New Scottish class action procedure - how will the regime work? Part 1: The certification stage

Last month we reported on the new class action mechanism that is being introduced in Scotland on 31 July 2020 (see here). The new mechanism is intended to better facilitate group claims. It is being introduced on an opt-in basis initially, requiring potential class members to elect to join a class. The Scottish Civil Justice Council has stated that it will consider introducing an opt-out regime (as permitted by the enabling legislation).[1] Opt-out mechanisms automatically include persons within the class definition unless they elect to “opt-out”. Those regimes are therefore similar to U.S.-style class actions and are particularly effective at aggregating large and high value claims even if the losses per individual class member may be low.

At the time of our last update, the detailed rules for the new procedure were not available. However, the Act of Sederunt (Rules of the Court of Session 1994 Amendment) (Group Proceedings) 2020 (the “Rules”) have now been published (see here).

We will be exploring the new regime in two Law Now updates. In this update we cover certification issues, i.e., how the courts will decide whether a claim is suitable for the new regime. In a subsequent update we will address how a group claim will proceed, if it has been certified.

Overview

Most class action mechanisms provide for a “certification stage”. Group proceedings can be expensive to defend and burdensome for the courts to administer, and so a certification stage serves an important purpose in rejecting unsuitable claims early in proceedings rather than allowing them to proceed to proof (trial).

The Rules provide for two phases in certification:

1. authorisation of the proposed representative; and
2. granting permission to bring group proceedings.

In summary, on “authorisation” the court will examine the “suitability” of the proposed representative including its ability to pay adverse costs. On “permission”, the court will apply a commonality test, a merits assessment and a superiority test. These tests are similar to those used in collective proceedings mechanisms in other jurisdictions and we provide more detail below. The court will also need to be satisfied that the representative has made sufficient efforts to identify and contact all potential group members.

Authorisation of the proposed representative

The court will authorise a proposed representative “only where the applicant has satisfied [the court] that the applicant is a suitable person who can act in that capacity should such authorisation be given”.[2] Where considering whether an applicant is “suitable” the court will consider the following factors:[3]

1. the special abilities and relevant expertise of the applicant;
2. the applicant’s own interest in the proceedings;
3. whether there would be any potential benefit to the applicant, financial or otherwise;
4. confirmation that the applicant is independent from the defender;
5. demonstration that the applicant would act fairly and adequately in the interests of the group members as a whole, and that the applicant’s own interests do not conflict with those of the group; and
6. demonstration of sufficient competence to litigate the claims properly. This will include having financial resources to meet any expenses awards, however, the Rules expressly state that the details of funding arrangements do not require to be disclosed.

It is helpful that the Rules list criteria that the court should apply in assessing whether or not an applicant is “suitable”, but a number of important points are uncertain. For instance, there is tension within criterion (f). On a natural interpretation, “demonstration [of] financial resources to meet any expenses award” would require a party to provide relevant documentation, but the rules specifically state that an applicant does not need to disclose “the details of funding arrangements”. It is unclear how the court will assess whether criterion (f) is met without access to funding arrangements.

The wording of the Rules suggests that the court must take into account the factors at criteria (a)-(f) where assessing “suitability”. Given how the rules are drafted, there could be grounds for appeal if a court arguably failed to have regard to all of these factors where making its assessment.

Permission to bring group proceedings

The Rules provide that the court “may refuse [permission to bring group proceedings]” where:[4]

1. The two key criteria set out in the 2018 Act have not been met, namely:
   1. that “all of the claims made in the proceedings raise issues (whether of fact or law) which are the same as, or similar or related to, each other”; and
   2. that “the representative party has made all reasonable efforts to identify and notify all potential members of the group about the proceedings”;
2. it “has not been demonstrated that there is a prima facie case”;
3. it “has not been demonstrated that it is a more efficient administration of justice for the claims to be brought as group proceedings rather than by separate individual proceedings”;
4. it “has not been demonstrated that the proposed proceedings have any real prospects of success.”

We comment on these criteria as follows:

• Criterion 1(a) is a commonality test, which is a normal provision in a collective proceedings mechanism. Clearly, claims should not be brought in the same group unless they have the requisite degree of commonality.
• Criterion 1(b) requires the proposed representative to make “all reasonable efforts”. This is potentially a high threshold. Identifying and notifying all potential group members could be an expensive exercise. The Rules do not identify a geographical limit to this obligation, so the proposed representative could be obliged to contact persons outside of Scotland for certain claims. Under an opt-out regime persons may be unaware that they are within a class and that their legal rights are being affected, so a legal obligation to inform and communicate with class members is frequently imposed on the representative. It is less common to impose a communication obligation on a representative in an opt-in regime, as, by its nature, the only persons who have their legal rights affected are those who voluntarily elect to join the group.
• Both criterion 2 and criterion 4 are merits assessments. The standards “prima facie case” and “any real prospects of success” have not been set at an exacting threshold. Having taken the policy decision to include a merits assessment in the certification criteria, it isn’t immediately obvious to us why two standards have been promulgated in the Rules.
• Criterion 3 is a “superiority requirement”, obliging the representative to demonstrate that the new mechanism is more suitable for the proposed claim than to bring claims individually.

