23 April 2020

Closing the door on closing the class

This article is written by Moira Saville, Alex Morris and Armen Varvachtian

Introduction

In a significant decision, the New South Wales Court of Appeal has held that the Supreme Court does not have power under section 183 of the Civil Procedure Act 2005 (NSW) – which is in equivalent terms to section 33ZF of the Federal Court of Australia Act 1976 (Cth) – to make an order effecting a so-called “soft closure” of the class in a representative proceeding in anticipation of a potential settlement at mediation.

The decision in Haselhurst v Toyota Motor Corporation Australia Ltd t/as Toyota Australia [2020] NSWCA 66 is important because it clarifies the extent to which the parties to a class action will be able to achieve certainty about the size of the class that might benefit from a settlement prior to embarking upon alternative dispute resolution processes with a view to achieving such a settlement.  In simple terms, it means that defendants may face a heightened degree of uncertainty when trying to negotiate a commercial resolution of a class action.  However, there are methods of addressing that uncertainty in negotiations – and those methods had been used for some time before “soft closure” orders became fashionable.

Background

The issue arose in the context of several separate class actions arising from the recall of allegedly defective motor vehicle airbags, which are being case managed in parallel by the Supreme Court of New South Wales.  In November 2019 (before the High Court’s significant decision in BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 94 ALJR 51see our alert here – on the scope of section 183 in the context of now-defunct common fund orders), the primary judge made orders including one which was described as bringing about “soft class closure”. 

Under that order, which would only have had effect if an “in principle” settlement of the disputes could be achieved before the commencement of the initial trial of the common issues in the actions (and subject to court approval of such a settlement), the causes of action held by group members who had neither opted out of the class actions nor registered their intention to participate would be extinguished.  The class closure was “soft” because, if an “in principle” settlement was not achieved before the commencement of the initial trial, the non-registered group members’ rights would remain unextinguished such that they could participate in any fruits of the action.

In making the order, the primary judge relied upon Full Federal Court authority to the effect that a class closure order which “operates to facilitate the desirable end of settlement” may be appropriate under the federal legislative equivalent to section 183.  His Honour considered that “a mediation will only be effective if the parties know the likely number of participants and can thus offer an amount reflective of those numbers”, and said that “the parties must come to terms with the reality of the situation, and that involves all sides having an understanding of who will be in the class and therefore what the likely damages will be”.  This is the usual practical motivator for parties to seek such orders.  His Honour also determined that the interests of group members who did not register and could not benefit from any settlement were outweighed by the parties being able to explore whether a settlement could be achieved.

Did the Court have power to make the class closure order?

At issue in the appeal was the question whether the Court had power, under section 183, to make such an order (and, if so, whether it should have been made as a matter of discretion).  The Court held that it did not have such power and that, even if it did, the order should not have been made.

Section 183 provides:

“In any proceedings (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order that the Court thinks appropriate or necessary to ensure that justice is done in the proceedings.”

The legislative framework of the Act, however, was held to tend “strongly against an implication that there must be power to make an order extinguishing the rights of an unregistered Group Member in advance of any settlement being achieved (or even attempted) in order to facilitate settlement of the claims of Group Members who choose to register their claims.”  The legislation permits a representative plaintiff to make people group members without their consent and one of the concepts underlying the statute is that group members (who may not even know that they are group members) are not required to take affirmative steps to participate in the proceeding – at least until the determination of the common questions of law and fact.  The legislation contemplates, instead, that they are to take affirmative steps only if they wish to opt out of the proceeding.

Justice Payne (with whom the other members of the five-member Bench agreed) analysed a number of cases which have traditionally been relied upon as authority for the proposition that the Court has power to make class closure orders.  One of those cases – the Victorian decision in Matthews v SPI Electricity Pty Ltd (No 13) (2013) 39 VR 255 – was held not to be authority for the proposition that the Supreme Court of New South Wales is empowered to make a class closure order, not least because the Victorian legislation contains a provision that expressly gives the Court in that jurisdiction power to make orders which would have the effect of closing the class of claimants by a certain date.

The other central decision was that of the Full Federal Court in Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd (2017) 252 FCR 1, concerning the federal legislative framework for class actions which – like the New South Wales statute – lacks an express power to close a class.  In that decision, the Full Federal Court had acknowledged that class actions “are intended to require little or no active involvement by class members” and that “[t]here must be a good reason to exercise the discretion to make a class closure order which may operate to deny the benefits of a settlement to class members who do not opt out and who do not take the active step of registering”.  However, the Court had also said that “if a class closure order operates to facilitate the desirable end of settlement, it may be reasonably adapted to the purpose of seeking or obtaining justice in the proceeding and therefore appropriate under s 33ZF of the Act”.

Justice Payne noted three short matters about the Treasury Wine Estates decision: first, the question of power was conceded; secondly, it cited the Matthews decision, which is not authority for the suggestion that the Supreme Court of New South Wales has the power in question; and thirdly, the other cases referred to in the decision had proceeded by consent.  Most importantly, however, the decision was made before the decision of the High Court of Australia in Brewster.  In Brewster, the High Court had expounded a construction of the statutory class action regime that his Honour considered to be inconsistent with the relevant aspects of Treasury Wine Estates decision (even though Brewster and the case at hand related to different types of order).  His Honour said that “the majority judgments [in Brewster] each made clear that the power conferred by s 183 was to be construed in the context of structural considerations in Part 10 relating to settlement and judgment”.

