Large-scale consumer actions can pose significant financial and reputational risks for businesses. The litigation funding market has and continues to provide claimants with capital to allow them to bring these claims.

However, recent developments in the United Kingdom and Australia  have given market participants a lot to think about. 

In this article, we examine the changing landscape for litigation funders overseas, and consider how these changes, coupled with the proposed regulation for New Zealand’s own litigation funder market, may affect the market here. 

PACCAR: Developments in the UK

In 2023, the United Kingdom Supreme Court issued its decision in R (on the application of PACCAR Inc) v Competition Appeal Tribunal, sending ripples through the litigation funding industry [1]. The Supreme Court determined that, where litigation funding agreements provide for the funder’s fee to be calculated as a percentage of the damages award, those agreements fall within the definition of a “damages-based agreement” under the Courts and Legal Services Act 1990 (UK). It was initially feared that this decision might have wide-ranging consequences:

(a)   In certain proceedings, such as opt-out class actions in the Competition Appeal Tribunal, where consumer class actions are often brought in the UK, damages-based agreements are prohibited altogether under the Competition Act 1998 (UK).

(b)   For other types of proceedings, damages-based agreements are unenforceable if they do not meet the conditions set out in the Damages-Based Agreements Regulations 2013 (UK), as litigation funder agreements commonly did not.

However, post-PACCAR case law has shown that litigation funding agreements could nevertheless be enforceable if they adopt an alternative approach to the calculation of the litigation funder’s fee. For example, in Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe, the Competition Appeal Tribunal held that a litigation funding agreement was not a damages-based agreement where the funder’s fee was determined by reference to a multiple of the “Costs Limit”, being the amount of funding that the funder was obliged to provide [2]. While these adapted agreements have been accepted in lower Courts, appellate courts could well disagree. Anecdotally, the number of class action claims does not seem to have been impacted.

In response to the Supreme Court’s decision in PACCAR, the UK Government has introduced the Litigation Funding Agreements (Enforceability) Bill 2024, which sought to reverse the effects of PACCAR by explicitly excluding litigation funding agreements from the definition of “damages-based agreement” in the Courts and Legal Services Act. However, the Bill is in limbo following the 2024 UK General Election and is not expected to be reintroduced until mid-2025. Simultaneously, the Civil Justice Council is conducting a wide review of third-party litigation funding in the UK, which includes a consultation process with the and public that will likely inform the Government’s attitude towards the Bill. 

Australia’s shifting regulatory landscape for litigation funders

The Australian litigation funding market has been subject to periodic uncertainty for some years now. In 2009, the Australian Federal Court in Brookfield Multiplex Ltd v International Litigation Fundings Partners Pte Ltd held that litigation funders fall under the existing regulatory regime for managed investment schemes, and must meet those requirements accordingly [3]. Successive governments passed legislation for and against that position. The Federal Court then overruled its own decision in Brookfield in [2022].

The upcoming 2025 Australian Federal Election may lead to further changes. On top of restoring the pre-2022 position where litigation funders would be subject to financial services regulations, the Coalition is proposing policies that would impose caps on recoverable fees for litigation funders and would require disclosure of investors in litigation funders’ schemes, citing concerns of interference by foreign actors via strategic litigation funding.

Implications for New Zealand’s litigation funding market

Litigation funding remains less common in New Zealand than in overseas jurisdictions. 

As matters currently stand, the New Zealand market is relatively quite favourable to class actions. The Supreme Court has recently permitted opt out class actions and common fund orders (which require all members of an opt-out class action to contribute to the third party funding of the class action out of any proceeds, regardless of whether they have signed a funding agreement) [4].   

However, New Zealand is likely to face changes in the funding industry if the Class Actions legislation recommended by the Law Commission is introduced. This would require disclosure of any litigation funder agreements to the High Court for approval. To give its approval, the Court must be satisfied that the plaintiff group has taken independent legal advice on the agreement, and the agreement as a whole is fair and reasonable. The then Government agreed to the Law Commission’s recommendations in principle in November 2022, but no progress has been made since the change in Government in October 2023.

If the Government were to proceed with the Law Commission’s recommended statutory scheme, the current incentive of a low-regulation environment might well be diminished, potentially discouraging offshore litigation funders from taking risks in financing New Zealand class action litigation.

As ever, New Zealand businesses must remain alive to the risk of representative or class actions. The future of regulation remains uncertain and, in any event, institutions within the remit of the Financial Markets Authority (FMA) could still face a consumer class action brought by the FMA pursuant to provisions in the Financial Markets Authority Act 2011. While that power has yet to be used, if class action activity slows or stalls due to an absence of funding, the FMA may see a public benefit in bringing this kind of representative action to seek to vindicate consumer rights.

The collective futures of litigation funding in the UK, Australia and New Zealand will likely be at the mercy of appellate court decisions and Government priorities leading into 2025 and beyond, so it will be important to watch these with interest. While litigation funding activity may fluctuate around the world, businesses should be keenly aware of the now well-embedded risk of class actions, particularly in the face of challenges like climate change, the rise of artificial intelligence, natural disasters, and continued economic instability.

Footnotes:

1. R (on the application of PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28.
2. Alex Neill Class Representative Ltd v Sony Interactive Entertainment Europe [2023] CAT 73.
3. Brookfield Multiplex Ltd v International Litigation Fundings Partners Pte Ltd [2009] FCAFC 147, (2009) 180 FCR 11.
4. ANZ Bank New Zealand Limited v Simons [2024] NZSC 330.