Toyota class action: Background

The Applicant commenced representative proceedings against Toyota Motor Corporation Australia Limited (Toyota) on behalf of persons who acquired certain motor vehicles with a defective diesel exhaust after-treatment system (DPF System). The effect of the defect was that the relevant vehicles were more prone to experience a number of issues, including:

• the vehicle emitting white smoke and foul-smelling exhaust;
• the vehicle having an increase in fuel consumption and decrease in fuel economy; and
• owners needing to have the vehicle inspected, serviced or repaired to deal with the DPF System.

The Applicant purchased the relevant vehicle in April 2016 and began experiencing issues in late 2016. Toyota first became aware of the issues in 2016 and had attempted to implement a series of countermeasures to fix the problem, all of which were ineffective. It was only in May 2020 that Toyota was able to implement an effective countermeasure which remedied the defect and was subsequently rolled out to owners of the relevant vehicles.

The Federal Court found the relevant vehicles were not of "acceptable quality" within the meaning of s 54 of the Australian Consumer Law (ACL). Critical to the case (and the subsequent appeals) was the determination of the loss and damage suffered by the Applicant (and group members) as a result of the breach of the acceptable quality. Relevantly, s 272 of the ACL provides:

(1) In an action for damages under this Division, an affected person in relation to goods is entitled to recover damages for:

(a) any reduction in the value of the goods, resulting from the failure to comply with the guarantee to which the action relates, below whichever of the following prices is lower:

• the price paid or payable by the consumer for the goods;
• the average retail price of the goods at the time of supply; and

(b) any loss or damage suffered by the affected person because of the failure to comply with the guarantee to which the action relates if it was reasonably foreseeable that the affected person would suffer such loss or damage as a result of such a failure. (emphasis added)

On appeal, the Full Federal Court found (among other things) that the primary judge erred in the assessment of damages, because his Honour did not take into account that a repair for the defects had become available. Specifically, the Full Court indicated that a departure from assessing damages at the time of supply, or an adjustment to avoid over-compensation, might be required to address the fact that a subsequent remedy was introduced by a manufacturer to repair the defect. This was a central issue in the appeal to the High Court.

Ford class action: Background

The Applicant commenced representative proceedings against Ford Motor Company of Australia Pty Ltd (Ford) on behalf of persons who acquired certain motor vehicles fitted with a defective "DPS6" transmission. The effect of the defects was that the relevant vehicles were more prone to experience a number of issues, including the car vibrating or shuddering, difficulties with gear selection, lack of or loss of power, among other things.

The Federal Court found the relevant vehicles were not of "acceptable quality". The Full Federal Court found that the primary judge erred in the assessment of damages, for reasons similar to those given in the Toyota Class Action. The Applicant was granted special leave to appeal to the High Court.

Both appeals to the High Court concerned the appropriate interpretation of damages under s 272 of the ACL. Due to the significant factual and legal overlap, the judgments in the Toyota and Ford Class Actions were released together and cross-referenced each other.

Judgment: Key findings

The High Court made a number of important findings in relation to the assessment of loss and damage in respect of a manufacturer's breach of a consumer guarantee:

• 'Reduction in value' damages are to be assessed at the time of supply: Damages available to individuals under s 272(1)(a) of the ACL ('reduction in value' damages) are to be assessed at the time of supply of the defective good(s). In conducting this assessment, the hypothetical reasonable consumer is attributed with knowledge of the state and condition of the goods (including any hidden defects of the goods) as available at the time of trial. Another way of putting this might be simply – had the consumer known of the defects and the consequences of those defects that they would subsequently face (with the knowledge that they have as at the date of trial), what price would they have paid at the time of supply?

In overturning the Full Federal Court's decision, the High Court commented:

"…it seems inherently unlikely that a hypothetical reasonable consumer of its vehicle in 2016 would have paid the same purchase price as Direct Claim Services [the appellant] had they been informed of the existence and nature of the core defect, the likelihood of the defect consequences materialising, the likely number of attendances that might be required to obtain a fix and the fact that no effective fix would be available until at least four and a half years later." (Toyota, [62])

While a subsequent remedy is still a relevant factor in the assessment of loss and damage, it may not be a complete defence to a 'reduction in value' damages claim. However, because 'reduction in value' is assessed on the basis of the difference between the price paid by the actual consumer, and what a hypothetical reasonable consumer vested with knowledge of the defect (including the availability of a post-supply 'fix') would have paid at the time of supply, a remedy or 'fix' made available relatively soon after the time of supply may cause 'reduction in value' damages to become minimal (or even nil). This is because the hypothetical consumer may not have paid a materially lower price (or a lower price at all) for the good. In Toyota, because the fix was released well after Toyota became aware of the issues (over four years later), it was a significant factor in assessing the 'reduction in value' of the goods.

