High Court resolves debate over 'soft class closure' orders

Paving the way for more informed and effective settlement negotiations 5 min read

The High Court has narrowed the divide between the New South Wales Supreme Court and the Federal Court on the question of class closure orders and group member registration processes in class actions. The decision confirms the existence of a valuable tool available to parties, and paves the way for more informed and effective settlement negotiations.  

Background

Representative proceedings in Australia follow an 'opt-out' model. An action may be commenced on behalf of persons without their consent or knowledge, with group members later given an opportunity to 'opt out' of the proceedings. This model has the consequence that it is often very difficult to make a reasonable assessment of the size and identity of the class.

So-called 'soft-class closure' orders have been one means by which this problem may be addressed. The orders involve three aspects:

• First, group members coming forward and registering their details by a certain date (often prior to a mediation).
• Second, a consequence for a failure to register by the specified date – namely, the prospect that the group member may not be entitled to share in the proceeds of any settlement.
• Third, if there is no settlement within the specified timeframe, unregistered members being permitted to share in any later settlement or judgment.

The prevailing practice has been for parties to apply to the court prior to a mediation for the distribution of a notice to group members informing them of an intention to seek class closure orders on settlement (a soft class closure notice), thereby encouraging group members to register their claims.

While a registration process has obvious practical benefits, the court's power to make soft class closure orders and to issue soft class closure notices has been called into question.

A federal divide

In New South Wales, the Court of Appeal has consistently held that the court did not have power under the relevant provisions of the Civil Procedure Act 2005 (NSW) (CPA) to make a soft class closure order in anticipation of settlement negotiations or to issue a soft class closure notice.¹ The Court of Appeal's view was that the issue of a soft class closure notice would:

• subvert the statutory scheme set out in the CPA, converting the regime from one where group members are entitled to the benefits of the proceeding unless they opt out, to one where group members must opt in; and
• place the representative plaintiff in an untenable position of conflict between its interest (to settle the proceeding) and those of unregistered group members who had not opted out (who may not be able to share in the settlement).

In contrast, the Full Federal Court has held that the court does have power under the Federal Court of Australia Act 1976 (Cth) to issue a soft class closure notice. In doing so, the Full Court observed that while group members are generally entitled to take a passive role prior to settlement or judgment, there was no 'absolute rule' to this effect.² The Full Court further observed that potential or actual conflicts of interest were 'an inevitable by-product of a regime where the self-appointed representative applicant's individual claim is the vehicle through which the common questions are to be tried'.³

The High Court's decision in Lendlease Corporation Ltd v Pallas,⁴ presented an opportunity for it to weigh in on this divide.

The High Court's decision

The issue before the High Court was whether the New South Wales Supreme Court (and, by extension, the Federal Court) has the power to issue a soft class closure notice. In a unanimous decision, the Court answered that question in the affirmative. In reaching that conclusion, the Court recognised that, in appropriate cases, a registration process could be beneficial for both representative plaintiffs and defendants:⁵

• For defendants, it allows for a better understanding about the number of potential claimants so that questions of quantum can be addressed in any settlement negotiations.
• For plaintiffs, a better understanding of the size and identity of the class assists in negotiating an appropriate settlement and ultimately facilitating court approval of any such settlement.

However, as Justices Gordon and Steward were anxious to observe, the Court's decision was concerned with power, not the merits of the proposed soft class closure notice.⁶ Whether or not a notice will be issued in any proceeding is ultimately a matter for the trial judge.

What does the decision mean for parties to class actions?

The High Court's decision confirms the existence of a valuable tool available to parties to class action proceedings. In certain cases – large shareholder class actions are an obvious example – a registration process can provide valuable information without which an early resolution of the case may not be possible. Other cases are less suited to such a process and parties should expect a court to closely scrutinise any such application.

In Alford v AMP Superannuation Ltd (No 2) [2024] FCA 423, for example, the court declined to make orders in a superannuation class action facilitating a registration process in circumstances where:

• the evidence did not establish that the trustees' records were insufficient to allow them to obtain a sufficient understanding of group members' claims to participate effectively in an upcoming mediation;
• there was likely to be low levels of registration and substantial costs involved in facilitating the process; and
• it was not a case where a significant proportion of the class would need to register at some point in order to be paid their share of any settlement or judgment.

Ultimately, in deciding whether to approve a registration process, the court will be guided by the extent to which such a process is likely to improve the prospects of achieving a reasonable settlement and whether it is in the interests of group members as a whole.⁷