Legal Briefing

Kilted class actions

The In-House Lawyer Logo

Scotland | 01 May 2012

Class actions have been a hot topic in recent months due to a number of high-profile actual and threatened class actions south of the border. However, as things stand, class actions do not exist in Scotland. Would Scotland benefit from having a class action procedure and, if so, what form might it take?

Two key reports have discussed the options; the Scottish Law Commission (SLC) report on multi-party actions (no 154 of 1996) (the SLC Report) and the report of the Scottish Civil Courts Review (the Gill Review). This article will consider some of the discussion and recommendations contained in these two reports, including the arguments for adopting either an ‘opt-in’ or ‘opt-out’ approach and related procedural issues including prescription and limitation, global awards and disposal of residue and certification by the courts.

Opt in or opt out

A preliminary question for any legal system considering the adoption of a class action procedure is whether an opt-in or opt-out approach should be adopted. Under an opt-in approach, a potential class of litigants is identified and members who fall into this class, and wish to join the action, have to take steps to do so, otherwise their claim will not be considered by the court and they will not be able to share in any award. By contrast, if an opt-out procedure is adopted, any person who falls within the identified class will be bound by the judgment unless they chose to opt out of the action. Both approaches have been adopted and are in use in different jurisdictions.

The Gill Review noted that most European countries, with the exception of Portugal, have adopted an opt-in system, although some operate a hybrid system or permit opting out in consumer claims. Advantages of the opt-in system include:

  • claimants who are party to the action can be identified more easily;
  • it is simpler for the defender to quantify their potential liability;
  • only claimants who actively opt in are bound by the decision; and
  • it can reduce the possibility of a litigation becoming unmanageable.

Arguments against the opt-in approach include:

  • it does not promote necessary access to justice;
  • the need to opt in can be an unnecessary barrier; and
  • concerns that parties may not learn of their right to opt in until it is too late (ie the matter has been determined and their claim is time barred).

The SLC recommended adopting an opt-in approach. Its provisional view was that the primary consideration should be to preserve the liberty of the individual to participate in litigation only if they wish to do so. The Commission felt that ‘a person should not be required to disassociate himself or herself from a litigation which he has done nothing or little to promote’.1

It recommended that:

‘Persons, other than the representative party, who wish to be group members, should be required, within a prescribed period and in a prescribed manner, to elect to be members of the group.’2

An opt-out approach is more controversial and, in our view, seems alien to most practitioners. Proponents of this approach cite as its primary advantages, its ability to:

  • provide a single decision on all the issues in which members of the group have the same interest;
  • reduce costs and increase efficiency as it avoids the time-consuming, costly or, indeed, in some cases arguably impossible, exercise of identifying all of the potential members of the class for the litigation prior to commencing the procedure; and
  • provide a remedy in cases where a claim is ‘individually non-recoverable’.

In addition, they argue that some claimants may be put off by the requirement to take active steps to join the litigation. An opt-out system may make it more likely that these claimants will obtain legal redress.

The Gill Review considered that opting out could be appropriate in certain circumstances, for example, where a large number of claimants were affected by the same factual situation. It cited the US case of American Trading & Production v Fischbach & Moore Inc [1969], which arose out of a fire at an exhibition hall which destroyed several exhibitors’ property3. It also cited a situation where a large number of consumers are affected and the nature and the quantum of each claim is the same (for example the action brought against JJB Sports plc by the Consumer Association under s47B of the Competition Act 19984). In these circumstances, the value of the claim to each individual consumer may be such that it is not economically viable to pursue their claim on an individual basis.

Arguments against an opt-out procedure include concerns that:

  • it may result in an unmanageably large group in which members are not identifiable;n someone should not be entitled to pursue a litigation on behalf of others without their express mandate;
  • litigations may be raised by busybodies and encouraged by unprincipled lawyers; and
  • a person may not realise that they can opt out until it is too late.

As it would be necessary to ensure that potential class members are aware that their claim could be considered without them playing any part in raising an action, it is possible that considerable costs will be incurred in publicising the litigation to inform those who wish to opt out that they can and must do so.

Realistically, if Scotland was to have any form of class action procedure, it is difficult, notwithstanding the Gill Review findings, to justify an opt-out procedure. In our view, for the reasons set out above, this form of procedure seems to create difficulties that could lead to a great deal of uncertainty and unjustified expense for potential defenders.

Prescription and limitation

A question raised in both the Gill Review and the SLC Report was whether further legislation to amend prescription and limitation would be necessary. Different views were reached by each on this point. The SLC’s view was that its recommendation of an opt-in arrangement removed the difficulties that may have been caused by an opt-out scheme. The Commission, therefore, recommended that the statutory rules on prescription and limitation need not be amended to cope with the introduction of group proceedings.5

Legislation to amend prescription and limitation was recommended by the Gill Review. It noted that:

‘It will be necessary to amend the legislation relating to prescription and limitation to take account of a group litigation procedure which permits opting out.’6

It appears clear, from the discussions in the SLC Report and the Gill Review, that the question of whether any legislative amendments to prescription and limitation are required will be influenced by the type of class action procedure enacted.

In our view, this is, in itself, a further argument against an opt-out procedure.

Global awards and disposal of residue

The procedure for dealing with any award at the end of a class action also raises questions. In particular, should the court be given an express power to make aggregate awards of damages if the claim is successful and, if so, how should it dispose of any residue of the award?

