Soft closure mis-deploys: another hurdle for class action settlements?

By Alexandra Rose and Will Atfield
23 Apr 2020
The decision reinforces the need for all parties in class actions who are interested in exploring settlement to embrace the challenges that opt-out class actions bring to scoping the likely number of group members and assessing the quantum of their potential claims.

The recent shifting of the sands of Australia’s class action landscape continues with the New South Wales Court of Appeal unanimously holding in the Takata airbag class actions that the Supreme Court of New South Wales does not have the power to make "soft class closure" orders before settlement or judgment pursuant to section 183 of the Civil Procedure Act 2005 (NSW) (Haselhurst v Toyota Motor Corporation Australia Ltd t/as Toyota Australia [2020] NSWCA 66).

It reinforces the supervisory jurisdiction of the Court to ensure that all group members’ interests are protected but places a fresh hurdle before class action parties seeking to better understand the size and scope of the class in order to facilitate early settlement discussions.

After more than two decades of near uniformity across jurisdictions, the case also signals a further divide in the operation of the class action regimes with the Victorian Supreme Court regime again potentially proving to offer a different approach given the arguably different scope of the Court’s power to make early soft class closure orders.

What are soft class closure orders?

The purpose of a soft class closure order is to facilitate settlement discussions, because such orders allow both sides to have a better understanding of the number of class members, to assess the quantum of their claims, permit the settlement amount to be capped by reference to the number of class members, and assists in achieving finality for the parties.

Such orders require group members to register in order to participate in a settlement by a particular date (Registration Date), provided such settlement takes place by a specified date (Specified Date) (generally before the commencement of trial).

All group members are ultimately bound by any settlement reached before the Specified Date, but any group member who does not register before the Registration Date is barred from participating in the fruits of the settlement.

If there is no settlement by the Specified Date, the class closure order is spent and the class reopens. This allows group members who failed to register by the Registration Date to continue to participate in the class action, including the fruits of any subsequent judgment or settlement.

"Soft closure" can be contrasted with a "hard closure" which permanently extinguishes a group member’s rights unless they register by the Registration Date.

To date, NSW courts have made soft closure orders pursuant to s 183 of the Act, which provides:

"183 General power of Court to make orders

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."

Similar provisions exist in the class action regimes in the Supreme Courts of Victoria and Queensland and the Federal Court of Australia.

A leading authority on the power of Australian courts to make class closure orders was the judgment of the Full Federal Court in Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd (2017) 252 FCR 1.

Procedural background

On 1 November 2019, Justice Sackar of the NSW Supreme Court delivered judgment in respect of an application by the defendants in the Takata Air Bag Class Actions for registration and class closure and subsequently made orders including an order for "soft closure" pursuant to section 183 of the Act. The plaintiffs appealed.

On 4 December 2019, the High Court of Australia handed down its decision in BMW Australia Ltd v Brewster [2019] HCA 45 that relevantly held that section 183 of the Act did not empower the making of "common fund orders".

An extended bench of the NSW Court of Appeal heard the appeal in February 2020, and delivered its judgment on 22 April 2020. The primary issue on appeal was whether the order for soft closure was within the power granted by section 183 of the Act in light of the High Court’s reasoning in Brewster. If there was power, the second issue was whether the primary Judge's exercise of discretion in making the order miscarried.

The appeal succeeded on both grounds.

The appeal

Critically, the Court of Appeal accepted the appellants' argument that the soft closure order amounted to the contingent extinguishment of group members’ rights (such extinguishment being contingent on the court subsequently approving a settlement).

Justice Payne wrote the primary judgment, with short concurring judgments from President Bell and Emmett AJA. Justices Macfarlan and Leeming agreed with Justice Payne and the observations of President Bell.

President Bell observed that the High Court’s decision in Brewster makes it clear that section 183 is not “at large” and is not a power conferred on the Supreme Court simply to make such orders “as the Court thinks fit” or which are “in the interests of justice” or which will promote or facilitate settlement. President Bell explained that the words “appropriate or necessary to ensure that justice is done in the proceedings” are words of limitation which “should not be ignored. If it cannot be concluded that an order meets this description, section 183 of the Act does not authorise it.

President Bell continued, saying that:

"it 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”. 

The Court of Appeal considered a number of decisions in which class closure orders had been made, including the Victorian Supreme Court decision of Matthews v SPI Electricity Pty Ltd (No 13) and Treasury Wine. It refused to follow Matthews because the relevant orders were made by reference to section 33ZG of the Supreme Court of Victoria Act, which can be used to make an order specifying a date by which group members must take a step, and which lacks a counterpart in the Act. It refused to follow Treasury Wine because the reasoning could not survive Brewster.

The Court of Appeal observed that while the majority of the High Court in Brewster confirmed that the power conferred by section 183 of the Act is “wide”, “broad” and intended to deal with new and unforeseen circumstances, the High Court had found that it was incongruous 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.

It then carefully reviewed the operation of Part 10 of the Act and held that Part 10 specifically envisaged the extinguishment of group member rights at the approval of settlement (section 173) or following judgment (section 177) but not before.

It followed that the soft closure order gave rise to such an incongruity, and was therefore not within power.

Justice Payne rejected the contention that soft closure was necessary to promote settlement and continued, saying that the relevant soft closure order:

"strikes at the heart of the Part 10 regime, by setting up an alternative regime of extinguishment of Group Members’ rights of action for the purpose of encouraging the parties towards a pre-trial settlement. Self-evidently, the fewer people the respondents need to compensate, the less they believe they will need to pay to settle the proceedings. Whilst order 16 makes settlement more likely, it does so in a manner contrary to the scheme established by the legislature."

Finally, he held that even if the Court did have the power to make the order pursuant to section 183 of the Act, the exercise of the primary judge's discretion in making the order miscarried.

What does this mean for class action settlements?

Subject to any appeal, the decision spells the end of soft class closure orders before settlement or judgment in the NSW Supreme Court.

It confirms that the impacts of Brewster will extend beyond the making of common fund orders and raises the question as to the legitimacy of other orders that have been made pursuant to section 183 of the Act or its equivalent relying on a now outdated view of the scope of the Court’s powers. It will also be very interesting to see how the Federal Court next approaches the question given the alignment of the legislative regime but also whether a difference emerges in how the Victorian Supreme Court may act given the separate and unique power available to it under section 33ZG.

Importantly, the decision expressly confirms that the Court has the power under section 183 to make registration orders, but these orders will arguably be of limited utility now there is no consequence for failing to comply with such orders. The decision reinforces the need for all parties in class actions who are interested in exploring settlement to embrace the challenges that opt out class actions bring to scoping the likely number of group members and assessing the quantum of their potential claims. There are ways to do this either through how proceedings are constituted, for example, by how the pleadings define the group; by using other available data sources to identify likely group members – for example in these cases the number and attributes of vehicles and whether the airbags have been replaced; and more generally through risk sharing arrangements when parties are agreeing on settlements.

Query though whether this all means that settlements will take longer to achieve, legal costs will be higher and the growing weight that class actions have on the Court’s resources will continue to build. In protecting the interest of group members, this case shows that no group member will have their claim pre-emptively barred but in the long run it does raise the question about whether group members who do take an interest in class actions will see their claims take longer to be resolved and whether their eventual recovery will be diminished as a result.


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