LEGIST Law Firm

Problems of Actions Aimed at Protection of Interests of Unspecified Group of Persons and Class Actions.

      Changes and complication of relations in the sphere of business turnover characterizing the current Russian reality brought about a considerable increase of recourses to court seeking protection of infringed rights and interests of individuals and legal entities protected by law. An urgent need to update the procedural law was clearly revealed against this background.

      As a result of multiple scandals on the financial and stock markets of Russia, the courts faced the necessity to consider dozens of thousands of similar actions filed against one and the same respondent - a financial company, a bank - seeking return of the money. This situation revealed disability of the courts to adjudicate such categories of civil cases quickly and efficiently. The reasons of that are different. One of them has a procedural aspect. The available legal instrumentality does not make it possible to ensure an efficient protection of all claimants’ interests. Besides, the principle of equity of justice is violated at the stage of the executory process. The first claimants are in time to recover all their money, whereas the rest receive practically nothing.

      Obviously, in such circumstances it is impossible to speak about availability of justice, let alone about observance of the constitutional right to judicial protection.

      In this connection, issues of procedural laws related to judicial protection of rights of a large group of persons acquire special importance. One of the ways to solve these problems is to develop new institutions in the civil process, such as actions aimed at protection of interests of an unspecified group of persons and class actions.

      The possibility of recourse to court to protect the interests of an unspecified group of persons was for the first time stipulated in the Law of RF dated 7 February 1992 On Protection of Consumers’ Rights. Later, this kind of remedy was included into the Law of RF dated 18 July 1995 On Advertising, the Federal Law dated 5 March 1999 On Protection of Rights and Lawful Interests of Investors on the Securities Markets. The possibility of recourse to court by an unspecified group of persons seeking protection of their interests is indirectly provided for by a number of other laws, as well. However, to-date there are no procedural rules regulating the procedure for implementation of this kind of remedy.

      Only the Federal Law dated 07.02.2000 introduced amendments into Article 42 of the Code of Civil Practice of RSFSR whereby governmental and local authorities, organizations, and individuals are entitled to bring actions, in the events provided for by the Law, to protect violated or challenged rights, freedoms, and interests of an unspecified group of persons, which are protected by law. But this entitlement is not ensured by the procedural rules concerning adjudication procedure for cases of the protection of interests of an unspecified group of persons. In this connection, one may speak about impediments created by the procedural law in implementation of the rules specified in the substantive laws and the necessity to eliminate these.

      An action seeking protection of interests of an unspecified group of persons is brought, first of all, with the aim to protect the public interest, i.e. to suppress illegal activities of an organization. At the same time, the judgment delivered in such case creates a so-called «basis» for filing individual claims seeking protection of interests of specific persons who have suffered from these illegal activities, since the judgment concerned establishes the fact of illegal activities and is binding for the court considering specific claims for damages. However, the issue of damage compensation to specific persons is not directly considered in the proceedings of the action seeking protection of interests of an unspecified group of persons.

      A specific protection of interests of a large group of persons who have found themselves in a similar juridical and factual situation as a result of violation of their interests by one and the same person is possible within the framework of such kind of action as a class action.

      Whereas an action seeking protection of interests of an unspecified group of persons may be brought both in a civil and arbitration processes, a class action is a kind of remedy for individuals in civil process.

      A class action may be regarded as a variety of action seeking protection of interests of an unspecified group of persons. The group of persons having similar claims to the respondent has not been identified by the time the action is filed. However, by the moment the judgment is delivered on the merits of the class action, the group of such persons will be identified as a result of notification of all interested persons whose rights have been violated by the respondent.

      Accordingly, the judicial act will deal with the rights of every specific person. Besides, filing of a class action does not deprive the interested persons of the right to defend their individual claims in court separately, without joining the class action.

      The criteria of attribution of actions to class ones are as follows:

multiplicity of persons whose rights have been violated by the respondent’s actions;

use of the same common means of civil rights protection (first of all, claim for damages);

similarity of the subjects and causes of the claims of the group of persons;

      one and the same respondent for all the claimants.

