Introduction

Representative actions, New Zealand's version of class actions, are becoming increasingly frequent across the litigation landscape. In 2020 it seems that two separate representative actions may have resulted from the collapse of CBL Corporation. The second stage of the trial (for quantum) of the Feltex shareholder representative action is due to commence and preparations have begun on an opt-out case relating to aluminium composite panels on buildings, the kind of material used on the Grenfell Tower in London.

In Ross v Southern Response Earthquake Services Limited ([2019] NZCA 431), the Court of Appeal issued what may be a landmark decision for the future of representative actions in New Zealand. In overturning a decision of the High Court, the Court of Appeal approved the plaintiffs bringing a representative action in which the represented group would be formed on an opt-out basis, similar to class actions in other jurisdictions.

The opt-out order is the first of its kind in New Zealand and is expected have a flow-on effect on subsequent litigation. In overturning the High Court's decision, the Court of Appeal relied on principles of access to justice and judicial system efficiency.

Representative actions

When a potentially complex case is brought against a defendant with extensive resources, there is a huge risk in starting a claim without similar significant resources. In New Zealand, provision is made for a group of claimants who wish to sue a defendant on the basis of common claims to do so by means of a representative proceeding.

Rule 4.24 of the High Court Rules 2016 allows for one or more persons to sue or be sued, on behalf of or for the benefit of all persons with the same interest in the subject matter of the proceeding. These proceedings can be brought with the consent of the other persons who have the same interest or as directed by the court on an application by a party or intending party to the proceeding. 

The courts take a liberal approach to representative proceedings, consistent with securing the just,  speedy and inexpensive determination of proceedings and limiting the number of persons named or joined as parties.

In Credit Suisse Private Equity LCC v Houghton ([2014] NZSC 37), the Supreme Court advanced the following propositions in relation to Rule 4.24:

• The principal purpose of a representative proceeding is the promotion of efficiency and economy. The whole point of having a representative proceeding is to avoid clogging the courts with a multiplicity of individual proceedings covering the same subject matter, which would undermine the efficiency and economy of litigation.
• Flexibility in how the rules are applied is the modern approach to representative proceedings.
• Where injustice can be avoided, the rules should be applied to promote the expedition and economy of proceedings.

Representative actions can rebalance the advantage of unequal resources in legal proceedings by bringing together numerous people who claim to have been adversely affected by the same conduct of a defendant. Bringing a group of people together, represented by a lead plaintiff, and pooling resources lowers the risks and costs of legal proceedings at an individual level.

Many kinds of claim can form the basis of a representative action. Common claims involve shareholder and investor disputes, consumer law, environmental and human rights issues and employment.

Facts

In Ross the appellants alleged breaches of Section 9 of the Fair Trading Act 1986 as well as misrepresentation, mistake and breach of the duty of good faith.

The claim was based on an allegation that Southern Response, a run-off insurer, had given the Ross family incomplete information about the cost of rebuilding their earthquake-damaged house. They alleged that Southern Response had received two different versions of a report setting out the costs of repair or rebuild but had given only one of them to the insureds. Consequently, the insureds had been misled into settling their claim on a less favourable basis than should have been the case.

The parties agreed that the case could proceed as a representative action but disagreed on the means by which the represented group could be formed. The dispute turned on whether the group would be formed on an opt-in or opt-out basis.

To opt in would mean that, to participate in the action, claimants would need to give notice to the court that they wished to join the group. Conversely, to opt out would mean that all potential claimants within a defined group would be represented in the proceeding unless they gave notice to the court that they did not wish to be represented.

As is common with representative actions, the case was to be heard in two stages. The first stage would determine the issues that were common to all policyholders conclusively between the represented policyholders and the insurer. If a common basis for liability was upheld, the second stage would address loss and causation at the level of each individual policyholder, at which point issues such as the extent to which group members took professional advice relating to the settlement
would be considered.(1)

The scope of the common issues to be determined in stage one had yet to be determined. In the Court of Appeal, counsel for the representative plaintiff identified common stage-one issues, which broadly related to:

• the obligation to pay the expected additional costs set out in the undisclosed report;
• whether Southern Response owed a duty of good faith to its policyholders;
• whether different actions and responses by Southern Response amounted to a breach of the duty of good faith, misleading or deceptive conduct or the making of false or misleading representations in trade;
• whether the settlement agreements entered into provided a defence for Southern Response. (2)

It was common ground that, if the proceeding reached stage two, it would be necessary for represented claimants to take active steps to establish their individual claims. If represented claimants wanted to obtain compensation, they would each need to opt in to stage two of the proceedings and provide all necessary information for their individual compensation claims. The central issue before the High Court, and on appeal, was whether stage one should proceed on an optout basis as the Ross  family, the representative plaintiffs, proposed.

