Understanding the Risks Involved in Funding Litigation

Newsletters |

6 March 2017

Most directors and shareholders of companies are aware that they may be held liable in their personal capacities for actions contravening the Companies Act. There is, however, little awareness of the common law principle that allows a person to be held liable even where there was no wrongdoing on his part, by virtue of being a funder of litigation.

Our law allows for a person who funds a litigation to be joined as a co-party to the litigation that it funded. Our courts would join the funder of the litigation to the proceedings in order to hold him liable for any costs order that may be awarded in such litigation. This does not only apply in the case of companies and their directors and shareholders, but in the case of any third party funders to litigation. Directors and shareholders are particularly susceptible to joinder on this basis, however, as they are oftentimes called upon to put forward money for litigation, for instance in the case where the company does not have sufficient funds to fund the litigation itself. In such cases those directors or shareholders may end up having judgement awarded against them personally.

In order to be held liable for costs, the non-party (director or shareholder) must substantially control the litigation or benefit from it. It is under the following circumstances that courts find the control and benefit of the funder sufficient to warrant the funder being joined as a party to the proceedings:

  1. Where the funder funds the litigation for his own interests;
  2. Where the funder is gaining access to justice for his own purpose; or
  3. Where the funder does so for his own financial benefit, either to gain the fruits of the litigation or to preserve assets in which the person has an interest.

There will be no joinder in the instance of a pure funder of litigation, that is,a funder who has no personal interest in the litigation, who does not stand to benefit from it, who is not funding the litigation as a matter of business, and in no way seeks to control its course.

It is rarely the case, however, that directors and shareholders will not ultimately stand to benefit from litigation by their companies in the event that such litigation is successful, therefore, it is important for these parties to be aware of their potential exposure in this regard. Directors and shareholders should therefore ensure that they have sufficient cover (whether by way of insurance, etc.) to provide for any potential liability that they may incur, so as to avoid exposing their personal assets to attachment in order to satisfy a judgment.

 

Mercia Fynn
Director
Commercial Attorney
Email merciaf@kisch-ip.com
Tel +27 11 324 3033