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The power of the collective

14 July 2016 - By James Greenland

The power of the colective

Access to justice is fundamental to the rule of law.

In many respects, the right to justice is the rule of law. Rights and interests are only as valuable as the extent to which they can be enforced and protected.

“The law has potential to be an amazing force for good in society,” former Chief High Court Judge, now Court of Appeal Judge, Helen Winkelmann told LawTalk late last year. “But for it to be enforced for good, people need to be able to access it.”

Access to justice through the courts remains a hallmark of civil society, yet, internationally, justice is becoming harder and harder to access for more and more people. Though the phrase itself, imprecise and ethereal, frustrates some, “access to justice” has become perhaps the major issue for the modern profession.

It might well all be described as “nonsense on stilts” by a jurist like Jeremy Bentham.

A pragmatic and practical thinker, his positivist legal philosophy stressed that the so-called ‘natural rights’ of individuals are mere rhetorical nonsense when absent the capacity to be enforced.

Bentham used to say that liberty is the “absence of restraint”. To the extent that one is not hindered by others, one has liberty, is “free”, he argued.

Today, we commonly call this “negative liberty” and, thankfully, it’s a freedom with which we are very familiar in this country.

While negative liberty may be the benchmark of a “free” society, “positive liberty”, the capacity to act – to make use of one’s freedom, is probably the better measure of a free society’s success.

Can individuals within society realise their rights? Can they actually protect their interests? Can they seek and – more importantly – achieve redress when their rights are disregarded?

One suspects the original right to access justice originally hinged more on the “negative” notion of liberty. Individuals, since Magna Carta, have been free (in theory at least) to have their claims heard before the court, to defend themselves against accusation, to live and engage with society without unjust restraint.

Modern references to “access to justice” seem to look beyond “negative liberty”, to suggest that a right to the courts, to lawyers, to the institutions of justice, is fundamental. Many argue that access to justice is not just a freedom, but a positive right – a right that a government is obliged, as consideration for the social contract with which it establishes authority, to provide its citizens.

That’s why criminals with low earnings are entitled to a legally aided defence.

But, are individuals as empowered to realise their civil legal rights? No. Civil legal aid is only available for the very poorest New Zealanders, and in limited circumstances. (The legal profession will, no doubt, be interested to see how the $17.2 million increase for family and civil legal aid, announced in the latest Budget, will work out in practice.)

Access to the civil courts is expensive, with filing fees and lawyers’ bills and security for costs. One’s proverbial “day in court” is out of reach for many, possibly most, in today’s deeply unequal society.

Even “middle” New Zealand reportedly can’t afford litigation.

Of course, individuals are, also fundamentally, free to represent themselves before the court. And many these days do so, whether by choice or lack of alternative.

But for individuals without either the capacity to self-represent or the means to afford it, “access to justice” remains a right unrealised – a freedom for all, unreachable by many.

“Nonsense on stilts”, Bentham would decry!

When individuals can’t rely (because they can’t afford to) on the law to protect and enforce their negative liberties – their freedoms of movement and of speech, their sanctity of self and right to life, their property interests and contractual promises – they, the disempowered, become disenfranchised.

When people can’t access justice, public perceptions of lawyers and the legal system become tarnished, the profession collectively suffers and the rule of law itself comes into question.

Effective solutions, changes, creative thinking is required by all who form the legal system, to protect the reputation of the law and its practitioners and most importantly to ensure the fundamental promises of law – justice, equality, fairness – are preserved.

These are two promising developments in New Zealand’s legal landscape that have potential to enhance access to justice, by making it possible for more individuals to have their issues heard. These are class actions and litigation funding.

Class actions rely on the power of a collective; litigation funding the power of wealth.

Both, separately and in tandem, can empower individuals to bring meritorious claims before the courts – to access justice where otherwise they’d be unable to afford it.

A brief history of class actions in New Zealand

A 2015 report Dispute resolution in New Zealand – trends and insights by Chapman Tripp observes that “class actions are becoming more popular” and “we are seeing the entry of the litigation funder to the New Zealand market” – which is not unrelated to the increasing popularity of the former.

Generally known as “class actions” overseas, the grouping of multiple individuals’ like claims into a single large-scale action is something most New Zealand practitioners, and many non-lawyers too, are well familiar with.

The David v Goliath, triumph of the “underdog” archetype is reworked by legal novelists like John Grisham and Harper Lee. A dramatic fight for justice against great odds resonates with readers.

Class actions in particular, grouping as they do large numbers of “underdog” claimants, have become somewhat engrained in the social psyche thanks in part to American literature and blockbuster films like Erin Brokovich and The Rainmaker. A collective of the small and otherwise weak taking on, and beating in court, big, powerful and otherwise “above the law” institutions has since Biblical times been a best-selling narrative.

