2020 Litigation Forecast - Class actions: A new ‘opt-out’ era?

Last year, we predicted developments in New Zealand’s class action litigation regime, which has not kept pace with developments in other common law jurisdictions. We have not been disappointed:

  • In June 2019, the Law Commission announced that it was reactivating its Class Actions and Litigation Funding project.
  • In September 2019, the Court of Appeal issued its landmark decision in Ross v Southern Response, in which – for the first time in New Zealand – it made anopt-out’ order, meaning that all potential claimants are automatically included as plaintiffs in the case unless they take a positive step to opt out of the group. The decision has been appealed to the Supreme Court.

Two recent Australian decisions are also likely to provide guidance in New Zealand:

  •  In October 2019, the Federal Court of Australia issued the first-ever shareholder class action judgment in Australia. Significantly, the Court accepted the ‘market-basedcausation’ theory – meaning that shareholder class action plaintiffs need only prove that the market (as a whole) was misled, so that they do not need to prove that each individual plaintiff was misled – which is much more difficult.
  • And in December 2019, the High Court of Australia issued its decision in the BMW and Westpac cases, finding that neither the Federal nor New South Wales procedural rules permitted the making of ‘commonfund’ orders, which require all plaintiffs in a class to contribute to the costs of funding the litigation.

A busy year ahead

In 2020, we predict that we will see:

  • The Supreme Court’s decision in Ross v Southern Response, clarifying whether the Court of Appeal’s decision to permit ‘opt-out’ orders will be a lasting change (we predict that it will)
  • Progress in the Law Commission’s reactivated Class Actions and Litigation Funding project
  • A substantive appellate decision in the Kiwifruit PSA case against the Ministry for Primary Industries
  • Interlocutory decisions on representative action procedure in other cases
  • A decision on common fund orders, which will impact on litigation funding

We may also see an increase in the number of class actions being pursued, as ‘opt-out’ orders and other developments make them more attractive to plaintiffs and to funders, at least for the time being.

At last, a class action regime for New Zealand?

On 18 December 2019, the Law Commission released terms of reference for its Class Actions and Litigation Funding project. According to the Commission, its review will include, but not be limited to:

Class Actions

  • Whether and to what extent the law should allow class actions;
  • If class actions should be allowed, how they should be regulated, for example in relation to:
    • the scope of a class actions regime;
    • the criteria and process for commencing a class action,including how a “class” should be defined;
  • management of class action proceedings; and
  • damages, costs and settlement.

Litigation Funding

  • Whether and to what extent the law should allow litigation funding, having regard to the torts of maintenance and champerty;
  • The role of the courts, if any, in overseeing litigation funding arrangements;
  • Whether and to what extent litigation funders and/or funding arrangements should be regulated, for example in relation to:
    • the nature and extent of the litigation funder’s recovery;
    • the powers and responsibilities of litigation funders;
  • the potential for conflicts of interest; and
  • disclosure requirements.

While the Law Commission has left open the possibility that reform will not be required, we would be surprised if there was no development. Properly considered reform would reduce the need for costly litigation over the procedural aspects of class actions, improve access to justice and increase certainty for litigants.

Establishing the rules without a formal framework

The New Zealand courts continue to develop a procedural framework for class actions in New Zealand ahead of formal reform. We think that the volume of future class actions in New Zealand is likely to depend, to a large degree, on whether:

  • Opt-out’ orders are to remain the norm – this will depend upon the Supreme Court’s decision in Ross v Southern Response
  • Common fund orders are available in New Zealand. Such orders require all members of the claimant group to contribute to litigation funding costs, regardless of whether they have signed a litigation funding agreement. For obvious reasons, common fund orders make class actions more attractive to litigation funders. We expect that the availability of common fund orders will be decided by the High Court, in the first instance, in the Ross v Southern Response case, where an application for such an order has been made.

Of perhaps more academic interest is whether the New Zealand courts will adopt the ‘market-based causation theory for shareholder class actions, as in the Myer case in the Federal Court of Australia. The New Zealand Supreme Court touched on the issue in Houghton v Saunders. In relation to Mr Houghton, the Court remarked:

“‘On the faith of’ means in reliance on the truth of the publicly registered document, which informs the market, but does not require that investors have seen or read the prospectus”.

Whether or not this approach applies to all members of the class in that case will be determined by the High Court in stage 2 of the trial, that may be heard in 2020. The outcome will be less relevant to shares purchased pursuant to a regulated offer document under theFinancial Markets Conduct Act, that contains a rebuttable presumption that purchasers have suffered loss where the shares have dropped in value and the misstatement is proved.

We expect that 2020 will be an exciting year for class actions in New Zealand.

Ross v Southern Response – paving the way without a framework

In September 2019, the Court of Appeal issued a landmark decision permitting the plaintiffs inRoss v Southern Response to progress a class action on an opt out basis. We cover the case in detail on our website.

Where an ‘opt-out’ order is made, everyone with the same type of claim as the representative plaintiff will automatically be a class member, unless they expressly opt out of the group. This was the first order of its kind in New Zealand. The Court was not troubled by the absence of a legislative framework for class actions to make the order. The Court indicated that ‘opt-out orders will be the norm and whether they are appropriate will be decided based on the circumstances of each case and the interests of justice:

“We are satisfied that there is no jurisdictional barrier to the making of ‘opt-out’ orders in representative proceedings. Nor is there any policy reason why they should be exceptional. It all depends on the case. In most cases there willbe compelling access to justice reasons for making an ‘opt-out’ order. We do not consider that it is necessary — or appropriate — to wait for detailed legislation about class actions to be enacted before the court is willing to make such orders. The courts have the necessary powers to manage the procedural issues that will arise in the context of opt out representative proceedings.”

The decision has been appealed. We expect the Supreme Court to hear and determine the appeal in 2020.

Read the full Litigation Forecast

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