The NZ Law Commission is continuing its review of class actions and litigation funding, with a view to making recommendations around the introduction of regulations to the minister of justice by mid-2022. Calls for the regulation of class actions and litigation funding in New Zealand have been highlighted by the public withdrawal of funding in a class action midway through trial, resulting in a large costs payout from the funder to the defendant and no recovery for the plaintiffs. This was swiftly followed by a High Court judgment in favour of the defendant in a similar proceeding.⁽¹⁾

Background

There are no court rules or procedures in New Zealand that are specific to, or targeted at, class actions or third-party funded proceedings. Instead, class action proceedings have to operate within the general High Court Rules; specifically, the rule relating to representative actions and the case law that has developed under that rule.⁽²⁾ Although drafted with multiple parties with the same interest in mind, this rule is arguably not adequate to cover all procedural matters that may arise in the large funded or class action pieces of litigation that are increasingly occurring in New Zealand. There is also no legislation that regulates the funding of litigation either generally or specifically for class actions. This has meant that, until recently, there has been little high-level consideration for whether the NZ civil justice system should accommodate or encourage class actions and litigation funding, or how the NZ approach should be reflected in legislation or regulation, if at all.

Absence of specific regulation has also meant that practitioners and funders in the area have had to operate without clear guidance on appropriate procedures. Courts dealing with class actions have adapted the rules relating to representative actions as needed. The lack of targeted regulation has meant that points of procedure have needed to be litigated as they have arisen in such actions, adding to the costs incurred and delays in reaching a resolution. To date NZ courts, including the highest appeal courts, have had to decide on issues including:

• security for costs (for further details please see "Substantial security for costs ordered for third party funded claims");
• disclosure (for further details please see "Supreme Court mandates disclosure of litigation funding agreements");
• opt-in and opt-out schemes (for further details please see "Opting in or opting out: representative action"); and
• costs (for further details please see "Litigation funding in New Zealand").

More substantive issues, such as the legality of funding arrangements, have also been litigated because New Zealand has not abolished the torts of maintenance and champerty as other jurisdictions have done (for further details please see "Supreme Court decision seen as warning for litigation funders").

Given the lack of legislation in the area, the NZ Law Commission is currently considering class actions and litigation funding, and it has recently released a supplementary issues paper. The Law Commission is at the consultation phase but it has confirmed its preliminary view that:

• New Zealand should have a statutory class actions regime;
• litigation funding is desirable in principle; and
• litigation funding should be permitted, as long as certain concerns are addressed. 

Facts

The Cridge proceeding involved a class action by 144 owners of leaky buildings against a cladding manufacturer for damage to various individual residential properties throughout New Zealand that were not watertight. The owners claimed that the watertightness issues and resultant damage had been caused by the cladding used in each of the buildings, a product called "Harditex", which had been manufactured and supplied by James Hardie NZ Ltd (now Studorp Limited).

The homeowners claimed there were nine inherent defects with Harditex, two of which related to the Harditex product itself and seven to the system in which it was used, which included jointing, aesthetic features and coating. These alleged defects related to:

• the durability and absorbency of the product;
• how the product interacted with other building elements; and
• failures to provide proper information on installation and maintenance.

The homeowners brought claims in negligence and under the Fair Trading Act 1986.

Decision

In relation to the negligence claims, the High Court agreed that the manufacturers of Harditex owed a duty of care to homeowners, but the Court held that this duty had not been breached. In particular, there was no breach in relation to the manufacturing of the product itself or in relation to the technical literature. The Fair Trading Act claim also failed. Therefore, all claims were dismissed.

The judgment ran to 274 pages and it contained a vast amount of analysis of the scientific and expert evidence produced by both parties. The written briefs ran to 10,000 pages, with 6,000 pages of oral evidence and vast documentation. The judgment recorded 20 lawyers as counsel for the parties and the hearing ran for four months.

The judge noted that the substantial body of evidence had failed to prove that Harditex was a flawed product unable to deliver a weathertight house. Instead, international experts had demonstrated that it was a product which could work and that it was not significantly different from products that had been on the market for some time prior. A detailed analysis of some of the plaintiffs' houses showed a pattern of incompetent building and poor texture coating, which the judge considered was more likely to be the cause of the homes' damage.

