Law Commission recommends formal frameworks for class actions and litigation funding
A roadmap for the courts and parties regarding class actions and litigation funding in Aotearoa | New Zealand now appears much closer.
Following an extensive two-year consultation period, the Law Commission has released a comprehensive report with wide-ranging recommendations on how new class actions legislation and regulation of litigation funding should look.[1] The report makes 121 recommendations for reform, including a new Class Actions Act, new procedural rules in the High Court Rules 2016 for class actions, and amendments to the Lawyers and Conveyancers Act 2006 to clarify the obligations of lawyers acting in class actions and funded proceedings.
We have previously commented on the New Zealand courts’ efforts to fill the legislative void in these areas of law over the past decade (see Duncan Cotterill articles here and here). Such issues have been particularly prominent in the media during the past 12 months with a focus on cases such as the Feltex litigation coming to an ignominious end following funding issues, two funded James Hardie cladding class actions failing, and the ongoing battle over the disbursement of settlement funds in the Property Ventures liquidation.
The Commission’s recommendations seek to provide greater certainty for all parties involved in such litigation, including judges.
The proposed statutory class actions regime
The Commission has recommended the development of a new Class Actions Act (Act) to strengthen access to justice and improve efficiency in litigation. The Act, together with amendments to the High Court Rules, would be the principal source of law for plaintiff class actions. The underlying reasoning for these recommendations is that existing methods to commence and progress group litigation in New Zealand is inefficient and uncertain.
The key features of the recommended regime focus on the role of the representative plaintiff (the individual who represents the class), how a class action is commenced in court, the process of “certifying” a proceeding so it can progress as a class proceeding, procedural steps during a class action, how costs are shared, how adverse costs are met, and the effect and management of a settlement or judgment.
Some more specific points of interest are:
- A proceeding must be certified before it can proceed as a class action. Certification requires a court to be satisfied that there is a reasonably arguable cause of action, there is a common issue of fact or law for class members, the representative plaintiff is suitable, and progressing as a class action is an appropriate procedure to efficiently resolve the claims of class members.
- There is a 90-day deadline for anyone else to file a competing class action. This will enable a court to consider the certification applications of competing class actions together and determine which one will best allow class member claims to be resolved in a just and efficient way.
- There will be active court supervision to safeguard the interests of class members.
- A court must approve any settlement to ensure it is fair, reasonable and in the interests of the class members. A court must also approve the discontinuance of any class action.
The Commission has also recommended that the Government should consider a separate class action regime for employment-related claims.
The recommendations and the proposed Act are not unusual and reflect how similar jurisdictions manage class actions, particularly in Australia and Canada.
Litigation funding
Litigation funding is a recent and growing phenomenon in New Zealand. There is no doubt funding can enhance access to justice. However, like the proposed class action regime, there is an acknowledged need for increased regulation to minimise the challenges that can arise in court cases that involve funding agreements. Some of these challenges were discussed in the Supreme Court decision of PwC v Walker,[2] where a defendant to a funded proceeding said the manner in which the funder had become involved in the proceeding was impermissible, amounted to a form of “trafficking in litigation”, and should not be allowed. Although it was not ultimately at issue, the Chief Justice also considered it was arguable the particular funding agreement between the funder and the plaintiff in that case was contrary to law, including because of the extent of control the funder had over the litigation (legal representation, settlements, and discontinuance) and the ongoing provision of funding.[3]
As observed above, we have also seen several cases brought to trial then collapse as a consequence of inefficiencies, a lack of reliable ongoing funding, or funders simply pulling out. For example:
In a lengthy High Court claim against building materials maker James Hardie (White v James Hardie New Zealand Ltd), the aggrieved homeowner plaintiffs ended their $220 million class action claim halfway through a trial with the defendant target of the lawsuit receiving a payment from the plaintiffs. The litigation funders were not willing to continue funding the proceeding because they lacked confidence the case could be won.[4]
Houghton v Saunders was a funded class action brought by Feltex shareholders against Feltex directors and Credit Suisse regarding statements in a prospectus issued for an IPO of shares in 2004. The proceeding was commenced in 2008 and quickly became mired in ongoing court applications, hearings and decision for the next 12 years, including at least three hearings in the Supreme Court. By 2020, with a trial on the horizon to determine whether investors had suffered loss as a result of statements in the prospectus, the plaintiffs were unable to provide security for adverse costs due to difficulties in ongoing funding, and the proceeding came to an end.[5]
These recent cases highlight the need for a regulatory framework, particularly one that provides confidence for all parties – claimants/plaintiffs and defendants – that claims backed by litigation funders are brought reasonably and efficiently.
In its report, the Commission considered a number of these issues, including the potential power imbalance between the parties to a funding agreement, the extent of control a funder might exert over a proceeding and its resolution, potential conflicts of interest between the funder, the funded plaintiff and the lawyer who has been engaged, and the level of return a funder might receive.
The Commission considers that court oversight, combined with professional regulation of lawyers, will produce a fair and efficient framework to regulate funding agreements in litigation. In particular, the Commission takes the view that increasing the scrutiny and control over such agreements will incentivise funders to support litigation but ensure this does not detrimentally impact the interests of the class members being represented.
Some of the Commission’s key recommendations are that:
A funding agreement in a class action will be subject to approval by the court, which must be satisfied the agreement is fair and reasonable, and the representative plaintiff has received independent legal advice. Factors a court will consider are the circumstances in which the funder can withdraw, the rights of the representative plaintiff to instruct the lawyer and control the litigation, the adequacy of a funder’s ability to meet costs of a proceeding (including potential adverse costs orders), and the fairness and reasonableness of the commission a funder will receive from any money successfully obtained.
There will be a presumption a litigation funder will provide security for costs and can be subject to adverse costs orders.
The Rules of conduct and client care for lawyers should be amended to clarify a lawyer’s professional obligations in funded proceedings to mitigate any potential conflicts between lawyers, funders, representative plaintiffs, and class members.
Ultimately, the Commission considers the courts are best placed to assess the fairness and reasonableness of funding arrangements in class actions. This is consistent with our own experience of court practices in other common law jurisdictions such as British Columbia in Canada.[6]
What next?
The report has been presented to Parliament. Given the extent of the Commission’s consultation with a large number of stakeholders during its review (including government agencies, the legal profession, litigation funders, business and community organisations and academics), and the experience of the New Zealand courts endeavouring to fill the void during the past decade, we expect some decisive steps will be taken. Finally bringing some order and discipline to the class.
For more information, please contact a member of our Litigation and Dispute Resolution team.
Sparke Helmore Lawyers have published an article about class actions and litigation funding from an Australian perspective. The article, Law reform in class actions and litigation funding in Australia, examines the regulation of litigation funders and the unique legal framework in Victoria compared with the rest of the country. Special thanks to the authors Patrick McGrath and Claire Gomo for sharing this article with us.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
[1] Law Commission Ko ngā Hunga Take Whaipānga me ngā Pūtea Tautiringa | Class Actions and Litigation Funding (NZLC R147, 2022).
[2] Pricewaterhousecoopers v Walker [2017] NZSC 151.
[3] Pricewaterhousecoopers v Walker, at [100] and [134].
[5] Houghton v Saunders [2021] NZSC 38.
