How not to conduct a class action: Dyczynski v Gibson [2020] FCAFC 120

Introduction

On 7 July 2020, the Full Court of the Federal Court handed down its decision in Dyczynski v Gibson [2020] FCAFC 120. The decision provides significant clarification as to the role and obligations of a lead applicant in a class action towards group members, and the nature of the duties owed by the solicitors and counsel acting for a lead applicant to group members.

The decision also provides useful guidance as to the ambit of the meaning of “claims” under section 33C of the Federal Court of Australia Act 1976 (Cth) (Act) which may be pursued through the vehicle of a class action, and the extent of a lead applicant’s authority to settle the individual claims of group members.

Key takeaways

1. The lead applicant in a class action proceeding owes fiduciary duties to group members. What the content of those duties are remains unclear.
2. Where the lead applicant’s solicitors have also entered into a retainer with group members, they owe those group members fiduciary duties, as well as duties in contract and tort, and duties specified in the applicable Solicitors’ Conduct Rules. . Those duties require that solicitors take steps to keep group members updated as to the status of the proceeding and to not act in a way that may prejudice the individual claims of group members in the absence of instructions. In exceptional circumstances, a court may make personal costs orders against solicitors and counsel who fail to properly discharge their professional duties.
3. In circumstances where there is no retainer between a lead applicant’s solicitors and group members, the lead applicant’s solicitors will at least be required to act in the interests of group members, consistently with the lead applicant’s fiduciary duty to group members.
4. The extent of a lead applicant’s representative authority is limited to the claims the subject of the common questions in the class action proceeding, and does not extend to group members’ idiosyncratic or individual claims.
5. Section 33ZB is the pivotal provision in Part IVA of the Act, as it is this provision which enables the Court to bind non-party group members in respect of the common questions in a class action proceeding.
6. Practitioners should ensure orders under section 33ZB are sought concurrently with orders under section 33V such as to ensure that group members are bound by a settlement which is approved by the court.

Background

The appellants in this appeal were Dr Jerzy Dyczynski and Ms Angela Rudhart-Dyczynski. In 2014, their only child, Fatima Dyczynski, was completing a Master’s degree in Space Systems Engineering in the Netherlands. Dr Dyczynski booked a return flight for his daughter from the Netherlands to Perth for the purpose of her making an application for permanent residency in Australia. On 17 July 2014, Fatima boarded Malaysian Airlines flight MH17 to Australia which was tragically shot down over the Ukraine killing all 283 passengers and crew.

In January 2016, the Dyczynskis entered into a retainer agreement with LHD Lawyers (LHD) under which LHD accepted instructions to act on their behalf in relation to the death of Fatima, including to commence a claim against Malaysian Airlines for compensation under the Convention for the Unification of Certain Rules for International Carriage by Air (Montreal, 28 May 1999) (Montreal Convention) in a court of competent jurisdiction.

Procedural history

Notwithstanding that the Dyczynskis understood that LHD would commence an individual claim on their daughter’s behalf, on 11 July 2016, LHD commenced a class action in the Federal Court in which Ms Gibson (for whom they also acted) was the representative applicant. LHD advised the Dyczynskis that they met the class description in the statement of claim and that, accordingly, they were members of the class and could pursue their individual claims through the class action.

In December 2016, the primary judge struck-out the initial class description in the statement of claim on the basis that it included persons who could not possibly have a claim against Malaysian Airlines under the Montreal Convention. Thereafter, the Court granted leave for the lead applicant to amend the class description with effect from 2 May 2017.

Following the amendment of the class description, LHD continued to advise the appellants that they were class members and could pursue their claim through the class action. In November 2017, counsel instructed by LHD in the class action conferred with the applicants in relation to the quantum of their individual claim.

In February 2018, the Court made class closure orders which required class members to register their claim by 23 March 2018 if they wished to participate in the distribution of any settlement. The appellants lodged the requisite forms and thereby became registered class members.

The proceeding was then set down for a hearing to answer certain preliminary questions as to whether class members met the threshold jurisdictional requirements to bring a claim under the Montreal Convention. At the hearing on 2 August 2018, counsel for the lead applicant purported to concede that the Court did not have jurisdiction to determine the Dyczynskis’ claim under the Montreal Convention. Malaysian Airlines accepted the concession and the Court did not make any determination in respect of the preliminary questions. The lawyers for the respective parties then proceeded on the basis that the Dyczynskis did not form part of the class. Importantly however, the lawyers never took any steps to give legal effect to the concession by seeking leave to amend the class description or seeking a declaration that the Dyczynskis did not form part of the class.

