After 30 years, class action regime still plagued with uncertainty

By Greg Williams, Andrew Morrison, Alexandra Rose and Will Atfield
07 Mar 2022
While the current spotlight on the role of litigation funding in Australia and, in turn, returns to group members is warranted, other aspects of the regimes are ripe for reform to ensure that the class action regimes provides certainty for all parties and that any unnecessary hurdles are removed to allow efficient settlement negotiations.
This article was first published in Lawyerly, 7 March 2022.

Thirty years ago, the federal class actions regime was introduced to enhance access to justice, resolve disputes more efficiently, and avoid respondents facing multiple individual proceedings with the potential for inconsistent findings across those proceedings. It was also intended to reduce the costs for both the parties and the courts. Similar objectives were cited on the subsequent introductions of the regimes in Victoria, New South Wales, Queensland and Tasmania. Western Australia is poised to follow.

Fast forward 30 years and most people with experience of class actions agree that the regimes, while not perfect, have largely met these objectives. Class actions have undeniably provided practical access to justice for a large number of claimants with a wide range of claims, many of whom would not have been able to bring individual claims before the courts.

This has not stopped their being the focus of a number of different inquiries, which have all made similar recommendations for legislative and procedural reform. The most recent was in December 2020 when the Federal Parliamentary Joint Committee on Corporations and Financial Services made a number of recommendations directed at ensuring the federal class actions regime facilitates access to justice, and promotes the fair, efficient and effective use of court resources and that these objectives do not become secondary to the profit motivation of those who fund and promote class actions.

The recommendations attracted significant media attention and much debate, most of which has been focused on the role that litigation funding plays in class actions in Australia. The reforms proposed by the federal government in light of the recommendations focus on this issue only. This is, in some respects, not surprising: on the one hand litigation funding has been critical to the viability of many class actions, but on the other, the price exacted by funders in exchange directly impacts on the amount of money returned to the plaintiff and group members. It is not surprising that people are uncomfortable with litigation funders making what can be perceived to be windfall profits at the expense of group members. Recent well-documented examples of abuse of the litigation process to enrich lawyers and funders have only heightened concerns.

But should other aspects of the regimes be reformed?

From our experience in product liability and mass tort class actions, there are other aspects of the class action regimes ripe for reform.

Multiple and competing class actions

It is not unusual for two or more class actions to be commenced in relation to the same facts or allegations, by different plaintiff law firms, against the same defendants, representing the same or overlapping class members. The class actions may even be brought in different courts.

There is currently no prescriptive power in any of the class action regimes to dictate what should occur when a court is faced with multiple and competing class actions. Rather, the courts rely on their general powers to ensure justice is done in the proceeding and, as a result, a number of different approaches to managing this issue have emerged.

Three years ago, the High Court confirmed the approach taken by the New South Wales Supreme Court to managing one particular instance of competing and overlapping class actions. In permitting one class action to proceed and staying four other class actions, the primary judge assessed the relative potential benefits expected to flow to group members from each of the competing class actions, using a “multifactorial assessment” which involved consideration of: (i) the competing funding proposals, costs estimates and net hypothetical return to members; (ii) the proposals for security for costs; (iii) the nature and scope of the causes of action advanced; (iv) the size of the respective classes; (v) the extent of any bookbuild; (vi) the experience of the legal practitioners and availability of resources; (vii) the state of progress of the proceedings; and (viii) the conduct of the representative plaintiffs to date.

However, the High Court majority also recognised that there is no one-size-fits-all approach and the court determines which class action proceeding would be in the best interest of class members, so long as the defendants' interests are not unreasonably affected by that decision. It also recognised that multiple and competing class actions can be managed in other ways, including (for example) by using special referees to give insight into the litigation funding arrangements.

