Litigation funding in the spotlight in March
Litigation funding - hardly a phrase on everyone’s lips, is set to move into the spotlight during the next few weeks.
Two high-profile court battles financed by litigation funders - Mainzeal, and a group of kiwifruit growers’ fight with MPI - will be in the news in March.
And the terms of reference for a long-awaited Law Commission review into class actions and litigation funding are also due soon - potentially the same month.
This week’s $36 million judgment against four directors of failed construction company Mainzeal is a good example of a case that would never have got to trial without financing from a third party - in this case New Zealand company LPF.
Mainzeal liquidator BDO accused the directors of the construction company, including former Prime Minister Jenny Shipley, of reckless trading. This follows years where the mainly loss-making firm was technically insolvent, but continued to trade.
When the company finally collapsed it owed $110 million to unsecured creditors, including $45.4 million to subcontractors and tradies working on Mainzeal projects.
“It enabled the creditors to get access to justice,” BDO business recovery and insolvency partner Andrew Bethell says. “We didn’t have funds to take this claim. It’s a good result in terms of New Zealand reckless trading.”
However, the compensation covers only a third of what the creditors are owed.
“We would have liked a bigger number,” Bethell says. Neither BDO nor the directors have announced whether they will appeal the judgment, but with the limit being 20 working days, key decisions will be taken this month.
Meanwhile March 11 is the date set for the start of an appeal in the case between the so-called "Strathboss" kiwifruit growers and the Ministry for Primary Industries over the devastating kiwifruit disease PSA. The case will be heard by Appeal Court judges Patricia Courtney, Brendan Brown and Murray Gilbert.
A group of 212 kiwifruit orchardists, plus packhouse operator Seeka, claimed MPI failed to do its job and was negligent in letting PSA into New Zealand. The High Court agreed, but both sides have appealed.
The case and the upcoming appeal is also funded by LPF, whose initials stand for “level playing field”.
“These are two of the best examples of the value of litigation funding,” says LPF founding director Phil Newland. “They are two cases which are strong on their merits, but could not have happened without litigation funding.
“But the fact the timing is proximate is coincidence.”
Newland says whether litigation funding takes off in New Zealand will depend on the outcome of a Law Commission review into class actions and litigation funding. It was announced last year, but has been on the back burner while the commission dealt with other issues.
Class action involves a group of plaintiffs getting together to sue one of more defendants. It’s often used overseas when each claimant is likely to get only a relatively small amount of compensation, but where the total sum involved is big.
Litigation funding, where a third party funds a case, is often used in class actions. The funders get a slice, sometimes a relatively large slice, of any settlement.
Litigation funding has been hampered in New Zealand in part by two archaic and obscurely-named torts - maintenance and champerty.
These legal wrongs basically forbid third parties making money out of someone else’s lawsuit - the basic premise of litigation funding.
Maintenance and champerty have been abolished in the UK, where they originated, but are still part of common law in New Zealand.
Until that is cleared up "litigation funding is going to continue to be used only in a relatively small way in New Zealand,” Newland says.
Announcing the Law Commission review in May last year, Law Commission president Douglas White said New Zealand laws were lagging behind those in other countries such as Australia and the UK.
“Practitioners, judges and commentators have argued that the absence of a regulatory regime for class actions and litigation funding in New Zealand is creating inefficiencies in the court system and uncertainty for court users.”
However, White said there are also risks and costs.
“For example, class action proceedings may take longer and cost more to resolve than individual claims due to the complex procedural issues involved," he said.
Litigation funding could also raise questions of fairness, both to the defendant, if the funder has insufficient capital to meet a costs order, and to the funded plaintiffs, if the funder’s interests conflict with theirs, or if the terms of the funding agreement are unfair, White said.
White told BusinessDesk the Law Commission review was “in the early stages of being reactivated”, and no specific dates were yet in place. However, media reports have suggested the review could begin soon.