The concession was made without LHD and counsel having received instructions from the Dyczynskis nor even communicating with them about the possibility that their individual claims could be finally determined through the preliminary questions procedure. LHD did not even tell the Dyczynskis that the concession had been made. For the next year, the Dyczynskis continued to believe that they were class members and continued to interact with LHD on that basis.

In June 2019, an in-principle settlement was reached between certain identified registered class members and Malaysian Airlines. The settlement provided for individual settlement amounts for the identified class members. The settlement did not, however, purport to bind class members other than those identified. The Dyczynskis were not included in the settlement as it was presumed by LHD at this point that they were no longer class members.

Settlement approval hearing

On 26 June 2019, the Court heard the application for approval of the in-principle settlement under section 33V of the Act. At the hearing, junior counsel appeared for the lead applicant, Ms Gibson, and informed the Court that the settlement covered all class members, that all class members had given their instructions to settle, and that all class members were “before the Court”. The primary judge then made orders approving the settlement and dismissing the proceeding on the express basis that all affected class members were before the Court: Gibson v Malaysian Airlines (Settlement Approval) [2019] FCA 1007.

The Court also made orders dispensing with the requirement under section 33X(4) of the Act that notice of the settlement must be given to all class members. This dispensation was also made on the express basis that notice was unnecessary as all class members were before the Court.

The Dyczynskis’ application

On 17 July 2019, the Dyczynskis became aware, through online media, that the class action had been settled and immediately made inquiries with LHD. It was at this point that LHD informed the Dyczynskis for the first time that they were no longer class members. Further, notwithstanding that they were clients of the firm, LHD refused to provide the Dyczynskis with any information and informed them that the settlement was confidential.

The Dyczynskis then filed their own interlocutory application with the Court. The application was drafted without legal assistance and, in effect, sought orders directed to obtaining more information about the settlement, and allowing them to continue to pursue their claim through the class action as either substituted lead applicants or as a sub-group.

The Dyczynskis’ application was heard by the primary judge on 28 August 2019. At the hearing, the Dyczynskis represented themselves. Junior counsel, being the same counsel who had previously advised the Dyczynskis as to the quantum of their claim, appeared on behalf of the lead applicant instructed by LHD and opposed the application. The application was also opposed by Malaysian Airlines. The Court was not made aware that LHD and the junior counsel, whom the Dyczynskis had instructed, were acting against them in the same matter in which they had been retained.

Having not been apprised of LHD and junior counsel’s apparent conflict, the primary judge proceeded to make a declaration that the Dyczynskis were not class members within the description in the amended statement of claim.

Decision on appeal

The Dyczynskis then appealed to the Full Court seeking to set aside the declaration that they were not class members and seeking to set aside the order dismissing the proceeding so that they could continue with their claim against Malaysian Airlines. The Dyczynskis also sought leave to withdraw the concession made on their behalf to the extent that such leave was necessary.

It was central to the Dyczynskis’ case on appeal that it was arguable that Fatima was a permanent resident of Australia at the time of the incident. This was the only available avenue of jurisdiction to the Dyczynskis for the commencement of a claim under the Montreal Convention in Australia, and was also one of a number of alternative conditions of class membership in the amended statement of claim.

The Dyczynskis’ case advanced three grounds of appeal.  This article only considers the ground of appeal which the Court ultimately upheld. That ground was that the primary judge erred in making a declaration that the Dyczynskis were not class members within the description in the amended statement of claim because the Dyczynskis were persons with a claim against Malaysian Airlines on whose behalf the representative applicant had commenced the class action, and they remained class members during the currency of the class action. 

In response to this ground of appeal, the respondents contended that the Dyczynskis had ceased to be class members on two bases:

1. When the class description was amended as the respondents contended that the Dyczynskis no longer fell within the amended description.
2. As a result of the concession made by LHD and counsel for the lead applicant during the hearing of the application to determine the preliminary questions.