Class actions leverage the strength of numbers, and by doing so can make justice more accessible, corporate social responsibility more ethical and imbalances of social and legal power more equal.

But, while familiar to Kiwis, “class actions” or “group actions” or “representative suits” are not a common species of civil litigation. In fact, in 2009 the Court of Appeal described this as “one of the areas of serious underdevelopment in New Zealand civil law” (Carter Holt Harvey Ltd v Commerce Commission [2009] NZCA 40 at [151]). Seven years later, and despite the interim drafting of a Class Actions Bill, there remains no formal class action regime.

NOTE: The Rules Committee, responsible for the laws governing procedure in the courts, met in February and discussed whether it should draft rules to provide for representative actions. It had been suggested that rule 4.24 might be elaborated on, to “reflect the case law developments over the last seven to eight years”. Chief Justice Sian Elias reportedly “queried whether it would be best to leave the requirements to develop in individual cases rather than making rules based on the cases so far”. She said the development of representative proceedings “might well evolve to the stage where some sort of checklist would be useful, but that it was not yet there”.

Our lack of clear procedural rules has stymied development of class actions. But the slow growth is probably partly due also to our relatively small population and economy.

Two recent and successful claims from the Canadian and New South Wales jurisdictions illustrate the enormous scale class actions can reach, both in size of group and quantum of damages.

The largest class action trial in Canadian history (the Blais/CQTS action) commenced in March 2012, 14 years after the initial plaintiffs filed proceedings. It involved Quebec’s 1.8 million smokers and the three biggest cigarette companies, who were ultimately ordered to pay $15 billion between them.

And a class action brought by 150 sexually and psychologically abused former students of New South Wales’ Fairbridge Farm School recently concluded in a $24 million settlement following a six-year legal battle with local and federal governments.

Incompatibility with New Zealand’s legal culture may also explain the relative absence of class actions from our civil jurisprudence; as well as our restriction on personal injury suits, our costs regime – where unsuccessful plaintiffs can be liable – our restriction on contingency fees, and our modest damage awards, says Liesle Theron, a litigation partner at Meredith Connell in Wellington.

“New Zealand also does not have the large plaintiff litigation firms with a history of doing class action work that are such an established presence in Australia and the United States.”

But, as New Zealand’s class action regime develops in the courts, and current uncertainties about the operation of the representative rule (High Court Rule 4.24) are clarified, “there is every reason to expect that local firms or legal teams with the skill and ability to conduct large scale group actions will emerge,” Ms Theron says.

And New Zealand has already seen a handful of types of class action case.

There’s been the seminal Feltex shareholders’ claim, a couple of product liability actions brought by leaky-home owners and claims for breach of contract and bad faith against an earthquake insurer.

There’s been the well-publicised “fair play on fees” case against a bank’s allegedly unfair penalty charges, a claim of Government negligence by a collection of kiwifruit growers, allegations of wage discrimination by aged-care sector workers, and a settlement recently achieved by about 50 small business owners against those responsible for New Zealand’s largest maritime environmental disaster, the Rena grounding.

Ms Theron for Meredith Connell has filed a group action on behalf of recipients of defective hip replacements that she says will “test the boundaries of the ACC bar”, and Wellington firm Gibson Sheat is registering interest for a class action against car maker Volkswagen.

The FELTEX jurisprudence – a third party-funded class action

The Feltex jurisprudence (see Credit Suisse Private Equity LLC v Eric Meserve Houghton [2014] NZSC 37), involving a claim by some 3,600 shareholders of the failed Feltex Carpets Limited against its managers, has been seminal in the development of both class actions and litigation funding in New Zealand. Ultimately the claimants were unsuccessful at trial, but the courts, including the Supreme Court, did make several important observations throughout the litigation, including:

  • the key procedural steps that must be followed to obtain a representative order;
  • that High Court Rule 4.24 should be interpreted in a “flexible” manner, and “provided its application will not cause injustice, should be applied”;
  • representative actions promote efficient and economic litigation by preventing unnecessary congestion in the courts;
  • that there is scope for continued development in this area; and
  • the extent to which courts will supervise litigation (third party) funding agreements.

Class actions as a means to access to justice

There are risks, of course. A lack of defined procedure creates uncertainty as to how proceedings will operate, potentially preventing litigants from making fully informed decisions about the conduct of their claims. There are difficulties in getting large groups of plaintiffs to co-operate. And, as we will see from the Canterbury case study, uncertainty provokes interlocutory disputes that add to the expense and delay of proceedings.

Finally, the development of procedural rules by the courts on a case-by-case basis, while offering flexibility, increases the risk of inconsistent application of the law.

Nonetheless, “these developments should be embraced,” Ms Theron says.

