Publications | Without Prejudice | October 2016
A glance at the law of champerty
A champertous agreement is one in terms of which a person provides a litigant with funds to prosecute an action in return for a share of the proceeds. It goes back to the Roman and Roman-Dutch periods. Originally known as pacta de quota litis, these agreements were looked upon with disfavour by the courts. They were considered to encourage speculative litigation and consequently abused the legal process.
Until recently, South African courts, out of concern for the integrity of the judicial system, similarly adopted a dim and uncompromising view of any agreement in which an outsider provided finance to enable a party to litigate in return for a share of the proceeds. Deriving their name from English law, champertous agreements were considered by the courts as contrary to public policy and of no force or effect, with one exception – the good faith provision of financial assistance to a poor litigant to help them to prosecute an action in return for a reasonable compensation in the litigation.
This approach was fundamentally altered in 2004 when the Supreme Court of Appeal (SCA) reconsidered the validity of champertous agreements in the landmark case Price Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd 2004 (6) SA 66 (SCA). At issue was an agreement between the Co-operative and an external third party, whereby the third party undertook to fund the Co-operative's action in return for 45% of the proceeds. The SCA dismissed the appeal by PwC in which the firm argued that the Co-operative was prosecuting the action pursuant to an agreement which was champertous, and thus contrary to public policy. It ultimately held that champertous agreements are not ex facie contrary to public policy or void.
The SCA highlighted significant developments in South African law including The Contingency Fees Act 66 of 1997 which, inter alia, provides for a "no win, no fees" agreement which attorneys and advocates may enter into with their clients. This, the SCA remarked, was indicative of the legislature making speculative litigation possible, and represented a watershed in public policy brought about by the view that it is in the public interest that litigants be able to take their justiciable disputes to court for adjudication. The SCA found that the idea of champertous agreements is consistent with the constitutional values underlying the right to access to justice and the freedom of contract, and is thus not contrary to public policy.
In 2013, in the case of Price Waterhouse Coopers Inc and Others v IMF (Australia) Ltd and Another 2013 (6) SA 126 (GNP), the North Gauteng High Court further developed the common law relating to champertous agreements by establishing that a litigation funder may be directly liable for costs, and may be joined as a co-litigant in the funded litigation. The court held that it is necessary to join the litigation funder to proceedings in order to enable the court to exercise its discretion regarding costs against the funder. In this matter, PwC applied to join IMF (the litigation funder) as second plaintiff to obtain a costs order against it. The court accepted that, in principle, a court should make the costs order against a person who funds litigation and, to this end, specifically developed the common law to make a direct order for costs against a funder possible. The court took the view that for PwC to join IMF was a natural progression from the earlier 2004 judgement which held that champertous agreements were now lawful. The court remarked that to allow litigants to hold funders directly liable for costs was one way in which courts could counter any possible abuses arising from the recognition of the validity of champertous contracts.
In 2014, the Western Cape High Court reaffirmed the principle that a non-party funder could potentially be liable, in the exercise of the courts discretion, for an adverse costs order made against the funded party. This was the outcome in the case of EP Property Projects (Pty) Ltd v Registrar of Deeds, Cape Town and Another, and Four Related Applications 2014 (1) SA 141 (WCC). On the facts, a Mr Marais, a losing party in arbitration proceedings involving the ownership of land, concluded an agreement with a "litigation funder', his attorney – Mr Naidoo. In terms of the agreement, Naidoo would fund the review or appeal proceedings in return for part ownership of the property in the event of successful litigation. Marais ceded his interest in the litigation to Naidoo, who oversaw the conduct of the litigation. The court found that Naidoo was not a mere commercial funder of litigation and thus held him jointly and severally liable for any costs order granted against Marais.
In the same year, the Western Cape High Court was again confronted with the issue in Scholtz and Another v Merryweather and Others 2014 (6) SA 90 (WCC). In this matter the court distinguished between "pure litigation" funders and other types of litigation funders. A pure litigation funder, it was held, was someone who had no personal interest in the litigation and did not stand to benefit from it or control the course of litigation. The other type of litigation funder on the other hand does not merely fund litigation proceedings, but also substantially controls the proceedings that it funds, or, at any rate, stands to benefit from them. It was held that it is this latter class of litigation funders against whom a court may award a costs order. In this matter the court ordered that as Scholtz's father had funded his son's litigation and had substantially controlled the proceedings, he was jointly and severally liable with Scholtz for the costs of the application. The control Scholtz's father had exercised over the litigation was unambiguously direct and substantial, and he was thus not deemed a "pure litigation" funder and held liable for costs.
In the 2015 Gauteng Local Division case of Gold Fields Ltd and Others v Motley Rice LLC 2015 (4) SA 299 (GJ) the court was tasked with determining whether a litigation funder should be joined to proceedings in order to render it susceptible to a costs order. The facts in this case involved the certification of a class of plaintiffs, over 55 mine workers, with a view to instituting a class action against Gold Fields for compensation for silicosis contracted while in the company's employ. The miners were represented on a contingency-fee basis by attorney Richard Spoor who, in turn, was funded by Motely Rice LLC, a firm of American attorneys specialising in class action lawsuits. Gold Fields sought Motely Rice's joinder in order to make it susceptible to an order for costs. In issue was whether Motely Rice exercised sufficient control and benefit over proceedings to warrant its joinder or whether it was merely a "pure litigation" funder.
The court dismissed the application for joinder, citing Motely Rice's control and benefit as being insufficient. This, the court remarked, was because Spoor, as attorney for the mine workers, retained professional control over the proceedings and the miners had not granted Motely Rice any rights. Motely Rice was deemed a "pure litigation" funder. In arriving at its decision the court highlighted the importance of access to justice. Despite this radical departure from the past, our courts have held that exceptional circumstances still exist where such agreements may in fact constitute an abuse of process, in which case courts would not countenance them. This will be the case where the litigation is frivolous or vexatious, or where litigation is being pursued for an ulterior motive. It is evident that in light of changed circumstances, in particular the Constitution and with the rise of litigation funding in South Africa, the common law relating to champerty has developed considerably. It is unlikely to be long before the courts are presented with opportunities to further develop the law, and the associated liability of litigation funders for the costs of failed proceedings.
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