The new Companies Act will bring class actions into mainstream corporate and commercial activity in SA, with far reaching consequences for companies, directors and victims of corporate fraud and negligence.
"The class action will arrive without any legislative procedural guidance," says Deneys Reitz director Michael Hart. "From an insurance point of view it could make SA a more risky jurisdiction if litigation increases dramatically. It will also focus the attention of directors and officers on the need to seek adequate insurance cover."
The class action is a type of lawsuit brought by a representative member of a large group of people on behalf of all members of the group. Until now, class actions have been limited to constitutional matters. There has been no legislation governing this type of court action in civil damages claims.
In 1995 the SA Law Commission recommended legislation establishing the procedure under which class actions would be conducted. "The recommendation has not yet been implemented, but the introduction of the concept of a class action in the new Companies Act may well provide the stimulus for steps in this direction," says Hart.
He says until that happens, the courts will provide guidance and control as they have done during the developmental stages of constitutional class actions.
Hart says this is likely to have an effect on the cost of directors' liability insurance and how insurers view the local market. "Up until now SA has been seen as low-risk from a litigation point of view, but the possibility of class action suits will change this," he says. Under the new act, representatives of large groups of victims can bring a class action suit by acting as a member of, or in the interests of, a group of affected people. This means victims of corporate fraud, negligence and breach of duty will now be able to take directors and certain company officers to court for their losses.
"The order binds everyone in a class, so unless a person chooses to opt out of the legal proceedings, they're automatically part of it," says Hart.
There is some concern that the class action could develop along the lines of the US, where the federal government has tried to curb rampant growth in what has become an industry. Class actions in the US have developed into a process feared by product manufacturers and increasingly by those charged with the governance of corporations. Though the federal government has tried to bring some control to the industry by limiting attorney's fees, the risk of companies being forced to pay massive payouts still looms large.
Hart says the main drivers of class actions in the US include a jury system, punitive damages awards and the absence of the risk of an adverse cost award in failed actions. "The US also allows plaintiff lawyers to charge a percentage of the damages received by their clients, which has a dramatic effect on the amount of the damages awarded by juries," says Hart. "These are not characteristics of the SA system."
The high cost of launching and pursuing a class action is one of the main factors discouraging litigants. But the emergence of litigation funding businesses, which fund the action in return for a share in the ultimate award, is likely to make them more accessible.
WHAT IT MEANS
 From an insurance point of view it could make SA a more risky jurisdiction
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Litigation funding in SA recently became lawful following a decision by the Supreme Court of Appeal, which held that an agreement in terms of which a person provides a litigant with funds to prosecute an action in return for a share of the proceeds is not contrary to public policy. "Given the recognition of contingency fee arrangements in SA, as well as litigation funding, we now have the two ingredients required by people wishing to institute shareholder class actions or creditor class actions under the new law," says Hart.
Class action suits do offer the chance for victims of corporate fraud to at least recover some of their losses. In the US, class action lawsuits enabled 1,5m investors to claim US$40bn in losses following the collapse of Enron in 2001. The case was settled by payment of $7,2bn about six years later. The second largest class action settlement was $6,1bn approved by a federal judge in 2005 against Worldcom, the telecommunications company accused of accounting fraud.
Hart says though there was a drop in the number of class action lawsuits initiated in the US in 2007, which could be ascribed to the prosperous and stable financial market existing at the time, there has been a proliferation of suits which followed the market collapse of last year.
"However, SA is unlikely to develop into a forum where massive, unrealistic damages are awarded against companies," says Hart. "SA, like jurisdictions such as Canada and Australia, has the advantage of learning from the US experience in establishing procedures."