“Class action litigation gives individuals access to the courts by pooling a large number of claims which may not be viable on their own, and raises public awareness of important issues.

“It holds the promise of a more level playing field on which powerful defendants can be held to account.”

In his 2015 LLM thesis for the University of Toronto, Thomas Hallett-Hook argues that modern class actions are now possible in New Zealand, despite our lack of a clear procedural regime, and that access to justice has been enhanced by the economies of scale achieved when issues common to multiple plaintiffs are grouped into a single proceeding.

The scale enables “the pursuit of claims that would not otherwise be economically viable,” he says.

Another benefit is “behavioural modification”, he writes, as “wrongdoers who cause widespread but relatively modest harm can no longer count on the practical reality that individual proceedings are too expensive to pursue, to shield themselves from liability.

“Judicial economy” is also achieved, Mr Hallett-Hook writes, “avoiding inefficient duplication of fact finding and legal analysis, and reduces the risk of multiple claims against the same defendant”.

Chapman Tripp also predicts the continued rise of class action suits, stating that such actions can address the “imbalance of power that typically exists” between the individual plaintiff and large businesses, organisations and governments.

That imbalance “both in terms of legal buying power, the costs of litigation, and general tenacity – usually dissuades the enforcement of legal rights,” the briefing states.

“In many of these cases the cost of an individual action would exceed the amount claimed.”

Obviously, in this sense class actions are good for the “underdogs” who, collectively, are put in a better position to advance their case.

It “remains to be seen” whether the development of a local class action market is a net benefit to New Zealand as a whole, the Chapman Tripp insights report concludes.

“The perils of class actions are well-publicised overseas, particularly in the United States – increased litigation, cost to business in defending speculative or meritless claims, and risk of abuse of process,” Ms Theron says. “So far there has been little sign of such risks emerging here, but it is very early days.

“Either way, in the short term there will almost inevitably be an increase in interlocutory skirmishing around proposed representative actions as defendants look to test the boundaries of what is permissible from plaintiff groups.

“Most of the features responsible for the expansion of this type of litigation in Australia are also present in New Zealand,” Ms Theron says.

“The New Zealand courts have shown themselves to be open to class actions, facilitating them as far as possible.”

And, such large-scale claims may become even more viable as more third-party litigation financers begin to operate in New Zealand and fund claims under the representative rule.

Litigation funding (third party funding) in NZ

“The presence and expansion of litigation funders suggests that the small New Zealand economy is able to generate sufficient returns to support the funding industry,” Liesle Theron says.

Closely, though not necessarily, related to the topic of class actions is litigation funding – the financing of a legal action by a third party to the substantive claim.

As the Chapman Tripp report notes, the “entry of litigation funders onto the NZ litigation scene is both a symptom and a cause of the rise of representative actions”.

Class actions are expensive, especially when expert witnesses are required, as they often are.

Typically, a litigation funder will “invest” in a court case (or, increasingly, a portfolio of cases), providing finance to fuel the litigation in return for a percentage of monetary damages awarded if the claim is successful.

There would be no reward without risk.

Litigation funders will typically indemnify claimants from financial liability if they are unsuccessful. The funders of the unsuccessful Feltex claimants were ordered to pay a large part of the defendants’ costs, reportedly up to $5 million.

Like class actions, there is a notable absence of clear rules and regulation to govern litigation funding despite its rapid and significant expansion into the New Zealand litigation landscape in recent years. And like class actions, the courts have thus far demonstrated a relatively facilitative approach to litigation funding.

“Funding will be permitted provided it does not amount to a full-scale assignment of the plaintiff’s claim,” the Chapman Tripp report says.

Full-scale assignment of a claim to a third party, particularly a third party financier, would likely breach the old-fashioned, but still in force, torts of champerty and maintenance.

Research conducted this year in the United States by funder Burford Capital, which describes itself as “the world’s largest provider of finance for litigation and arbitration”, suggests that third party funding of legal actions is undergoing “explosive growth and ongoing evolution” internationally.

Burford’s 2016 Litigation Finance Survey reports that 28% of private practice lawyers in the United States say their firms have used litigation finance directly – “a four-fold increase since 2013”.

Founded in 2009 in the wake of the Global Financial Crisis, Burford says economic pressure on law firms has driven the demand for third party capital investment in litigation: “from clients that couldn’t afford to pay hourly fees to hire their firm of choice, and from law firms that could neither take on more contingent risk nor afford to turn clients away”.

Litigation finance developed as a “tool of economic necessity”, Burford says, but is increasingly being used “as a matter of choice – as a smarter, more efficient means of unlocking the asset value of pending litigation and adding cash flow to businesses and law firms”.

