Court of Appeal allows opt-out class actions

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In a landmark decision for class actions in New Zealand, the Court of Appeal has ruled that a representative action brought by two Christchurch homeowners can proceed on an “opt-out” basis.

In a landmark decision for class actions in New Zealand, Ross v Southern Response,1 the Court of Appeal has ruled that a representative action brought by two Christchurch homeowners can proceed on an “opt-out" basis.

Court of Appeal decision

Mr and Mrs Ross brought proceedings against Southern Response, alleging that Southern Response had failed to provide them with full information about the cost to rebuild their house before they settled their insurance claim.

The Rosses sought orders allowing them to bring the proceedings, not only for themselves but also on behalf of 3,000 other insureds who had settled with Southern Response. In New Zealand, this type of proceeding is known as a “representative" class action.

The Rosses also sought permission to bring the proceedings on an “opt-out" rather than an “opt-in" basis. As in the United States, an opt-out proceeding would allow the Rosses to sue on behalf of all other insureds without obtaining their consent (unless they specifically say that they do not wish to participate).

  • The Court of Appeal overturned the High Court's decision and allowed the Rosses to bring the proceedings on an “opt-out" basis. It ruled:
  • The courts have jurisdiction to make “opt-out" orders for representative proceedings, on the basis of a broadly-worded rule in the New Zealand High Court Rules.
  • There is no policy consideration that precludes “opt-out" actions. The Court considered that the purpose of representative proceedings was to improve access to justice, facilitate efficient use of judicial resources, and strengthen incentives for compliance with the law. It concluded that in most cases these purposes will be better served by adopting an “opt-out" approach.
  • The Court ruled that the courts should apply a “liberal and flexible" approach to the High Court Rules, that this would allow the courts to make orders that best serve the purposes of the Rules, and that the courts could therefore make “opt-out" orders.
  • The Court concluded that, while it would have been preferable to have a detailed legislative framework for class actions, it was neither necessary nor appropriate to wait for Parliament to pass legislation before the courts would make such orders.

The Court of Appeal made an “opt-out" order for “Stage 1" of the Ross proceeding, which will concern liability. However, the Court also accepted that class members will need to specifically opt-in for a “Stage 2", in which each class member's entitlement to compensation will be addressed.

A “radical departure"?

The Court of Appeal's ruling is a landmark decision.

To date, New Zealand courts have refused to allow “opt-out" class actions, on the basis that the courts are required to work within the existing High Court Rules, and that those Rules only contemplate “opt-in" proceedings. Indeed, in an earlier case, the High Court had concluded that allowing “opt-out" actions would represent “too radical a departure" from the existing Rules.2

In its consultation paper released in September 2018, the High Court Rules Committee also suggested that the availability of “opt-out" actions was a matter best left for Parliament, saying that “matters of policy … are best left for legislative response, such as whether an opt-out procedure should be permissible under the High Court Rules."

Further, the Law Commission is currently reviewing the law relating to class actions. It has stated that “it is important that any legislative regime for class actions and litigation funding be introduced only after careful research, policy analysis and consultation".

The Court of Appeal's decision is therefore a significant step in the evolution of class actions in New Zealand.

Implications for class actions in New Zealand

The Court of Appeal's decision in Ross leaves many unanswered questions.

As the Court recognised in its judgment, the courts will now need to grapple with a wide range of procedural issues that arise in relation to “opt-out" claims, given that there is no legislative regime. The Court of Appeal accepted that these issues will need to be worked out on a case by case basis, which in our view will likely result in yet more class action litigation.

One key issue will be how “opt-out" proceedings are funded. In the usual case, a litigation funder will take a cut of any settlement or judgment from class members who have signed up to the funding agreement. In an “opt-out" proceeding however, class members can become part of the proceedings without having to agree to contribute to the funder's costs.

In Australia, the courts have addressed this by making US-style common-fund orders, which require all class members to contribute to costs, whether or not they have agreed to do so. These orders are controversial, and the ability of the courts to make such orders has recently been challenged in the High Court of Australia. A decision is pending.

In New Zealand, the High Court Rules do not give the courts any express power to make common fund orders, and the Court of Appeal in Ross declined to comment on the availability of common fund orders.

However, the Court of Appeal also said that it was “confident that the Court has the necessary tools to address any real unfairness in this context, whether under the High Court Rules or in the exercise of its inherent powers."

It therefore remains to be seen whether the New Zealand courts will follow the Australian approach and allow US-style common fund orders in this country.

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