As to the respondents’ first contention, each of Murphy and Colin JJ and Lee J held that the Dyczynskis continued to be included in the class following the amendment of the class description.¹

In reaching that conclusion, their Honours emphasised that section 33C(1) of the Act only requires that a person have “a claim” which falls within the class description, but it is not necessary for a prospective class member to establish a right or entitlement to relief.² With this in mind, it was held that Dyczynskis continued to fall within the amended class description by reason of their claim that Fatima’s principal and permanent place of residence was Australia. Accordingly, the Court dismissed the respondents’ first contention.³

As to the respondents’ second contention, the Court held that the concession which LHD and counsel purported to make did not cause the Dyczynskis to cease to be group members. Murphy and Colvin JJ held that the concession had no effect for several reasons which included:

1. the lead applicant had no authority under Part IVA of the Act to make a concession in relation to the Dyczynskis’ individual claim as the lead applicant and the Dyczynskis were only privies in interest to the extent of their common claims (but not their individual claims);⁴
2. LHD and the counsel they instructed could only properly make the concession if they obtained the Dyczynskis’ instructions to do so, which they had not;⁵
3. it was necessary to give the Dyczynskis notice that one of the preliminary questions which related to the merits of their individual claim would be determined in advance of the trial of the common issues and no such notice had been provided;⁶
4. both LHD and the counsel they instructed misled the Court during the hearing of the preliminary questions as to the character of the concession and the circumstances in which it had been made.⁷

Lee J dealt with the respondents’ second contention by finding that, the Court had not made any order which gave legal effect to the group members. Accordingly, his Honour held that the Dyczynskis continued as group members and the Remaining Group Members Ground ought to be dismissed.⁸

Disposition

In the result, the Court allowed their appeal and granted relief which included the following:⁹

1. The primary judge’s declaration that the Dyczynskis were not class members was set aside.
2. The primary judge’s order dismissing the proceeding was set aside.
3. An order that, to the extent necessary (though doubting that it was in fact necessary), leave was granted to the Dyczynskis to withdraw the concession.
4. An order under section 33ZB identifying the group members which were bound by the settlement approved by the primary judge but allowing the Dyczynskis the opportunity to continue with the existing proceeding as substituted lead applicants.

Issues considered by the Court

In allowing the Dyczynskis’ appeal and granting the relief set out above, the Court canvassed a broad range of issues arising under the Part IVA class action regime.

The role and duties owed by a lead applicant to group members

Murphy and Colvin JJ made clear that the lead applicants’ representative capacity vis-à-vis group members is limited to the claims giving rise to the common claims the subject of the proceeding, as the lead applicant and group members are only privies in interest to the extent of those common claims.¹⁰

Their Honours confirmed that the lead applicant has the conduct of the proceeding on behalf of class members under Part IVA in respect of the common claims. For that reason, the lead applicant owes “fiduciary obligations” to group members when acting in that representative capacity.¹¹

Murphy and Colvin JJ did not elaborate on the content of those fiduciary obligations. Unhelpfully, the case cited in support of the position – that a lead applicant is a fiduciary of group members – does not necessarily support that unequivocal conclusion.¹²

The duties of solicitors and counsel acting for a lead applicant

Murphy and Colvin JJ identified that, in circumstances where LHD had entered into a retainer agreement with the Dyczynskis, it had a fiduciary duty to act in the Dyczynskis’ best interests as well as common law duties and contractual obligations.¹³ Their Honour’s found that LHD had breached those duties arising as a result of its retainer with the Dyczynskis by failing to keep them adequately informed as to the status of the proceeding, by failing to seek their instructions prior to the determination of the preliminary questions, and by appearing against the Dyczynskis in their application before the primary judge.¹⁴

Murphy and Colvin JJ observed that, even if LHD had not entered into a retainer with the Dyczynskis, it nevertheless owed the Dyczynskis a duty to act in their interests as group members. In this respect their Honours referred to the decision of Murphy J in Kelly v Willmott Forests Ltd (in liquidation) (No 4)¹⁵ in which his Honour identified the uncertainty in the jurisprudence and academic commentary as to the extent of the duties owed by a lead applicant’s solicitors and whether those duties were of a fiduciary character.¹⁶

Although their Honours did not express a concluded view, they observed that “[i]n acting for the representative applicant LHD was obliged to act consistently with the representative applicant’s fiduciary obligations to class members.”¹⁷

