NSW Court of Appeal delivers major setback for early settlement of class actions

Key takeaways

• The NSW Court of Appeal has confirmed that class closure orders that extinguish the rights of unregistered group members cannot be made before a court-approved settlement or judgment. Legislative reform is required for class closure orders to be made that would have that effect.
• Close scrutiny should be given to whether orders made under the general power conferred by the legislative scheme are in fact “appropriate or necessary to ensure that justice is done in the proceedings”.
• The decision has implications for what are known as ‘class closure’ or ‘soft closure’ orders in class action litigation but, importantly, does not limit every type of procedural step that may be used to limit or vary the members of a class.
• Uncertainties regarding the number of group members and the amount of their claims before settlement or judgment can be addressed without offending the principles in this decision – these include amending the definition of the group members, capping settlement amounts or applying distribution rules to ensure fair compensation. 

The decision of Haselhurst v Toyota Motor Corporation Australia Ltd t/as Toyota Australia (Haselhurst) is significant as defendants may have less certainty regarding the number of group members and the amount of their claims before settlement or judgment. Even so, the result is unsurprising given the High Court’s decision in the same litigation late last year.²

We provide an overview of the decision, strategies for achieving early settlements and the implications for the future of class actions in Australia.

What is a ‘soft closure’ order?

A judgment in a class action binds each of the group members at the time it is given unless they have opted-out in accordance with the court’s orders. To achieve finality, courts have previously made orders ‘closing the class’ of persons who are able to maintain a claim in the proceeding. 

Once the class is closed, only those in it can benefit from any settlement or judgment. Those who had opted-out of the class continued to maintain their claims against the defendants, unaffected by any settlement or judgement.

As the Court of Appeal noted, ‘closing’ a class has been used to describe very different orders in representative proceedings over the last three decades. Care should be taken when relying on loose descriptors such as ‘class closure’ or ‘soft closure’ – it is necessary to examine the precise effect, surrounding circumstances, and the timing of such orders.

The class closure orders made in the proceedings required an opt-out notice to be sent to group members and for group members who did not wish to opt-out to register their interest in the proceeding. 

The order in dispute, referred to in the litigation as Order 16, was made purportedly under section 183 of the Civil Procedure Act 2005 (NSW) (CPA). Order 16 only had effect where an ‘in principle’ settlement was achieved before commencement of the trial. Order 16 was said to be ‘soft’ because, if an ‘in principle’ settlement was not reached, it would not extinguish the rights of group members who had not registered. Conversely, if an ‘in principle’ settlement was reached, Order 16 extinguished the rights of the group members who had not registered. That consequence was central to the issues in the appeal.

What were the issues in Haselhurst?

There were two issues before the NSW Court of Appeal. First, whether Order 16 was within the power of section 183 of the CPA. Second, if it was, whether the discretion to make Order 16 miscarried. 

When making Order 16, the trial judge relied on existing authority that a class closure order to facilitate the desirable end of settlement may be appropriate in certain circumstances.³ In particular, the trial judge was persuaded that the proposed mediation would only be effective if the parties knew the likely number of group member participants and could make offers reflective of that number.⁴

Shortly after Order 16 was made, the High Court decided BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall⁵ (Brewster). That decision clarified the scope of section 183 of the CPA and section 33ZF of the Federal Court Act 1976 (Cth) (FCA). You can read our overview here. Sections 183 and 33ZF form part of the legislative schemes regulating conduct of representative proceedings, and empower the NSW Supreme Court and Federal Court of Australia to “make any order that the Court thinks appropriate or necessary to ensure that justice is done in the proceeding”. 

In addition to class actions in NSW, the decision in Haselhurst has significant implications for class actions in the Federal Court of Australia and class actions in Victoria, Queensland and Tasmania, as these jurisdictions all have a provision conferring a general power in materially the same terms as section 183.⁶ (Notably, the legislative scheme in Victoria contains specific provisions that address class closure that lack any counterpart in other jurisdictions.⁷)

Given that significance, the NSW Court of Appeal convened a five member bench (Bell P, Macfarlan, Leeming, Payne JJA and Emmett AJA). 

What did the Court of Appeal decide?

The Court decided that Order 16 was not within the power of section 183 of the CPA and, even if it was, the discretion to make Order 16 miscarried. We set below some of the important issues addressed by the Court in relation to those issues.

