CLOSING THE COURTHOUSE DOOR? AVOIDING CLASS ACTIONS THROUGH ARBITRATION CLAUSES IN AUSTRALIA.

• Date: 01 August 2020
• Author: Noonan, Charles

Contents I Introduction II The Objectives and Utility of Class Actions in Australia A Background to Pt IVA B Purposes of the Class Action Regime 1 Access to Justice (a) Centrality to the Rule of Law (b) Objective of Pt IVA 2 Judicial Economy 3 Private Regulation III Arbitration A Background B Class Arbitration in Australia? C Requiring Proceedings to Be Brought on an Individual Basis IV Overseas Judicial Consideration A United States B Canada C European Union V Australian Law A Obviating a Statutory Regime B Arbitrability C Unconscionable Conduct D Unfair Terms 1 The Meaning of 'Unfair' 2 Application to Arbitration Clauses (a) Significant Imbalance (b) Reasonably Necessary to Protect Legitimate Interests (c) Detriment VI Conclusion I INTRODUCTION

Class actions provide access to justice for victims of widescale misconduct, facilitate judicial economy and provide significant deterrence from institutional and corporate wrongdoing. (1) However, for powerful and well-resourced perpetrators of such misconduct, class actions increase the potential of redress being sought against them and may shift the balance of power in favour of claimants once redress is sought. (2) In this sense, for some, class actions may represent an unwanted constraint on decision-making freedom. (3) It is therefore unsurprising that the potential for arbitration clauses to be used in a wide range of contracts to, in effect, eliminate or greatly reduce the possibility of class actions being brought by groups of potential claimants has been referred to as a 'tantalising' prospect in Australia. (4) This is notwithstanding the detrimental impact that this may have on the ability of individuals to vindicate their rights, and the consequences that may flow from a reduced threat of enforcement action. (5) Despite being the subject of extensive judicial consideration overseas, whether arbitration clauses may effectively operate to 'immunise' corporations from class actions is an issue that has not yet arisen before the courts in Australia. (6) However, as arbitration clauses are now part of everyday life in Australia, (7) it is only a matter of time before this significant issue comes before the courts for determination.

This article commences at Part II with a brief introduction to the purposes and utility of the class action regime in Australia. This Part sets out the policy objectives of pt IVA of the Federal Court of Australia Act 1976 (Cth) ('Federal Court Act') and details the benefits that a well-functioning class action regime confers on both potential claimants and the wider community, so that one may appreciate what is at stake if class actions may be avoided through the operation of arbitration clauses.

Part III then provides an overview of arbitration as a means of alternative dispute resolution in Australia. This Part commences with a discussion of the nature of arbitration and the prohibition on judicial intervention in the arbitral process, including the requirement that a court must stay judicial proceedings and refer the parties to arbitration where the parties have entered into a valid arbitration agreement. (8) As the 'foundation of the arbitral process is the agreement by which the parties refer their disputes to arbitration', (9) this Part makes clear that the parties to an arbitration agreement have the flexibility to prescribe the procedural and substantive aspects of the way in which the dispute will (and will not) be resolved. While this has conventionally involved the parties agreeing to the seat of the arbitration, the substantive law governing the dispute and the number and/or characteristics of arbitrators, (10) it is revealed that parties are now using arbitration agreements to expressly require that proceedings only be commenced by claimants on an individual basis, thereby precluding aggregated or group claims of any kind. (11)

Part IV canvasses how the courts of overseas jurisdictions have dealt with the public policy tension between class actions and mandatory arbitration clauses, commencing with a discussion of the United States' hard-line approach to rigorously enforcing arbitration agreements according to their terms. (12) While the Canadian courts have adopted a similar approach to the United States ('US') in the past, (13) Part IV demonstrates that the Canadian courts have more recently evinced a willingness to consider the intent of the legislature when disputes with a public interest component are sought to be resolved by arbitration. (14) This Part concludes with a consideration of a seminal decision of the High Court of England and Wales, indicating that a more nuanced and contextual approach has been adopted in the United Kingdom with a focus on whether the arbitration clause in question is unfair. (15)

