Landmark judgment paves the way for opt-out class actions in New Zealand
New Zealand's highest court has unanimously endorsed class actions being brought on an "opt-out" basis in Southern Response Earthquake Services v Ross.
The Supreme Court considered whether Mr and Mrs Ross could bring a claim against their insurer on the basis that they represent other policy-holders on an opt-out basis. The Court also considered whether representative proceedings more generally should proceed on an opt-in or opt-out basis.
Opt-in or opt-out: what is the difference?
As we explained in our previous update, whilst representative actions have begun to gain prominence in New Zealand in recent years, the High Court in the context of the Feltex class action had expressed the view that an opt-out procedure was too radical a departure from existing procedural rules. Class actions have therefore proceeded, until now, on an opt-in basis – meaning that only those people who have signed up (opted-in) will be considered to be part of the class for the purposes of the court action.
In most comparable jurisdictions, notably Australia, representative actions may be brought on an opt-out basis. This allows an action to be brought on behalf of all persons within the definition of the class, unless they formally elect not to be (opt-out). However, those other jurisdictions have detailed procedural rules governing the bringing of opt-out actions.
No need to wait for detailed legislation
In contrast, there are no specific rules or legislation for class actions here in New Zealand, whether opt-in or opt-out. In the absence of such rules or legislation, the courts have proceeded to develop a set of principles for the management and conduct of class actions in the course of recent cases using the representative proceedings regime provided for in Rule 4.24 of the High Court Rules.
Potential legislative reform in this area has been under consideration for a number of years, including by the New Zealand courts Rules Committee as recently as 2018, but no action has been taken. Currently, the Law Commission is conducting a review into class actions and litigation funding and expects to release a consultation paper later this month.
However, the Supreme Court did not consider that it needed to wait for detailed legislation to allow class actions to proceed and could use the existing procedural rules, applied flexibly, to develop procedures for opt-out class actions.
The Court agreed with the Court of Appeal that representative actions have three objectives: improving access to justice, facilitating the efficient use of judicial resources and strengthening incentives for compliance with the law. Further, New Zealand's court procedure aims to secure the just, speedy and inexpensive determination of proceedings. The Supreme Court held that an opt-out procedure is generally consistent with those objectives and, in particular, has advantages in improving access to justice.
The Court also expressly recognised that New Zealand has a long history of representative claims brought by individual rangatira on behalf of their hapū or iwi. Where necessary, the Court held, the procedural rule should be construed consistently with the tikanga that underpins this history.
How will the Courts deal with opt-out class actions?
One of the perceived difficulties with an opt-out regime in the absence of detailed rules was a lack of clarity as to how such claims would be managed and supervised by the courts and indeed whether the courts would have the powers required to do so under the existing procedural rules and the inherent powers of the courts.
The Supreme Court acknowledged that there would inevitably be some uncertainty in the absence of a more detailed framework and that this was not an ideal situation for plaintiffs or defendants but, given that similar issues would arise whether or not the status quo was maintained, rule 4.24 should be interpreted to meet modern requirements – with the concern not to work injustice kept in mind.
The Supreme Court set out a number of points as to the procedure that will apply to opt-out class actions. We have summarised the key findings below:
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Opt-in or opt-out?
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When commencing a representative proceeding, the representative must apply to the High Court for leave to proceed on an opt-out basis. The starting point is that the court should adopt the procedure sought by the applicant (opt-in or opt-out), unless there is good reason to do otherwise. However, the court must consider "the relevant factors in light of what will best meet the permissible objectives of the representative action in the particular case."
Relevant considerations include:
- If there is a real prospect that some class members may end up worse off (eg where there is a counter-claim) – this favours an opt-in approach.
- Class size – opt-in may be more appropriate where the class is small (although this is not determinative).
- Participation at "stage 2" – opt-in may be more appropriate if persisting with opt-out at that point lessens the benefits of the representative proceeding or increases any unfairness or prejudice.
An "opt-out order" will be given on conditions that include:
- Requirements for notice to be given to class members with an explanation of the right to opt out.
- A requirement for court approval of a settlement or discontinuance.
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Litigation funding
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- The court has a role to ensure that litigation funding arrangements do not amount to an abuse of process.
- The scope of the courts' supervisory role in relation to litigation funding arrangements remains an open question, but it would be premature to say there is an expectation that the litigation funding agreement should be routinely provided to the court as part of an application for leave.
The Supreme Court did not comment on the use of:
- so-called "common fund orders" which provide for all group members to bear a proportionate share of liability to a litigation funder whether they have signed the funding agreement or not; or
- "funding equalisation orders" which allow deductions from the amounts payable on settlement to unfunded class members equating to the funding commission payable if they had entered into the litigation funding agreement.
There is a pending High Court application for a common fund order in the Ross case, so we anticipate that there will be further guidance in this area in the near future.
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Court approval of settlements
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- As a general rule, the need for court approval should be a condition of granting leave for an opt-out action.
- In deciding whether to approve a settlement:
- We anticipate the courts will look to guidance from other jurisdictions (eg Australia).
- Courts can consider the extent to which the settlement prejudices individual class members.
- It may be that the courts draw on the assistance of independent experts.
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Closing thoughts
The decision is a landmark in the development of class action procedure in New Zealand. More broadly, it bears the hallmarks of the Supreme Court in 2020: a concise unanimous judgment, which centres considerations of tikanga and access to justice.
We await with interest how the Law Commission will seek to address these issues in its consultation paper due later this month. It would seem to us to be difficult now to reverse the trend of recent court decisions in favour of class actions, including opt-out actions, and that the Commission is therefore perhaps more likely to be considering the extent to which detailed rules are needed to reflect those decisions and the procedural principles that have been developed, rather than seeking to reverse them.
This article 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 of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.