Destroying a person’s right of action not “necessary to ensure that justice is done”

The clear purpose of Order 16 was to extinguish group members’ rights of action against the respondents, albeit contingent on reaching an ‘in principle’ settlement prior to the commencement of the trial. Order 16 had the effect of binding non-registered group members under an agreement to which they were not a party. While that could not be achieved as matter of contract, it was sought to be done by court order. Group members who failed to opt-in would not be entitled to participate in the benefit of a settlement, and would be barred from making a claim arising from the same subject matter in the future.⁸

As Order 16 had the effect of “destroy[ing] 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”, it was difficult to conceive that such an order was “necessary to ensure that justice is done in the proceedings”.⁹

Existing authority supported retaining a person’s right of action

The Court of Appeal distinguished Order 16 from orders made in other decisions that were said to support the making of Order 16. The Court of Appeal’s reasons provide a useful summary of the case law on orders granted to alter or limit the definition of a class. Importantly, in those decisions and unlike the effect of Order 16, the persons that ceased to be group members retained their rights to bring a claim against the defendants.¹⁰

Class closure orders can still be made but usually only as part of a settlement or following judgment

The Court of Appeal distinguished existing authorities involving class closure orders. In particular, the previous decisions involved orders made after settlement or judgment¹¹  and, in some instances, were based on the Victorian statute which differs from the CPA and FCA in that it expressly provides for orders requiring group members to take a step in the proceedings to receive a share of a settlement.¹²

Given the limitations imposed by the Court of Appeal on the exercise of the power in section 183, it will usually only be “appropriate or necessary” to make a class closure order as part of a court-approved settlement or after judgment.

Section 183 is a ‘gap-filling’ provision not a licence to rewrite the legislative scheme

Having regard to what the High Court said in Brewster, it would be incongruous to the structure and context of the legislative scheme in which section 183 operates “to read a power into section 183 when other provisions of Part 10 make specific provisions apt to accommodate that task but which operate at the conclusion of the proceeding.”¹³ In other words, section 183 is a supplementary or ‘gap-filling’ provision. It is not a power to do work beyond that done by the specific provisions in the CPA or, as described in Brewster, “as a vehicle for rewriting the scheme of the legislation.”¹⁴

The Court of Appeal considered that the words “to ensure justice is done in the proceedings” in section 183 would extend to making orders to facilitate settlement. However, Order 16 did so contrary to the scheme established by the legislature by setting up an alternative regime for extinguishing rights by effectively determining the non-registered group members’ rights earlier than envisaged by sections 173 (in the case of a settlement) and 177 (in the case of a judgment).¹⁵

There are alternative methods for dealing with uncertainties

Even if the Court did have power under section 183 to make Order 16, the Court of Appeal said that the primary judge’s exercise of discretion miscarried for two reasons. First, the primary judge erred in concluding that the mediation would “only” be effective if Order 16 was made. There was no evidence to support that finding and the Court of Appeal considered that the conclusion was “inconsistent with a long history of representative proceedings” and the methods for dealing with doubts about the number of group members or value of claims.¹⁶ We briefly mention some of those methods below.

Regard must be had to all group members “to ensure that justice is done in the proceedings”

Second, the judge failed to take into account the interests of all group members as Order 16 would have the principal effect of limiting the number of group numbers entitled to participate in any settlement amount.¹⁷ The Court of Appeal reiterated that a court has an important role in ensuring that “the interests of the non-party group members are not sacrificed to the interests of the parties before the Court”.¹⁸

Strategies for settling representative proceedings after Haselhurst

The Court of Appeal referred to a number of alternative methods for addressing doubts about the number of group members or value of claims. 

Those methods include:

• amending the definition of the group members so that any settlement only applies to those members who had registered  – leaving those who fall outside the definition able to pursue claims against the defendant and the defendant facing the risk of the commencement of a subsequent class action;
• a settlement “structured to result in a payment of a designated amount to any person meeting a particular description”²⁰; 
• capping any settlement amount; and 
• applying distribution rules to ensure all group members are compensated fairly.²¹

The possibility of reform

The ALRC’s Final Report on its Inquiry into Class Action Proceedings and Third-Party Litigation Funders which was published in December 2018 recommended that the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) be amended to provide criteria for when it is appropriate to order class closure during the course of a representative proceeding and the circumstances in which a class may be re-opened.²²

In light of the decision in Haselhurst precluding the use of the general power to make ‘class closure’ orders in aid of pre-trial settlement or prior to judgment, that recommendation may not go far enough for jurisdictions whose legislative schemes do not expressly provide for ‘class closure’. 

In early March, the Attorney-General announced that the Commonwealth Government’s response to the ALRC Inquiry would be released shortly and that a Parliamentary Joint Committee on Corporations and Financial Services would be established to inquire into all aspects of the class action system, including whether there should be further regulation of litigation funders, with a November report date. Shortly afterwards, Parliamentary sittings were adjourned due to COVID-19 so the status of this unclear.  

We expect that there will be renewed interest and a push for reform in this rapidly developing area of the law.