Court of Appeal opts-out of “opt-in” for class actions

In a landmark decision, the Court of Appeal has permitted the plaintiffs in Ross v Southern Response to progress a class action on an “opt-out” basis.[1] This means that everyone with the same type of claim as the plaintiffs will automatically be a class member claimant, unless they expressly opt-out of the class. This is the first order of its kind in New Zealand and is likely to make class actions easier to commence and will likely result in larger damages claims.

In a unanimous judgment delivered by Goddard J, the Court decided that to decline the appeal would go against the principles of access to justice, efficiency and incentives for consumer-facing entities to comply with legal obligations.

The claim

In May 2018, Mr and Mrs Ross commenced High Court proceedings against Southern Response. They allege that Southern Response provided them with incomplete information about the cost of rebuilding their Canterbury-earthquake damaged home, which caused them to settle their claims on a less favourable basis than they otherwise would have. Mr and Mrs Ross applied to bring the proceedings as representatives of a class of around 3,000 policyholders who also settled with Southern Response in similar circumstances.

The claimants allege that Southern Response received two different Detailed Repair/Rebuild Analyses (DRA) for Southern Response setting out the costs of repair or rebuild. One DRA set out the full costs for rebuild or repair. However, it is alleged that the other DRA (provided to the insured) did not disclose certain cost items – estimates for internal administration, demolition and design – showing a lower rebuild/repair cost.[2] The claimants allege breach of s 9 of the Fair Trading Act 1986, misrepresentation, mistake and breach of the duty of good faith. Southern Response denied the allegations saying (amongst other things) that it honestly held the belief that the omitted items were not payable and that there are reliance issues as customers obtained their own legal and professional advice before entering into the settlements.

Both parties agreed that the case should proceed by way of representative action, but could not agree on whether policyholders would be required to “opt-in” by giving notice to the Court (Southern Response’s preference) or “opt-out”, meaning that they were represented in the claim unless they gave notice to the contrary (the Ross’ preference). It was acknowledged that the case would be split into two: first, a hearing of the common issues between all relevant policyholders and, secondly, if the plaintiffs succeed at stage one, a separate hearing in relation to each class member’s particular position, taking into account the findings on the common issues.

The High Court declined to allow the claim to proceed on an “opt-out” basis. “Opt-in” orders had been made in all other cases in New Zealand and there was “no cogent reason” why the Court should depart from past practice.[3] The High Court also restricted the class to those members of the 3,000 policyholder class whose homes required rebuilding, and excluded those whose homes could be repaired. We covered the High Court case here.

Mr and Mrs Ross appealed both rulings.

Court of Appeal’s decision

The Court of Appeal allowed the appeal. Its principal finding was that stage one of the case could, and should, proceed on an “opt-out” basis. There were a number of key reasons for this finding.

First, the relevant High Court Rule permits the making of an “opt-out” order: “The rule clearly authorises a representative plaintiff to bring proceedings on behalf of other persons with the same interest in the subject matter of a proceeding without first obtaining their consent.”

Secondly, the New Zealand courts should adopt the same liberal and flexible approach as the Australian and Canadian courts. The lack of a detailed legislative regime was not a sufficient reason to decline to make an “opt-out” order.

Thirdly, an “opt-out” approach:

  1. Is likely to significantly enhance access to justice – in this regard the Court considered that “The courts should be slow to put unnecessary hurdles in the path of class members, depriving those who fail to take active steps to participate in the proceedings of the opportunity to have their claims determined by the courts, and of the possibility of obtaining some form of relief if their rights have been infringed.” It acknowledged that whichever approach was ultimately adopted, many class members were likely to fail to take any positive action for a number of reasons which may not have to do with whether it is in their best interest to participate in the proceedings. As Goddard J said, the “significance of inertia in human affairs should not be underestimated.”
  2. An “opt-out” approach would “strengthen the incentives for insurers and other large entities dealing with the public to comply with the law, as it increases the prospect that they will be held to account for any breaches of their obligations to large numbers of individuals in circumstances where individual claims may not otherwise be pursued.”
  3.  Might provide some efficiency advantages over an “opt-in” approach, but the relative efficiencies were “finely balanced”. Many of the possibly problematic procedural issues would arise in both an “opt-in” and “opt-out” process, including reviewing claimant notices by the courts, supervising litigation funding arrangements and ensuring that any settlement does not disadvantage a subset of class members. While dedicated legislation would be preferable, the courts had an appropriate supervisory jurisdiction under High Court rule 4.24 and their inherent powers to control procedure for both opt-in and opt-out classes.

Fourthly, a split trial gave rise to a stronger case for an “opt-out” order as the need to decide whether to participate would be deferred until the common issues had been resolved. At that point the potential advantages and disadvantages of proceeding would be clearer and more immediate and claimants would have more information to determine whether to opt-in at that stage. Claimants’ interests would be protected in the meantime by inclusion in stage one.

Lastly, the Court implemented a safety net for members of the class by directing that claimants must seek leave before settling and discontinuing the proceedings. This will give the High Court an opportunity to review any proposed settlement and ensure that there is no unfairness to a subset of class members.

While it remains open to a court to direct that a particular claim be brought on an “opt-in” basis, the Court went so far as to say that it anticipates that “opt-out” orders will be the norm, absent cogent reasons to adopt a different approach.

The Court also allowed the appeal of the High Court’s restriction of the class to rebuild customers. The Court considered “that there are significant questions of both law and fact which are common to rebuild and repair customers. Any relevant differences in policy entitlements arising from differences in the terms of the policy in relation to repair and rebuild scenarios can readily be addressed at stage 1 of the proceedings.” The Court found that a combined stage one trial for rebuild and repair claimants would be more efficient.

Our view

The Court of Appeal’s landmark judgment brings New Zealand into line with class action frameworks in jurisdictions such as Canada and Australia, and has significant implications for New Zealand’s class action landscape.

So long as the approach is not altered on any further appeal, we predict that this decision will make class actions more attractive for potential claimant groups, and litigation funders, as having a larger class will likely result in an increase in the quantum of damages.

We also consider it likely that a rise in “opt-out” class actions is likely to impact insurers of insureds which provide goods or services, or otherwise owe obligations, to large groups of potential claimants. There will also be increased risk for insurers of directors of these types of entities. Insurers will no doubt be assessing the risks associated with the possibility of these claims succeeding and what impact they could have on their businesses.

[1]Ross v Southern Response Earthquake Services Limited [2019] NZCA 431.

[2] This also had an impact on project contingency which was applied to the total cost entitlement.

[3] The High Court specifically considered Houghton v Saunders (2008) 19 PRNZ 173 (HC).

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