The Law Commission is currently reviewing class actions and litigation funding, and considering whether reform is needed in this fast-growing and mostly unregulated area of the law.
The Law Commission sought submissions on an Issues Paper as part of its review (see our previous summary here).
Given our role representing clients in many of the leading class actions in New Zealand, we thought it important to ensure that the Commission was aware, not only of the importance of access to justice to plaintiffs, but of the need to also ensure procedural fairness to defendants.
A copy of our submission is here. In summary, we said that that we support the introduction of a statutory class actions regime. However, we cautioned against a design which focusses unduly on “access to justice" considerations for plaintiffs (which was a common theme in the Law Commission's Issues Paper) at the expense of a just and fair process for defendants. It is critical that any new regime build in measures to protect defendants from protracted and costly defences of unmeritorious claims.
In our submission, these protections should be applied as follows:
A more rigorous standard is needed for a class action to proceed
The Law Commission review provides an opportunity to replace the current procedural rule used for class actions (High Court Rule 4.24, which has been applied very flexibly by judges) with a more rigorous certification process. In our view, this would require plaintiffs to prove matters such as:
commonality (i.e. that common issues predominate over individual issues),
that they have at least an arguable case,
that they have suitable funding arrangements in place and security for costs will be paid,
that there is a suitable representative plaintiff, and
that the class members are clearly defined and appropriately divided into sub-groups where there are legal or factual distinctions between them.
If plaintiffs are unable to pass the certification stage, their claims would not proceed. This is an important safeguard to guard against unmeritorious class actions brought by plaintiffs who do not have the funding to meet defendants' costs.
Opt-in class actions as the default
In our view the presumption should be for opt-in class actions (i.e. claimants have to take steps to elect to be part of the class) rather than opt-out class actions (where the class could be anyone affected, whether or not they are involved with or even aware of the litigation). Importantly, there is a real risk that if opt-out proceedings are the norm, this will encourage funders to issue proceedings irrespective of the merits, knowing that the breadth of the proceeding will create significant pressure on defendants to settle.
We are also concerned that opt-out class actions fit uncomfortably with the choice litigants have in any other context, i.e., the choice to bring proceedings to vindicate a wrong or seek compensation, and the ability to have a say in how that proceeding is run or at least have some visibility over that. There is also a greater need to protect the interests of class members in an opt-out class action. By contrast, in opt-in proceedings, those opting-in usually sign a retainer agreement with legal counsel, creating a direct solicitor-client relationship and protecting class members in that way.
Regulation of litigation funders
Research from Australia suggests that close to 50% of a settlement payout goes to funders and plaintiffs' lawyers, rather than class members. In our view, there is a need for regulation of the litigation funding industry including in relation to profit levels, conflicts of interest, transparency of information and the communications from funders to the claimant group (which in our experience, can be misleading as to claim prospects and financial returns to claimants).
The recent report of the Australian Parliamentary Joint Committee on Corporations and Financial Services (Litigation Funding and the regulation of the class actions industry) sets out the significant issues encountered in Australia due to its current “light touch" regulation of the litigation funding industry there. New Zealand is well-placed to learn from Australia's current approach and to design a system that better regulates the litigation funding industry so as to protect class members, defendants, and the Court system as a whole.
Court approved settlement of class action claims
In our view, when a litigation funder is involved, the Court should approve any class action settlement agreement in order to ensure the agreement is fair in terms of the financial return to class members, and that there has been a fair process in terms of class approval of the settlement. This is similar to the approach adopted in other jurisdictions.
The Law Commission's final report is due in the first half of 2022. If the Law Commission recommends law reform in this area, there will be further opportunities to submit on the detail of that proposed reform.
Bell Gully will be staying closely engaged in this process, and will continue to update you with any new developments.
Our team has acted in a number of the significant class action proceedings before the New Zealand courts to date. We are adept at navigating the complexity of the procedural issues raised by class actions, and advising on overall strategy (including on issues that arise as a result of involvement of litigation funders). Combined with the firm's overall strength in commercial litigation, we are uniquely placed to assist clients involved in class action proceedings.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.