Legislation and funding rules needed for class actions

A major shake-up of class action law and litigation funding in New Zealand could significantly boost the number of group actions, leading to bigger settlements and more funders seeking a slice of the pie.

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That’s the view of legal experts, asked by LawNews to comment on the Law Commission’s wide-ranging review of the current legislation which dates back to 1873.

Class actions are big business in some overseas jurisdictions, especially in the United States where it is estimated more than 10,000 new class actions are filed each year in the federal and state courts. 

The #MeToo movement is reportedly fuelling many of these claims.

Billion-dollar settlements involving corporates are commonplace with actions against the tobacco industry costing it US$206 billion, BP (Gulf of Mexico oil spill) US$20 billion and Volkswagen (emissions scandal) US$14.7 billion.

Here in New Zealand, where the current legal framework for such actions is very different, there have been only 36 claims, according to Auckland University law lecturer Nikki Chamberlain who has just completed the first survey of class actions in this country.

Of those, a third were taken against the government but an increasing number are now being filed against big companies on behalf of consumers.

Chamberlain says her study did not determine how many have been successful.

She says the absence of specific laws governing such actions has hampered their development in New Zealand.

“In my view, the current legislation relating to class actions is not fit for purpose. Unlike the United States and Australia, there is no statutory framework that specifically governs the management of class actions.

“Put simply, the current law can impede consumers’ access to justice given that class action litigation can be more uneconomic and inefficient to pursue without formalised rules.

“A benefit of class action litigation is that it allows consumers to bring an action against a corporation that otherwise would not be economically viable if an individual consumer litigated alone against the corporation.

“Class actions level the playing field.”

However, legal proceedings for many class action members are often extremely long and costly with no certainty of success.

A case in point is the long-running saga against seven former directors of carpet manufacturer Feltex which went belly-up two years after its 2004 float, owing shareholders $245 million.

A $185 million class action was taken on behalf of more than 3600 former shareholders who brought claims in relation to allegedly misleading statements in the prospectus for the initial public offering.

After 13 years of legal wrangling, involving more than 20 interlocutory and costs judgments, the Supreme Court recently decided the revenue forecast in the prospectus was misleading and untrue under section 9 of the Fair Trading Act as the Feltex directors knew that it could not be achieved (throughout the litigation the directors have denied any wrongdoing).

However, questions of causation and loss – whether the untrue revenue statement in the prospectus was material to investors’ losses - have yet to be determined in a separate stage-two trial in the High Court.

A more recent class action involves kiwifruit growers who last year obtained judgment against the Ministry of Primary Industries with the High Court ruling the government was negligent in its handling of the PSA disease.

Significant damages have been sought with estimates in the hundreds of millions of dollars.

Although the decision on liability has been appealed, Jenny Stevens, a litigation partner at Bell Gully, says the litigation funder and the class members could receive a significant payout.

“That could pave the way for future action including the potential for increased action against the Crown.

“The case shows that the Crown is not immune from class actions and the Crown may be a ‘deep pocket’ target for future action.”

MinterEllisonRuddWatts partners Jane Standage and Oliver Meech believe the initial success of the kiwifruit and Feltex claims will “give credence to class actions in the eyes of the public” and may also encourage litigation funders to pursue more actions given the potential rewards.

Standage and Meech say there are many lessons to be learned from these early cases.

With no formal framework, New Zealand did not have the ability to stage true class actions in the way they are conducted in the United States or Australia.

“Group litigation in New Zealand currently proceeds through what is called a ‘representative action’ under the High Court Rules. There is no detailed procedural regime.

“In order to facilitate class actions, courts are interpreting the existing ‘representative actions’ rule flexibly, focusing on achieving access to justice and gaining the efficiencies of grouping claims together. This is, however, a patch at best.

“Parties and practitioners are left to derive the ground rules from a growing body of procedural judgments. This has led to inefficiencies and additional costs, with procedural decisions often appealed resulting in delays to determination of the substantive claims.”

Standage and Meech say there is no doubt reform is overdue, noting that in 2008 the Rules Committee released a draft Class Actions Bill providing a detailed set of rules. But a change of government meant it was never introduced.

As a result, the courts had made do with using High Court Rule 4.24, a procedural rule with its origins in the 18th century.

“That rule allows one or more persons to sue or be sued ‘on behalf of or for the benefit of all persons with the same interest in the subject matter of a proceeding’ with the consent of people with the same interest, or after an application to the court.

