Class actions are unique as aside from the representative applicant, generally the group members who sit behind them do not have to give discovery of documents in relation to their claims. This is a consequence of the split trial process in class actions – the first trial deals with the representative applicant’s claim as a whole and the issues said to be common to all group member claims eg. liability, with a second later trial addressing individual group member claims eg. reliance, causation and loss.
As a result a key advantage of class actions for group members is that they can bring claims, often without having to take active steps (and incurring significant legal costs) in the proceedings as class actions usually settle out of court before they proceed to the second trial stage. As a practical matter, not only does the burden of discovery in class actions generally fall on the defendant – but defendants are not automatically entitled to information regarding the merits and quantum of individual claims, which may be a barrier to early settlement.
In the recent decision in National Australia Bank Limited v Pathway Investments Pty Ltd  VSCA 168 (Bongiorno and Harper JA and Bell AJA) (Pathway Investments), the defendant sought identity particulars of certain group members and orders for the discovery by those group members of broad categories of documents. In declining to make the orders, the Victorian Court of Appeal considered whether the documents sought were demonstrably necessary for the fair and just determination of the defendant’s case, in light of the objects and purpose of the Civil Procedure Act 2010 (Vic) and the fact that group members are often passive participants in the proceedings.
The Court of Appeal’s unanimous decision perpetuates the difficulties for class action defendants in obtaining discovery orders against group members, even where proceedings are conducted on behalf of a closed class.
Discovery from class action group members – a summary
Discovery orders are usually granted at an early stage of proceedings to allow the parties to assess the merits of their case and to encourage the efficient resolution of the proceedings.1
Class actions present a unique dilemma for Courts. On the one hand, a defendant should be entitled to assess the possible extent of any liability and the amount of the potential claim. However, group members are essentially passive participants in the proceedings and generally do not expect to be required to participate as a party or be subject to an order for discovery.
Defendants in class actions have challenged this approach previously with varying success. Prior to Pathway Investments, discovery orders, or orders to provide particulars of group member identities, were made in:
- the recent Centro class action where Middleton J ordered the Centro parties to discover an extract from the securities register during the relevant period to PricewaterhouseCoopers (PwC), to enable PwC to issue subpoenas to those group members;2
- the Multiplex class action, where Finkelstein J accepted that it would be difficult for Multiplex to assess the value of each institutional investor’s claim without information regarding their exposure to Multiplex securities.3 His Honour ultimately ordered that if directed to by a mediator, each party (or another party) must provide information or documents the mediator thought relevant concerning the quantum of the applicants’ and group members’ claims;4 and
- the Horsham bushfires class action against Powercor Australia where J Forrest J accepted that it would be contrary to the objects and purpose of the Civil Procedure Act 2010 (Vic) to allow the case to proceed to trial without allowing both parties to have access to information regarding liability and quantum to enable the resolution of the proceedings.5
J Forrest J observed that:
My own experience of Part IVA cases has been that early discussion concerning the size and quantum of the group claim has facilitated resolution and a fast track settlement process; in doing so it has obviated the necessity of a lengthy trial, a judgment and then complicated arguments concerning causation and damages in relation to the claims of the group members. This approach is, of course, all the more relevant given the impending introduction of the [Civil Procedure Act]. To focus on the pre-trial ADR process solely on the representative plaintiff’s claim is both blinkered and contrary to the interests of justice.6
J Forrest J ordered ten of the group members who had retained a specified law firm to provide particulars of loss and any documentation to support those particulars. The order was limited to the five largest and five smallest group members (by quantum of damages).
The representative plaintiffs in the class action were small traders in the defendant’s shares during the period in which the defendant is alleged to have failed to disclose its exposures to certain offshore collateralised debt obligations. Several group members are institutional shareholders and fund managers which would have routinely bought (and sold) the defendant’s shares in the same period in large volumes. The defendant sought orders requiring the plaintiffs to provide particulars of the identities of the top 20 institutional group members (the Market Participants). It also sought orders requiring each of the Market Participants to provide discovery of documents relating to investment decisions concerning the defendant’s shares and its overall exposure to CDOs or Subprime ABS (asset backed securities).
The Court of Appeal unanimously upheld the trial judge’s determination to refuse to grant the orders for discovery and identity particulars.
The Court upheld the trial judge’s determination that the “fundamental question was whether the identity particulars and documents were relevant to the common issues in the group proceedings at that stage” (our emphasis). The trial judge had decided to split the hearing, with all common issues relating to liability (ie the availability and materiality of the relevant information under the continuous disclosure regime and the extent to which the Market Participants were aware of the same information themselves) to be determined prior to the assessment of damages.
The Court of Appeal accepted that the documents sought by way of discovery might have supported the defendant’s case that the information was generally available and may have enabled the defendant to show that the group members’ trading decision incorporated that information. If so, there was no necessity for the defendant to make a public announcement disclosing the information. In addition, if the documents suggested that the Market Participants considered a wide range of information before deciding whether to buy or sell shares, the information in issue was much less likely to be regarded by the court as material or not generally available.
The Court of Appeal also accepted that discovery orders could have been obtained in relation to the group members’ knowledge of the allegedly contravening conduct for the hearing on loss and damage (stage two of the trial). However, the Court indicated that granting discovery of the kind and scale sought in the initial trial would run the “serious risk” of the that trial becoming too focused on the subjective knowledge and individual trading decisions of the group members which the trial judge had scheduled for determination at a later stage of the class action, rather than the availability and materiality of the information considered objectively in terms of the whole market. The Court found that the scale of the proposed discovery was disproportionate to the potential relevance of the evidence sought and that the width of the discovery categories meant that orders in the terms sought would likely impose “very onerous obligations” on the Market Participants.
In its decision, the Court of Appeal reaffirmed the view that discovery orders will not be made against group members unless there are “compelling reasons” justifying the need for the order. So, notwithstanding the closed nature of the class in this instance7 and the fact that the group members were mainly institutional shareholders with substantial resources, the group members were:
…entitled to expect that, in the usual course, the plaintiffs will be responsible for the carriage of the proceedings and group members will not be required to participate as a party or be subject to orders for discovery.
The Court of Appeal did, however, acknowledge that the nature of class action proceedings “cannot stand in the way of an order for discovery which is demonstrably necessary for the fair and just determination of a defendant’s case”.
Pathway Investments illustrates how class action proceedings can provide procedural advantages to plaintiffs, which would not otherwise be available if the claims were brought individually.
Pathway Investments is the first Australian appellate Court decision concerning discovery by class action group members. The decision suggests:
- discovery orders will need to be carefully drafted to capture information relevant to issues in dispute at the first stage of the proceedings.
- it is more difficult to obtain discovery orders against group members at an early stage in the proceedings, particularly when the Court intends to conduct separate hearings on the issues of liability and quantum, which will likely make it more difficult to settle the proceedings early.
- it remains difficult for securities class action defendants to obtain discovery from group members concerning their individual trading decisions to assess their potential liability. The Court of Appeal emphasised that the tests for materiality and availability of the under the continuous disclosure regime are objective. The subjective knowledge of each of the group members is only relevant to the question of whether they each individually can establish causation and reliance and are entitled to damages.