2021 Litigation Forecast - Class actions and litigation funding: Progress at last

Class (or representative) actions have continued to increase, both in frequency and size, over recent years. This has put sustained pressure on insurance for prospective defendants and together with an increased insolvency risk profile has put even more pressure on directors.

Twelve months ago, in our last forecast, we reflected on progress in New Zealand’s class action and litigation funding landscape and predicted further developments. Despite unprecedented unpredictability, we have seen two major steps to progress New Zealand’s class actions and litigation funding regime in 2020.

  • “Opt-out” orders are now here to stay, following the Supreme Court’s November 2020 decision in Southern Response Earthquake Services Limited v Ross [2020] NZSC 126.
  • The Law Commission has published its substantive, and substantial, Issues Paper for its Class Actions and Litigation Funding project.

We predict that 2021 will see the courts continuing to focus on managing class actions while the Law Commission presses ahead with its recommendations for a statutory class action regime (having come to a preliminary view that New Zealand should develop one) and for the potential regulation of litigation funders (which are a necessary part of the majority of class actions).

Southern Response Earthquake Services Limited v Ross

In September 2019, the Court of Appeal issued what was a landmark decision. It permitted, for the first time, “opt-out” orders for representative actions in New Zealand. The Supreme Court then upheld the Court of Appeal’s decision.

Both parties had accepted that the existing rules allowed for “opt-out” orders by the time the case reached the Supreme Court.

In September 2019, the Court of Appeal issued what was a landmark decision for representative class actions.

However, Southern Response contended that it was not appropriate to make such orders in the absence of a legislative framework governing representative actions.

The Supreme Court provided the following guidance for when “opt-out” orders should be made:

  • Generally, the court should adopt the applicant’s chosen procedure unless there is good reason to do otherwise.
  • In terms of departures from the above starting point, an “opt-in” approach should be favoured where there is a real prospect that some class members may be worse off or adversely affected by the proceeding. Cases where there is a counterclaim or the potential for one to emerge would fall into this category. Class size is relevant, with smaller classes with existing connections between members favouring an “opt-in” approach.
  • A universal class (where notice is not required, and class members do not have the chance to opt in or out) may be appropriate where the relief sought, such as a declaration, impacts all class members equally.
  • The Court can supervise settlement of representative actions, to ensure fairness to class members in terms of the outcome and consequences of settlement. Representative order applications should address the court’s supervisory role in this regard.

Law Commission’s Issues Paper in its Class Actions and Litigation Funding project

The Law Commission spent 2020 progressing its Class Actions and Litigation Funding project.

Having initiated conversations with key stakeholders, the Law Commission decided on a first principles-based review process, primarily because:

“It is evident from [the Law Commission’s] initial conversations and research that there is no broad consensus on the desirability of a class actions regime or litigation funding, nor on the extent to which, or how, they should be regulated.”

The Law Commission’s recent work has culminated in a mammoth 376-page Issues Paper to: ‘… facilitate consultation and feedback on whether the potential benefits of class actions and litigation funding can be realised in a way that outweighs any risks and concerns.’ The Issues Paper is evenly divided between class actions and litigation funding.

Class actions

The key to the Issues Paper is the Law Commission’s preliminary view that New Zealand should have a statutory class actions regime. The Law Commission considers that class actions provide valuable access to justice and that any disadvantages in the current system (which it considers inadequate) can be managed in a statutory regime. The goal of any regime is to “provide greater certainty, predictability and transparency of the law”.

The Law Commission is now focused on the issues that will need to be addressed if New Zealand is to adopt a statutory class actions regime. Key issues include:

  • Whether each case must be certified to proceed as a class action i.e. what basic requirements must be met. In our view, any regulatory regime will need to ensure that the preconditions to class actions do not present an insurmountable barrier to entry. The regime must provide ready access to justice to allow plaintiffs with meritorious actions to have their grievances determined expeditiously.
  • Who can be a representative plaintiff, including the role of tikanga in determining questions of mandate in representing groups of plaintiffs, as well as class membership. Again, we think that these are important issues, particularly in ensuring that New Zealand’s legal processes are consistent with tikanga.
  • Management of adverse costs where class actions are unsuccessful. It will be important that costs issues are regulated to ensure fairness to both plaintiffs and defendants.

We maintain that a well-developed statutory regime would assist access to justice. It would provide clarity on the requirements for class actions, while also removing the high cost associated with the proceedings currently necessary to settle procedural rules.

Sophisticated funders provide a valuable service.

Litigation funding

The Law Commission’s preliminary view is that “… litigation funding is desirable in principle and should be expressly permitted, provided that..” concerns can be managed:

  • Funder control of litigation – the key concern being one of interest misalignment between funders and plaintiffs. The Law Commission has said that the courts retain a supervisory jurisdiction over their own process. One option would be the mandating of minimum contractual terms as to funder control.
  • Conflicts of interest – both as between the funder and plaintiffs (e.g. where one wants to settle and the other does not) and between the plaintiffs and their lawyer(s) (e.g. where the lawyer’s proximity to, and/or reliance upon, the funder creates a conflict). The Law Commission has suggested the possibility of minimum contract terms in funding agreements regarding conflict management.
  • Funder profits – funding is a given that it is generally no-recourse i.e. the funder does not get repaid its outlay or commission if unsuccessful. While recognising that economic reality, the Law Commission has considered options to mitigate the risk of superprofits and the impact that such an outcome could have on substantive justice for plaintiffs.
    “Options… include facilitating increased competition in the litigation funding market, court supervision of funder commissions and direct regulation of the amount of permissible funder commissions.”
  • Capital adequacy of funders and funder regulation – the Law Commission has highlighted the risk to plaintiffs (and therefore justice) if funders do not maintain adequate capital reserves to ensure that proceedings, and costs consequences, can be funded throughout the course of the litigation. Options for reform include amendments to the security for costs regime that would require funders to provide security for defendants’ costs and/or mandating capital requirements for funders, depending on the type and nature of the proceeding.

Tied to the above concerns is the Law Commission’s preliminary view that funders should be regulated. The express manner of regulation is the subject of discussion, with the Law Commission recognising that there is no global standard. Self-regulation is an option, as well as more formal financial services regulation.

In our view, any funder regulation must ensure the right balance between protecting litigants’ (and the public’s) interests, while at the same time ensuring access to justice. Sophisticated funders provide a valuable service, as many class members are unable (or unwilling in many cases) to put their own money into proceedings. So long as there is a group of funders prepared to take that risk then, consistent with the Law Commission’s preliminary view, we see litigation funding as desirable.

Next steps and timing

It appears that the Law Commission will remain busy in 2021, with submissions or comments on the Issues Paper open until 11 March 2021.

The Law Commission will then take this feedback into account as it develops recommendations. Further consultation is expected, with a final report to the Minister of Justice expected in May 2022.

We also expect to see further case law on class action procedure while the law reform process runs its course.

Read the full forecast

Who can help