Welcome to our new series, Case in Point, in which we highlight key case law and other developments shaping commercial litigation in New Zealand and abroad.
In this edition we cover:
Australia's class action law is significantly more developed than in New Zealand, where courts often shape the law as new issues arise. While Australia's class action regime has statutory backing, its decisions can provide useful guidance for how similar issues might be approached here (although experience shows that New Zealand courts do not automatically follow their Australian counterparts).
A key feature of Australia's regime is its "opt-out" model, under which class members benefit from any court judgment unless they opt out. Class members, however, are not always automatically entitled to receive a share of any settlement and parties can seek orders excluding them from a settlement if they do not proactively register in the proceeding. These are known as "soft" class closure orders, which have been a matter of controversy. They are "soft" because, if there is no settlement and the case is resolved by judgment, class members can still participate in judgment proceeds - even if they did not opt-in. They are excluded only from receiving settlement proceeds.
In the Lendlease proceedings, the defendant sought an order to notify class members that soft class closure orders would be pursued, effectively signalling that members need to opt-in to benefit from any settlement. The High Court of Australia held that the NSW Supreme Court had the power to issue notices foreshadowing that soft class closure orders will be sought. They also held that such notices do not transform the opt-out scheme into an impermissible opt-in one. These notices support settlement negotiations by encouraging class members to register their participation and helping parties estimate the number of such class members. Importantly, the court retains discretion over whether ultimately to make the soft closure order.
The availability of soft closure orders in Australia blurs the boundaries between opt-out and opt-in proceedings and could create a greater incentive for defendants to settle early to limit exposure to a "smaller" class, depending on the rights retained by the unregistered class members. It remains to be seen, however, if soft closure orders will be made in this particular case, and if so, on what terms. The High Court ruled only on their availability in principle, leaving the balancing of rights between registered and unregistered class members to be determined.
This decision offers strategic insights for both claimants and defendants in class actions. It also highlights the risk to class members that, even in opt-out proceedings, they may still need to effectively "opt-in" to benefit from any settlement. New Zealand courts have yet to address this issue, but it is likely only a matter of time.
The High Court of Australia has confirmed that the Federal Court can make common fund orders (CFOs), which require all group members on whose behalf the representative proceedings have been commenced - and who have not opted out - to contribute equally to a litigation funder's commission. This is calculated as a percentage of the settlement or judgment sum. The Court ruled, however, that CFOs cannot be made where the litigation funder is a law practice, known as a solicitors' CFO.
The relevant legislation only permits a Federal Court to make a CFO where it is "just" to do so. The Court found that solicitors' CFOs would breach rules prohibiting law firms from charging fees based on the amount of any award or settlement that may be recovered. As such, solicitors' CFOs are not “just” and fall outside the Federal Court’s powers.
The New Zealand High Court's jurisdiction to grant CFOs was only recently confirmed by the Court of Appeal in July 2024.1 Whether New Zealand lawyers may seek to fund class actions on a conditional basis, and whether courts will follow Australia’s lead, remains to be seen. Given New Zealand has similar restrictions on conditional fee arrangements, our courts may be inclined to follow suit.
Do shareholders have a right to access a company's legal advice?
Historically, English law recognised the "Shareholder Rule", which prevented companies from asserting legal advice privilege against its shareholders, except where the advice related to hostile litigation. The rule was originally based on the idea that shareholders had a proprietary interest in the company and therefore in any advice it obtained.2 More recently, courts have suggested the rule is justified by a joint interest in the advice.
In Jardine Strategic Limited, the UK Privy Council held that the "Shareholder Rule" does not exist under Bermuda law and should not exist under English law. The Board of the Privy Council rejected the proprietary justification as wholly inconsistent with the legal separation between companies and shareholders.3 It also dismissed the joint interest rationale, noting that company and shareholder interests often diverge.
The shareholder rule has not received much judicial treatment in New Zealand, although the Supreme Court has previously suggested it applies as a matter of joint interest privilege. The Jardine decision offers an opportunity for our own courts to reconsider this position. Its removal would give company boards reassurance that communications made with the company's lawyers on behalf of the company are secure and protected.
The New Zealand Supreme Court in Routhan v PGG Wrightson Real Estate Ltd 4 has confirmed that the “scope of duty” principle forms part of New Zealand’s law of negligence. This principle is one of the methods courts use to determine the scope of a person's liability where their negligent act causes another's loss. It does so by analysing the relationship between the claimant's losses and duty owed by the defendant.
The majority of the Supreme Court held that this analysis requires courts to critically assess both risk (whether the allocation of risk was fair in the circumstances) and purpose (what the defendant was responsible for). The aim is to ensure defendants are liable only for the risks that made their conduct negligent in the first place. It can have quite a dramatic effect on the scope of liability, as the case itself demonstrated.
The case arose from a PGG Wrightson real estate agent's negligent misstatement of a dairy farm’s milk production value. Following trial, the High Court awarded the purchasers, the Routhans, nearly $1.7 million in damages, including losses from the forced sale of the farm and another property, and capital improvements – less a deduction for contributory negligence.
Applying the scope of duty analysis, the Supreme Court held that PGG Wrightson's duty extended to ensuring the Routhans did not overpay for the farm and that it would produce to the represented level. However, it did not extend to advising on the purchase decision or post-sale farming or capital investments. Damages of $780,500 were awarded for the overpayment for the farm (relative to its value on true productivity levels) and for some costs incurred in attempting to reach expected production levels, but not for indirect losses like revenue shortfalls, capital investments, increased debt servicing costs and other unforeseeable losses.
The majority decision of the Supreme Court reiterates the complexity of ascertaining the extent of liability in this area, both in principle and fact, and the uncertainty of any result in litigation. For claimants, it's a reminder that success on liability does not guarantee full recovery of consequential losses. For defendant professionals, it highlights the importance of clearly defining the scope of responsibility before commencing work for clients.
Significant changes to the conduct of litigation are underway:
Please get in touch with one of our experts if you have any questions about how these changes might affect your current or potential litigation.
This content is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter, please contact a Russell McVeagh partner/solicitor.