The provisional view of the SLC was that aggregate assessment of awards would be acceptable if the evidence tendered in a particular case was reliable7 and that the court should consider itself able to make an award if a reasonably accurate assessment could be made of the amount due8. However, it concluded that there would be no need for this in the opt-in scheme that it recommended9 (given that the pursuers and the value of their claims would be identified). The SLC took the view that it was not an essential feature of class action procedure and recommended that no express provision should be included in the rules with regard to aggregate monetary awards or the disposal of any residue of aggregate monetary awards.10

The Gill Review considered the Canadian opt-out model, where the relevant legislation and/or rules of court provide for aggregate awards of damages and their distribution among the class members. The conclusion of the Gill Review was that the court should have the power to make global awards and dispose of residue. It considered that it would be necessary:

‘… to confer powers on the court to make an aggregate or global award of damages for the disposal of any undistributed residue of an aggregate award’.11

This is likely to have been influenced by its recommendation of a limited opt-out approach.

In our view, such an approach would again lead to fundamental unfairness to potential defenders leading not just to uncertainty as to who the pursuers are, but also, even at the conclusion of the action, uncertainty as to the extent of the defender’s liability. In addition, it could complicate the process of settlement of the action as, if the defender is not able to estimate the potential extent of their liability, it will be much more difficult for them to make a reasonable settlement offer and resolve the action at an earlier stage.

Certification

Like the SLC, the Gill Review was persuaded that a procedure for certifying an action as a multi-party action would be appropriate.12 Certification criteria for the action recommended by the Gill Review included that the court should consider whether:

  • the case involved common or similar issues of fact or law;
  • there was no better alternative procedure available; and
  • the applicant was the appropriate pursuer to be the representative party.13

In contrast to the position of the SLC, the Gill Review was also persuaded that a merits test should be satisfied, as this would be an important safeguard against potential abuse.14 In the discussion on this point, the example of Portugal (which, as noted above, adopts an opt-out approach) was considered.

There, the court will conduct a preliminary hearing to consider whether the action is manifestly ill founded.15

In our view, both a merits test and certification procedure should be a prerequisite to the introduction of any form of class action procedure in Scotland to limit, so far as is possible, the potential for abuse of the process.

Funding/costs

Consideration was given in both the Gill Review and the SLC Report to the funding arrangements that could be put in place. These will not be considered in detail here. However, to summarise, the Gill Review concluded that for any procedure to be introduced, expenses should follow success but there could be public interest exceptions at the discretion of the court16. It envisaged that speculative actions be permitted and additional fee awards will be available.17 No recommendations were made with regard to contingency fees as it was felt that this would be premature18. It also considered that special funding arrangements could be put in place with special criteria to be satisfied in order to obtain financial assistance. This would be administered by the Scottish Legal Aid Board.19

Conclusions

In both the SLC Report and the Gill Review, positive recommendations for the introduction of a class action procedure were made, with the Gill Review noting that at least 75% of respondents were in favour of the introduction of some form of procedure.20

As a result, there appears to be a strong case for the introduction of a form of class action procedure in Scotland. However, the conclusions as to the type of approach that should be adopted differed, with the SLC favouring the implementation of an opt-in approach and the Gill Review considering a more flexible approach. As has been noted above, this decision will be the determining factor in relation to many other procedural points such as prescription and limitation amendments, the potential for aggregate awards to be made to settle claims and requirements for certification of the action and funding.

In our view, if Scotland is to have any form of class action procedure, we have to be alive to the difficulties that such procedures can create and the need to introduce appropriate safeguards, including a comprehensive certification procedure allowing for representations to be made by the potential defender(s). On balance, in our opinion, the adoption of an opt-in procedure is to be preferred. It would provide a better fit with existing legal structures and procedures and avoid the potential pitfalls that an opt-out procedure might create.

By Iain Rutherford, associate, and Helen Bain, solicitor, business disputes and asset recovery team, Brodies LLP.

E-mail: iain.rutherford@brodies.com; helen.bain@brodies.com.

American Trading & Production v Fischbach & Moore Inc [1969] 47 FRD 155 (ND 111 1969)

The Consumer’s Association v JJB Sports plc [2009] CAT2

Notes

  1. SLC Report at paragraph 4.51.
  2. Recommendation 13 of the SLC Report at Paragraph 4.55.
  3. Referenced at paragraph 80 of Chapter 13 the Gill Review. This was a case where plaintiffs who were exhibitors in an exhibition hall sued a defender who was a corporate parent of a wholly owned subsidiary electrical contractor corporation, which had allegedly installed faulty wiring in the hall which they claimed caused a fire which destroyed the hall and their property.
  4. The Counsumer’s Association v JJB Sports plc [2009]
  5. SLC Report, recommendation 27 at paragraph 4.140.
  6. The Gill Review, chapter 13 at paragraph 83.
  7. SLC Report at paragraph 4.97.
  8. SLC Report at paragraph 4.98.
  9. SLC Report at paragraph 4.102.
  10. SLC Report at paragraph 4.103.
  11. The Gill Review, chapter 13 at paragraph 83.
  12. The Gill Review, chapter 13 at paragraph 65.
  13. The Gill Review, chapter 13 at paragraph 65.
  14. The Gill Review, chapter 13 at paragraph 66.
  15. The Gill Review, chapter 13 at paragraph 66.
  16. The Gill Review, chapter 13 at paragraph 94.
  17. The Gill Review, chapter 13 at paragraph 97.
  18. The Gill Review, chapter 13 at paragraph 96.
  19. The Gill Review, chapter 13 at paragraph 113.
  20. The Gill Review, chapter 13 at paragraph 16.