By Stuart Walter, Partner

The inclusion of a sub-class of “non-participating” group members and how that group is dealt with has arisen as a key consideration in whether to approve a number of settlements in recent Australian group proceedings.  It arises at a time when the High Court has also given consideration to the true extent of claims covered by group proceedings in the context of “Anshun” estoppel, election and possibly waiver of rights.

One of the key considerations for including a “non-participating” sub-class of group members is that it allows respondent parties to bind as many group members to an outcome as possible and brings the potential benefit of “finality” which can encourage earlier resolution (which can be beneficial to all parties).  However, there is a degree of unease where impacted parties who may be potential plaintiffs have their rights to bring claims removed, simply because they do not get actively involved in a group proceeding.

The Open Class System

Traditionally, class actions (or group proceedings as they are termed in Australia) are framed as “open” in nature where defined group members fall within a class/group unless they choose to “opt out”.

Those who choose to opt out of the proceeding are not bound by the outcome of that proceeding.  It follows that, by opting out, they relinquish the potential to receive the benefit (at least directly) that may arise from the settlement of the proceeding.

There are, of course, a number of reasons why a group member may decide to opt out.  One of the key considerations arises where that group member may have another claim against the relevant defendants that is ‘unique’ to that group member and the preference is to pursue that individual claim.  Alternative considerations may be that the group member simply does not think the arguments being run in the group proceeding are strong and they do not want to be bound by an adverse outcome, the group member views the firm running the case as not particularly competent or the terms under which a litigation funder had agreed to fund the case may be commercially unattractive.

In all of those instances, the group member who is opting out is making a conscious decision to do so.

Sufficient Information Required When Deciding Whether to Opt Out

Recent settlement approval hearings in cases such as “Great Southern” (where settlement was approved), “Wilmott” (where the initial settlement approval application was rejected) and “The Royal Bank of Scotland” (settlement approved) have all touched on the necessity for opt out notices to properly identify what group members may ultimately be ‘bound to’ when deciding whether or not to opt out and also whether settlements should be approved.

The importance of fully informed notice is particularly relevant where proposed settlements may include acknowledgements of loans being valid and enforceable (such as in Great Southern and the initial proposed settlement in Wilmott [1]) or where settlements seek to include broad ranging releases that go beyond the common claims pleaded in the particular group proceeding (such as in Wilmott and the Royal Bank of Scotland matters).

The recent High Court decision in “Timbercorp” [2] delved into the distinction between common claims and individual claims in the group proceeding context and whether a decision to not opt out of a group proceeding could see group members estopped from later running individual defences.  The High Court affirmed the earlier decisions of the Honourable Justice Robson and the Victorian Court of Appeal that essentially found that group proceedings only sought to deal with common claims between group members.  Individual group members could, after the final determination of the group proceeding, still pursue claims outside the common claims that may be available to them.

Non-Participating Group Members a “Common Device” in Group Proceedings

Group proceedings have continued to see the emergence and evolution of a group often termed “non-participating group members”.

The precise definition of this class differs from case to case but, in a general sense, involves parties who fall within the definition of a group member, have not opted out but end up in a position (often by failing to register) where they receive no benefit from any successful outcome in the group proceeding (including any settlement) but are otherwise bound by the outcome.

The division of group members in this way has “become a relatively common device in “open class” representative proceedings” [3].   It appears to have evolved largely as a result of litigation funding arrangements and those group members who had entered an agreement with the relevant funder being deemed “participating” and those who had not, deemed non-participating.  The division has been seen to have a benefit for respondents in allowing final resolution of group proceedings to occur without risk of non-participating group members re-agitating claims at a later date via separate proceedings.

The division of group members in the Wilmott group proceedings was somewhat distinguishable to the more common basis for division identified above.  In that case, the division arose as a result of the respondent parties in those cases successfully applying for security for costs [4] and a somewhat lengthy and complicated process that followed.  That process saw group members who contributed to the pool of funds to meet the security classified as “participating group members” and those who did not (and did not opt out) as “non-participating” group members.

Why would anyone (Properly Informed) choose to be a Non-Participating Group Member?

Non-participating group members potentially give up a lot for no benefit.  In fact, they almost inevitably give up rights for nothing.

It does beg the question – why would anyone, properly informed, choose to be a non-participating group member?