An area of likely significant controversy will be the extent to which the court permits document recovery (disclosure) prior to applying the authorisation and permission criteria. Should the proposed representative be required to disclose internal documents on the efforts it made to contact potential members of the group? Will the proposed representative (and possibly also the defender) be required to disclose documents going to the merits? If the court allows extensive document recovery (broad disclosure), the certification process will become expensive. However, restricting document recovery arguably will make it difficult to properly apply the certification tests as set out in the Rules. How the court assesses these questions may create grounds for appeal by either party.

Re-examination of certification decisions

The Rules address re-examination of certification decisions and appeals, but there are some ambiguities.

Authorisation of a representative “endures until the group proceedings finish or permission is withdrawn”.[5] Thus there is arguably no further opportunity for a defender to challenge authorisation of a representative once granted (but it is implied that permission can be withdrawn). This is concerning to defenders, particularly as ability to pay adverse costs is a qualifying criterion for a proposed representative. Should circumstances change during the course of a claim such that a representative is no longer able to pay adverse costs, a defender should be permitted to challenge the representative’s authorisation but the Rules arguably foreclose this avenue.

In contrast, the Rules contain provisions for replacing a representative.[6] This process can be initiated either by the authorised representative or by a group member. The court will only authorise the new proposed representative where they are “suitable”, applying the same authorisation criteria described above and where the best interests of the group members are met. Where a group member is attempting to replace the existing representative, the court must also be satisfied that the existing representative is “not able to represent the interests of the group members adequately”.[7]

This acknowledgement, that a previously authorised representative may become unable “to represent the interests of the group members”, highlights the oddity, in our view, that a defender cannot proactively re-examine the suitability of a representative if circumstances change post authorisation.

Case management of the certification stages

The initial procedure for both types of application is the same:

• the application is lodged with the court;
• the court makes an order requiring service, intimation and advertisement as it thinks fit; and
• any person wishing to participate requires to lodge a response (Answers) to the application within 21 days.

On an application for authorisation, the court must hold a hearing if any party lodges a response. Thus, defenders can trigger a mandatory right to have a hearing. The permission stage is different. The court may grant permission without holding a hearing “if it is satisfied that it is appropriate to do so.”[8] Defenders will be concerned that permission can be granted without holding a hearing. Unhelpfully the Rules do not contain guidance on when it may be “appropriate” for permission to be granted even without a hearing.

The Rules envisage that the authorisation and permission stages will be dealt with expeditiously. If the applications for both stages are lodged together, the process could conceivably be completed within 8 weeks. This is insufficient time for detailed access to documents (disclosure). The court has flexible case management powers where dealing with either type of application, and can extend deadlines on the request of the parties involved. At the permission stage the court must have regard to the “need for the fair and efficient determination of the application” where considering case management requests (motions). Defenders will no doubt argue that disclosure is necessary for the court to “fairly” determine permission applications.

Applications for the authorisation and permission stages can either be brought consecutively or concurrently. This can be contrasted with the Collective Proceedings Order (“CPO”) UK-wide opt-in/opt-out regime for competition claims, where authorisation of the representative and suitability for a CPO are considered together and there is no provision for those issues to be considered separately in consecutive applications. Perhaps some pursuer firms will see an advantage in applying for authorisation first, saving money overall if authorisation is denied. For promising claims this approach would increase costs, as two consecutive applications with potentially two separate hearings will inevitably cost more than a single omnibus process.

Grant or refusal of applications for both certification stages can be appealed, albeit permission from the court is required to appeal decisions on authorisation.

Comment

The Rules promulgated under the 2018 Act will potentially lead to pursuer law firms, in conjunction with litigation funders, raising more group claims with significant litigation exposure for defenders. Given the sums involved, defenders will vigorously contest certification. The Rules contain a number of ambiguities that defenders will be able to exploit, in the correct cases. A body of caselaw will eventually be established with clearer guidance on the types of claims and the types of proposed representative that are likely to be certified. We are at the beginning of a long journey

In our next update, we will look at how group proceedings will progress if certification is granted.

[1] The legislation that enables the new mechanism, the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018 (the “2018 Act”), provides for both opt-in and opt-out claims.

[2] 26A.7(1).

[3] 26A.7(2).

[4] 26A.11 and section 20(6) 2018 Rules.

[5] 26A.7.(4).

[6] 26A.8

[7] 26A.8(9).

[8] 26A.11(1)(a).