New Zealand commercial regulators have yet to fully grapple with the rise of litigation funders, according to a spokesperson for the Ministry of Business, Innovation and Employment (MBIE). “MBIE is not aware of litigation funders being raised as a consumer policy issue in New Zealand, but we are observing developments in this area,” the spokesperson says.

Again in similarity with the emergence of class actions in New Zealand, the “outworkings of the emergence of a market for litigation funding remain to be seen”, the Chapman Tripp report concludes.

There are obvious access to justice benefits, but also obvious dangers.

“Plaintiff groups with relatively clear claims and a favourable ratio of claim quantum to litigation cost will benefit.

“Plaintiffs with just, but difficult or uneconomic claims, not so much.”

There are more than seven litigation funders already offering services in New Zealand.

The types of claim they will typically fund include: “breach of contract, breach of statute, insolvency related claims, professional negligence, breach of trust, insurance related claims, intellectual property, construction contracts, commercial disputes,” one of their websites states.

“Our main purpose is to provide assistance and funding to plaintiffs that do not have the resources to follow through with a worthy claim and to be successful in doing so which will enable all parties to benefit as a result,” it continues.

Another funder, London-based Woodsford Litigation Funding, is also eyeing opportunities for investment in the New Zealand litigation market. And they’re no small player.

“Our goal is to invest £100,000,000 in funded cases over the next five years,” says former Bell Gully (Auckland) solicitor Lara Bird.

She recently joined the multinational funder as an investment officer, where her role includes reviewing cases – “undertaking the appropriate due diligence and taking a view, with the input from the wider team, whether to invest in them”, managing those funded cases – “for example, making sure the bills are paid on time and assisting the instructed lawyers and/or client whenever they request it”, and general marketing and business related activities – “including seeking out opportunities in a number of jurisdictions around the world”.

“Opportunities” are cases that look like winners.

“Litigation funders are only interested in funding meritorious claims,” Ms Bird says.

“It is of no benefit to anyone to fund cases that are unlikely to succeed. However, there is no perfect case and litigation (and therefore litigation funding) does involve a large element of risk,” she says.

Ms Bird says there has been an increase in group actions in England and Wales and within Europe, with a large number being backed by litigation funders.

“The main reason for this is that class actions (or representative actions in New Zealand) are extremely expensive often due to the complexity of the case, the large amount of time required to ‘book-build’ and to do the appropriate due diligence to get the case off the ground, and the large number of under-resourced claimants (and lawyers) involved.

“Without funding, many of these actions would not be able to proceed,” she says.

Some funders follow strict criteria in deciding which cases to invest in, she says. Others are more flexible. “We are prepared to take an initial look at most cases,” Ms Bird says.

Woodsford is currently funding cases in Australia, the Netherlands, the United States and France, and has ongoing projects in Italy and Poland.

Of course, the key metrics are the expected cost of litigation and the anticipated damages to be awarded if successful.

“While Woodsford seeks to receive a return on the money they have invested, they also take into account the amount of money that the claimant is likely to receive,” Ms Bird says.

“Ideally, the claimant should always maintain the dominant economic interest in the case, including expecting to receive over 50% of the proceeds of the litigation.”

Each funder has its own business model. They will likely agree on different terms for each claimant or claimant group they fund.

“Woodsford’s classic access-to-justice product offers funding on a case-by-case basis for meritorious claims in litigation or arbitration, where the claimant lacks the resources or the appetite to proceed without financial support.

“Our funding is non-recourse, with Woodsford’s return payable only upon success.

“The terms of investment and of our return are bespoke, individually tailored for each case. This funding may cover lawyers’ fees and disbursements.

“While there is always a risk, I believe litigation funding adds a different dynamic and an additional layer of diligence to litigation.”

What are the torts of champerty and maintenance?

Maintenance is the support of litigation, by a stranger to the litigation, without just cause.

Champerty is an aggravated form of maintenance, where litigation is supported by a third party in return for a share of the proceeds.

On the face of it, third party funding agreements resemble the type of arrangement that the tort of champerty sought to disallow.

However, the torts were developed hundreds of years ago, in the context of a drastically different legal system where “unruly nobles”, wealthy individuals and “unscrupulous men of power” could fund lawsuits in which they had no legitimate interest as a means of oppressing opponents who would become subject to the expense and difficulty of court proceedings.

In Australia, Canada and the UK, the torts have been abolished by statute. While in New Zealand there is no reported case on a breach of maintenance or champerty, both remain part of our common law and have potential to disrupt litigation funding agreements.

That said, the Court of Appeal’s Justice Baragwanath expressly discussed maintenance and champerty during the Feltex saga and observed that the “interests of justice can require the court to unshackle itself from the constraints imposed” by arguably no-longer-fit-for-purpose torts.

Last updated on the 14th July 2016