“However, there were no other procedural rules detailing how a class action might be managed. There are no rules on how to assemble the class, or how potential class members should be notified of the proceeding.

“There are also no specific rules governing the role of litigation funders or any safeguards (such as court approval) for settlements.

“So, the limited rules we do have are being interpreted as flexibly as the courts can permit. It is creaking at the seams and lags behind the legal frameworks for group litigation in the jurisdictions New Zealand commonly compares itself to.”

Asked what specific proposals they would like the Law Commission to recommend, Standage and Meech say there is much to learn from the Australian Law Reform Commission’s (ALRC) recent review of federal rules governing class actions.

“For example, consumers often have the problem of how to obtain funding to pursue a class action claim. If the claims do not attract a litigation funder, this may mean a class action will never get off the ground.

“In New Zealand, lawyers cannot charge a contingency fee (a percentage-based fee on the total amount recovered if the claim is successful), but Australia is now considering whether it will permit contingency fees to increase access to justice.

“However, there are real issues about whether this creates a conflict of interest between a lawyer and the class group.

“To address the conflict of interest concerns, the ALRC has recommended contingency fees should be permitted, provided leave is granted by the Federal Court.”

Standage and Meech say another issue is what are known as common fund orders.

“The typical way class actions operate is that class members sign a funding agreement under which the class member agrees that the funder will receive part of any settlement or judgment.

“Common fund orders require all members of a class to contribute equally to the legal and litigation funding costs of the proceedings, regardless of whether the class member signed a funding agreement.

“The ALRC has now recommended the Australian courts be given powers to make common fund orders as they reduce the obstacles for funders and encourage class actions to be brought on matters which might not otherwise attract funding.”

Standage and Meech say regulations around funding will be a key topic for the New Zealand Law Commission.

“The interests of litigation funders appear to have been generally well balanced by the New Zealand courts to date. However, it would be useful to have a specific set of rules making clear what oversight role the courts have.

“In Australia, the ALRC has made recommendations for funder regulation, including giving the courts the power to reject or amend the terms of a funding agreement.”

Bell Gully’s Jenny Stevens also says she sees the need for regulating litigation funders.

“A more permissive class action regime must increase the prospect of funders achieving returns in at least some cases they take on and this may well increase the presence of funders and may drive more class actions.

“One of the issues in funded actions is that it introduces a dynamic that does not exist in other traditional litigation. Make no mistake, the funder’s interest is purely business in that it is seeking a return on its investment in litigation.

“Traditional plaintiffs may be seeking damages but may also be seeking other changes to practice and process moving forward. For some plaintiffs an apology or a public admonishment of the defendant’s action is also important.

“A settlement dynamic in a funded action will therefore often differ from the norm. With a traditional plaintiff you may be able to explore nonfinancial resolutions but they will simply be of no interest to a funder.”

According to the President of the Law Commission, Sir Douglas White, there are at least seven funding firms operating in New Zealand.

New Zealand-based funders are LPF Group, Litigation Funding Limited, Tempest Litigation Funders, Earthquake Services Ltd. Based in Australia are Litigation Lending Services, and IMF Bentham. Another funder, Harbour Litigation Funding, is based in the UK.

Nikki Chamberlain says four cases had been funded up to 1 March 2018.

  • Joint Action Funding Ltd: Credit Suisse Private Equity LLC v Houghton (2008) – the Feltex case.
  • Litigation Lending Services Ltd: Cooper v ANZ Bank New Zealand Ltd (2013)
  • Litigation Lending Services Ltd: Southern Response
  • Unresolved Claims Group v Southern Response Earthquake Services Ltd (2015)
  • LPF Litigation Funding Ltd: Strathboss Kiwifruit Ltd v Attorney-General (2015)

Chamberlain says she has no figures on the costs of those cases.

However, Jenny Stevens says costs for the LPF Group, which provided the financial backing for the kiwifruit case against MPI, “would have been significant”. She also notes that LPF paid more than $3.4 million to support the liquidator’s claim in the Mainzeal directors’ liability claim.

“In the class action space there has not yet been a significant payday for a funder [but] if a funder receives a large pay out to restock the war chest, this could trigger even more interest from funders in pursuing class actions in New Zealand.”

Next week: Navigating the obstacles to class Actions

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