Class actions and litigation funding project revived

The Law Commission will soon seek feedback in its Class Actions & Litigation Funding Review Project. This is an area of continued interest to the insurance market.

The Law Commission’s review

Class actions

The Law Commission will first look at class actions: proceedings brought by or on behalf of a group of plaintiffs with the same interest. Unlike other jurisdictions, New Zealand does not have a comprehensive class actions regime. The Commission’s review aims to scope:

  • whether and to what extent the law should allow class actions;
  • if they are to be allowed, how they should be regulated regarding –
    • the provision of a regime;
    • the criteria and procedural requirements for commencing class action, and how to define a ‘class’;
    • management of class action proceedings; and
    • damages, costs, and settlement. [1]

Many consider that New Zealand’s class actions regime requires fine-tuning in order to keep up with the growing number of class actions and to minimise the risk of such actions becoming expensive and cumbersome. In particular, the Law Commission is looking for ways to best manage competing funded class actions – a familiar tale in Australia where “beauty parades” of class action sub-groups compete with each other and a ‘winner’ is selected by the Court to proceed on an exclusive basis.

Litigation funding

In relation to litigation funding, the Law Commission will consider:

  • whether and to what extent the law should allow litigation funding, taking account of the torts of maintenance and champerty;[2]
  • the role of the courts in overseeing litigation funding arrangements, if any; and
  • whether and to what extent litigation funders/funding arrangements should be regulated in relation to the nature of recovery, funders’ powers and responsibilities, conflicts of interest, and disclosure requirements.[3]

The Commission’s review is a timely update as the Christchurch High Court this year stayed proceedings due to a clause in a litigation funding agreement which was found to amount to an abuse of process.[4]

The insurance context

Class actions and litigation funding remain top of mind for insurers.

In the ongoing Ross v Southern Response litigation, policyholders collectively allege that Southern Response misled them as to the extent of their entitlements under their policies following Canterbury earthquake damage to their homes. On 15 and 16 June 2020, the Supreme Court heard Southern Response’s appeal of the Court of Appeal’s decision[5] allowing the Ross’ representative action to proceed on an “opt-out” basis. An “opt-out” representative action is one where all plaintiffs are automatically included in the “class” unless they choose not to be. We covered the Court of Appeal’s decision in this article. We expect the Supreme Court to uphold the availability of “opt-out” orders as an option for representative actions in the right circumstances.

The Ross case is funded by CFA, owned by Australian class action law firm Maurice Blackburn.

Recent case on litigation funding

In Cain v Mettrick, liquidators alleged breaches of directors’ duties against Jim Boult (the Mayor of Queenstown) and Brent Mettrick. Mr Boult argued that the proceedings were an abuse of process because the liquidators’ claim was essentially being funded by Christopher Meehan, who was alleged to have an ulterior motive and a vendetta against Mr Boult. The proceedings were funded by a litigation funder, PLF Services Limited (PLF), which was wholly-owned by an entity ultimately controlled by Mr Meehan, although that was not publicly available information.

The Court rejected this argument, holding that an ulterior motive only amounts to an abuse of process where proceedings are used to “achieve a collateral advantage beyond what the law offers”, or are conducted to cause the defendant problems “beyond what is ordinarily encountered” in proper litigation, rather than to vindicate a right.[6] There was nothing more than speculation and hearsay pertaining to Mr Meehan’s alleged ‘vendetta’ against Mr Boult.

However, Messrs Boult and Mettrick did succeed in having the proceedings stayed on the basis that PLF’s litigation funding arrangement amounted to the assignment of a bare cause of action. While the court does not have a role in “gauging the fairness of the bargain” between funder and plaintiff, it will look at the funding arrangements as a whole, having regard to the degree of control exercised by the funder, as well as the profit share. In PLF’s funding agreement there was a clause which dealt with the situation where the plaintiff wished to settle. If PLF did not agree upon settlement, it was entitled to provide the plaintiff with the same return on the same terms as if the settlement had been entered into. Following this, the companies would be obliged to carry on the proceeding and may not make or accept a later settlement. This arrangement amounted to an assignment of a bare cause of action for profit. In other words, the companies would be required to continue with litigation they would not otherwise have pursued, and the litigation would be carried on largely by PLF and for its benefit.

This case is important for insurers of defendants in funded litigation. Defendants can look to have proceedings stayed if the funder has such significant rights in its arrangements with the plaintiff that it can effectively take over and run the litigation against the wishes of the funded plaintiff.

Footnotes

[1] Law Commission Project Overview of Class Actions and Litigation Funding https://www.lawcom.govt.nz/our-      projects/class-actions-and-litigation-funding

[2] Champerty and maintenance are common law doctrines that aim to prevent frivolous litigation and abuse of legal proceedings, where one is essentially financing off litigation, and the other is the unlawful interference of a disinterested party to encourage a lawsuit, respectively.

[3] Law Commission Project Overview of Class Actions and Litigation Funding https://www.lawcom.govt.nz/our-      projects/class-actions-and-litigation-funding

[4]Cain v Mettrick [2020] NZHC 2125

[5]Ross v Southern Response Earthquake Service Ltd [2019] NZCA 431

[6]Cain v Mettrick at [31].

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