For insurers, new opportunities for litigation mean new types of risk. One developing area of litigation is the increasing number of court proceedings brought in an attempt to meet the global challenge of climate change.

Activists are increasingly turning to the courts to hold to account those perceived as directly or indirectly contributing to climate change. Actions are increasingly brought against national or state governments to challenge carbon reduction targets as inadequate or seeking to set aside specific decisions such as permits for new gas exploration or coal mines. There is an increasing risk of regulatory action against businesses accused of so-called “greenwashing” or making misleading statements about their climate credentials. More recently, there has been increasing shareholder activism and other forms of activist litigation against private companies. New Zealand was recently the forum for a ground-breaking decision in the last of these categories. In February 2024, the Supreme Court issued its decision in Smith v Fonterra & Ors, a landmark judgment of international significance to large corporations and, by extension, their insurers.

The decision is important because it marks a rare success – albeit only at an interlocutory stage – by an activist litigant against a private, corporate defendant in a climate change case in a common law jurisdiction. It is likely to encourage activist litigation against corporate defendants relating to their carbon emissions or other aspects of their operations that may have an adverse environmental or social effect. Attempts in other common law jurisdictions to bring similar cases have been struck out on the basis that they are legally flawed and have no prospect of success. This was initially the fate of the Smith case in the High Court (for two of three causes of action) and in the Court of Appeal (for all causes of action), until the Supreme Court overturned the latter decision and allowed the case to proceed to trial.

While such claims may not have much prospect of success at trial, the decision means that it will be more difficult for corporates to use the summary strike-out procedure to bring them to an end quickly and efficiently.

What the case is about

The plaintiff, Mr Smith, is an elder of Ngāpuhi and Ngāti Kahu and a well-known political activist. He claims that coastal land to which he has a traditional connection in Māori tikanga is threatened by the effects of  climate change. His claim pleads causes of actions in the common law torts of public nuisance, negligence and a proposed new tort relating specifically to climate change. The defendants are seven private companies in the dairy, steel, petroleum and coal industries which Mr Smith claims are major contributors to greenhouse gas emissions. He seeks declarations that they are breaching duties they owe to him and orders that they make substantial reductions to the emissions he says they cause or contribute to.

The Court’s decision to allow the case to proceed to trial does not mean that it is a strong case. A strike-out application under New Zealand law can only be made on the basis that even if the plaintiff was able to prove each fact alleged, the claim cannot succeed because it is legally untenable. Normally, claims are struck out because the facts alleged do not constitute a breach of a legal duty The Supreme Court allowed the Smith claim to proceed on the basis that the defendants could not surmount the very high bar of showing that the claim could not possibly succeed even if all the facts alleged were proved. Nor does this mean that a legal duty of care on the facts pleaded exists – the Court found that this should be decided at trial once all the facts were known.

The judgment identified some likely challenges for Mr Smith at trial. One of these is a finding that the claims could only succeed if he proves that the defendants’ actions amounted to a “substantial and unreasonable” infringement of his rights, which is a “significant threshold” only some emitters will cross. Those who merely drive cars or heat their homes, for instance, will not be caught. This creates an interesting distinction between those who drive cars or heat their homes and those who supply them with the fuel that enables them to do so, albeit the end result is the same. In any event, the Court held that whether the defendants’ conduct exceeded this threshold could only be determined at trial.

A second challenge is that any remedies granted may be limited, even if a plaintiff could prove a breach of a legal duty. The Court indicated that the case might be legally untenable if Mr Smith had claimed money damages to compensate him for loss, as a “more conventional” approach might then be taken to the requirement for proof of causation. The declarations sought were a possible remedy, although his claim for injunctions also faced obstacles and the Court would tailor any injunctions with a view to their impact.

The fact that the claim has been allowed to proceed is significant, however, because it means that the defendants will now have to defend it in a High Court trial. The nature of the proceeding and the number of parties means that the trial could potentially be lengthy and costly to defend, as well as being high profile. Political activists – many of which are incorporated societies with no or limited assets – are not commonly in a position to pay defendants’ legal costs if their claims fail.

In deciding to allow the claims to proceed to trial, the Supreme Court addressed some key issues that have implications for insurers.

