Continuing developments in Southern Response v Ross – Class Action “opt-out” approved

Southern Response Earthquake Services Limited v Ross continues to throw up significant legal developments.  The latest is the landmark judgment issued last month by the Supreme Court whereby it has approved the use of an “opt-out” representative action regime in New Zealand.   

Also, in a significant postscript, the government has announced a “proactive package” to be offered to eligible policyholders.  This article looks at both developments.

The Supreme Court decision in Southern Response v Ross

Background

In 2018, Mr and Mrs Ross applied to the High Court for leave to bring a representative claim (class action) against their insurers, Southern Response Earthquake Services Limited (Southern Response).  They allege that Southern Response gave them incomplete information about the cost of remedying the damage to their home arising from the Canterbury earthquakes, which they say caused them to settle their insurance claim for less than they would have had they been given proper disclosure.  They say that Southern Response’s approach was a systematic one which disadvantaged the other members of the proposed class, being some 3000 policyholders. 

Mr and Mrs Ross sought leave to bring a representative claim of all policy-holders, on an opt-out basis pursuant to High Court Rule 4.24(b), which provides that persons may sue or be sued on behalf of all persons with the same interest, either with the consent of other persons who have the same interest or as directed by the court.

It was acknowledged by all parties that the rule permitted the imposition of an opt-out procedure, however, Southern Response and (somewhat surprisingly) the intervening litigation funder, LPF Group Limited, argued that the status quo should be maintained before a legislative framework had been implemented by Parliament.  

In the High Court, Associate Judge Matthews granted leave for the representative claim to be brought on an “opt-in” basis but refused to make orders for an opt-out procedure relying on Houghton v Saunders,[1] in which French J held that an opt-out class action was not permitted by the Rules.  That judgment articulated the conceptual concerns which have underscored New Zealand’s historically conservative approach, namely:

“[t]he notion that someone can become a party to a Court proceeding without their consent is something alien to our way of thinking.”[2]

This traditional approach was rejected by the Court of Appeal, favouring the more liberal one found in other jurisdictions such as Australia, Canada, and the United States, which permit the imposition of opt-out procedures.  Southern Response subsequently appealed to the Supreme Court.   

Brief overview of the Supreme Court’s decision

The Supreme Court upheld the Court of Appeal’s central findings.  The Court was chiefly persuaded by the three objectives:

1.       Improving access to justice: providing an economic means to bring proceedings on behalf of consumers, and facilitating the joinder of claimants who would, for one reason or another, otherwise take no action on an opt-in basis;

2.       Facilitating efficient use of judicial resources: by hearing common issues together, they can be resolved for a greater number of parties in a more speedy and cost-effective manner; and

3.       Strengthening incentives for compliance with the law: whereby consumer-facing businesses would be less inclined to engage in wrongdoing where they faced litigation. 

In terms of protections for prospective plaintiffs, the Court specifically noted that exposure to the risk of counterclaims would be a countervailing factor in the granting of leave.  With respect to defendants, it was noted that the “concern not to work injustice on a defendant” was met in part by the requirement that the applicant would have to satisfy the Court that they had the requisite “common interest”.  It also noted that the “usual armoury” provided by the High Court Rules would apply, including the ability to apply for strike-out or stay on the basis of abuse or process, prejudice or delay. 

The Court also asserted it had a supervisory jurisdiction by which it could comment on the adequacy of notices provided to the proposed class, however, it did not provide any specific guidance in that regard.  It also confirmed that it could approve settlements by assessing them by reference to a “fair and reasonable compromise of the claims.” 

Comment (Morgan Fee)

The Court considered the most persuasive basis for opt-out procedures to be what it viewed as improved access to justice through opt-out procedures.  Here, the Court arguably took a paternalistic approach to litigants, determining that it was in the best interests of a member of a class to be included as a plaintiff in an action, regardless of whether this aligns with their wishes.  Part of the rationale in that regard was adopted from the Court of Appeal’s judgment, which provided:

“many class members are likely to fail to take any positive action for a range of reasons that have nothing at all to do with an assessment of whether or not it is in their interests to participate in the proceedings. Some class members will not receive the relevant notice.  Others will not understand the notice, or will have difficulty understanding what action they are required to take and completing any relevant form, or will be unsure or hesitant about what to do and will do nothing.”  

