Australia: Test cases: are concurrent parties really bound?

Introduction

Wardle v Agricultural and Rural Finance Pty Ltd; Agricultural and Rural Finance Pty Ltd v Brakatselos [2012] NSWCA 107

Last Thursday, the New South Wales Court of Appeal handed down its decision in Wardle v Agricultural and Rural Finance Pty Ltd (Wardle) which provides useful guidance about the scope and application of undertakings given to a court at first instance by concurrent parties seeking to be bound by findings in test cases. Among other things, the Court considered the extent to which parties will be bound by their undertakings and more importantly, the circumstances in which parties will be free to raise separate issues to those considered in test case decisions.

This case is particularly relevant for Australian Government agencies involved in current or anticipated proceedings where the appropriateness of a test case is being considered.

Background Facts

In 1997, the first respondent, Agricultural and Rural Finance Pty Ltd (ARF), lent money to over 200 borrowers to facilitate their investment in, among other things, a project known as the Port Macquarie Tea Tree Plantation.

Each borrower had entered into two agreements – a Loan Agreement with ARF and another with the second respondent, Oceania Agricultural Limited (OAL)(the Second Agreement). Under the Second Agreement, OAL agreed to develop the tea tree plantation that the borrower had a licence to occupy. Pursuant to the terms of the Loan Agreement with ARF, the borrowers were required to make repayments of principal and interest on specified dates. At the direction of ARF, certain payments were required to be paid to OAL and under the Second Agreement, OAL agreed to indemnify the borrower against the borrower's liability to repay the principal and interest to ARF provided that such payments were 'punctually paid'.

The Port Macquarie Tea Tree Plantation was a 17 year project which, due to a significant decrease in the price of tea tree oil, ultimately failed and was subsequently terminated in January 2003. On termination, ARF commenced proceedings in the Supreme Court of NSW against 216 borrowers, seeking payment of loan moneys that it claimed were repayable by each investor on cessation of the project (the Main Proceedings). A key and common issue in the Main Proceedings concerned whether certain payments made by the defendant borrowers were 'punctually paid', in which case the borrowers were entitled to an indemnity from OAL for the repayments claimed by ARF pursuant to the terms of the Second Agreement.

At a preliminary stage in the Main Proceedings, leave was granted for the case against Mr Gardiner, one of the defendant borrowers, to be pursued as a test case in relation to the common issues among the defendants including what was meant by the phrase 'punctually paid' in the Second Agreement (the Test Case). Leave was granted by the Court on condition that the remaining defendants to the Main Proceeding provide undertakings to be bound on common questions by the findings of the Test Case (the Undertakings). At the time this order was made, Mr Gardiner was the only defendant who had filed a defence.

At the hearing of the Test Case at first instance, Young J found in favour of ARF. Mr Gardiner appealed from this decision, which was allowed by the Court of Appeal. ARF and OAL subsequently obtained special leave to appeal the decision to the High Court, following which the High Court held that Mr Gardiner had not made his payments punctually and therefore was not entitled to an indemnity under the Second Agreement.

Application of the Test Case

Applying the High Court's ruling in the Test Case to the Main Proceedings, judgment was entered in favour of all defendant borrowers who had made their payments punctually. However, a number of the remaining defendant borrowers sought to advance various alternate defences against ARF in the Main Proceedings which were not raised by Mr Gardiner in the Test Case.

In response, ARF successfully applied to have the additional defences struck out on the basis that they went behind the Undertakings previously given to the Court. In granting the strike out application, Einstein J held that at the time the separate trial order was made by the Court, the only defence filed in the proceedings was that of Mr Gardiner. On this basis, his Honour held that the common questions among the defendants were entirely defined by the issues to be determined in the Test Case and the remaining defendants were stopped from raising additional defences. The remaining defendants appealed from the decision of Einstein J on the basis that the alternate defences remained available to them, notwithstanding the operation of the Undertakings.

The Scope of the Undertakings

Prior to the separate trial order being made, the Court directed the parties to agree on the common questions to be the subject of the Test Case, however the parties were unable to reach agreement. On that basis, the Undertakings given by the defendant borrowers were expressed in the following simple terms: 'I undertake to be bound by the findings of the Gardiner Test Case'.

The Court of Appeal held that at the time the Undertakings were given, it was impossible to identify what would be common questions between the Test Case and the case of any other defendant. On that basis the Court found that the remaining defendants would only be bound by the findings of the Test Case which ultimately turned out to be common questions between their respective cases and the case of Mr Gardiner. The findings in the Test Case therefore did not preclude any defendant from raising a defence arising from any issue that had not been decided in the Test Case.

As a result of this finding, several defendants were able to successfully defend the claims made by ARF based on facts which were not pleaded in the Test Case, including those relating to various methods used to make payments to OAL.

Consequences

The Wardle decision raises a number of issues in relation to the scope of undertakings made by parties who seek to be bound by the outcome of a test case. As seen in this case, although each concurrent party will be bound by findings relating to common questions, it may not be certain at the time of giving the undertakings what precisely the common questions will be.

To avoid an outcome such as in this case, parties who are seeking or consenting to orders for a test case should take all steps to reach agreement as to the common questions for which the concurrent parties will be bound at the time those parties give any undertaking. If the parties do not turn their minds to the issue at this stage in the process, there may be scope for concurrent parties to plead an issue or defence that arises from matters not pleaded in the test case.

For the sake of certainty and to avoid the increased costs of additional unnecessary proceedings, this is an important consideration for Australian Government agencies who are parties to proceedings in which a test case is being considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.