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Companies should pay close attention to class actions

1 October 2014
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A class action is a legal procedure in which one or more people bring an action on behalf of a similarly affected group of people, known as a class. While the South African Constitution and laws like the new Companies Act and the Consumer Protection Act recognised the legal standing of a class, the lack of procedural rules and law to regulate how to bring an action on behalf of a class had meant that the use of the class action was at best remote, if not academic.

In Children’s Resource Trust the SCA sought to deal with the gaping procedural hole that existed and developed the law on class actions in such a way that it concretised the manner in which such actions may be brought before the courts, and so opened the door to the process being invoked in the mainstream.

Companies should pay close attention to the development of class actions as a form of litigation . Previously companies were relatively immune from litigation in which many people had claims, especially small claims because the risk of incurring individual legal costs for potential litigants often outweighed the potential benefit of a judgment that could be obtained.

In essence, claims that would have never been brought because litigating them was too costly for the ordinary person can now be brought on behalf a class of affected people thus increasing the likelihood of litigation and the potential legal risk faced by companies. Also, as illustrated in bread price-fixing class actions, small individual claims of hundreds of rands, when amalgamated into a class action and multiplied across thousands of people, escalates small-time litigation into big-time litigation for millions of rands.

More recently the Constitutional Court (CC) had its say on class actions in the matter of Mukaddam v Pioneer Foods handed down in June this year. The CC confirmed the core of the SCA judgment in Children’s Resource Trust and, in our view, indicated that a court ought to adopt a positive attitude that is primarily concerned with whether the interests of justice are served in permitting the class action to proceed.
There are many reasons why the CC adopted the interests of justice approach to this development of the law. In a country where access to courts is a largely inaccessible right to the majority of citizens, class actions present a real opportunity to increase access to courts. This is because class actions allow for one person to act in a representative capacity on behalf of a similarly affected group of people; making this procedure beneficial in advancing actions on behalf of marginalised people who ordinarily may not have had access to courts.

In addition, the nature of South African society provides fertile ground for the mushrooming of class actions – especially considering that institutionalised discrimination often affected the level of goods, services and standards of care provided to large sections of the population. The development of the class action procedure is thus likely to bring an increase in actions being brought against companies for present and possibly historical transgressions, the beginnings of which is the silicosis case.

While on one hand class actions present a real opportunity to increase access to courts, on the other, the procedure is one that, without adequate safeguards, could be subject to abuse. For example, in America, the potentially oppressive nature of class actions is well documented. In some instances, the threat of embroiling a company in endless and unmanageable litigation has been used as a means of inducing a settlement, leading some authors to call the class action a form of legalised blackmail. It also has the potential to stymie business innovation, research and development by forcing companies to ensure large financial reserves for potential future litigious claims.

Whether the new developments with class actions will result in a litigious society remains to be seen. It is, however, reassuring to note that the SCA is alive to all of the issues surrounding class actions, both the negative and the positive, and that it sought to initiate procedural safeguards to temper any negative effects.