It is implicit in the Court’s judgment that justice for the claimants will be advanced by their involuntary joining into a claim brought on their behalf, regardless of how likely it is to provide them with any real remedy.  No assessment of the merits of the proposed claim was undertaken.  Perhaps it was reasonable that there was this an implicit assumption in this case, given that the similar substantive claims have already been adjudicated.[3] 

However, it may not be fair to apply such an assumption in other cases.  Further, such an approach is in stark contrast to other instances where a party is compelled to become an involuntary litigant, such as applications to commence derivative actions, where the court is required to assess the prospect of the claim succeeding. 

Sanctioning an opt-out class overlooks possible detriment to an involuntary claimant – such as being unwittingly signed up to a litigation funding agreement,[4] time and energy spent on fruitless litigation, and a lack of control over mismanaged litigation.[5]  It also does not take into account the inherently oppressive nature of defending a claim on this scale.  Without any express requirement to consider the merits of a proposed claim before it can be brought, defendants are left vulnerable to the “Americanisation” of the legal system whereby unmeritorious claims are mounted with a view to extracting significant settlements. 

With respect to approving settlements, the Court said that it could have regard to a “broad range of factors”, including the settlement sums, prospects of success and likely outcome of litigation vis-à-vis the proposed settlement, legal and other expert advice, the likely duration and cost of the proceeding if continued to judgment, and the “attitude of the group members to the settlement” (although how that is to be ascertained was not discussed). 

The standard of a “fair and reasonable” compromise could perhaps overlook the scope for tension between the interests of a funder in securing a settlement and that of a claimant.  Many funding arrangements (particularly overseas) follow a “waterfall” arrangement, which provides for the repayment of outlaid costs to the funder first from the resolution sum, with a percentage of the remainder to be paid to it over and above.  A recent study from the Australian Law Reform Commission, in December 2018, showed that (on average) 49% of recoveries made under shareholder class actions are retained by the law firms and litigation funders.[6]  While a litigation funder will arguably be content if they make a respectable profit, a claimant who has allegedly lost (as in Southern Response) a significant portion of their primary asset may not be satisfied with so modest a recovery. 

Nor is it clear that the anticipated deterrence for consumer-facing businesses is founded on empirical evidence.  Anecdotal experience would suggest that heavily litigated environments such as the United States do not generally result in a more consumer-friendly system.  What is a certain outcome of increased litigation on this scale is that the costs to insurers, and thus to insureds, will increase exponentially.  Again, the Australian Law Reform Commission’s Report found that the cost of D&O Insurance had increased by over 200% in the last two years, which market commentators attribute to an increase in securities class actions.[7] 

One vital issue that was left open was whether Mr and Mrs Ross would be given “common fund orders” whereby the class members are signed up by the court to a litigation funding agreement which provides for recovery of the costs of the proceeding through the resolution sum.  This is a concept which was previously permitted in Australia, but recently rejected by the High Court of Australia in BMW Australia Ltd v Brewster.[8]  This remains to be determined by the High Court in Southern Response, and the Supreme Court expressly declined to make any comment. 

The Supreme Court decision leaves a large number of issues “up in the air”, awaiting further resolution.  Consequently, the legal regime in New Zealand remains significantly uncertain – a state of affairs not relished by insurers.  

Postscript:  Government package rolled out to policyholders

On 14 December, the government announced that it would offer to eligible policyholders who had settled with Southern Response prior to October 2014 a “top-up payment”.  These policyholders are those who are in a similar position to Mr and Mrs Ross.  The payment may include certain professional fees, a contribution to legal fees, unpaid contingencies, and interest.

The package will be overseen by an independent oversight committee.   

[1] (2008) 19 PRNZ 173 (HC). 

[2] At [157]. 

[3] See Southern Response Earthquake Services Ltd v Dodds [2020] NZCA 395, and our subsequent article in InBrief from 1 October 2020

[4] Which, pending the resolution of Mr and Mrs Ross’s application for a common fund order, remains to be determined. 

[5] Note: a class member is unlikely to be exposed to adverse costs awards, as those orders are usually confined to the representative plaintiff and indemnified by his/her lawyers or litigation funders.  However, with the issue of a common fund left open, there is the possibility that class members are exposed to litigation agreements which provide an indemnity to the representative plaintiff for adverse costs orders. 

[6] Australian Law Reform Commission Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (ALRC R134, 2018) at 3.53. 

[7] Above n.5 at 9.83. 

[8] [2019] HCA 45. 

Morgan Fee is an Associate at Fee Langstone