In his verdict, the judge recorded his assessment that some of the plaintiffs' expert witnesses were unreliable and that they had strayed outside their expertise, reducing the weight given to their evidence and weakening the plaintiffs' case. By contrast, the expert evidence for James Hardie was described as being of "considerable strength".

Withdrawn funding

The unsuccessful proceeding was originally commenced in 2015. It took six years to get to trial, with a hearing that lasted four months. The proceeding would likely have been an incredibly time-consuming and expensive process, ending in disappointment for both the plaintiffs and the funders, no recovery and exposure to a substantial adverse costs award.

The judgment was released in mid-August 2021. Just a week before it was released, another class action against the same defendants in relation to the same products was abruptly settled midway through the trial as a result of the litigation funder, Harbour Litigation, withdrawing funding. That proceeding had also been running for six years and involved over 1,000 plaintiffs. Many of the expert witnesses engaged by the plaintiffs were the same as those that had been used in the Cridge proceeding. By the conclusion of the plaintiffs' case during the trial, the funder appeared to reach the view that the claims would not succeed, and they entered into a substantial costs settlement with the defendants. A third class action against James Hardie is due to be heard in 2023.

Law Commission review

Representative or class actions and litigation funding will continue to be an area of focus in New Zealand, and their use is expected to increase. Prior to the current Law Commission's consideration, New Zealand had not engaged in a high-level analysis of class actions and litigation funding, with a consideration for whether they are desirable and improve access to justice or whether they should be discouraged. The Law Commission is not only attempting to consider whether class actions facilitate access to justice, but also to consider how class actions and funding should be regulated and what role the courts should play where litigation is third-party funded.

The Law Commission's review began in 2019 and it has been through one round of consultation, with a further set of questions released in September 2021. The Law Commission has indicated its preliminary views that:

• a regulatory class action regime is desirable because:
  • the current representative actions rule is inadequate for modern group litigation;
  • class actions can improve access to justice and the efficiency and the economy of litigation, as well as strengthen incentives for compliance;
  • potential disadvantages of group litigation can be mitigated through careful design of the regulation; and
  • regulation would provide greater certainty on class action rules.
• litigation funding is desirable in principle and should be permitted in New Zealand, so long as the following concerns can be
• addressed:
• funder control over litigation;
• the potential for conflicts of interest;
• funder profits; and
• capital adequacy of litigation funders.

The consultation is ongoing, with the issues in the supplementary consultation paper centring on:

• issues relating to commencing class actions, including those with multiple defendants, and the impact of a class action on limitation periods;
• the certification of class actions;
• how competing class actions should be managed;
• relationships in a class action, including the responsibilities of the representative plaintiff and the nature of the lawyer-class member relationship;
• issues that arise during a class action, including:
  • giving notice to class members;
  • case management;
  • discovery;
  • managing individual issues; and
  • whether to allow common fund orders or funding equalisation orders;
• issues associated with class action judgments; and
• settling class actions.

 

Comment

While the Law Commission's consideration is ongoing, it is highly likely that class actions and third-party funding of class actions and other litigation will continue to increase in New Zealand. There seems to be clear advantages to specifically regulating class actions and their funding, in order to ensure that plaintiffs are better able to access justice and reach fair resolutions. One of the areas presently being contemplated by the Law Commission (and, it could be argued, is in need of serious consideration) is whether lawyers acting in class actions or on funded litigation should have specific professional obligations to reflect the potential for conflicts of interest between class members, the funder and the lawyers, resulting from the potential complexities of the relationships within class litigation. Whatever regime the Law Commission recommends must work for both plaintiff classes and funders if it is to achieve its core aim of improving access to justice. Submissions are open until mid-November 2021 and final recommendations are due in May 2022.

For further information on this topic please contact Felicity Monteiro at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]).

Endnotes

(1) Cridge v Studcorp Limited [2021] NZHC 2077.
(2) High Court Rule 4.24.