24/09/2021·4 mins to read
High Court clarifies opt out class action process
Class action litigants now have some long-awaited guidance on how the opt out process will work following the High Court’s release this week of four judgments in the ongoing Ross v Southern Response Earthquake Services Limited proceeding.
Ross is the first case in New Zealand that is being advanced on an opt out basis, meaning a person who shares a common interest in the proceeding is automatically part of the class unless they exclude themselves. This contrasts with an opt in class action, where a person must actively consent to join the class.
- The Court has declined an application by the representative plaintiffs to have 15% of any settlement funds received by class members set aside to ensure those class members can contribute towards payment of the litigation funder’s costs if a common fund order is later made by the Court.
- The Court has explained why it refused to allow Southern Response to communicate directly with class members regarding settlement, noting the potential for confusion given the timing of the representative plaintiffs’ opt out notification.
- In its supervisory role, the Court has carefully reviewed both the representative plaintiffs’ opt out notification and Southern Response’s settlement communications before approving them to be sent to class members.
Setting aside (and common fund) orders
In an opt in proceeding, each class member will have agreed that the litigation funder receives a proportion of any compensation the class member recovers. However, in an opt out proceeding, a key issue for the funder is how it can receive a share of any proceeds recovered by class members that have not consented to the litigation funding agreement.
In Ross, the representative plaintiffs sought an order that 15% of any funds Southern Response paid to class members to settle the proceeding should be set aside to ensure that, if the Court subsequently makes a common fund order (or equivalent), funds would be available to give effect to the Court’s order. A common fund order is a Court order requiring all members of a class to contribute to the funding of the class action out of the proceeds of a judgment or settlement, irrespective of whether they have signed the litigation funding agreement.
The Court declined to make the setting aside order (even assuming it has jurisdiction to make common fund orders and, by way of interim relief, setting aside orders). The Court came to this conclusion by applying interim injunction principles. In doing so, it found that:
- There are clearly serious questions to be tried, both as to the jurisdiction to make common fund orders and, if so, whether the facts of the case justify the making of such orders.
- The balance of convenience is directed not only at the parties themselves, but also at members of the class who have indicated (or may in the future indicate) that they choose not to be part of the proceeding. On this assessment, the prejudice to class members by being out of funds (which are for the purpose of repairing and rebuilding their homes) pending resolution of the common fund order application was significant and outweighed the prejudice to the representative plaintiffs.
- In terms of the overall justice of the case, the fact the Ross proceeding has not advanced substantively and is still dealing with interlocutory steps was also significant. It was debatable to what extent, if any, the proceeding had benefited the class members (as opposed to the benefit they have received from the parallel Dodds v Southern Response litigation where the Court has made liability findings against Southern Response on similar issues). This was contrasted with the representative plaintiffs’ position, and how they must be taken to have been properly advised of (and accepted) the risks of pursuing their claim on a representative basis (in particular, that there was a risk they would not obtain a common fund order or an earlier setting aside order).
Settlement communications between the defendant and class members
Earlier this year, the Court refused Southern Response’s application to communicate with the class members regarding settlement. Southern Response wished to communicate with those class members because following the liability finding in Dodds the Government had approved a package to be offered to eligible homeowners, which likely included members of the Ross class.
The reasons for that refusal have now been released. In summary:
The Courts have a supervisory jurisdiction in relation to the conduct of representative proceedings that proceed on an opt out basis.
The Court considered how communication is dealt with overseas and summarised that:
overseas jurisdictions recognise the general freedom of a defendant to communicate settlement offers directly to claimants (other than the representative plaintiff), but with the Court prepared to intervene where the defendant’s conduct is misleading, coercive or similarly unacceptable; and
offers to the representative plaintiff (and other claimants who are clients of the plaintiff’s solicitor) must be made through the solicitor and not directly to those claimants.
- In this particular case, the supervisory intervention by the Court was found to be appropriate. This was due to the “unusual feature” that the timing of Southern Response’s application to communicate with class members coincided with the representative plaintiffs’ application for notification orders. Those notification orders would determine the information that would be provided by direct notice to class members, setting out details as to the proceeding, class membership, the right to stay in or opt out of the representative proceeding, and the consequences of each of those options. The Court was concerned that there would be potential for confusion if both sets of communications went out, unless the Southern Response communication was independently scrutinised.
Court oversight of communications to class members
The final two judgments released by the Court deal with the specific wording and formatting of both the representative plaintiffs’ notification and Southern Response’s amended communication of the settlement package to policyholders. Both sets of communication were heavily scrutinised by the opposing party, as well as by the Court.
The key takeaways are:
New Zealand does not have the history of representative proceedings conducted on an opt out basis for the Court to confidently determine a comprehensive set of appropriate requirements or guidelines in relation to notification.
Development of notification guidance is likely best achieved incrementally as the issue is considered on a case-by-case basis. In particular, the Ross litigation was considered “unusual” given the number of interlocutory issues and appeals, consequential delay and the resolution of issues in the parallel Dodds litigation.
- The purpose of the notice to class members is to inform and not to recruit. Therefore, the notice should not contain wooing or advocating content.
In determining whether Southern Response’s communications to policyholders are not misleading, coercive or similarly unacceptable, the Court should consider (among other factors) whether:
the documentation accurately explains the consequences of accepting and not accepting the offer;
the offer allows a period of acceptance that is sufficient for the class member to obtain legal advice if desired; and
- the documentation makes it clear the class member is entitled to seek, and might benefit from, independent legal advice.
It is clear the Courts are taking their supervisory role in representative actions seriously to ensure that justice is done. However, while the Courts continue to clarify novel procedural aspects of representative actions as they arise, they have not gone as far as laying down comprehensive guidance.
As a result, there will continue to be material risk and uncertainty for parties to a representative action pending changes resulting from the Law Commission’s current review.
Special thanks to Chaowei Fan for his assistance in writing this article.
 Ross v Southern Response Earthquake Services Limited  NZHC 2451, 2452, 2453, 2454.