Although the respondents had argued that the class closure order was consistent with the statutory regime in that “it assists in the management of the proceeding in order to bring it to a resolution”, his

Honour considered that the effect of that order was “to address a matter, the barring of a claim held by a Group Member, which is addressed in s 173 in the case of settlement and s 177 in the case of a judgment, in each case supplemented by the specific power in s 179 to make a judgment binding all Group Members.”  Further, “[i]t is, so the plurality in Brewster explains, incongruous to read a power into s 183 when other provisions of Part 10 make specific provisions apt to accommodate that task but which operate at the conclusion of the proceeding.  The power to bar a claim held by a Group Member is one that arises at the conclusion of a representative proceeding”.

Crucially, s 183 – while broad – does not empower the Court to take steps that go beyond what the specific provisions of the legislation show the provision was intended to supplement.  And, as the President observed in a separate concurring judgment:

“[I]t is difficult to conceive of how an order which destroys a person’s cause of action within the limitation period, without a hearing and with no guarantee that the person will necessarily know of the outcome or consequences of their failure to register, is an order that could be thought to be ‘necessary to ensure that justice is done in the proceedings’.”

Justice Payne also made remarks about the submission that an order extinguishing the rights of unregistered group members was a “practical necessity, in order to secure the desirable result of settling claims”.  His Honour noted that there was no evidence to support this proposition and – as the President had observed during oral arguments – “settlements occurred in class actions for years, decades even, without this mechanism”.  In other words, although class closure might be beneficial for defendants, it is not necessarily the case that it is essential.  As the President also observed, a mediation “is not an end in itself and is not…something which is required to ensure that justice is done in the proceedings”, adding (while it is not the case that “mediation is not valuable or that settlement should not be encouraged”):

“If a mediation can only occur in circumstances where group members who do not register to participate in it will lose their causes of action (an assertion which must underpin the respondents’ position and which I consider dubious), I do not consider that that outcome is something that can be described as either ‘appropriate or necessary’ to ‘ensure that justice is done in the proceedings’”.

Further, Justice Payne said that allowing such an order would give rise to a conflict of interest that would put representative plaintiffs (who are supposed to represent the interests of all group members) in an invidious position.  This is because, on the one hand, it will be in the interests of the plaintiff and registered group members to achieve as high a settlement sum as possible; on the other, it will be in the interests of unregistered group members that the matter not settle at all so that their claims are not extinguished.

If the Court did have power, should the order have been made?

The Court of Appeal also considered the question whether, if a class closure order was within power, it should have been made as a matter of discretion.  The answer, again, was “No”. 

The primary judge had considered that the facilitation of settlement (described as an “imperative”) was sufficient in itself to justify making the order, and that the order was necessary because mediation would “only” be effective if it were made.  But Justice Payne found that there was no evidence that this was so, noting that the very fact that the order was the subject of controversy told against that proposition.  That proposition was also inconsistent with the historical experience of representative proceedings, with various methods (such as capping or the drafting of distribution rules) being available to address uncertainties about the size of the class and the overall claim.

Is it now less likely that class actions will settle?

The fact that class closure orders are not available does not mean that class actions are less likely to settle.  As the Court pointed out, settlements have been happening for decades without the aid of such orders.  Often, class action defendants already have a significant amount of information about the number of group members and the value of their asserted claims (though, of course, information about the degree of interest group members have in participating in a settlement would improve the position).  Other mechanisms are also available in order to provide a degree of certainty conducive to settlement.  For example:

  • as the President observed, settlements can be structured on a pro rata basis to accommodate uncertainty, as opposed to a global sum;
  • as the President and Justice Payne both observed, it is possible to amend the class definition on settlement so that any settlement only applies to those members who have registered (thereby avoiding the risk of overpaying if the matter is settled on a global basis, without extinguishing the claims of those who neither opted out nor registered). This would, however, give rise to the risk of a subsequent class action being brought on behalf of those who did not register, although that risk may be low;
  • the decision appears to leave intact the availability of a registration and closure process after the settlement of a matter, consistently with the reference in Brewster that “group members will have to take action at some stage to obtain the actual payment of any monetary relief to which they have established an entitlement”.  This would have the benefit of closing the class (while allowing group members to be heard in relation to the terms of the settlement), without the risk of a further class action by unregistered group members whose claims would remain unextinguished if the same result were to be achieved by narrowing the group definition; and
  • parties can negotiate a potential settlement by taking into account the fact that not all group members – as defined in the pleading – may wish to participate.

The decision of the Court of Appeal exemplifies the importance of legal principle and a careful understanding of the statutory regime governing class actions, while also demonstrating that the legislative framework remains conducive to the conduct of class actions in a way that is principled as well as being commercially realistic.

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