There would have to be an acknowledgement by the funders that their funding commitments remain in place despite this limitation and any certification order should reflect that.  To take account of the interest of the funders, the certification court should stipulate a risk return ratio that is warranted.

The concern was that raised that the walk-away provisions of the funding arrangement would allow the funders to exit the litigation and avoid liability for adverse cost orders made to that point.  That concern, the court said, was met by an addendum to the funding arrangements and the draft order in terms of which the funder would remain liable for the expenses and adverse cost orders incurred up until the date of cancellation of the funding arrangement or the lawful withdrawal of the funding.

The court said that overall the funding was necessary to permit the litigation to proceed.  It struck a fair balance between protecting the interests of the defendants, the funders and the class members.  There was funding and insurance cover to secure the payment of adverse cost orders made in favour of the defendants.

The funders could withdraw but under conditions that permit some scrutiny of their evaluation of the prospects of success.  Any payment to the funders from an award or settlement would require the sanction of the trial court.

Individual and class action litigants using, or exposed to a litigation funded claimant, should carefully consider all the issues reviewed in the Steinhoff judgment and apply the judgment’s learning and requirements.