• Proving actual loss or damage is not required to claim 'reduction in value' damages: It is irrelevant to an assessment of 'reduction in value' damages whether the consequences of the defects materialised, resulting in actual loss or damage to a claimant. All that needs to be established is that a defect existed at the time of supply. If the defects do materialise, the claimant may be entitled to recover additional loss or damage suffered under s 272(1)(b) of the ACL ('consequential loss' damages):

"The materialisation of the risks carried by the defect does not add anything to a hypothetical reasonable consumer's knowledge of the defect or the goods at the time of supply. For example, a vehicle may have a defect in the design of its braking system that carries a 50% risk of the brakes failing in five years. All other matters being equal, there will be no difference between the damages payable for two such vehicles under s 272(1)(a) which were purchased for the same amount on the same day even if the brakes subsequently fail on one vehicle but not the other…" (Toyota, [64]-[65])

• While 'reduction in value' damages runs with the person who holds title to the goods, 'consequential loss' damages does not: The High Court held the view that the right to claim 'reduction in value' damages runs with title or ownership of the defective goods (Toyota, [71]). This means that if a Manufacturer supplied a defective vehicle to Consumer A, who then sold it Consumer B at a later date (before the defect is discovered), then only Consumer B has the right to claim 'reduction in value' damages from the Manufacturer as they hold title to the vehicle.

In circumstances where there are multiple subsequent owners of the vehicle, the calculation of 'reduction in value' damages is to be assessed at the time of the initial supply. Using the above example, despite Consumer B holding title to the vehicle, reduction in value damages will be assessed at the time the vehicle was supplied by the Manufacturer to Consumer A (Toyota, [125]-[126]). The Court noted that this approach provides greater certainty to manufacturers regarding their potential exposure, as it would not vary according to the identity of the party who brings the claim and the price paid for the second-hand good. To simplify an illustration provided by Edelman J in Toyota (at [124]-[125]), assume Consumer A purchases a vehicle for $50,000, and Consumer B purchased the vehicle from Consumer A for $40,000 on the second-hand market. If, at the time of the initial supply to Consumer A, a hypothetical reasonable consumer would have only paid $10,000 for the vehicle, the appropriate assessment of 'reduction in value' damages for Consumer B is $40,000.

However, to the extent that Consumer A and/or Consumer B suffered any incidental loss as a result of the defect while they each owned and used the vehicle (for example, increased fuel consumption or mechanic costs), then both Consumer A and Consumer B can make a claim against the Manufacturer for 'consequential loss' damages. Importantly, this means the Manufacturer may have to pay 'consequential loss' damages to both Consumer A and Consumer B in relation to the same vehicle.

Implications for manufacturers

Toyota and Ford have now been remitted to their respective primary judges to reassess loss and damage based on the High Court's findings. In the interim, there are three key takeaways for manufacturers:

• If manufacturers discover a defect in their products, they should endeavour to find and propose solutions to remedy the defect as soon as possible. This is because while a subsequent remedy may not be a complete defence to a 'reduction in value' damages claim, it is still a relevant factor in the assessment of that loss and damage, and doing so may mitigate their potential exposure.
• A manufacturer may be liable to multiple consumers for a defect in a single product. While the right to claim 'reduction in value' damages travels with whoever holds title to the goods, the right to claim 'consequential loss' damages does not. Each owner of a single good can theoretically claim compensation from the manufacturer of that good, so long as they can each establish that they each suffered foreseeable and consequential loss or damage as a result of the defective good.
• The High Court's comments provide certainty for consumers, in that they can claim 'reduction in value' damages from manufacturers, without having to establish the defective good caused them actual loss or damage. This potentially increases class action risk for manufacturers, as it may give rise to the filing of more product liability class actions going forward.

To find out more about how these recent developments may affect you, please reach out to the relevant MinterEllison contact below.