On 17 November 2020 the Supreme Court released its decision in Southern Response v Ross [2020] NZSC 126 and on 4 December 2020 the Law Commission released its Issues Paper on Class Actions and Litigation Funding. This article considers key aspects of the Supreme Court’s decision and comments on some of the Law Commission’s preliminary views.
The Supreme Court decision concerns a claim by Mr and Mrs Ross against Southern Response for losses suffered as a result of settling their insurance claim for earthquake damage based on incomplete information given to them by Southern Response. Mr and Mrs Ross applied to the High Court for leave to bring their proceeding as a representative claim of the class of policyholders who settled their claims with Southern Response in the same circumstances. They sought an opt out order – meaning the claim would be brought on behalf of every member of the group of affected policyholders unless any member expressly chose to opt out. The High Court allowed the representative claim to proceed on an opt in basis which required class members to elect to opt into the proceeding by completing an opt in election form. That decision was overturned by the Court of Appeal.
It is no surprise that the Supreme Court has dismissed the appeal by Southern Response and agreed with the Court of Appeal that an opt out order is appropriate. Both the Supreme Court and Court of Appeal judgments recognise that improving access to justice is a key rationale for granting an opt out order.
An opt out order means that Mr and Mrs Ross will advance the claim on behalf of the approximately 3,000 policyholders who settled their claims for earthquake damage with Southern Response without knowing the full cost of remedying damage to their homes. While individual policyholders have the freedom to opt out of the proceeding, it is unlikely they will do so – at least in any significant numbers.[1]
The proceeding will be determined in two stages. The first stage will deal with issues which are common to all policyholders. The parties now need to seek an order from the High Court setting out the issues which need to be determined at the first stage. If and when the proceeding reaches stage two, it will be necessary for each class member to take active steps to establish their individual claims. Effectively at stage two each class member will need to opt in.
Unlike other jurisdictions New Zealand does not have a comprehensive regime to regulate class actions. One issue in Southern Response was whether the use of an opt out procedure for representative actions should await any reform which may follow after the Law Commission’s current review of class actions is completed.
The existing provision for representative proceedings is rule 4.24 of the High Court Rules (HCR). That rule allows 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. However, the rule is silent about the procedure to be used.
The Supreme Court acknowledged that there will inevitably be some uncertainty about how the court will exercise its supervisory powers of representative actions in the absence of a comprehensive regime. However, it observed the court could rely on HCR 1.6(2) to conduct proceedings in a way calculated to secure the just, speedy and inexpensive determination of the proceeding. It also noted that HCR 4.24 should continue to be interpreted to meet modern requirements.
The Law Commission, however, sees a number of problems with using this rule to bring claims that have similar features to class actions. It has expressed a preliminary view that a statutory class actions regime would be preferable. It reasons that the current lack of procedural rules means the courts have to develop procedural rules on a case-by-case basis which make litigation inefficient and increases its costs. The Law Commission is also concerned that presently certain types of claims may not be able to be grouped in one proceeding.
The Supreme Court considered that as a general rule the court will need to approve a settlement or discontinuance in order for leave to be given to bring proceedings on an opt out basis. This means that if the Southern Response proceeding is settled before stage two, the plaintiffs will need to seek the court’s leave to settle the claim or discontinue it. This requirement is to ensure that any settlement does not affect absent plaintiffs unfairly.
The Law Commission’s Issues Paper has noted court approval of settlement is one of several features of a typical class action and that the courts have used HCR 4.24 to develop rules for representative actions. The Issues Paper does not address the issue of court approval of settlement beyond making this observation. However, this issue is likely to be addressed by submitters when responding to questions about essential features of a class actions regime.
The Court did not agree the litigation funding agreement should routinely be provided to the Court as part of an application under HCR 4.24(b), but it remains unclear how the Court will exercise its role in ensuring arrangements with the litigation funder do not amount to an abuse of process. There is still uncertainty about whether litigation funding is contrary to the torts of maintenance and champerty.
The Law Commission’s Issues Paper considers four options for reforming the torts of maintenance and champerty. The options are: (1) retaining the torts but allowing the courts to clarify and develop the law, (2) retaining the torts but carving out a statutory exception for litigation funding agreements which meet certain requirements, (3) abolishing the torts, and (4) abolishing the torts but retaining the courts’ ability to find a funding agreement unenforceable on grounds of public policy or illegality.
The Law Commission is seeking submissions on 60 questions it has posed in relation to class actions and litigation funding. Submissions close on 11 March 2021.
[1] Although the High Court judgment referred to some Canadian research suggesting that typically around 8 percent of class members might opt out when the claim is brought on an opt out basis.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.