The High Court of Australia has granted special leave to appeal from the decision of the New South Wales Court of Appeal in Pallas v Lendlease [2024] NSWCA 83, indicating it will weigh in on the divide that has emerged between intermediate appellate courts on the question of power to make 'class closure' orders in representative proceedings.
Background
Constructive settlement discussions in 'open' class actions1 can be difficult because the parties do not know how many group members there are, nor the asserted value of their claims. To overcome this difficulty, parties (usually respondents) sometimes seek a 'class closure' order.
Typically, such orders:
- require group members to 'register' their interest in
participating in any settlement by a specified date (by providing
details which help the parties to assess the value of their
individual claim); and
- stipulate that group members who do not register will not be able to participate in a settlement, but will be bound by the settlement if reached by a particular date.
Historically, these orders were made pursuant to section 33ZF of the Federal Court of Australia 1976 (Cth) (FCA Act) (and its equivalent provision in the Civil Procedure Act 2005 (NSW)), which allows the Court to make "any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding".
Path to the High Court
Whether there is power to make class closure orders has become a controversial topic.
A disruption to the status quo
The uncertainty derives from the decision of the High Court in BMW Australia Ltd v Brewster (2019) 269 CLR 574. While Brewster concerned the question of power to make a 'common fund order' (CFO) at the commencement of a representative proceeding, a key issue confronting the High Court was the ambit of power conferred by section 33ZF of the FCA Act.
A majority of the High Court found that although section 33ZF is a broad "gap filling" power which empowers the Court to make orders as to how an action should proceed in order to do justice, it is not concerned with the "radically different" question of whether an action can proceed at all. The majority held that there is an incongruity in construing section 33ZF as providing power to make a CFO, when other provisions of the FCA Act are apt to accommodate that task, but which operate at the conclusion of the proceeding.
Importantly, the plurality observed that section 33ZF cannot be given a more expansive construction and a wider scope of operation than other, more specific, provisions in the legislative scheme. The plurality held that to do so would be to use section 33ZF as a vehicle for rewriting the legislation.
A split emerges between two intermediate appellate courts
The decision in Brewster catalysed a divide between the New South Wales Court of Appeal and the Full Federal Court as to the power to make class closure orders:
- In Haselhurst v Toyota Motor Corp Australia Ltd (2020)
101 NSWLR 890, the New South Wales Court of Appeal found that
section 33ZF did not extend to making a class closure order. The
Court held that the "gap filling" power in section 33ZF
could not be deployed to extinguish group members' rights when
there are specific provisions which accommodate that task, but
which operate at the conclusion of the proceeding.
- In Wigmans v AMP Ltd (2020) 102 NSWLR 199, the New
South Wales Court of Appeal considered the validity of an order
that did not seek to close the class but merely provided notice to
group members of an intention, at the time of settlement, to seek
an order that would exclude those group members who had not
registered in accordance with the procedure specified in the
notice. The Court found that, while section 33ZF was not being
relied upon, the power to issue notices must nonetheless conform
with the "basic precepts" of the statute, namely that a
group member may remain passive until a settlement or judgment. The
Court held that approving a notice in these terms would engender an
immediate conflict of interest between the representative applicant
and group members, given that the applicant would approach
settlement negotiations on the basis that it would seek to exclude,
at a later time, any unregistered group members.
- In Parkin v Boral (2022) 291 FCR 116, the Full Court
of the Federal Court considered two questions, each essentially
directed to the forms of order the subject of dispute in
Haselhurst and Wigmans, being: (a) whether there
is power to make a class closure order pursuant to section 33ZF and
(b) whether there is power to issue a notice foreshadowing a class
closure order being sought at the time of settlement but with
effect from the date stipulated in the notice. The Full Court found
Wigmans to be "plainly wrong", noting that the
broad power to issue notices should not be read down by
implications not found in the express words of the statute. It also
disagreed with the emphasis in Wigmans on conflicts of
interest, noting that conflicts are an inevitable by-product of the
class action regime and that sufficient safeguards exist to
regulate such conflicts. The Court also left open the question of
power to make a class closure order pursuant to section 33ZF in an
appropriate case.
