Class actions and litigation funding - Law Commission report released

Introduction

The Law Commission has released its final report Class Actions and Litigation Funding which recommends the creation of a statutory class action regime and litigation funding regulation.  The Law Commission states that having its recommended Class Actions Act as the principal source of law on class actions, will provide more certainty and accessibility than is currently available. More specific procedural rules will be contained in the High Court Rules.

The Law Commission report also confirms regulation and oversight of litigation funding was needed, and all its recommendations were all made following consultation with government agencies, the legal profession, funders, business and community organisations, and academics.

It notes that while representative actions akin to a class action are possible under current High Court Rules 2016, (allowing a person to sue (or be sued) on behalf of, or for the benefit of, all persons with the same interest in the proceeding) this has resulted in large, complex litigation outside the scope of the current representative action procedure. It has also resulted in extensive litigation on procedural issues, causing delay for parties and required considerable court resources, and increasing the costs involved. 

The Law Commission report discusses some of the access to justice barriers for potential representative plaintiffs and class members, including the high costs of litigation and adverse costs rules, and the potential unavailability of legal aid. It notes that while litigation funding can remove or reduce these barriers somewhat, it will only be available if the litigation funder considers it sufficiently profitable. It is unlikely to be available in public interest litigation, or where the relief sought is non-monetary. To that end the Commission recommends the creation of a public class action fund, which could have significant access to justice benefits.

Class Actions

Other key recommendations on class actions include:

• Class actions will not be restricted to certain types of claim, although may only be commenced in the High Court (excluding the District Court, Environment Court or Māori Land Court) and that the government considers class action rules for the employment jurisdiction.
• The requirement of court approval for cases to proceed as a class action, known as certification, in recognition of the ‘significant burden’ that class actions impose on defendants and the court system. The court to consider at the certification stage whether the proceeding discloses a reasonably arguable cause of action, whether the representative plaintiff is suitable, and whether a class action proceeding is the appropriate procedure for the claim.
• Allowing both opt-in and opt-out class actions, with the proposed certification test allowing flexibility to determine which is most appropriate.
• Rules for particular class members are proposed, with people outside New Zealand only able to join if they opt in, as well as Ministers of the Crown and government departments.
• After certification the representative plaintiff’s lawyer should be regarded as the lawyer for the entire class, and not solely for the representative plaintiff.
• The lawyer-class relationship arising on certification needs to be prescribed by legislation, requiring amendment of the Lawyers and Conveyancers Act 2006.
• That judgments are binding on class members, with respect to the common issues set out in the certification order. The court also having power to make any orders for distribution of an award or aggregate monetary relief that it considers appropriate, including appointing an administrator to distribute the award.
• The court being more involved in the oversight of class actions including approval of any settlement (whether the class action is opt-in or opt-out and whether the settlement is reached before or after certification) or discontinuance of a class action.
  The usual adverse costs rule would apply, with the successful party normally entitled to an award of costs. The representative plaintiff would be liable for any adverse costs award in favour of the defendant, with the Commission anticipating they would generally obtain an indemnity for adverse costs.

Litigation funding

For litigation funding, the Law Commission has recommended court oversight, combined with professional regulation of lawyers, and changes to strengthen the security for costs mechanism, as the best model for regulating litigation funding, while assuring the integrity of the court system. It also considered the courts were best placed to assess the fairness and reasonableness of funding arrangements in class actions.

 Its recommendations include:

• Litigation funding agreements should only be enforceable if approved by the court.
• Plaintiffs should be required to disclose their funding agreement to the court and the defendant (with appropriate redactions).
• Development of a strengthened security for costs mechanism, with a rebuttable presumption that funded representative plaintiffs will provide security for costs in class actions in a form enforceable in New Zealand.
• Investigation of establishment of a public class action fund, in cases where litigation funding not available, and production of a clear and accessible online guide to assist class members to understand the class action process.
• Amendment of the Rules of Conduct and Client Care for Lawyers to clarify how conflict of interest should be avoided and managed in funded proceedings.
• Changing the Rules of Conduct and Client Care for Lawyers to prohibit lawyers claiming unpaid legal fees and expenses from the representative plaintiff.

IoD submission March 2021

In March 2021 the IoD made a submission in support of the Law Commission’s preliminary view that a statutory class actions regime should be created and that litigation funding should be regulated.

We noted that there were significant risks and concerns that will need to be addressed and managed in developing a new regime, including:

• requiring a certification process early on in proceedings to deal with unmeritorious claims and
• an assurance that claimants have the ability to pay an adverse costs order.

IoD Submission November 2021

In November 2021 the IoD made a further  submission  (following the Law Commission’s Supplementary Paper) in which the IoD expressed continued support for the review of class actions and litigation funding in New Zealand, and confirmed this as being a key opportunity to put in place a regime that is fit for purpose and for the long-term.

Conclusion

We are pleased to see that the final Law Commission report has adequately addressed the concerns that we raised. As we submitted in March 2021 the IoD considers that:

“It is essential that New Zealand gets this right for various stakeholders and also for governance, capital markets and the country as a whole. Adverse outcomes of getting this wrong may lead to greater risk aversion in board decision-making and further add to the compliance burden. A danger with undue risk aversion is that boards can miss strategic and innovative opportunities failing to realise the potential for their organisations.”

The Law Commission says the government will now consider its recommendations and decide whether to reform the law. While we are encouraged by the content of the Law Commission Report, and that it has adequately addressed the issues we have previously raised, we will be watching closely the government’s response.

Should the Law Commission report’s recommendations be progressed, we anticipate the opportunity to submit on any reforms proposed as part of the usual parliamentary process. We will continue to monitor and advise on future developments.