Omni Bridgeway supports appropriate regulation of litigation funders in New Zealand
Litigation funding is becoming a more regular feature of the legal landscape in New Zealand, particularly in the funding of large multi-party actions. However, there are no specific legislative or regulatory provisions that apply to litigation funding and no statutory class actions regime.
Omni Bridgeway, therefore, welcomed the opportunity to provide a submission to the New Zealand Law Commission’s review into class actions and litigation funding. Omni Bridgeway is currently funding two representative actions in New Zealand and, since listing on the Australian Securities Exchange in 2001, we have been involved with 89 multi-party actions in Australia.
Statutory class actions regime
The current representative proceedings regime in New Zealand has worked well to date. The courts have had the flexibility to approach procedural issues on a case-by-case basis. However, in Omni Bridgeway’s view, there would be benefits for all parties – claimants and defendants - for New Zealand to adopt a clear and more detailed legislative regime. A statutory regime would provide clear policy objectives and rules on the procedural issues that commonly arise and are unique to multi-party actions.
Omni Bridgeway considers that the statutory regime should be based on the Australian system which largely works well. It was first introduced in the Federal Court of Australia almost 30 years ago and, since then, has been substantially adopted in several Supreme Courts of Australian states. Under the Australian regimes, the courts retain significant powers throughout proceedings and all class actions settlements must be approved by the court.
However, in our view, the statutory regime in New Zealand should include some reforms to certain areas that have led to uncertainty and satellite litigation in Australia in recent years, including in relation to competing and multiple class actions and class closure orders.
Omni Bridgeway also submitted to the Commission that, in our view, the New Zealand statutory regime should permit both opt-in (closed) class actions and opt-out (open) class actions. However, in our view, the closed class system has several benefits over open class actions, including that a closed class action:
- Demonstrates that a class action is supported by enough engaged claimants and is not merely a speculative endeavour by a litigation funder or entrepreneurial lawyers.
- Enables the litigation funder to determine whether it is commercially viable to fund the action. If there is insufficient group interest, the action will not proceed, consistent with the overarching purpose of not using the court’s time to achieve an outcome that group members are not interested in participating in.
- Provides the group members with an avenue to express their preference for a particular funder, lawyer or case theory.
Regulation of litigation funding
While litigation funding is permitted in New Zealand, maintenance and champerty remain part of the common law and have not been specifically removed by legislation. Omni Bridgeway has recommended in its submission that the torts of maintenance and champerty should now be abolished in New Zealand as they have in many common law jurisdictions around the world, including England & Wales, Singapore and the majority of states in Australia. There has been an increasing acceptance of the benefits of litigation funding, particularly given the high costs of large, complex litigation and concerns about access to justice.
Omni Bridgeway also submitted to the Commission that it supports appropriate regulation of litigation funders in New Zealand, including a licensing regime that includes:
- Minimum capital adequacy requirements.
- Disclosure obligations and reporting standards.
- Conflicts management requirements.
Third-party funding arrangements for class actions generally include obligations on the funder to pay significant sums. In Omni Bridgeway’s view, prudential regulation of funders is required to ensure those commitments can be met.
Returns to litigation funders
Omni Bridgeway also made submissions to the Commission in response to questions about funder profits. In our view, the appropriateness of the returns that funders receive, when there is a successful recovery, can only be properly evaluated on a portfolio basis rather than cherry-picking individual cases with hindsight bias. The litigation funder’s fee is fixed at the commencement of a class action, before the outcome is known, and depends on the claim size, estimated recoverable amount, estimated costs, estimated duration to resolution and the risks undertaken. The returns on successful cases must be balanced against losses in other parts of a funder’s portfolio, some of which may be costly. The fees charged by funders must also be balanced against the outsized risks that come with pursuing litigation against large, well-funded defendants over long periods.
Nevertheless, Omni Bridgeway submitted to the Commission that we consider there should be a legislated minimum return to group members of 50 per cent of gross recoveries in funded class actions1. We believe that this will ensure that funders and claimant lawyers only back claims where the recoveries and costs appear likely to enable this metric to be met. It will also ensure that class actions are run for the benefit of the group members.
However, it is also important to ensure that, if a minimum return is introduced, it does not have the consequence - unintended or otherwise - of pricing funders out of the market. The returns received by funders need to allow for fluctuations in a funder’s portfolio – some cases will be lost and others will achieve a lower recovery than anticipated. Therefore, any minimum level of return needs to be set at a level that, in most cases, will allow sufficient proceeds left for funders to cover their costs and to receive a fee for the significant capital investment and risks taken. If not, funders will leave the market and many class actions will not be pursued – leaving group members with no means to access the legal system.
This position is supported by independent research by PwC, which was commissioned by Omni Bridgeway, to review possible regulatory models for the regulation of litigation funders (PwC report)2. The PwC research analysed data collected by Professor Vince Morabito on past Australian class actions3.It found that, based on the data, a guaranteed return of 70%4 to class members would have resulted in 36% fewer class actions (that is, cases where the legal costs alone would have exceeded the 30% cap).
The PwC report says:
“… a 30% cap on gross returns to litigation funders [as proposed
by the Australian PJC] will have the effect of reducing the investment by third
parties to support class actions. What we see is a trade-off; by providing
higher returns to some plaintiffs, there will be fewer supported actions, and
hence zero returns to other potential plaintiffs.”
The PwC report also found that even a 50% minimum return to group members would render a large number of cases commercially unviable to fund, due to the capped amount being inadequate to cover the legal costs of the class action and generate a profit adequate to justify the risks assumed by the funder in often long and protracted litigation.
Nevertheless, Omni Bridgeway believes that setting a minimum of 50 per cent return to group members is appropriate, beyond which courts are in the best position to assess the reasonableness of returns to a litigation funder.
Ensuring access to justice
In Omni Bridgeway’s view, there is a balance to be struck in ensuring regulation of the class action industry in New Zealand does not harm the very people it is trying to protect. If there are too many barriers placed in the way of class actions or in the way of litigation funding then the aims of promoting access to justice may be harmed. Therefore, the form of regulation must ensure that funders operate fairly but does not prevent them from participating in the process, to ensure the litigation is conducted efficiently for the benefit of all and to enable the funder to protect its investment.
- Omni Bridgeway also made this recommendation to the Australian Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into class actions and litigation funding in 2020.
- The PwC report can be accessed from the Class Actions page on Omni Bridgeway’s website.
- Professor Morabito is in the Department of Business Law and Taxation at Monash University’s Monash Business School.
- Recommendation 20 of the Australian PJC’s report in December 2020 was that the Australian Government consult on, amongst others, the best way to guarantee a statutory minimum return of the gross proceeds of a class action (including settlements) and whether a minimum gross return of 70% to class members is the most appropriate level.