The High Court declined to permit the representative class to be formed on an opt-out basis. The court saw no reason to depart from established past practice, with all previous representative action orders in New Zealand having been made on an opt-in basis. In addition, the court held, consistently with the earlier decision in Houghton v Saunders ((2008) 19 PRNZ 173 (HC)), that Rule 4.24, which governs representative actions, does not envision opt-out orders.

Whether a representative action is brought on an opt-in or opt-out basis has a significant impact on the likely size of the representative group. The High Court received evidence of research which indicated a striking difference in class size depending on the basis of formation: approximately 8% of a given class would likely opt out of a representative proceeding, while only 39% would opt in. For a predicted class size of 3,000, the difference in approach would be around 1,000 members.

In rejecting the opt-out application, the court emphasised that the size of each individual claim, while relevant to whether the action should proceed on a representative basis, was not relevant tothe basis on which the class should be constructed.
While seeing some merit in the argument that an opt-out option was a fail-safe approach in cases in which members may be ill-equipped to make decisions on the technical elements of the case, because this proceeding related to homeowners, the court considered that they would be competent to grasp the financial and legal aspects of the decision to be made. 

Court of Appeal decision

The Court of Appeal's decision to allow the formation of the representative group on an opt-out basis was based on numerous considerations.

The court held that, as the scope of Rule 4.24 is broad enough to authorise a representative plaintiff to bring proceedings on behalf of other persons with the same interest in the subject matter of a proceeding without first obtaining their consent, it also provides the court with the requisite jurisdiction to make an opt-out order.

In relation to jurisdiction, while it would be preferable to have a detailed legislative framework for opt-out proceedings, it was neither necessary nor appropriate to wait for Parliament to pass legislation. The High Court was sufficiently empowered, under the statutory framework and its inherent jurisdiction, to deal with any issues that might arise from the proceeding continuing on an opt-out basis.

The Court of Appeal considered that New Zealand should adopt the liberal and flexible approach to representative actions already adopted in Australia and Canada.

The court also considered policy reasons affecting authorisation on an opt-out basis. The only policy reason against authorisation on an opt-out basis was the lack of a detailed legislative framework, but the court considered this to be an insufficiently strong policy reason to decline the order.

Conversely, the court found numerous policy factors which supported proceedings on an opt-out basis:

• Opt-out proceedings would be likely to enhance access to justice significantly.
• There would be an increased incentive for large companies and public entities selling goods and services or otherwise owing obligations to the public to comply with the law.
• An opt-out basis would provide efficiency advantages regarding the use of judicial resources over an opt-in approach. In split trials, the benefits of determinations of common legal and factual issues would be greater with an opt-out approach.

Further appeal

On 9 December 2019 the Supreme Court granted leave to appeal,(3) concluding that the question of whether representative claims could proceed on an opt-in or opt-out basis raised important questions of broad application. The New Zealand Law Society and the New Zealand Bar Association were invited to intervene to make submissions if they wished to do so. A hearing is expected to take place shortly.

Future of representative actions

If confirmed, the precedent set by Ross will likely lead to an increase in representative actions on an opt-out basis in New Zealand. The effect will mostly likely be experienced by insurers, banks, government departments and other entities which provide goods, services or otherwise have duties or obligations towards large groups.

Many other jurisdictions have detailed rules governing representative proceedings. Rules of those kind have been proposed in New Zealand on numerous occasions but have not been adopted to date.

If upheld on appeal, the decision to authorise an opt-out representative group may result in the control of such actions receiving greater legislative priority. Any new NZ legislation is likely to draw on legislation and experience from Australia.

The Law Commission and the Rules Committee are currently reviewing representative actions and whether opt-out proceedings should be permitted. In tandem, the Law Commission is also considering litigation funding and the parameters around such funding. The resulting recommendations may influence the procedural constraints placed on the operation of representative actions and funders' involvement.

The Law Commission has released its terms of reference for consideration of representative actions and litigation funding. The review will include whether and to what extent the law should allow representative actions and, if allowed, how they should be regulated. Importantly for the basis on which a class is formed, the commission will examine the criteria and process for commencing a representative action and how the class should be defined.

Comment

In the light of the current reviews and the Supreme Court granting leave to appeal the decision of the Court of Appeal, this promises to be an interesting area of litigation practice to follow over the coming months.

For further information on this topic please contact Victoria Rea at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]). The Wilson Harle website can be accessed at www.wilsonharle.com.

Endnotes

(1) Ross v Southern Response Earthquake Services Ltd [2018] NZHC 3288 at [48].
(2) Ross v Southern Response Earthquake Services Ltd [2019] NZCA 431 at [31].
(3) Southern Response Earthquake Services Limited v Ross [2019] NZSC 140.