Novel activist claims may be harder to strike out

The Court ruled that the novel nature of the claims and the significance of the alleged harm was a factor counting against striking the claims out without a full trial. The Court reasoned that a full trial would mean that a decision could be made with the benefit of evidence and full argument. 

This ruling may encourage other activist litigants to bring novel climate change claims – and indeed other types of novel claims seeking political ends – even where the prospects of success may appear slim. Novel claims are by their very nature attractive to political activists, who aim to change the status quo. The Court’s reluctance to strike out the Smith claim because of its novelty may have a broader effect by encouraging litigants to believe that strike outs in political cases will be more difficult for defendants to achieve. As a result, insurers may be faced with funding defendants’ legal costs in circumstances where claims might previously have been struck out at an early stage.

Compliance with regulatory schemes not a bar to activist claims

In Smith v Fonterra & Ors, the defendants argued that the courts should not recognise a possible duty in tort where Parliament had enacted a comprehensive regulatory regime for precisely the same thing. They relied upon the legislative regime for emissions and carbon credits in the Climate Change Response (Zero Carbon) Amendment Act as well as the regime for granting permission for uses of land under the Resource Management Act. The Court ruled, however, that a person who has been granted permission to engage in regulated conduct may nevertheless be challenged by a person who claims that the same conduct constitutes a breach of a private law duty of care. This may encourage activists who view legislative consenting regimes as inadequate and wish to challenge them.

Other possible claims

Some claims may be brought along the same lines as those in the Smith case, as claims in tort against companies and other entities that activists perceive as responsible for climate change or other effects that are viewed as undesirable. Others may be brought as shareholder derivative actions or on other legal grounds. We may even see attempts to bring private prosecutions alleging breaches of regulatory prohibitions such as those against ‘greenwashing’, although regulators are increasingly active – ASIC in Australia has issued three proceedings for alleged greenwashing by superannuation funds [1].

In England, two climate activist cases were brought against company directors last year, alleging that they had breached their directors’ duties by failing to address sufficiently the risks of climate change through the companies’ operations: ClientEarth v Shell plc [2] and McGaughey v Universities Superannuation Scheme Ltd [3].

While neither succeeded, they illustrate the willingness of activists to bring novel actions. The director’s duty to act in the best interests of the company in the Companies Act 2006 (UK) now includes mandatory ESG considerations, which underpinned these claims. New Zealand’s new equivalent duty in the Companies Act 1993 does not go this far, only making ESG considerations voluntary, but there is scope for ambiguity in how much attention must be paid to these considerations.

Similar claims have been brought in Australia. In Abrahams v Commonwealth Bank of Australia [4], the Federal Court of Australia granted orders permitting a shareholder access to internal documents to assess the bank’s compliance with its environmental policies and commitments. In McVeigh v Retail Employees Superannuation Trust [5], a pension fund member claimed that a superannuation trust had failed to disclose information about climate change related business risks and plans to address them. The claim was withdrawn only after the trust agreed to implement climate targets and report its progress.

Considerations for insurers

Climate change litigation and other activist litigation is increasing. The rapidly evolving and unpredictable landscape poses challenges for insurers. This is particularly so where insureds are engaging in activities that have expressly been permitted but are claimed to be unlawful at common law. The re-purposing of traditional causes of action and novel claims and proceedings seems likely to continue as activists draw inspiration and learn lessons from litigation around the world.

Footnotes

[1] Mercer Superannuation (Australia) Limited, Vanguard Investments Australia and LGSS Pty
Limited (ActiveSuper).
[2] ClientEarth v Shell plc [2023] EWHC 1137 (Ch); ClientEarth v Shell plc [2023] EWHC 1897 (Ch);
and ClientEarth v Shell plc [2023] EWHC 2182 (Ch).
[3] McGaughey v Universities Superannuation Scheme Ltd [2023] EWCA Civ 873, [2023] Bus LR 1614.
[4] Abrahams v Commonwealth Bank of Australia FCA SD864/2021, 4 November 2021.
[5] McVeigh v Retail Employees Superannuation Pty Ltd [2019] FCA 14; and McVeigh v Retail
Employees Superannuation Pty Ltd [2020] FCA 1698.

Disclosure: MinterEllisonRuddWatts’ Auckland and Wellington litigation teams separately represent two of the seven defendants in the Smith v Fonterra proceeding.