The extent of a lead applicant’s authority to settle group members’ claims

As to the authority of a lead applicant to settle the claims of group members, Murphy and Colvin JJ applied the High Court’s decision in Timbercorp, confirming that group members in a class action are only bound by a determination of claims which give rise to the common questions, and the lead applicant only represents group members with respect to the claims the subject of the proceeding (but not with respect to their individual claims). The corollary is that a court may not determine any questions in a representative proceeding other than those in respect of the claims that are made, or could be made, by all of those in the class against the defendant.¹⁸

Their Honours did however note that, in the context of a settlement approval, the Victorian Court of Appeal has held that an order may be made approving a settlement which binds class members in respect of both common claims the subject of a class action proceeding and any individual claims.¹⁹ Although indicating that it was not necessary to take a concluded view on this issue, their Honours expressed disapproval of the Victorian position, noting that “in the absence of express statutory words we would not conclude that Parliament intended that, absent authorisation by class members, the applicant has no authority to settle the individual or idiosyncratic claims of group members.”²⁰

Statutory estoppel under section 33ZB

In the reasons of both Murphy and Colvin JJ and Lee J, it was observed that section 33ZB of the Act was “the pivotal provision” in Part IVA.

In this respect, Lee J observed that it is only upon the making of an order under section 33ZB that non-party group members are bound by findings of the court as to the common questions.²¹ Murphy and Colvin JJ similarly observed that the making of an order under section 33ZB ensures class members who have not opted out are bound by the judgment of the Court, even though they are not parties to the proceeding.²²

Having identified that it is necessary for an order under section 33ZB to be made by the Court to bind non-party group members, it was emphasised by the Court that orders under section 33ZB should always be sought concurrently with settlement approval orders under section 33V in order to ensure that group members are ultimately bound by the settlement.²³

The effect of the concession made during oral argument

Relatedly, the Court held that the concession which was purportedly made on behalf of the Dyczynskis was not binding for several reasons.

These reasons included that the concession was not given effect to by an order under section 33ZB of the Act.

In those circumstances, Lee J held that it was not necessary for the Dyczynskis to withdraw the concession.²⁴ Murphy and Colvin JJ did however proceed to make an order that leave be granted, although indicated that the order may be unnecessary for the reasons expressed by Lee J.²⁵

Non-party costs orders against solicitors and counsel

Murphy and Colvin JJ left open the question of whether LHD or counsel should pay the Dyczynskis’ costs on either a party/party or indemnity basis as a result of their failures to act with professional skill and competence. Their Honours then invited LHD to show cause as to why it should not be required to pay the Dyczynskis’ costs associated with the appeal and their application before the primary judge.²⁶

Lee J went a step further indicating that his preliminary view was that, as a result of the level of unreasonable and unjustifiable conduct evident from the history of LHD’s dealings with the Dyczynskis, there was no reason why the Dyczynskis should not be fully compensated for their costs by LHD.²⁷

Lee J observed that the reason that the Dyczynskis found themselves in the position they did was “through the failure of their legal representatives to attend properly to looking after their interests and dealing with the class action in a way consistent with the overarching purpose pursuant to s[ection] 37M of the Act.”²⁸

In each of the Federal Court and the Supreme Court of Victoria, a failure of practitioners to adhere to the prescribed overarching purposes (such as the failings of LHD that were identified by the Court), is a factor which weighs in favour of the making of non-party cost orders.²⁹ This is to be contrasted with the position in NSW, which does not have an analogue of the statutorily prescribed overarching purposes applicable in the Federal Court and in Victoria.

In the result, the Court ordered that LHD show cause why it should not be ordered to pay the Dyczynskis’ costs on either a party/party or indemnity basis and, if LHD submitted that counsel should contribute to any costs it is ordered to pay, for counsel to file evidence and short submissions accordingly.

Conclusion

The Full Court’s decision adds to the growing number of significant class action decisions this year and provides a useful contribution to the jurisprudence as to the role of the lead applicant in a class action, and the role of the solicitors and counsel who represent them. That said, the decision leaves open the extent to which duties owed by the lead applicant and their lawyers are properly characterised as fiduciary in nature.

Murphy and Colvin JJ’s disapproval of the Victorian Court of Appeal’s decision in Pekell adds to the ongoing controversy as to the scope of a lead applicant’s representative authority to settle the individual claims of group members in a class action. Given the conflicting position across jurisdictions, this is an issue which may ultimately be required to be resolved High Court, although special leave has not sought been in the present case.

Watch this space.