Class actions: Are we in or out?

  • Legal update

    31 March 2021

Class actions: Are we in or out? Desktop Image Class actions: Are we in or out? Mobile Image

How a class of litigants is established has implications for both plaintiffs and defendants in a dispute. This article examines the distinction between whether a class action is “opt-in” or “opt-out” and discusses the commercial implications arising from each.

New Zealand does not have a detailed framework that governs the procedural aspects of a class action. However, the issue is currently being examined by the New Zealand Law Commission, and the Rules Committee has been developing additional rules to clarify the procedure for bringing a class action under the existing High Court Rule (HCR) 4.24.

Currently, HCR 4.24 provides the legal basis for class actions in New Zealand. It allows a plaintiff to sue “on behalf of, or for the benefit of, all persons with the same interest in the subject matter of a proceeding”.  Broadly, a plaintiff brings proceedings as a representative of a “class” of other plaintiffs who have the same or similar interests against a common defendant.  A class action allows claims to be grouped together and heard in the same trial, creating significant cost savings for plaintiffs (as opposed to each plaintiff incurring the costs of bringing a separate claim). For a defendant in a class action, the establishment of a class action means that they will only face one claim from a class of plaintiffs, but that claim will likely be in respect of a substantially higher exposure in terms of quantum.

Difference between opt-in and opt-out class actions

A key issue is the procedure by which a “class” of litigants is established. An opt-in class action requires potential class members to take active steps to join the proceeding before they can form part of the class and benefit from any successful claim. Typically, an opt-in class is established in a “bookbuild” process by issuing a notice to all members of the class that outlines the claim, the expected costs and the process by which an individual plaintiff can indicate their intention to join the class. Often this will involve completing a registration form which is available on the website of a law firm acting for the plaintiffs.

By comparison, an opt-out class action presumes eligible plaintiffs are part of the class by default, unless they take active steps to indicate otherwise. This distinction has significant implications for both plaintiffs and defendants. For plaintiffs, the most significant implication of inclusion in the class is that they are bound by the decision in that case and cannot relitigate the claim in an individual proceeding. For defendants, opt-out class actions could often mean there is a larger exposure in terms of quantum than if they were facing an opt-in claim.

New Zealand’s legal position

HCR 4.24 was inherited from historical English Judicature Acts of 1878 and 1879 (Judicature Acts 1873 and 1875 (UK)) and was not intended as a mechanism for the type of class actions that we have seen before the courts in recent times. However, the courts have demonstrated a willingness to develop the law to meet modern requirements (Andrew Beck and others McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR4.24.01]). The courts have taken a broad interpretation of the phrase “same interest,” in HCR 4.24, and have said that such an interpretation is consistent with the purpose of the HCRs: to ensure just, speedy and inexpensive determinations of proceedings (HCR 1.2).

A consequence of not having a specific procedural framework for class actions is that there can be an increase in procedural points being raised at the interlocutory stage of proceedings. This can add significant delay and costs to litigation for the plaintiffs, which may discourage claimants from initiating a claim entirely.

The recent New Zealand Supreme Court decision in Southern Response v Ross [2020] NZSC 126 upheld the Court of Appeal’s decision that a class action under HCR 4.24 would, in some cases, be better served by adopting an opt-out approach (Southern Response v Ross [2020] NZSC 126 at [108]). The Court indicated that the plaintiff’s preferred procedure should be adopted unless there is “good reason” not to do so (at [95]). In practice, it is likely that most lead plaintiffs would prefer an opt-out class action. When considering the appropriateness of the class type, the Supreme Court said that regard must be given to the class size and whether there is a “pre-existing connection” between the claimants that would make an opt-in class more practical (at [98]). In making these comments the Court indicated that opt-in class actions may create “unnecessary hurdles” for class members to access justice (at [60]). The Court stated that it is important not to underestimate the effects of “human inertia”, even when it is clearly in the interest of a potential class member to opt-in to the proceeding (at [40]).