      Besides, the action is subject to consideration as a class one if separate consideration of individual actions may result in violation of rights, freedoms, and other persons’ interests protected by law. In case of protection of the investors’ violated rights, such situation may arise at the enforcement stage.

      The right to qualify brought actions as class actions must undoubtedly belong to a judge. In this connection the question may arise what the difference is between a class action and the possibility provided for by Article 128 of the Code of Civil Practice to join similar actions of different claimants against one and the same respondent in one proceeding. The answer is that in the latter event the actions joined are already pending. That is why, contrary to a class action, the joinder of actions does not entail identification of all persons having similar claims against one and the same respondent.

      From the same viewpoint it is impossible to agree with the opponents of the institution of a class action who ascertain that institutions of representation and joinder stipulated by the current civil process law make it possible to ensure protection of common interests of a large group of persons.

      Indeed, current joinder rules in the Code of Civil Practice allow several claimants to bring their actions against one and the same respondent. However, real problems arising in connection with protection of rights and lawful interests of groups of persons, including investors on the securities market and bank depositors, have specific features. These specific features сonsist in the fact that the activities of one and the same respondent inflict great damage on a large number of persons and this damage must be compensated, at least to a certain extent. With application of the current rules, the judgment rendered in favor of one or several persons will enable only «pioneers» to recover at the executory process stage everything awarded by the judgment. The persons who brought their actions later find themselves in a position when, though they have execution documents issued on the basis of the judgment rendered in their favor, their claims cannot be satisfied for lack of sufficient moneys and property, including by reason of full redress of other persons’ similar claims which have been filed earlier.

      The institutions of representation and joinder ensure protection of a more initiative, competent, and well-to-do group of those injured, whereas the mechanism of a class action makes it possible to provide judicial protection to all persons whose rights have been violated by illegal actions of the respondent, including persons who have no adequate knowledge of law or persons who have petty claims which most probably will not be filed by every individual depositor or investor in view of time and moral costs to be incurred in case of recourse to court.

      On the other hand, as we deem it, the cases of class actions must be conducted by one representative сapable of qualified representation on behalf of all claimants. Accordingly, representation in class actions may be effected by law firms and public organizations for protection of consumers and investors’ rights. At the same time, it would be reasonable to restrict personal participation of the claimants in the proceedings. All this would further a proper organization of the process, its dynamism, and complete protection of the claimants’ rights. This also meets the interests of the court which would deal with lawyers rather than with individuals ignorant of civil proceedings.

      The institution of writ, Chapter 11 of the Code of Civil Practice, which is also referred to by the opponents of a class action, enables every individual to resort to a court in respect of a debtor (a financial, an investment company, a bank) with an application for a respective writ for reclamation of the money due to him. However, the existing problems of protection of the rights of individuals who incurred losses on the financial and stock markets cannot be solved by writs for the following reasons:

      Firstly, a writ may be challenged in a simplified form by the debtor, and this would entail revision of the case. Secondly, a writ does not define the jurisdiction and security of an action. Thirdly, and the most important, enforcement problems are not solved. Problems of priority in execution of writs remain, and this results in competition among writs issued by different courts. The institution of writ is most reasonable for protection of individuals’ rights, but by no means it is adapted to protection of the rights of a great deal of persons having identical claims against one and the same respondent.

      Hence, the current regulation is extremely insufficient and therefore cannot be a sufficient legal basis for protection of the rights of a large group of investors.

      On the other hand, the advantages of a class action are obvious. Among these the following can be pointed out:

1)      a concurrent defense of public and legal interests (the respondent’s illegal activities in respect of an unspecified group of persons are suppressed) and private law interests (compensation for losses and damage to specific persons whose rights have been violated by the respondent);

2)      the procedure of notification enables to gather in one and the same proceeding all investors having identical claims against one and the same respondent;

3)      the interests of minor investors are taken into account. Besides, they will be able to question the respondent’s insolvency.

