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Client Update: An opportunity for greater certainty for class action defendants

5 October 2016

In brief: Class action settlement negotiations are often hindered by uncertainty about the number and identity of potential claimants. A recent decision of the Supreme Court of NSW has paved the way for defendants to achieve greater certainty in respect of unregistered class members at an earlier stage than had previously been the case. Partner Jenny Campbell (view CV), Associate Daniel MacPherson and Lawyer Hugo Dupree report. 

Introduction – the class closure process

Our recently released Class Action Risk 2016 report highlighted some of the issues defendants are facing in achieving finality through the class action process. A major source of this uncertainty in 'open class' class actions is the intentions (and often the identity) of class members that do not actively participate in proceedings. Settlement discussions and claim evaluation are often complicated by a lack of visibility about the potential size of the claim and the number of class members who intend to pursue a claim through the class action.

In recognition of the need for certainty, particularly in the context of settlement discussions, it is now common for courts to order at an appropriate stage (which differs from case to case) that class members take the positive step of registering their interest in participating in the proceedings. This process is commonly referred to as 'class closure'.

The usual order made in these cases is that the class members who do not register by the designated date will remain class members (and therefore have their claims extinguished by the class action) but will not be entitled to participate in any settlement or judgment. These orders are often expressed in terms that make them subject to further orders of the court.

As the non-registered class members remain members of the class, the usual practice has been to notify them of any settlement that is reached and to invite them to object to the settlement (despite them having forfeited all rights to participate by not registering). This further correspondence, combined with the fact that the class closure orders are usually subject to a further order, opens up the possibility for unregistered group members to seek to participate in, or disrupt, a carefully-negotiated settlement despite the effect of the previous order.

The recent judgment of Justice Beech-Jones in Lam v Rolls Royce PLC (No 5) [2016] NSWSC 1332 provides a useful precedent for mitigating these risks in appropriate cases.

The Rolls Royce class action

The Rolls Royce class action is being conducted on behalf of aircraft passengers who allege that they suffered psychiatric injuries as a result of an emergency landing after an aircraft engine, manufactured by Rolls Royce, failed mid-air (the incident caused no fatalities or serious physical injuries).

Rolls Royce has admitted (for the purposes of the proceeding only) that its manufacture of the engine was not undertaken to the appropriate standard and that that was the cause of the engine's failure. In practical terms, this means that the only remaining issues in dispute are whether each class member suffered a recognisable psychological illness as a result of the events consequent upon the engine failure and, if so, the level of damages that could be recovered.

Early dismissal of non-registered class members' claims

In the Rolls Royce case, the court made orders in March 2015 requiring class members who wished to participate in the proceedings to register. In June 2016, the court gave non-registered class members a further opportunity to apply to participate.

Against that background, Rolls Royce recently sought orders dismissing the claims of the class members that had not registered or applied to participate. Justice Beech-Jones agreed to make those orders.

The effect of the dismissal orders was that the claims of the non-registered class members were finally determined (ie extinguished) and they would not be able to make a claim against Rolls Royce in relation to the engine failure (whether as part of the class action or separately).

To the best of our knowledge, this is the first time an order of this kind has been made. The usual practice is for non-registered class members to remain in the class (even though they may receive no compensation) and to have their claims finally determined by the finalisation of the class action (most frequently, upon dismissal of the claim after the distribution of settlement monies). Justice Beech-Jones was satisfied that he had the power to make the dismissal orders under section 183 of the Civil Procedure Act 2005 (NSW), which is the equivalent of the better known section 33ZF in the Federal regime.

This decision was heavily fact dependent – among other things, the relevant incident occurred in 2010 and class members had been given two opportunities to register (the latter of which made it clear that a consequence of non-registration would be dismissal). That said, it will, in appropriate circumstances, be a useful precedent for defendants looking to extinguish the 'tail risk' associated with non-registered class members following a class closure process.

Defendants will, however, need to weigh that benefit against the benefit of non-registered class members remaining in the class and being bound by the terms of any settlement in circumstances in which it is quite common for settlements to include reasonably robust releases, supported by covenants not to sue and indemnities (for breach of those covenants) which would not be achieved through a simple dismissal. In many cases, defendants might prefer to wait to the end of the proceedings to ensure that all class members are bound by those terms.

A middle ground – dispensing with notification requirements

One aspect of the Rolls Royce decision which may be of broader utility relates to the notices sent to class members as part of the class closure process.

As mentioned above, the second invitation to register noted that failure to do so would result in the class members' claim against Rolls Royce being dismissed. The earlier notice also said that, if a class member did not register, they would not be notified of any settlement proposal and would not have the opportunity to oppose any such settlement.

The class action rules in each jurisdiction provide that, unless the court is satisfied that it is just to do so, an application for approval of a settlement must not be determined unless notice has been given to class members (see, for example, section 33X(4) of the Federal Court of Australia Act 1976 (Cth)). In our experience, this provision is often relied upon by the lawyers for the class to reject the inclusion of this type of language in class closure notices. This is despite the fact that it can be argued that it is just not to provide further notice of a proposed settlement to class members who have given up their rights to participate in any settlement by not registering.

In that respect, the ability to point to the inclusion of that language in the notices issued in the Rolls Royce case creates a useful precedent for including it in other appropriate cases.

Whether or not it is ultimately appropriate to dispense with the notice requirement (irrespective of what may have been said in the class closure notices) will depend on the terms of the proposed settlement. If, for example, the terms of the proposed settlement do more than extinguish the unregistered class members' claims (with associated releases and covenants not to sue etc), it is likely that further notice will be required. 

In summary

It remains to be seen how widely the approach taken in the Rolls Royce case will be adopted, but it is a welcome precedent. In circumstances in which the existence of the 'tail risk' created by non-registered group members is often an impediment to negotiating settlements, the possibility of further mitigating that risk is likely to be attractive to many defendants. Moreover, the opportunity to obtain greater certainty in respect of this 'tail risk' increases the prospects that settlements will not have to be re-opened to accommodate late registering group members.

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