Opting For Change
Southern Response v Ross

• The Courts do not have to wait for legislation governing class actions before allowing opt-out proceedings.
• Allowing opt-out actions will improve access to justice, facilitate the efficient use of judicial resources and strengthen incentives for compliance with the law.
• The existing High Court Rules, with close judicial supervision, are sufficient to address issues arising out of opt-out actions.
• Relevant factors for deciding between opt-out and opt-in actions will include: the applicants’ preferred approach, the size of the class, and the likelihood of adverse effects on members of the representative class.

This appeal related to a proposed representative action by Southern Response (SR) policyholders who say SR provided incomplete/misleading information when they settled their Canterbury earthquake insurance claims. Mr and Mrs Ross sought to bring the representative action on an opt-out basis. This would mean that all affected policyholders are initially included in the claim unless they elect to opt out at a later date. The proposed class will have around 3,000 policyholders.

The High Court initially found that the action should proceed on an opt-in basis. This is the typical approach adopted by New Zealand courts. However, the Court of Appeal overturned this finding and held the claim could proceed on an opt-out basis.

The Supreme Court has now endorsed the Court of Appeal’s approach and elaborated on the courts’ role in defining and supervising representative actions.

SR submitted the Court should maintain the status quo of an opt-in approach until there was a specific statutory framework in place to govern class actions. It said an opt-out approach would raise issues of natural justice for class members and impact on the rule of law. There were potential problems with the process for giving notice to class members, approving settlements, the involvement of litigation funders, and in the supervision of class actions generally.

Of the interveners, the New Zealand Law Society and New Zealand Bar Association supported an opt-out approach. Litigation funder LPF Group Ltd argued this was too problematic within the current procedural regime and essentially sided with SR.

The Supreme Court agreed with the Court of Appeal that the three general objectives of representative actions were: to improve access to justice; facilitate efficient use of judicial resources; and strengthen incentives for compliance with the law. It considered the opt-out approach would improve access to justice and recognised the history of representative claims brought by rangatira on behalf of iwi.

The Australian and Canadian jurisdictions have shown that opt-out representative proceedings can be accommodated without a comprehensive statutory regime to guide their performance.
Although the opt-out approach had practical difficulties that did not arise in an opt-in action, these issues could be effectively managed under the existing High Court Rules. Judicial management would be sufficient to deal with the concerns raised by SR and LPF:

• Notice to class members: A requirement to actively opt out binds members of the defined class to proceedings and their outcome, potentially against their wishes and interests. However, adequate notice to members of the class with explanation of their rights to opt out would ensure minimised impairment.
• Approval of settlements: “Absent” class members are bound by a settlement to which they have not consented. However, the requirement for court approval of any settlement or discontinuance would be a condition of giving leave for an opt-out action. In approving settlements, the Court would have to consider the extent to which the settlement prejudices individual class members. The Court would be able to draw on the assistance of independent experts where appropriate.
• Competing opt-out claims: If two or more representative plaintiffs bring separate proceedings on behalf of the same class on an opt-out basis, this would lead to an impossible situation with people being represented more than once in different proceedings in respect of the same loss. However, overseas courts have shown a willingness to manage competing claims together and either stay one of the claims or order that only one proceed on an opt-out basis.

The Supreme Court also said these safeguards would go some way toward addressing the potential issues associated with litigation funding. The courts may need to play a greater role in relation to funded opt-out actions, but this did not require the Court to routinely scrutinise litigation funding agreements as part of an application under Rule 4.24.
The Court also provided guidance on when an opt-out approach may be appropriate, identifying the following principles:

• Generally, courts should adopt the procedure sought by the applicant, unless there is a good reason to do otherwise.
• If there is a real prospect that some class members may be worse off or adversely affected by the proceeding, an opt-in approach should be adopted. For example, cases where there is potential for a counterclaim.
• The size of the class will have some relevance. An opt-in approach may be preferable where the class is small. However, class size is not necessarily determinative.
• Applications under Rule 4.24 should include proposed conditions as to the Court’s supervision of settlement and discontinuance.

Ross is a vote of confidence in the ability of the High Court to manage the issues that will inevitably arise in opt-out class actions. We can expect a new body of judge-made procedural law to emerge as the courts forge a way forward in opt-out class actions in the absence of a statutory framework.

Although the outcome was as expected, the judgment did not address the economic and policy implications of opt-out class actions – such as the different types of claims likely to be brought on an opt-out basis, how we want private and regulatory enforcement to interact in areas such as competition and securities law, and changing incentives for parties arising from the different scale of claims possible (compared to opt-in class actions). In our view, this was a missed opportunity by the Supreme Court.

The green light to opt-out actions will significantly impact New Zealand’s civil litigation landscape. Although the Ross case involves a claim against an insurer, the implications for claims against insured defendants are likely to be more substantial. As well as a likely increase in the volume and scale of representative claims generally, the advent of opt-out actions may lead to much greater uncertainty. The amount at stake is more difficult to determine where a claim is brought on behalf of a class of indeterminate size. Opt-out actions might also see an evolution in the types of risks insurers are called on to insure – especially in areas – like consumer law – where it is possible to aggregate a large number of small and otherwise uneconomic claims.

McElroys is continuing to closely follow developments in this area, particularly as they impact on procedural and strategic considerations for claims by funded plaintiffs.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.