That question was broadly touched on by the Honourable Justice Wigney in the very recent decision of Muswellbrook Shire Council v The Royal Bank of Scotland NV [2017] FCA 414 where his Honour noted at [16]:

“It is somewhat mystifying why any group member would elect not to participate in any settlement in these circumstances.  Nevertheless, it is tolerably clear that all group members were given adequate notice of the proceedings, the mediation and their rights to opt out or participate.  They were also given adequate notice of the implications if they chose not to register”

In that particular case, the group proceeding followed an earlier proceeding, with significantly over-lapping claims, where the applicants were successful at first instance (before the Honourable Justice Jagot) [5] and that position then upheld by the Full Court [6].  It seemed, on the face of it, that group members in the subsequent group proceeding had very strong prospects of receiving some form of benefit from the group proceeding.

As noted above, group members in Wilmott were separated depending on whether or not they contributed towards a pool to meet an order for security for costs.  On its face, the question of whether a group member should be compelled to contribute to security to essentially ‘stay in’ (to the extent of receiving a benefit) an open class group proceeding is an interesting one.  This is particularly the case where the relevant legislation contemplates that the lead applicant (often indemnified by a litigation funder) wears the burden for adverse costs and successful respondents would have no recourse to group members in the normal course.

Should there be a level of concern that the process to becoming a non-participating group member referred to above did not involve any positive step being taken by that group member to affirm that position?  That is, should the Court have required these group members to confirm that they did not wish to “participate” or, more specifically, that they each agreed to accept the risk that they may relinquish the right to any benefit that may arise from the proceeding as well as any right to pursue their own claims?

In both of the above cases, notices were sent.  However, there is no record confirming that these notices were received, the notices were read or that group members took advice in relation to the notices or formed a definite position on what position to take in relation to the notices.

Consideration of parties giving up rights for no benefit does bare some similarities to considerations in Yerkey v Jones and other unconscionable lending type cases.  Generally speaking, in those cases, the Court is asked to identify whether the guarantor stood to receive any benefit from the transaction and, if not, the Court will heavily scrutinise the conduct around the entering of the transaction.  As a result, lenders usually provide a great deal of information to borrowers and guarantors regarding their rights and obligations, provide cooling off periods and require signed disclaimers (and sometimes solicitor certificates) before completing the transaction.  Essentially, the lender will rely (if necessary) on positive evidence (being the signed documents and other steps) to establish that that the borrower/guarantor has received and considered the information provided and provided positive confirmation of accepting that position.

Case Management and Finality

It is accepted that case management principles, costs and the benefit of finality need to be factored in when considering the appropriate steps to best ensure group proceedings are managed in a way that ensures group members’ best interests are protected.

However, it appears to be becoming common practice for group proceeding settlements to include a ‘catch all’ release and there is a risk that parties who stand to benefit from such a catch all will frame proceedings and settlements with that in mind.

The High Court decision in Timbercorp does highlight the clear distinction between “common” and “individual” claims and where an Anshun estoppel issue may arise.  Clearly, in the normal course, a group member should be able to join a group proceeding to ventilate common claims and reserve the right to then run individual claims.  It is therefore a significant step to order take away the rights identified by the High Court for what is expressly noted as “no benefit”.

The criticism of the above may be that it would be extremely difficult to receive signed confirmation from each group member and that could cause undue cost and delay that prejudices other parties and group members.

If that criticism were to be accepted, is the question then whether those who do not respond should be excluded completely from the group?  This would be distinct from a party opting out (which may see them estopped from bringing a common claim later on).    Often, the reality is that most individuals who have not opted out will not then proceed to incur the costs and take on the adverse costs risk of running a separate claim.  This is especially the case if they have not opted out and chosen not to be ‘active’ in the group proceeding.  Further, if it does turn out that these individuals commence proceedings,  that simply highlights the issue with seeking to strip rights off them for no benefit in the first place.

The area is not settled, in fact it is quite volatile, but it would seem that a Court may require something more positive from a group member, for example signed consent or some receipt of some benefit, before approving a settlement that removes that person’s right to pursue individual claims.  One expects it will be an area for close scrutiny in future settlement approvals.

In any event, great care needs to be taken before proceeding to create a “non-participating” sub-class of group members moving forward.

[1] The initial proposed settlement deed was rejected by Murphy J in Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323.  A revised settlement deed was subsequently executed and a new application brought.  The revised deed did not include the previous acknowledgements and expressly precluded individual claims from the relevant releases.  Justice Murphy approved that revised deed in December 2016 (reasons have not been published).

[2] Timbercorp Finance Pty Ltd (in liquidation) v Collins; Timbercorp Finance Pty Ltd (in Liquidation) v Tomes [2016] HCA 44

[3] Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323 per Murphy J at [36]

[4] Madgwick v Kelly (2013) 212 FCR 1: [2013] FCAFC 61.

[5] Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200

[6] ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65