Balanced approach on litigation funding and class actions taken by the New Zealand Law Commission

On 27 June 2022, the New Zealand Law Commission published its report on Class Actions and Litigation Funding following its review and consultation, which began in 2020.^[1] 

The Law Commission has taken a considered approach to litigation funding and class actions, balancing the key concerns with appropriate restrictions. If adopted, these recommendations will provide certainty and clarity for litigants and funders alike and have a positive effect on the litigation funding market in New Zealand.

Background 

New Zealand currently does not have a regulatory regime for litigation funding and class actions. The Courts have adopted a permissive approach to litigation funding, only interfering when the arrangement amounts to an abuse of process or an impermissible assignment of the cause of action. In relation to class actions, the Courts have adapted and developed the rule permitting “representative actions” in the High Court Rules 2016 to allow class actions.  However, there has been demand for some time to provide a proper legislative framework for class actions to facilitate that process. 

The absence of regulatory guidance has created difficulties for parties to litigation, lawyers and funders as the parameters for what is permitted are unclear. 

Litigation funding 

The Law Commission considers that litigation funding is desirable for New Zealand in principle.  Balancing considerations of plaintiffs, defendants and funders, the Law Commission decided that it was not necessary to create a bespoke licensing regime for litigation funders, but that some further regulation and Court oversight is required.

The aim of the recommendations is to ensure that the litigation funding market is sustainable and competitive, while ensuring that outcomes are just, fair and reasonable, particularly in respect of funded class actions.

The key recommendations include:

1. Disclosure:  Litigation funding agreements should be disclosed to the Court and the defendant, with redactions to protect privileged matters or those which might confer a tactical advantage on the defendant. This is to ensure that defendants can make informed choices about whether to apply for security for costs, or a stay of proceedings on abuse of process grounds. The Law Commission also considers this would promote transparency which would in turn “provide greater assurance in the integrity of the Court system”.
   
   
2. Direct costs consequences for the funder:  The Law Commission recommends that the Courts be given the express power to order costs and/or security for costs directly against a litigation funder, rather than against the parties to the proceeding.
   
   
3. Security for costs enforceable in NZ:  Putting in place a rebuttable presumption that, if an order for security for costs is made against a funded plaintiff or a litigation funder, the security must be in a form enforceable in New Zealand.
   
   
4. Conflict Management: Amendments to the Lawyers Conduct and Client Care Rules about how conflicts of interest should be avoided and managed in funded proceedings, including where the lawyer/law firm acting in the proceeding has a financial or other interest in the funder.

There are also additional recommendations that apply only to class actions that are funded, which recognises the different level of risk attached to funded class actions and acknowledges that single funded plaintiffs can negotiate the terms of the funding agreement.  The additional rules recommended by the Law Commission in respect of funded class actions include:

1. Court Approval: Litigation funding agreements in a class action proceeding should be subject to Court approval. The Law Commission recommends that Court approval should only be given if it is satisfied that the agreement is fair and reasonable, and the representative plaintiff has received independent legal advice. We note that the Law Commission expressly does not recommend requiring Court approval of litigation funding agreements outside of a class action context as it considers that “most individual funded plaintiffs are likely to be sophisticated and able to protect their interests when negotiating funding agreements”.
   
   
2. Security for costs:  Where it is a funded class action, the Law Commission recommends that there be a rebuttable presumption that funded plaintiffs will provide security for costs.   

Class actions

The Law Commission also recommends introducing legislation for class actions. Key recommendations include: 

1. Class Actions Act:  a new Class Actions Act that would be the principal source of law in relation to class actions.  The proposed legislation would only apply to plaintiff class actions.  Representative defendants should continue to be governed by HCR rule 4.24.
   
   
2. Certification:  a requirement that a proceeding be certified by the Court before it can proceed as a class action. The certification test should require, amongst other things, that there be one or more reasonably arguable causes of action.
   
   
3. Cost Sharing Order:  The Courts should be empowered to order that the litigation costs of a class action (including the legal fees and funding commission) be equitably spread among all class members. This is especially important in an opt-out class action, where some class members may not have signed a litigation funding agreement.

Next steps

The report is now awaiting the response from Government, which will consider the Law Commission’s recommendations and choose whether to adopt the recommendations and enact legislation to bring it into effect.

We welcome the recommendations made by the Law Commission and would support the adoption of the recommendations and legislation to bring the recommendations into effect. 

Law& and Litigation Funding

Litigation Funding is part of DLA Piper’s Law& offering, which seeks to deliver solutions beyond traditional legal services. DLA Piper has established an entirely independent company, Aldersgate Funding Limited (“AFL”), which provides clients with access to GBP150 million of committed capital for litigation or arbitration claims across all jurisdictions in which it operates (subject to local laws and regulations), including New Zealand.

To see how Litigation Funding can help your business, get in touch with Alicia Murray.