Toyota Appeal comforts automakers that courts will recognise efforts to resolve product defects 10 min read
In this Insight, we consider the divergent approaches that the courts have applied when assessing and quantifying damages for breach of the acceptable quality guarantee. While the controversy is yet to be fully resolved – with various appeals outstanding – a recent Full Federal Court decision signals a welcome shift in recognising the need for post-sale events, including repairs, to be taken into account.
- In class actions against goods manufacturers, the acceptable quality guarantee remains one of the most potent provisions available to consumers in seeking redress. In doing so, the most commonly sought form of damages is one based on the 'reduction in value' of the goods as a result of the defect. This mechanism can result in substantial damages awards, making it attractive to class action promoters, including in several recent proceedings against auto manufacturers.
- The recent decision of the Full Federal Court in Toyota v Williams1 (the Toyota Appeal) has overturned first instance authority in finding that – in calculating reduction in value damages – events that occurred after the point in time of sale are relevant to the court's assessment. In the context of vehicle claims, this means that the provision of a fix, or even the potential availability of repairs, can affect the quantum of the damages available to consumers.
- At least for now, the Toyota Appeal gives comfort to auto manufacturers in confirming that efforts to resolve product defects will be recognised by the courts when assessing damages. However, it remains to be seen whether special leave to appeal to the High Court – sought by both Toyota and the lead applicant – will be granted, or whether a differently-constituted bench of the Full Court in Ford v Capic will follow the same approach (with the Court's decision currently reserved).
- More broadly, the Toyota Appeal, and other recent judgments, have affirmed that the courts have significant latitude when assessing reduction in value damages, and are to approach the exercise as a common-sense endeavour based on the available evidence, and not as a strict arithmetical exercise.
- While the need for courts to examine post-sale events adds important nuance to their assessment of damages, it may also impede plaintiffs from securing aggregate damage awards in automotive claims, or otherwise require the courts to specify a complex formula for doing so (having regard to various considerations, including the availability and nature of repairs, the time in which they occurred and the impact of the defect on the utility of the goods).
Section 271(1) of the Australian Consumer Law (the ACL) creates an action for damages against a manufacturer of goods where there has been a failure to comply with the acceptable quality guarantee in s54 in relation to the supply of goods to a consumer.
Section 271(6) provides that a consumer cannot commence such an action to recover reduction in value damages where they have required the manufacturer to repair or replace the goods under an express warranty, unless the manufacturer has refused or failed to remedy the failure, or has failed to remedy the failure within a reasonable time.
Section 272(1) provides that a consumer is entitled to recover damages for:
This Insight focuses on the courts' approach to the assessment and quantification of reduction in value damages under s272(1)(a), which is typically the 'main game' in financial terms for damages claims, and has been the focus of recent class actions targeting the auto sector.
Since then, the Full Federal Court (Justices Moshinsky, Colvin and Stewart) has handed down judgment in the Toyota Appeal on 27 March 2023, and a differently constituted bench of the Full Court (Justices Yates, Beach and Downes) has heard the appeal in Capic (the Ford Appeal). Judgment has been reserved in the Ford Appeal, and also by the NSW Court of Appeal in Dwyer, where the appeal was heard in March 2022.
To date, the decided cases have reached largely consistent positions on issues of liability, including the standard of acceptable quality, but have diverged in their assessment and quantification of damages. With two appeal decisions still pending, the controversy is not fully resolved. However, the recent Toyota Appeal decision provides the strongest indication yet as to where the law may ultimately land.
Williams v Toyota
Capic v Ford
Dwyer v Volkswagen
Each of the trial judgments in Williams, Capic and Dwyer considered the point in time at which the court should assess any reduction in the value of goods under s272(1)(a) of the ACL.
- In Williams and Capic, Justices Lee and Perram each held that the reduction in value should be assessed at the time of supply, having regard to the defects as found, without reference to subsequent events. This approach created the somewhat surprising outcome whereby consumers could obtain a full repair free of charge – leaving them with the exact product they had intended to purchase – yet remain entitled to compensation calculated on the basis that the repair had never taken place.
- In Dwyer, by contrast, Justice Stevenson endorsed a different approach, finding that the damages assessment must involve consideration of events following the time of purchase and how 'risks evolved into certainties'.
Now that judgment has been delivered in the Toyota Appeal, we have the first appellate authority on this question. The Full Court overturned the position reached at first instance in Williams and, in effect, the position reached in Capic. In doing so, the Full Court confirmed that while reduction in value damages are to be assessed by reference to the price paid (or the average retail price) at the time of supply, regard must also be had to: (a) the reasonable consumer's expectation as to the availability and timing of repairs that would restore any loss of utility in the vehicle resulting from the defect; and (b) any use to which the vehicle may be put despite the defect. This approach was said to reflect the compensatory nature of statutory damages, and the general requirement for damages to be appropriate compensation for the loss or damage actually suffered by the complainant (and no more).
The Full Court also provided some useful guidance as to how this approach applies in two scenarios:
- First, where an effective repair has been identified by the time of trial, as was the case in Williams, the correct approach is to take into account the period of time that the particular consumer held the vehicle (by reference to its useful life) before the repair became available.
- Alternatively, where an effective repair has not been identified at the time of trial, the correct approach is to account for the possibility of a repair becoming available (unless there is no such possibility).
