Court of Appeal judgment further opens class action gates

The Court of Appeal's landmark Southern Response may not unleash an avalanche of class action lawsuits, but that shouldn't diminish the significance of the decision handed down last month.

The Court of Appeal has decided to allow "opt-out" class action suits, rather than the "opt-in" approach New Zealand courts have previously taken.

It all hinges on how one interprets High Court rule 4.24, a procedural rule with origins in the 18th century and the only peg New Zealand courts have to hang their decisions on in class action cases.

"Where two or more persons have the same interest in the subject-matter of a proceeding, one or more of them may, with the consent of the other or others, or by direction of the court on the application of any party or intending party to the proceeding, sue or be sued in such proceeding on behalf of or for the benefit of all persons so interested," the rule says.

In the past, judges have focused on the "with the consent of the other or others" part, thus requiring potential litigants to opt-in to a representative lawsuit, and not the "or by direction of the court" part of the rule, which appears to be agnostic.

An associate judge has previously allowed an opt-out process, but that decision was overturned by the High Court. That was in the still-running case brought by Feltex investors who allege the prospectus contained untrue and misleading information and have a favourable decision to that effect.

With an opt-out approach, all potential claimants are party to the representative action, unless they specifically opt out. That's the approach United States cases have been based on.

With an opt-in approach, the only parties covered by the eventual judgment are those potential claimants who proactively opt in, the approach New Zealand courts have taken.

Clearly, significantly more people are included in opt-out cases than is likely in opt-in ones.

In the Southern Response case, fronted by claimants Brendan and Colleen Ross, the Court of Appeal decision means about 3,000 other Southern Response customers will be automatically covered by this judgment unless they actively opt out.

However, the court envisages a two-step process with establishing a fault that needs to be addressed being only the first stage.

Because each affected Southern Response customer's circumstances are different, any settlement will need to be decided on the facts of each claimant's particular case.

It is common ground between the parties that if the first stage succeeds, the second stage will be conducted on an opt-in basis.

Another case based on practically the same facts but representing a single couple, Karl and Alison Dodds, was decided in their favour by the High Court. Southern Response said last month it would appeal that decision, but also offered to cover the Dodds' costs, and has signaled its willingness to settle other similar cases will hinge on the appeal outcome.

Grant Cameron of GCA Lawyers, who is representing the Ross couple with the backing of Australia-based litigation funder Maurice Blackburn, suggests we shouldn't read too much into the two-stage process.

"It's always been the case that the court can hold a two-stage proceeding if it's thought more efficient that you establish the liability questions first," Cameron says.

If there's found to be no case to answer, there's no point in wasting everybody's time, he says.

Once liability has been established, though, Cameron thinks it's more likely cases will settle out of court.

The Australian experience, where class actions are becoming increasingly common and where cases follow an opt-out process, bears out that view as not a single class-action case there has ever been decided in court. All cases to date have settled out of court.

David Friar of Bell Gully, who has represented Southern Response on other matters but not on this case, says the two-stage process means "this particular case doesn't go as far as it otherwise might have, but the case does set a precedent for the future."

That could have significant consequences.

Previously, New Zealand courts have thought it was for Parliament to decide how far down the class action path we should go, but parliament hasn't taken up the challenge.

"Here, the court's decided it's not going to wait for parliament and it's going to effectively break new ground," Friar says.

Chapman Tripp litigation partner Laura Fraser says the two-step process is one way of dealing with the fact that not all claimants in the case have the same circumstance, or can even be found, but that courts overseas have taken a more relaxed approach.

For example, if some of the claimants in a successful class action can't be found, a certain portion of the proceeds will be donated to some charity.

"I don't think that will happen here, but it is one of the most difficult issues," Fraser says.

There's also the question of how much of any settlement the lawyers and litigation funders should be entitled to.

In Australia, this question is rigorously overseen by the courts. In one recent case against the Bank of Queensland, the judge "took a razor to the legal costs" and discounted the proposed fees by 40 percent, the Australian Financial Review reported.

Before the judge's intervention, class members were set to receive just 2 percent of the A$12 million settlement.

Cameron says New Zealand courts haven't taken much notice of litigation funding to date - he has been involved in a lot of similar cases covering events from the Cave Creek disaster to mis-treatment of children at Lake Alice.

He cites a case against Credit Suisse in which the Supreme Court took the view that it wasn't its business to second-guess commercial arrangements.

"There shouldn't be any reason why anybody should second-guess that," but the courts do get to scrutinise proposed settlements.

"If they had any adverse comments, I'm sure they would put it forward to the parties," Cameron says.

Fraser says issues of costs are yet another area of uncertainty in New Zealand.

"Unlike most other jurisdictions, we don't have those developed frameworks. We've inched forward in terms of making decisions about how class actions should be run," she says.

"Supervising settlements is something that does happen in other jurisdictions and that's something that will have to be worked out here. Does the court supervise settlements to make sure they're fair to all members of the class?"

It comes down to a delicate balance between allowing fair access to the courts and the costs involved.

While the amounts owed to individual Southern Response claimants run into tens of thousands of dollars and more, other cases ripe for class action treatment might involve very small amounts for each individual affected.

A good example of such a case is ANZ Bank's discovery in 2015 that a faulty calculator had affected the interest calculations of about 100,000 of its customers. While the amount involved was $10 million, the amounts owed to individuals were mostly too small to have ever warranted legal action.

ANZ has been voluntarily compensating each customer under Commerce Commission supervision.

Another similar case would be ACC's discovery last year that since 2002 it had over-charged the newly self-employed and other businesses by $100 million, excluding GST and interest.

About 300,000 businesses were affected so the amounts owed most individual businesses were small. Again, ACC is voluntarily refunding the people affected.

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