Case study: Class actions update

The High Court has recently issued two important decisions on class actions, both of which have arisen out of the Canterbury earthquakes: Ross v Southern Response Earthquake Services Ltd [2021] NZHC 3497, the first case where a New Zealand Court has been asked to approve a settlement of a class action; and Smith v Claims Resolution Service Limited [2021] NZHC 3561, which illustrates the types of issues that can arise if a representative plaintiff decides to step aside.

Ross v Southern Response Earthquake Services Ltd

Insurers will have been following Ross v Southern Response closely since these proceedings were first commenced in May 2018. This proceeding has led to a number of firsts in the class action space – it was the first class action proceeding permitted to proceed on an opt-out basis
in New Zealand, and it has now led to the first decision on how the Court will approach settlements that are submitted to it for approval.

The Ross’ claim

This proceeding arose out of the settlement of the plaintiffs’ insurance claim after their home was damaged by the Canterbury earthquakes. The plaintiffs alleged that Southern Response provided them with incomplete information about the cost of rebuilding their home, which caused them to settle their claims on a less favourable basis than they otherwise would have.

At around the same time, a Mr and Mrs Dodds also commenced proceedings against Southern Response, making similar allegations, and were successful in both the High Court and Court of Appeal. Following the Dodds’ success, Southern Response settled the Ross’s representative proceeding and submitted the parties’ settlement agreement to the Court for approval.

The Courts approach to approving settlement

The Court held that whether a settlement of a class action should be approved will depend on whether it constituted a fair and reasonable resolution of the plaintiffs’ claims in the interests of the class members as a whole, both as between claimants and the defendant and as between the individual claimants.

The Court considered the approach adopted in Australia and Canada where, like New Zealand, there is no statutory regime governing class actions. Following the approach taken in Canada, the Court outlined 11 factors to be considered in assessing whether or not to approve a settlement:

  1. likelihood of recovery or likelihood of success if the claim was to go to trial (to ensure that the plaintiffs’ interests were not being settled too cheaply);
  2. amount and nature of discovery, evidence or investigation that would be required if the claim was to proceed;
  3. settlement terms and conditions;
  4. recommendation and experience of counsel;
  5. future expense and likely duration of litigation and risk;
  6. recommendation of neutral parties, if any;
  7. number of objectors and nature of objections;
  8. the presence of good faith, arms-length bargaining and the absence of collusion;
  9. the degree and nature of communications by counsel and the representative plaintiffs with class members during the litigation;
  10. information conveying to the court the dynamics of and the positions taken by the parties during the negotiation; and
  11. if counsel fees were negotiated in the settlement, and if so, how big a factor they are (to ensure that the settlement is not favouring the lawyers’ interests over those of the clients).

Interestingly, this approach differs from that preferred by the Law Commission in its Supplementary Issues Paper on Class Actions and Litigation Funding released in September 2021. The Law Commission specified just five factors that a court should consider when deciding whether a settlement is fair, reasonable and in the interests of the class as a whole, with an additional catch-all allowing the Court to considering anything else it considers relevant:

  1. the terms and conditions of the proposed settlement;
  2. any legal fees and litigation funding commission that will be deducted from relief paid to class members;
  3. any information readily available to the Court regarding potential risks, costs and benefits of continuing with the proceeding;
  4. views of class members;
  5. process by which the settlement was reached; and
  6. any other factors the Court considers relevant.

It is interesting to note that the Court in Ross took into account the recommendations and experience of counsel involved, which does not feature in the Law Commission’s report. This was a weighty factor in the Court’s decision, where the Court said that it had the “utmost confidence” in the exercise of judgment of counsel in that case, and that their assessment counted “significantly in the Court’s assessment as to the reasonableness of the settlement”: at [118]. While the parties in Ross were both represented by senior counsel with significant experience in representative proceedings and insurance, taking into account counsel’s experience and judgment could be controversial in other cases if it were to involve second guessing the judgment of less experienced – or even less well regarded – counsel or where the parties are represented by lawyers with differing levels of seniority. It will be interesting to see whether and how the Law Commission comments on this when it releases its report on Class Actions.

Smith v Claims Resolution Service Limited

In Smith v Claims Resolution Service Limited, a class action fell apart when the representative plaintiff, Ms Smith, changed her mind about pursuing the matter. An application was made to substitute a Mr and Mrs Harris as plaintiffs, but this was declined. In reaching its decision, the Court focussed on the prejudice that the defendants would suffer if a substitution order were made.

Ms Smith’s claim

Ms Smith issued the proceeding against Grant Shand and Claims Resolution Service Limited (CRS), who had previously assisted her to relation to an insurance claim for earthquake damage to her home. Ms Smith alleged that Mr Shand and CRS had breached fiduciary duties owed to her
and that her contract with CRS was an unconscionable bargain. At the time, a number of other former CRS clients were defending proceedings commenced by CRS for the recovery of monies said to be owed pursuant to CRS contracts. In 2019, Ms Smith was granted leave to continue the proceeding as an opt-in representative proceeding; however complications arose when Ms Smith no longer wished to continue Mr and Mrs Harris were willing to step in as representative plaintiffs, but as a condition of their appointment they required the Court to grant a stay pending a decision of the Court of Appeal in separate but similar proceedings, Pfisterer v Claim Resolution Service Ltd & Grant Shand Barristers & Solicitors, without which the substitute representative plaintiff would not be able to obtain funding for the proceeding.

The Court declines a conditional substitution

The Court declined to grant the substitution application on the basis that the conditional nature of the application rendered it illusory. Mr and Mrs Harris wanted to “accept the benefit of a substitution order while reserving to themselves the right to withdraw their consent to act in accordance with it if there is any costs risk to them”. They were in effect, seeking an “option to reactivate the representative proceeding at some stage in the future”.

It was also significant that members of the class had not paid money that CRS claimed was owing to them. The Court accepted that the defendants’ ability to recover these amounts would diminish with further delay and as the substitution order sought by Mr and Mrs Harris would delay resolution of the proceeding for, potentially, years, this was overly prejudicial to the defendants.

Implications for class actions

This case will be of some comfort to large organisations who may face class actions; where a representative plaintiff has a change of heart and wishes to step away from the proceeding, the Court will have due regard to the prejudice that may be occasioned to the defendant if a substitution order may significantly delay resolution of the proceedings, notwithstanding that refusing a substitution order may mean that members of the represented class do not, or cannot, pursue their claims.

Read Cover to Cover – Issue 24

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