On the other hand, opt-out class actions pose a potential “free-rider” problem which can arise where class members benefit financially from litigation, without contributing to the legal costs that are incurred by the lead plaintiff. Effectively, free riders benefit from the litigation without paying for it, potentially forming a group of thousands of class members that are unknown to the lead plaintiff. It has been argued that this problem can be minimised by the presence of a third-party litigation funder, or seeking a common fund order, where a contribution to legal costs is deducted from any judgment in favour of the plaintiff class (the Supreme Court in Ross referred to a common fund order as a mechanism in which costs are deducted from awards made to class members at the outset).

An application for a common fund order would likely be made under HCR 14.1, although this has not yet been tested by the Courts. Prior to the Supreme Court judgment in Southern Response, in the Feltex litigation the High Court resisted the argument that class actions could be opt-out under HCR 4.24  (Houghton v Saunders (2008) 19 PRNZ 173 (HC) at [165]­). However, when considering opt out class actions, the Supreme Court in Ross examined the historic use of representative claims in New Zealand by iwi or hapū that brought claims against the Crown, where a single chief would represent the entire class of plaintiffs, for example in Te Heuheu Tukino v Aotea District Māori Land Board and Te Heuheu Tukino v Aotea District Māori Land Board [1941] NZLR 590 (PC)) (Southern Response v Ross at [27]).

What about litigation funding?

The increase in class actions in New Zealand has been coupled with the rise in the number of cases involving litigation funders, both based in New Zealand and offshore. Generally, litigation funders pay the costs of proceedings, and bear the cost risk, in exchange for a percentage of the compensation paid to the class either in settlement or upon a successful outcome. For ordinary consumers looking to bring a class action, litigation funding can assist in providing access to justice because individual claims are often uneconomic to bring in isolation, and commercial defendants are often able to draw on significant resources, including under insurance policies, to fund litigation. Consequently, litigation funders have an important role to play in providing access to justice. In recent years, we have seen several construction materials class action claims in the High Court funded by international litigation funders. For example, White v James Hardie, a cladding products case, is being funded by London-based Harbour Litigation Funding and a class action in respect of combustible cladding (Alucobond PE and Alucobond Plus) is being funded by Omni Bridgeway.

The increasing number of class actions and claims funded by third parties has led to a Law Commission review of the existing system that began in mid-2019. The review is focussed on the extent the law should allow class actions (if at all) and the regulation of such actions – including the scope, criteria and definition of a class and the management of proceedings, damages and costs (Law Commission Issues Paper 45: Class Actions and Litigation Funding (Wellington, 2020) at 375). In its recent consultation document, released on 4 December 2020, the Law Commission has taken the preliminary view that a new procedural regime would be beneficial and indicated that they are generally in favour of litigation funding. Once public submissions close in March 2021, the Law Commission has stated that it will develop substantive policy recommendations for the Minister of Justice, the Hon. Andrew Little, to present in the first half of 2021.

Key points

Whilst we await the outcome of the Law Commission’s review, the Supreme Court decision in Southern Response gives a clear direction that opt-out class actions are likely to remain part of the legal landscape in New Zealand. The Southern Response decision is likely to have significant commercial consequences, including the continued rise of consumer class actions. The Supreme Court decision suggests that future class actions will result in much larger classes which, in turn, will likely result in an increase in quantum. Consequently, it is possible that both the frequency and size (both number of members and quantum of damages) of class actions will increase in the future.

There are three key points that commercial parties should be aware of in respect of a class action:

  • Class actions are becoming increasingly common, including product liability claims by consumers against manufacturers in the construction industry.
  • The Supreme Court held that a court should adopt the plaintiff’s preferred procedure for class establishment, be it opt-out or otherwise, unless there is good reason not to do so. This is likely to lead to more applications to commence opt-out class actions and potentially lead to defendants facing a significantly higher quantum due to the larger number of plaintiffs within the class.
  • The Law Commission will report back to the Ministry of Justice in 2021, which may lead to the development of a tailored procedural regime to manage class actions and litigation funding. This would provide greater certainty to potential litigants evaluating the merits of initiating a class action.

This article was published in the April edition of the New Zealand Law Journal.