Parliament's Commerce Committee has recommended that the Government take steps to allow class actions, and regulate third party litigation funders in New Zealand.

Class actions cannot be brought in New Zealand at present, although, in certain circumstances, group litigation is possible by way of representative action.

A draft Class Actions Bill is currently with the Ministry of Justice (and has been since 2009). The draft Bill has not progressed beyond the Ministry over the last two years as the Government has prioritised other legislation. As part of an Inquiry into Finance Company Failures, the Commerce Committee recommended that the Government make the draft Bill a priority after November's election.

This FYI describes how group litigation works in New Zealand at present, and outlines some of the issues looked at by the Commerce Committee. These included difficulties experienced by investors in bringing and funding claims against failed finance companies.

Group litigation in New Zealand

The current High Court Rules allow group litigation by way of representative action. One party can sue or be sued on behalf of other parties with the same interest in a proceeding, either with the consent of the other parties, or, as directed by the court.

Representative actions have developed to further the objectives of the High Court Rules - to ensure the just, speedy and inexpensive determination of proceedings. For example, a representative action can avoid a defendant having to face a multitude of claims based on the same subject matter. Courts have taken a wide and flexible approach when deciding whether parties have the "same interest" in a proceeding and have allowed representative actions in a range of circumstances.

Issues with representative actions

When a cause of action requires actual reliance to be shown by each plaintiff, courts have not been so willing to allow representative actions. In a claim for negligent misstatement, for example, representative actions have been refused because the individual parties do not have the "same interest" in the proceeding. Each individual's claim will be different in an action for negligent misstatement and it will be difficult (if not impossible) for a representative to give evidence of other parties' specific reliance on the statement in question. Courts have at times also been reluctant to make an award of damages in representative actions.

Third party litigation funders

Increased ability to bring group litigation is likely to lead to an increase in third party litigation funding. Third party litigation funding involves a party, unrelated to the proceeding paying the costs of litigation. If that litigation is successful, the third party recovers a portion of any judgment or settlement reached.

Third party litigation funding has sometimes been viewed negatively by the courts, raising concerns about the running of worthless claims and the ethics of profit sharing in the proceeds of litigation.

Courts have recognised that the costs of litigation may make bringing a claim out of reach for some individuals. As with group litigation, courts have been increasingly more flexible and willing to allow third party litigation funding to further the objectives of the High Court Rules and increase access to justice.

Third party litigation funders do not come without their own issues; they are not subject to the same obligations of client care and conduct and duties to the court as counsel in New Zealand.

The Commerce Committee's report indicates that safeguards are necessary to govern the operation of third party litigation funders if class actions are to be allowed. For that reason, the Commerce Committee's report has also recommended that any legislation allowing class actions include guidelines for the operation of third party litigation funders.