From this standpoint, Part V considers the legal obstacles that a party seeking to rely on an arbitration clause may have to overcome when preventing a claimant from having their rights vindicated under pt IVA of the Federal Court Act. First, although an arbitration clause will not be void solely because it obviates a statutory regime, (16) the dispute covered by the arbitration clause must be 'arbitrable' in the sense that it must not involve such a sufficient element of legitimate public interest so as to render arbitration of the dispute inappropriate. (17) Second, a party may contravene the prohibition on unconscionable conduct by entering into, or giving effect to, an arbitration agreement that restricts the manner in which an action may be brought in arbitration, especially if an arbitration clause is a calculated means of predation on the weak, poor or vulnerable that involves secrecy, trickery or a lack of honesty or transparency. (18) Third, in the event that an arbitration agreement causes a significant and detrimental imbalance between the parties that is not reasonably necessary to protect a party's legitimate interests, the unfair terms regime may render an arbitration agreement void. (19)

II THE OBJECTIVES AND UTILITY OF CLASS ACTIONS IN AUSTRALIA

A Background to Pt IVA

In February 1977, the Attorney-General, Robert Ellicott QC, requested that the Law Reform Commission ('LRC') consider whether the existing law relating to class actions in federal courts (and courts exercising federal jurisdiction) was adequate and whether any changes to the existing law were desirable. (20) Almost 12 years later, in December 1988, (21) the LRC provided Parliament with a response through its final report, titled Grouped Proceedings in the Federal Court ('LRC Report'). (22) The LRC Report concluded that the existing law could be improved and recommended a federal class action procedure be introduced that would increase access to justice, promote the efficient use of judicial and legal resources and enhance compliance with the law. (23) Legislation largely reflecting these recommendations was introduced to Parliament in September 1991 through the Federal Court of Australia Amendment Bill 1991 (Cth) and, on 4 March 1992, a federal class action regime came into operation through pt IVA of the Federal Court Act. (24) A representative proceeding may be commenced under this regime if three threshold requirements are satisfied, namely that:

1 seven or more persons have claims against the same person; and

2 the claims are in respect, or arise out of, the same, similar or related circumstances; and

3 the claims of the group give rise to a substantial common issue of law or fact. (25)

The introduction of similar regimes has followed at the state and territory level, (26) although this article will focus solely on the provisions of pt IVA of the Federal Court Act.

B Purposes of the Class Action Regime

An effective class action regime has been referred to as an essential part of a legal system's response to multiple or far-reaching wrongdoing in an increasingly complex world. (27) The broad objectives of the class action procedure contained in pt IVA of the Federal Court Act were described by the Attorney-General during the second reading speech of the Federal Court of Australia Amendment Bill 1991 (Cth):

The new procedure will enhance access to justice, reduce the costs of proceedings and promote efficiency in the use of court resources ... The Bill gives the Federal Court an efficient and effective procedure to deal with multiple claims. Such a procedure is needed for two purposes. The first is to provide a real remedy where, although many people are affected and the total amount at issue is significant, each person's loss is small and not economically viable to recover in individual actions. It will thus give access to the courts to those in the community who have been effectively denied justice because of the high cost of taking action. The second purpose of the Bill is to deal efficiently with the situation where the damages sought by each claimant are large enough to justify individual actions and a large number of persons wish to sue the respondent. The new procedure will mean that groups of persons, whether they be shareholders or investors, or people pursuing consumer claims, will be able to obtain redress and do so more cheaply and efficiently than would be the case with individual actions. (28) These two purposes will each be examined as follows, along with one further objective of the regime that is often recognised by the courts and scholars alike, namely its function in regulating behaviour. (29) It is only once these public policy objectives are recognised that one can appreciate what is at stake if arbitration clauses can be used to circumvent the class action regime.

1 Access to Justice

(a) Centrality to the Rule of Law

While access to justice can mean different things to different people, it is a concept that broadly refers to the ideal that all people can and should have equal and effective means to enforce their legal rights and protect their legitimate interests. (30) The centrality of...