      It may be envisaged within the framework of a class action institution that in case the amounts claimed by the claimants in their class action reach a certain limit, initiation of the respondent’s insolvency, stay of the proceedings in the class action and referral of the case to the arbitration court must be considered in order to protect the interests of all the persons who have suffered from the respondent’s illegal actions.

4)      the judgment would be enforced concurrently with respect to the majority of investors, i.e. excluded would be the situation when the first claimants receive everything adjudicated to them and those who follow them receive nothing.

       Therefore, a class action is practical from all standpoints: for the investors - since it permits to consider in the same proceedings the claims of a large group of persons whose rights have been violated by one and the same respondent; it ensures equity of equal allowance of identical claims;

      for the court – since it ensures necessary procedural economy because claims for damage suffered by a large group of persons are considered in the same proceedings; the court need not consider numerous individual civil cases and that will result in the decrease of the work load on the courts. It seems that Russian courts have judges capable of consideration of this kind of actions, the more so since the experience of conducting insolvency cases involving a large number of persons has already been accumulated. In terms of their procedural nature class actions are similar to bankruptcy cases.

      The model of a class action has been successfully working for over 150 years in the USA, Great Britain, and other countries where it is efficiently used to protect investors’ and consumers’ rights, to compensate for damages inflicted on the population by ecological crimes and in other similar cases.

      To solve the questions posed it is necessary to supplement the current Code of Civil Practice of RSFSR with respective rules in order to establish in the civil procedural law the procedure for investors rights’ protection using a class action as a remedy. The necessity of a complex legal regulation of class actions also requires amendment of the Federal Law On the Executory Process.

      At the same time, various questions should be solved, including setting of criteria for qualification of a class action as defending a large group of persons at the time the proceedings are initiated. In every specific event of judicial recourse the judge must establish and the individuals must prove that the action is aimed at protection of interests of a group of persons.

      Jurisdiction of the court at the respondent’s location over the class action should be established in order to join the claims of all those that suffered from the respondent’s illegal actions.

      The acceptance of a statement of claim by the judge in the course of development of the case for proceedings must be necessarily followed by notification of all interested persons by way of a newspaper publication or otherwise about institution of such proceedings, specifying the parties, the claim brought, its causes, and proposing to all interested persons to join the case of a class action as plaintiffs within a specific period determined by the judge, which should be at least one month.

      The purpose of notification is to determine the largest number of persons who might claim the recovery awarded by the judgment in the event the claims are upheld. Those who do not wish to defend their interests in court or those who will do it separately simply should not respond to such information.

      Arranging an action security guarantees the possibility of the recovery under the future judgment in the event the claims are upheld. Therefore, in qualifying the action as a class one the judge should take measures of protection for the whole period of the development of the case for trial and identification of a possible group of those injured until delivery of a judgment. Additional measures of protection may be arranged which, depending on the respondent’s behavior, will be more diverse and flexible.

      The amendments and addenda introduced to the Code of Civil Practice of RSFSR with respect to judicial protection of a large group of persons, i.e. investors that suffered from violations on financial and stock markets, give rise to the necessity to establish an adequate enforcement procedure for the judgments delivered in their favor.
      We propose to supplement Article 21 Stay of the Executory Process of the Law On the Executory Process. The essence of the addenda is that the executory process pursuant to the execution document issued with respect to the action in favor of the person who has not been involved in or has refused to join the case of the class action (in the event the class action is pending) is suspended until the case of the class action is considered. This is necessary for protection of interests of all future claimants seeking collection, who will be able to have their claims allowed, even if partially, in this event only.

      Therefore, amendment of the law with respect to a class action will make it possible to establish legislative rules of the mechanism of protection in one proceeding and in one executory process of all or at least the majority of those that suffered from the acts (or omissions) of the same respondent, and this will actually сontribute to availability and efficiency of justice.

Margarita D. Lukashova,
Director and partner

Vladimir P. Sumin,
associate lawyer, chief expert