May 24, 2018

The Advent of Litigation Funding and what does it involve?

Given the costs and uncertainties in the prosecution of disputes, and in particular large scale and complex international, commercial and construction disputes which are often ongoing for extended periods of time, third party funding of disputes (more commonly referred to as litigation funding), and in particular international arbitration disputes, has become a globally accepted way of facilitating access to justice, and particularly so following the global financial crisis of 2008.

At its most basic, litigation funding involves an agreement between a party to a dispute and a third party funder that provides for the financing of the prosecution of a dispute, in exchange for a return on the third party funder’s investment. Returns can take various forms, including an agreed amount or an agreed percentage share of the recovered proceeds of the dispute. In the event that the claim does not succeed, the costs are covered by the third party funder. If the relevant rules on costs allow, the funding agreement may provide that an adverse costs award will be covered by After the Event (ATE) insurance.

At its most basic, litigation funding involves an agreement between a party to a dispute and a third party funder that provides for the financing of the prosecution of a dispute, in exchange for a return on the third party funder’s investment.  Returns can take various forms, including an agreed amount or an agreed percentage share of the recovered proceeds of the dispute.  In the event that the claim does not succeed, the costs are covered by the third party funder.  If the relevant rules on costs allow, the funding agreement may provide that an adverse costs award will be covered by After the Event (ATE) insurance.

Litigation Funding has grown into a US$3.5 Billion industry (as at 2017), and is having an increasingly significant impact on dispute resolution across the globe.

First used in Australia, it is now prevalent in the United States, Canada and the United Kingdom, and is on the rise in a host of other countries including South Africa.  In a 2004 judgment, the South African Court of Appeal accepted that agreements in terms of which an outsider provides finance to allow a party to litigate in return for a share of the proceeds of the action, are legal and enforceable and are consistent with our constitutional values underlying freedom of contract.  The court said:

“… it must also be recognised that the civil justice system is strong enough to withstand the perceived abuses which could arise as civil litigation is made possible by financial support given by persons who provide such support in return for a share of the proceeds.  Accordingly it must be held that an agreement in terms of which a stranger to a law suit advances funds to a litigant on condition that his remuneration, in case the litigant wins the action, is to be part of the proceeds of the suit, is not contrary to public policy".

[Price Waterhouse Coopers Inc. & Others v National Potato Co-Operative Limited [2004 (6) SA 66 SCA) at 79I]

Available for both litigation and arbitration, its benefits are numerous, including:

  • To allow parties who have limited available resources to pursue and prosecute disputes.
  • To manage cash flow by freeing up available funds and resources to pursue other business objectives and interests.
  • To provide certainty on legal spend in the case of multiple and complex disputes.
  • As a way of managing costs and risks inherent in major disputes, such as the duration of a dispute or adverse costs awards.It is seen as and is used as a risk management tool.
  • To bring on board a partner who has experience in litigation and arbitration and importantly someone who has expertise in tracing and recovery of assets and in the recognition and enforcement of both local and international judgments and awards.

Clyde & Co., through its offices worldwide, has in-depth experience and expertise in international disputes, both globally as well as on the African Continent. 

Our offices in South Africa and Tanzania are strategically placed to provide advice to investors on all aspects of international arbitration in Africa, including, alternative dispute resolution, funding of international arbitrations and recognition and enforcement of judgments and arbitral awards and investor protection.

As well as working closely with various litigation funders in Africa and globally, Clyde & Co. has an experienced team which can provide advice and assistance on all aspects of litigation funding, quite apart from the prosecution of a dispute, including:

  • The various funding models available.
  • Structuring and negotiation of litigation funding agreements and assisting in the procurement of litigation funding.
  • Due diligence and assessment of the risks inherit in each dispute, including litigation risk and credit risk.
  • Advice on Investor-State disputes, including sovereign immunity risk.
  • The prospects of recovery pursuant to a favourable judgment or award.
  • The recognition, enforcement and recovery of a judgment or award.
  • Measures to implement to protect against adverse costs awards being made directly against funders.