- Subsequently, in Pallas v Lendlease, the New South Wales Court of Appeal sat an enlarged bench to revisit the correctness of the decision in Wigmans. It concluded that the reasons advanced in Parkin were not sufficiently persuasive as to justify the conclusion that Wigmans was "plainly wrong", and there was no compelling reason to depart from Wigmans.
Hence, notwithstanding that the relevant provisions of the FCA Act and the NSW statute are in identical terms, there is a direct inconsistency in the approach taken by the New South Wales Court of Appeal and the Full Court of the Federal Court. Other jurisdictions with similar regimes have not yet had to confront this question. Victoria, by contrast, is immune from this issue, as section 33ZG of Supreme Court Act 1986 (Vic) expressly provides for the making of a class closure order.
The grant of special leave
Given the conflict that has emerged between two intermediate appellate courts on the interpretation of essentially identical legislation, it is unsurprising that the High Court has granted special leave to appeal in Pallas. The question for the High Court to determine is in the following terms:
"Does section 33X(5) (or the NSW cognate) authorise the giving of a notice to group members that the parties, alternatively, the defendant, upon any settlement, intend to seek an order that group members who have neither registered nor opted out shall not be permitted without leave to seek any benefit pursuant to any settlement?"
Potential implications of a High Court ruling
There is no doubt that class closure orders can help facilitate constructive resolution discussions between parties. Depending on the circumstances:
- knowledge of the total quantum of group members' claims can
allow settlement offers and counteroffers to be made on a
relatively certain footing;
- an understanding of the aggregate claim value can enable the
lawyers acting for the representative applicant to have greater
confidence in assessing whether any proposed settlement is fair and
reasonable and in the interests of group members, such that it is
likely to be approved by a court; and
- defined limits assist the respondent to achieve finality by enabling it to resolve the universe of potential claims against it (save for those of group members who opt-out), avoiding the prospect of another class action or a slew of individual claims in the future.
The High Court's answer to the special leave question may have significant ramifications for the class actions landscape.
If the High Court decides there is no power to make class closure orders:
- we are likely to see a further shift in filings to the
Victorian Supreme Court, where there exists an express power to
make a class closure order;
- we may see more cases proceed to judgment, particularly
securities class actions, where the parameters of group membership
are inherently difficult to determine in the abstract; and
- we may see more class actions being commenced on a closed class basis, including a renewed focus on bookbuilding, as plaintiff law firms and funders seek to secure the prospect of an early settlement from the outset.
If the High Court decides there is power to make class closure orders:
- we are likely to see a rebalance in filings between the New
South Wales Supreme Court and the Federal Court, as a key
disincentive for filing in the Supreme Court will be removed;
- we may see an increase in filings in other jurisdictions across
Australia where there exists a class action regime, as up until
this point the position in those jurisdictions was open to
question; and
- we are likely to see greater scrutiny directed to the question of discretion as to when it is appropriate to issue a notice which foreshadows a class closure order being sought at the time of settlement approval.12
Prospect of legislative change
Finally, it is useful to note that the prospect of law reform in this area has been brewing for some time.
Over 20 years ago, the Australian Law Reform Commission (ALRC) recognised the lack of an express power to 'close the class' as potentially problematic, noting that "[t]his issue may require immediate legislative amendment to ensure the continuing viability of the Part IVA arrangements".
In 2018, when class closure orders were in full force, the ALRC recommended that Pt 15 of the Federal Court Class Actions Practice Note (GPN-CA) be amended to provide a criterion for when it is appropriate to order class closure during the course of a class action, to ensure adequate balancing of the interests of finality to the respondent and fairness to group members.
In 2020, the Parliamentary Joint Committee on Corporations and Financial Services (PJC) echoed the recommendations of the ALRC. Recognising the increased uncertainty that had emerged following the decisions in Haselhurst and Wigmans, the PJC recommended that certainty be restored by amending the FCA Act to introduce an equivalent provision to section 33ZG of the Victorian regime. It was said that the Court's ability to close the class is 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".
In light of these recommendations, in the event the High Court finds there is no power to make a class closure order, one wonders whether legislative intervention is on the cards.
Footnotes
1 See, recently, J Wisbey & Associates
Pty Ltd v UBS AG (No 2) [2024] FCA 147 (Beach J).
2 An 'open' class action is a class action
commenced on behalf of a group of persons that is not limited to
those who have signed a funding agreement with a funder or a
retainer with a law firm.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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