Representative proceedings 

A representative proceeding — a class action — allows one applicant to sue on behalf of a group of people with related claims. The group members are not parties. They are bound by the outcome but do not appear, are not liable for costs, and in most respects take no active part.

The statutory threshold

Under Part IVA of the Federal Court of Australia Act 1976 (Cth)¹, and the substantially uniform state regimes, three requirements must be satisfied:

1. Seven or more persons have claims against the same person. The number is counted at commencement, and it is the number of claimants, not the number of respondents, that matters.
2. The claims arise out of the same, similar or related circumstances. This is a broad criterion — the circumstances need not be identical, and a series of similar transactions will usually qualify.
3. The claims give rise to a substantial common issue of law or fact. "Substantial" means real or of substance, not necessarily dominant. A single common issue may suffice even where individual issues predominate in volume.

The threshold is deliberately low. Australian regimes do not require a certification stage, and a class action begins as of right if the criteria are met. The court's control is exercised afterwards.

The opt-out model

Australian class actions are opt-out. Group members are defined by description and are bound unless they take positive steps to leave the group by a date the court fixes. They need not be individually named, and they need not consent.

The consequences matter. A group member who does not opt out:

• is bound by the judgment or approved settlement on the common issues;
• has their limitation period suspended while the proceeding is on foot;
• is generally not liable for costs, which fall on the representative applicant; and
• cannot bring a separate proceeding on the same claim without leave.

Courts have permitted closed classes, where the group is defined to include only those who have signed a funding agreement. This sits uneasily with the opt-out philosophy but has been accepted, and competing closed classes over the same subject matter have produced a significant body of law on consolidation and stays of overlapping proceedings.

The representative applicant

The applicant must have a claim of their own — a person without standing cannot represent the group. They carry the conduct of the litigation, bear the costs risk, and owe duties to group members that constrain their freedom to settle their own claim on favourable terms.

The applicant may be replaced where they cease to be a suitable representative, and a group member may apply to be substituted.

The court's supervisory role

Because group members are absent, the court supervises in their stead. The principal controls are:

• Settlement approval. A representative proceeding cannot be settled or discontinued without the court's approval. The court asks whether the settlement is fair and reasonable as between the parties and as between group members, and it will scrutinise the distribution scheme, the deductions for legal costs and funding commission, and any differential treatment within the group.
• Notice. The court approves notices to group members at the opt-out stage and before settlement.
• Sub-groups and individual issues. Where common issues do not resolve everything, the court may establish sub-groups, appoint sub-group representatives, or direct that individual issues be determined separately.
• Declassing. The court may order that a proceeding no longer continue as a representative proceeding where it is in the interests of justice — for instance because the costs will exceed those of separate proceedings, or because the relief sought does not warrant the mechanism.

Funding

Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386 established that third-party litigation funding is lawful and not an abuse of process merely because the funder controls the litigation and takes a share of the proceeds.² That decision is what made the modern class action economically viable.

Two mechanisms distribute the cost of funding across the group:

• a common fund order, requiring all group members to contribute to the funder's commission regardless of whether they signed a funding agreement; and
• a funding equalisation order, redistributing the burden among group members so that signed and unsigned members bear it evenly.

The availability of common fund orders — and in particular whether they may be made at an early stage or only on settlement — has been contested, and the position differs between the Federal Court and some state regimes. Check the current position for the forum rather than assuming.

Costs

Group members are not liable for the respondent's costs. The representative applicant bears that risk alone, which is why the applicant is usually funded or indemnified.

Two consequences follow. Security for costs is frequently sought against a class action applicant, and the presence and solvency of a funder is central to that application. And the applicant's costs exposure gives them an interest that may diverge from the group's, which is one of the reasons settlement requires court approval rather than the parties' agreement alone.

Legal costs are ordinarily deducted from the settlement sum before distribution, and the court assesses their reasonableness as part of approval. Contradictors are sometimes appointed to test the deductions on the group's behalf.

Applying this in a problem question

1. Test the three statutory criteria in order, and count claimants rather than claims.
2. Identify the substantial common issue expressly, and say why it is substantial.
3. Define the group and consider whether it is open or closed, and whether competing proceedings exist.
4. Address the applicant's own standing and suitability.
5. For settlement questions, focus on fairness between group members and on the deductions, since that is where approval is most often contested.
6. Deal with funding separately, and identify which order is sought.

Self-check

• Have I counted seven claimants, not seven claims or seven respondents?
• Have I named the common issue rather than asserting commonality?
• Have I remembered that group members are not parties and not liable for costs?
• Have I recognised that settlement requires court approval?
• Have I checked the forum's current position on common fund orders?