STUART PRINGLE | Makate’s saga reveals risks of an unregulated litigation funding industry

After 18 years in court, Nkosana Kenneth Makate has finally won his battle with Vodacom over the “Please Call Me” idea. But just as his victory is within reach, a new fight has erupted with his litigation funders over how much of the payout he will actually keep.

The new public spat exposes the fast-growing and often poorly understood role of litigation funding in high-stakes cases.

A 2011 funding deal is at the centre of a dispute with funders, Black Rock Mining, a British Virgin Islands–registered firm linked to a director named Errol Elsdon who claim that they are entitled to 40% of Makate’s award, which could exceed R500m.

A firm belonging to Elsdon paid some of his legal bills, but Makate allegedly cancelled a funding agreement with it. Elsdon insists Makate cancelled an agreement with a different entity, not his, leaving his firm’s claim untouched.

Litigation funding is increasingly regulated abroad, as countries grapple with concerns about whether funders covertly influence court strategy, prolong litigation or lock claimants into funding deals they don’t fully understand.

In Makate’s case in late November lawyers agreed to park 40% of his award in a trust pending the outcome of a court case surrounding Black Rock Mining’s claim.

Makate once rejected a R47m offer made by Vodacom’s CEO in 2016. Funding may have empowered him to hold out for far more, though it also leaves him facing hefty legal costs almost 10 years later, raising the obvious question of the perverse incentives created by litigation funding, which often favour the financial needs of the funders, above the actual litigant.

In the US, more than 37 states have proposed regulating litigation funding with Maine, Indiana and Louisiana expressly banning funders exerting influence over legal strategy. Disclosure to the court of who is funding the case is mandatory in a handful of states including West Virginia, Montana, Louisiana, Indiana, Kansas and Wisconsin.

Back in South Africa, Makate’s fight for compensation may be nearing its end, but his battle with funders exposes a deeper problem: South Africa has been left behind while other jurisdictions move to regulate an industry that can make or break access to justice.

Ireland prohibits litigation funding by parties not involved with a case, with justice minister Jim O’Callaghan recently stating he would not lift the prohibition because, litigation was “commodifying justice” and the “big winners” were lawyers.

In the UK, where litigation funding is self-regulated, the Civil Justice Council, an independent advisory public body sponsored by the UK ministry of justice, conducted a four-month review of litigation funding. It published its findings earlier this year. The investigation received public consultation submissions and also considered the European Commission principles.

It recommended a ban on funders having control of the litigation, but it didn’t go as far as capping the quantum of percentage awards funders may ask for.

The Civil Justice Council recommended to the UK government that litigation funders should disclose to court as early as possible the fact the case is funded, the name of the funder and the ultimate source of the funding.

It also advised that when litigation funders back class or group consumer actions, the claimants are given legal advice from a senior lawyer on the ins and outs of the funding agreement to prevent them being locked into agreements they may not understand.

While most EU countries currently have only patchwork or limited rules, momentum is building towards a unified framework encouraging member states to have litigation funding disclosed, and have systems in place to improve transparency, curb potential abuses and ensure claimants are not bound into unfair funding contracts.

In group or class action type litigation, the European Law Institute, an independent, non-profit organisation, founded in 2011 to improve the quality of European law suggests that member countries require the court to adjudicate on whether a litigation funder’s return is fair, just and reasonable.

Other recommendations by the institute include ensuring funders have sufficient capital to fund court actions without running out of money halfway through, a limit on funders’ influence over litigation strategy, and a cap, generally 40%, on how much of an award a funder may take.

Back in South Africa, Makate’s fight for compensation may be nearing its end, but his battle with funders exposes a deeper problem: South Africa has been left behind while other jurisdictions move to regulate an industry that can make or break access to justice.

Without transparency rules or limits on funders’ power or proper clarity on deals, litigants remain vulnerable to agreements they may not fully grasp. Whether Makate keeps most of the payout that he fought nearly two decades for now rests with the courts, but the case could spark long-overdue scrutiny of a funding industry operating in the shadows.

• Stuart Pringle is a Cape Town-based lawyer whose services range from family mediation, personal injury law, employment contracts and civil defense litigation.