While the Toyota Appeal is a welcome development for manufacturers, it may not be the final word on the subject, with both sides having filed special leave applications to the High Court in recent days. Further, the Full Court in the Ford Appeal has reserved judgment on the very same question. While considerations of judicial comity might suggest a similar outcome should be reached, counsel for Ms Capic submitted in the Ford Appeal that the Full Court should not consider itself bound by the Toyota Appeal and should affirm the approach of the trial judge.
Another key question that has confronted the courts is how reduction in value damages are to assessed in the context of consumer goods. In Dwyer, Justice Stevenson focused on the effect the breach of the guarantee had on the consumer's financial position. In Williams, Justice Lee held that concepts of market value, repair cost and the price that a consumer would have been willing to pay knowing of the defect were all useful indicators. In Capic, Justice Perram adopted a more intuitive assessment based on the risks present in the lead applicant's vehicle, given a lack of evidence as to what the fair market value would have been to a reasonable consumer, armed with knowledge of the defects at the time of supply.
The Full Court's decision in the Toyota Appeal signals a shift away from these approaches. The court found that the intrinsic value of consumer goods to retail buyers lies in their utility – or utilisation value – rather than their resale value. Any reduction in value, therefore, is to be assessed having regard to the loss in utility arising from the defect. This is to be done based on 'an objective assessment of the order of magnitude or significance of the defect'. The Full Court identified a number of criteria that should inform this assessment, including:
- the probability of the defect consequences manifesting;
- the extent to which the utility of the goods is impacted by the defect (eg whether the vehicles were still able to be driven despite the defect); and
- whether the defect reduced the useful life of the goods.
The Full Court's decision also affirmed that the assessment of damages need not be 'undertaken on a strict arithmetical basis', and the court is to do 'the best that can be done with the available evidence' to arrive at a figure, which will likely 'be most aptly expressed in percentage terms'.
In the Toyota Appeal, the Full Court provided helpful guidance as to the likely quantum of reduction in value damages in a number of potential scenarios (assuming that the remedy, if available, is provided within a reasonable period from the time of the sale or first onset of the relevant defect):
|Where the good is replaced
|No reduction in value
|Where the good is a 'write off' and has not been replaced.
|The reduction in value is the whole of the purchase price, less any allowance for scrap value.
|Where repair is impossible but the good retains some value (such that it should not be written off).
|The reduction in value is to be assessed by reference to the extent of the good's diminished utility to the consumer over the life of the product.
|Where repair is possible and wholly reinstates the utility of the goods.
|The reduction in value will be informed by the cost of the relevant repairs.
|Where repair is possible, and partially restores the utility of the goods.
|The reduction in value will be informed by the cost of repairs, as well as the ongoing diminished utility of the goods post repair.
As noted above, s271(6) of the ACL bars a consumer from bringing a claim for reduction in value damages in certain circumstances, where the consumer has required the manufacturer to repair or replace the goods under an express warranty.
One issue before the Full Court in the Ford Appeal was whether replacements provided, or repairs performed, by a manufacturer after a reasonable time fell outside the ambit of s 271(6) – in other words, can a consumer still receive reduction in value damages even where they have received a repair, albeit late? In light of the Toyota Appeal judgment, however, the significance of this issue may be smaller than it first appears. While reduction in value damages may be available, allowance will need to be given for any subsequent repairs. Further, if those repairs were provided within a short period of time – having regard to the expected remaining life of the vehicle – any damages will likely be modest in quantum.
Aggregate damages are a form of generalised damages that the court can award in a class action to compensate group members as a whole, avoiding individual proof of loss. The court's power to order aggregate damages is only available where a 'reasonably accurate assessment' can be made of group members' total loss; or, otherwise, where individual losses can be calculated by reference to a specified formula.
A key obstacle to an aggregate damages award in both Capic and Williams was the question of whether group members had received a repair under warranty within a reasonable time and therefore could not bring an action as a result of s271(6). This individualised factor bore upon Justice Perram's decision not to award aggregate damages in Capic; while in Williams, Justice Lee confined the aggregate damages award to those consumers who had acquired their vehicle new, not disposed of it, and not received Toyota's repair.
We expect the Toyota Appeal decision will also have consequences for the availability of aggregate damages. At trial, Justice Lee finding that post-sale events were irrelevant provided the foundation for a confined aggregate damages award, as it eliminated from consideration circumstances idiosyncratic to each consumer. By contrast, the Full Court's approach may complicate this process, as the court will now need to factor in a variety of potential considerations, including the availability and nature of repairs, the time in which they occurred and the impact of the defect on the utility of the goods. It remains possible that this additional nuance could be reflected in a convoluted formula; however, we expect aggregate damages awards will generally now be more difficult to obtain.
- The Toyota Appeal reinforces the conventional wisdom that goods manufacturers should look to remedy defects early and under warranty, to reduce the potential quantum of any reduction in value damages, and diminish the attractiveness of class action activity.
- Auto manufacturers should continue to treat reports of potential defects with care, and take prompt action to investigate and address them in appropriate cases.
- Even if a repair has not been identified or developed by the time the court considers damages, it may be important for auto manufacturers to be in a position to put on evidence showing that a repair is likely, or even possible, and over what timeframe.
Toyota Motor Corporation Australia Limited v Williams  FCAFC 50.
Williams v Toyota Motor Corporation Australia Limited (Initial Trial)  FCA 344.
Capic v Ford Motor Company of Australia  FCA 715.
Dwyer v Volkswagen Group Australia Pty Ltd  NSWSC 715.