The NSW Court of Appeal has held class closure orders which extinguish the rights of unregistered class members before settlement approval or final judgment are beyond its power, a decision which could undermine the ability of respondents to have clarity at the time of the mediation of a dispute as to the number and size of the claims to which the settlement might apply. In turn, that may undermine the willingness of some respondents to engage in productive settlement discussions at an early stage of the proceeding.

In a significant class action decision arising out of the Takata airbags class actions, a five Judge bench of the New South Wales Court of Appeal has held that the Supreme Court of New South Wales does not have the power under s 183 of the Civil Procedure Act 2005 (NSW) (CPA) to make class closure orders that extinguish non-registered group members’ rights in a class action before settlement approval or final judgment.

A “class closure” order before settlement effectively requires group members to opt-in to the class action in order to participate in the fruits of the settlement. In Takata, the respondents successfully obtained an order from the Judge at first instance which also had the effect of forever extinguishing the potential claims of any group member who had not opted in, in the event a settlement was reached. The purpose of such an order was to make certain the number of group members with potential claims against the defendant, which would enable the parties to better estimate the amount necessary to compensate the group members actually seeking some recovery and to remove the future risk of other like claims if the respondents resolved the dispute, thereby facilitating the parties’ settlement discussions.

The Court of Appeal overturned that order on the basis that the Court lacked power to extinguish the claims of persons who had not “opted-in” prior to settlement approval or final judgment in the case. The decision (Haselhurst v Toyota Motor Corporation Australia Ltd t/as Toyota Australia [2020] NSWCA 66), held that s 183 of the CPA does not empower the Court to make a class closure order because:

• an order which destroys a person’s cause of action within the limitation period, without a hearing and with no guarantee that the person would necessarily know of the outcome or consequence of their failure to register, is not an order that is necessary or appropriate to ensure that justice is done in a proceeding; and
• consequently, s 183 of the CPA is not a source of power to extinguish group members’ rights before settlement or a judgment in the proceeding.

The ruling is at odds with the decision of the Full Federal Court in Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited [2017] FCAFC 98, in which it was held that the Federal Court has the power to make class closure orders under a similarly worded power in equivalent Federal legislation. It also creates an inconsistency with available class action procedures in Victoria, which has an express statutory provision empowering the Court to make orders which have the effect of closing the class of claimants prior to final judgment in a class action.

This decision may create a structural disincentive for respondents to settle in circumstances where the quantification of the total aggregate loss will be more uncertain at the time of settlement discussions, which in turn will make it more difficult for parties to determine and assess the adequacy of any settlement offer. It does, however, sit comfortably with the line of reasoning employed by the High Court in the BMW matter which found the court lacked power to make common fund orders under the same statutory provision, as well as similarly worded Federal legislation.

The Court of Appeal’s decision may also affect the strategies adopted by litigation funders and class action lawyers as to whether they commence open or closed class actions, and the nature of book-building exercises they may conduct in that regard.

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