This however leaves parties uncertain as to which approach will be taken in their case. To ensure certainty of approach and the efficient management of multiple and competing class actions, the class action regimes should be reformed so that:

  • once a class action is filed, any other class action arising from similar facts and making similar accusations filed more than 60 days later (including in a different court) will be automatically and permanently stayed;
  • if two or more similar class actions are filed within the 60 days period referred to in a) above, a judge will select one (and only one) to proceed and permanently stay all others (with a right of appeal to the State Court of Appeal or the Full Federal Court, as applicable); and
  • any dispute about whether a class action proceeding is a similar class action will be determined by the court in which the class action proceeding is filed (with a right of appeal to the State Court of Appeal or the Full Federal Court, as applicable). If it is not, it will continue as would any other proceeding.

The judge’s decision, and any appeal, should be determined on the papers with an appropriate page limit to obviate the need for any time-consuming and costly in-person hearings.

“Soft” class closure orders

When a class action is commenced, the representative plaintiff must describe or otherwise identify the class members to whom the proceeding relates, but not name or even specify the number of class members.

This presents a challenge to the parties, particularly where the group members are not readily identifiable (for example, by reference to a share register). One example is a product liability or mass tort class action where class membership is defined by reference to those who have suffered an injury. The parties do not know who meets the class definition until the class action is significantly progressed. This presents a challenge for the parties, and in particular the defendant in considering the potential liability of the class action and, in turn, assessing settlement opportunities. Put simply: if you do not know how many people are in the class, how can you calculate the class liability?

As part of the settlement approval process, the courts make class closure orders which have the effect of requiring class members to come forward and register their interest in the settlement process. Any class members who do not come forward have their right to participate in the settlement or judgment extinguished. Such orders are known as “hard” class closure orders. A practical consequence of hard closure orders is that the parties know the size of the class.

However, the courts are generally reluctant to extinguish group members' rights at least before a settlement has been approved or a judgment given. This means it is difficult for the parties to know the size of the class when negotiating a settlement.

Prior to April 2020, to facilitate settlement negotiations without extinguishing the rights of class members who did not register to participate in the settlement, the courts would make “soft” class closure orders to facilitate settlement discussions.

Soft class closure orders require class members to register in order to participate in a settlement by a registration date, provided such settlement takes place by a 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 will not receive compensation from the settlement. If there is no settlement by the specified date, the soft class closure order expires and the class reopens. As a result, group members who failed to register in time can still participate in the class action, including the fruits of any subsequent judgment or settlement.

Soft class closure orders allow both sides to have a better understanding of the number of class members before negotiating settlement, to assess the quantum of their claims and permit the settlement amount to be capped by reference to the number of class members that have registered in the soft closure process.

However, in 2020 the NSW Court of Appeal held that the Supreme Court of New South Wales does not have the power to make soft class closure orders before mediation. A subtle difference in the Victorian regime means that it is possible that soft closure orders are still available in the Victorian Supreme Court. The Federal Court appears to take the same view as the NSW Court of appeal, although the Full Federal Court has reserved judgment on an appeal raising this issue in two competing shareholder class actions.

This means that, with the possible exception of Victoria, it is unlikely that the courts currently have the power to close the class before a mediation making settlement negotiations that much harder. Parties, and in particular the defendants when determining potential exposure, will likely need to resort to making onerous investigations and/ or assumptions as to the size of the class. Against this backdrop, the federal and state regimes should be reformed to include an express power to make soft class closure orders.

Conclusion: what the next 30 years could look like

Over the last 30 years, the class action regimes have undoubtedly improved access to justice, helped to resolve disputes more efficiently, and reduced the costs of litigation, both for the parties and the courts. However, the procedure has also been open to abuse and, from time to time, uncertainties about procedural issues result in lengthy and costly interlocutory disputes. While the current spotlight on the role of litigation funding in Australia and, in turn, returns to group members is warranted, other aspects of the regimes are ripe for reform to ensure that the class action regimes provides certainty for all parties and that any unnecessary hurdles are removed to allow efficient settlement negotiations.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.