Class Actions Update: Appellate guidance on declassing class actions in Australia

What you need to know

• Class actions can be "declassed" where it is in the interests of justice to do so because of certain factors – one of which is that a class action will not provide an efficient and effective means of dealing with group members' claims.
• The Full Federal Court has upheld the declassing of two COVID-19 business interruption class actions. 
• The Court found that the class action format would not be efficient and effective as the questions on which the applicants relied were either highly individual and unlikely to arise for determination at an initial trial, posed hypothetical questions, covered ground already dealt with in an earlier COVID-19 insurance test case or otherwise lacked sufficient utility in relation to the determination of group members' claims.
• Moreover, the insurers' internal claims handling processes were more efficient mechanisms for resolving claims.

Background

The Full Federal Court's decision in Strand Fitness involved class actions by insured businesses who claimed indemnity for business interruption losses caused by the COVID-19 pandemic and related government measures.

The central question was whether the cases should continue as class actions. Section 33N of the Federal Court of Australia Act 1976 (Cth) gives the Court a discretion to declass a proceeding if satisfied that it is in the interests of justice to do so, including because it will not provide an efficient and effective means of dealing with the claims of group members.

In the appeal, the applicants argued the class actions had continued utility because there were common issues concerning how causation was to be established under the insuring clauses, the causes of the government lockdowns and business closure orders, locational requirements for certain policy wordings and whether rent relief constituted "savings" to be credited against claims.

The decision to declass

The Full Court agreed with the primary judge that declassing was in the interests of justice, because the class action format would not provide an efficient and effective means of resolving group members claims. That was because:

(1) The common questions said to support the need for a class action did not clearly arise on the representative applicants' own claims or posed hypothetical questions that would provide little practical benefit to group members.

For example, questions concerning causation between the insured peril and loss invited answers that could only be expressed in general language, and to the extent anything useful could be said, it had already been dealt with in an earlier COVID-19 insurance test case both at first instance and on appeal (Swiss Re International SE v LCA Marrickville Pty Ltd [2021] FCA 1206; LCA Marrickville Pty Ltd v Swiss Re International SE (2022) 290 FCR 435).

(2) The remaining disputes were highly individual.

For example, questions concerning government lockdown orders required the Court to first determine the cause of the order and then determine whether the insured's premises fell within the geographic radius of the relevant outbreak. The first question could be addressed on a common basis but the second was individual to each class member.

The Court observed that the cause of the critical March 2020 lockdown was already the subject of factual findings in the earlier insurance test case. Similarly, questions regarding whether rent relief constituted a "saving" under the policies depended on the individual circumstances of each lease and did not arise on any applicant's claim against one of the insurers.

The Court drew a distinction between "common issues" (issues common to all group members) and "issues of commonality" (issues common to a sub-set of group members) in its assessment of whether representative proceedings would efficiently resolve all group members' claims.

(3) The insurers' internal claims handling processes, together with access to the Australian Financial Complaints Authority, were more efficient mechanisms for resolving individual claims, particularly in circumstances where only a small portion of group members had actually lodged claims (approximately 580 out of 36,000 potential group members for one of the insurers, and 10 out of 77 potential group members for the other).

(4) The Court observed that class actions are efficient where an initial trial directly resolves large parts of group members' claims or could provide findings that enable settlement, but neither condition was met here. The Court noted that it would not be efficient to render it, in effect, "an insurance claims handling clearing house".

Significance

While declassing applications are rare, with more and more funders and plaintiff firms in the market, class actions continue to push into newer areas and involve more variation in individual circumstances. The scope to consider declassing may therefore also increase.

This decision reinforces that even the existence of substantial "issues of commonality" does not preclude declassing if a representative proceeding will not efficiently resolve group members' claims. It also illustrates the Court's willingness to consider alternative dispute resolution mechanisms available to group members when assessing whether it is efficient and effective to continue as a class action.

Authors: Ian Bolster, Head of Complex Litigation APAC and Valentene Asvestas, Senior Associate.