Curtains on class closure orders

Class closures prior to mediation have been a useful tool for simplifying the complex task of settling large open class actions. They allow the parties to negotiate on behalf of a defined class of group members and give defendants some certainty as to who will be bound by any settlement.  However, class closures generally involve extinguishing the rights of group member who fail to come forward, which is arguably at odds with the intent of the “open” class action legislation. Now, the Federal Court of Australia and the Supreme Court of New South Wales look to have brought the practice of pre-settlement class closures to an end, at least for the time being.

Australia’s “open” class action regime results in claims being commenced on behalf of sometimes thousands of group members in circumstances where those group members (i) have not necessarily consented to, nor expressed any interest in being group members, (ii) may or may not be identifiable (iii) may or may not be contactable and/or willing to engage in the class action process (for example, by providing information and documents necessary to substantiate their claims) and (iv) may not even know about the class action.  

It is a state of affairs which poses challenges for settlement for both plaintiff law firms and funders and for defendants. Those challenges have often been addressed via “class closure” orders. Such orders generally limit the settlement entitlement to group members who come forward and register their interest to be eligible to receive a settlement sum. Those group members who fail to register (and who have not opted out of the proceedings) are generally bound by any subsequent settlement, but are shut out from receiving any share of the settlement. Their claims are effectively extinguished without compensation. [1]

There was, until relatively recently, a substantial line of authority[2] in support of the Court’s power to make pre-settlement class closure orders. Such orders were generally made under section 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCAA)[3] which allows the Court to make “any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding”.

However, the extinguishing the rights of group members who fail to come forward and register sat somewhat uneasily with the intention of Australia’s class action regime to facilitate and promote open class actions. That tension became more distinct in recent years. Firstly, the former practice of “hard” class closures gradually fell out of favour with the Courts. In a 2019 decision, hard class closures were described as “wholly inappropriate” by the Honourable Justice Lee[4] in Gill v Ethicon Sarl (No 2) [2019] FCA 177. However, his Honour said, ‘soft’ class closures could be adapted to “serve the admittedly desirable end of facilitating such a settlement”, and they remained a reasonably common practice into 2020.

More recently, a series of decisions between about April 2020 and February 2021 appear to have put an end to even ‘soft’ closures. Firstly, in Haselhurst v. Toyota Motor Corporation Australia Ltd[5] the Court of Appeal in New South Wales found that s183 of the Civil Procedure Act NSW (2005) (the equivalent of s33ZF of the FCAA) did not grant the Court the power to make class closure orders. The Court of Appeal based its reasoning on a range of factors but found, fundamentally, that the proposed extinguishment of unregistered group members’ rights was inconsistent with the class action legislative framework, and was in any event not “appropriate or necessary” to ensure that Justice was done. In that respect, Bell P stated at [12] - [16]

[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”…

 Moreover, there is no reason why, in my opinion, there could not be mediation in the current case without an order of the kind under challenge being required

Haselhurst, was shortly followed by a number of Federal Court of Australia decisions which were of similar effect and which appear to confirm the end of pre-settlement class closures, at least for the time being. The first decision was by Wigney in J Owners – Strata Plan No 87231 v 3A Composites GmbH (No 3)[6] in which his Honour similarly concluded that the Court did not have power under section 33ZF of the FCAA, particularly in light of the High Court decision in Brewster v BMW Australia Ltd[7]which considered the scope of the Court’s powers under section 33ZF in the context of common fund orders, and the Court of Appeal in New South Wales’ decision in Haselhurst. The Court of Appeal of New South Wales again found in Wigmans v. AMP[8]  that the Court lacked the power to make class closure orders in contemplation of settlement discussions, finding again this was contrary to “the essence of the opt out regime”.[9]

Earlier this month, in Furnell v. Shahin Enterprises Pty Ltd[10], delivered on 5 February 2021, the Court considered an attempt by the respondent to fashion class closure orders which addressed the Court’s reasoning in Haselhurst and Wigman and thereby sought to bring the orders within the Court’s power under s33ZF. For example, the orders proposed by the respondent were made “subject to the further order of the Court” (to allow unregistered group members to come forward at a later date) and did not seek any order for the release or extinguishment of group members’ claims.[11] Those matters notwithstanding, White J concluded that the Court did not have the power to make the orders sought.

What now - Settlement of class actions without class closure

It is firstly important to emphasise that the above decisions do not appear to impact the power of the Court to make class closure orders after settlement, pursuant to the Court’s powers under s33V and 33ZB of the FCAA, which are enlivened after settlement.[12] That is, class closure may still commence after a settlement has been reached.

It remains to be seen how the absence of class closure orders pre settlement will impact settlement discussions. Parties must now avail themselves of settlement mechanisms which were in use before the introduction of class closures including, for example, capping settlement amounts and/or applying distribution rules to ensure all Group Members are compensated fairly.[13] However, we expect settling claims with a large universe of potential group members will now be substantially more challenging.    

A return of class closure by legislation?

There is some likelihood that class closures will be re-introduced via legislation. The recently published Parliamentary Joint Committee on Corporations and Financial Services report into litigation funding and the regulation of the class action industry considered the impact of the Haselhurst and 3A decisions.

The report concluded that the Court’s power to order class closure was “integral to facilitating settlements in open class actions and upholding the objective of the class action regime to provide the respondent with the benefit of finality with respect to the dispute.” The Joint  Committee has recommended Part IVA of the FCAA  be amended to introduce an express power to order class closure orders, modelled on, or similar to, section 33ZG of the Supreme Court Act 1986 (VIC) which provides an explicit power for the Court to make class closure orders.

It may be then that class closure orders will make a return. But for now, class action parties in the Federal Court and in the Supreme Court of New South Wales will need to make do without them pre-settlement which may make settlement problematic.