Class action risk remains high for automotive manufacturers

Aggregate damages awarded after latest class action judgment 8 min read

Over recent years class action risk has remained at elevated levels for manufacturers in the automotive industry. This trend is poised to continue following the judgment for the applicants in Williams v Toyota Motor Corporation Australia Limited (Initial Trial) [2022] FCA 344.

Key takeaways

• In certain circumstances, the court may be willing to make an order for aggregate damages, including for only a subset of the group members in a class action.
• The court may determine whether goods are of an acceptable quality and whether conduct is misleading or deceptive on a common basis, without reference to individual circumstances.

Background

From 1 October 2015 to 23 April 2020 more than 250,000 Toyota cars in the HiLux, Prado and Fortuner ranges were sold in Australia that were fitted with a diesel exhaust after-treatment system (a DPF system). The DPF system was designed to store and periodically burn off particulate matter in a process known as regeneration. In various circumstances, including when the vehicles would drive at a regular continuous speed of approximately 100 km/h, the DPF system was impeded from regenerating effectively.

When regeneration was ineffective the vehicles were prone to emit excessive white smoke and a foul-smelling exhaust, fuel consumption increased and the driver's dashboard displayed notifications indicating that the DPF system was 'full'. If a driver continued to use a vehicle following warnings that the DPF was full the vehicle would go into 'limp mode', which prevented the use of fifth gear and limited acceleration. Toyota implemented a number of measures to resolve the problems with the DPF system, including a production change and a 'field fix'.

Toyota was the 'manufacturer' of the vehicles for the purpose of the Australian Consumer Law (ACL)¹ and marketed the vehicles for sale. In doing so, it made representations about the quality and characteristics of the vehicles and the DPF system.

The applicants advanced two causes of action against Toyota:

• acceptable quality: the vehicles were not of 'acceptable quality' and failed to comply with the statutory guarantee in s54 of the ACL which requires that goods are:
  1. fit for all the purposes for which goods of that kind are commonly supplied;
  2. acceptable in appearance and finish;
  3. free from defects;
  4. safe; and
  5. durable.

• misleading or deceptive conduct: Toyota contravened the ACL by making misleading representations and omissions in connection with the sale of the vehicles.

The acceptable quality case

Justice Lee held that the vehicles were not of 'acceptable quality' and, therefore, failed to comply with the statutory guarantee. His Honour held that:

• 'no reasonable consumer acquiring a new vehicle would regard as acceptable the fact that the vehicle cannot be exposed to a mode of operation and use that is considered normal in the Australian market without malfunctioning'. His Honour considered that regular continuous driving at approximately 100km/h to be a 'normal form of usage of the vehicles';
• the emission of excessive white smoke and foul-smelling exhaust was not an acceptable 'finish';
• a vehicle that requires 'frequent, unscheduled repair or replacement of a component part would not be regarded as acceptably "durable" by a reasonable consumer'; and
• when the adverse consequences of the defective DPF system manifest they significantly impact consumers' use and enjoyment of the vehicles. Justice Lee referred to the 'thousands of complaints' made by consumers including discomfort and distress, an inability to use standard features (such as putting the windows down), poor visibility, abuse from other motorists, the inconvenience of frequent servicing and frustration from a fuel economy that was significantly worse than advertised.

The misleading or deceptive conduct case

Justice Lee held that Toyota engaged in misleading or deceptive conduct in representing that the vehicles were non-defective, good quality, reliable, durable and suitable for all conditions of normal operation and use in the Australian market. Toyota sought to draw what the judge described as a 'false distinction' between defective goods on the one hand, and goods that contain a defective component on the other hand — submitting that 'the failings of the DPF system in any particular vehicle did not make the representations about that vehicle as a whole misleading'. Justice Lee rejected those submissions on the basis that a reasonable consumer would understand the representations to mean that the components that comprise the vehicle were not defective.

Loss and damage

The applicants alleged that group members suffered loss and damage resulting from Toyota's failure to comply with s54 of the ACL. Two heads of damages were claimed under s272 of the ACL:

• reduction in value damages: damages for the reduction in value of each car resulting from Toyota's failure to comply with s54; and
• other loss and damage: other reasonably foreseeable loss or damage suffered because of the failure to comply with s54, including excess taxes, excess financing costs, excess fuel costs and the costs incurred having the car serviced or repaired on account of the defect.

Reduction in value damages

The parties were in dispute about four questions of principle regarding the reduction in value damages claimed by the applicants:

• how one conceptualises 'reduction in value': Justice Lee stated that assessing the reduction in value is an objective concept requiring consideration of what a reasonable purchaser, fully acquainted with the defects in the goods, would be willing to pay. The question is what price would need to have been offered to sell the goods to the reasonable consumer. It is not what price the manufacturer or supplier would have been prepared to sell the goods;
• the meaning of 'reduction in value':  Justice Lee stated that a 'reduction in value' should not be conflated with a 'market value' that assumes a market equilibrium. His Honour held that concepts such as the 'repair cost' and any change in consumers' 'willingness to pay' are 'useful indicators in ascertaining any reduction in value';
• the point in time by reference to which the reduction in value must be assessed: the applicants contended that the reduction in value must be assessed by reference to the time of acquisition, while Toyota contended it must be assessed by reference to the date on which the loss crystallises, including by reference to subsequent events (such as the field fix). Justice Lee preferred the applicants' construction stating that it is 'logical to expect that Parliament intended this comparison to be an "apples with apples" comparison such that both the prices and the "real value" of the goods are to be assessed by reference to the same point in time, namely the time of acquisition'; and
• whether information obtained after the time of supply can be taken into account: Justice Lee held that information which arises after the time of supply may be taken into account in assessing the true value at the time of acquisition.

Quantifying the reduction in value

The applicants contended that the defect reduced the value of each car at the time it was supplied by 25% of the average retail price. The applicants relied on three disciplines of expert evidence in support of their position:

• valuation evidence: evidence of a valuer which considered factors such as the impact of the DFS system on the vehicle’s performance and operation, the need for the vehicle to have additional service or repairs, the increased costs of owning the vehicle, the reduced resale value of the vehicle, the negative impact of the owner’s experience and enjoyment of the vehicle and the reduced desirability of the vehicle. This evidence used the salvage value of the vehicles as a 'floor' to bookend the analysis and indicated a reduction in value of approximately 23–27.5%. Justice Lee accepted this as a 'useful guide';
• survey evidence: evidence which measured a consumers' willingness to pay for a defective vehicle compared to an identical non-defective vehicle, based on a 'choice-based conjoint survey' which collected data from a sample of the target population. The survey indicated a reduction in value of 20–30%. While Justice Lee acknowledged there were 'a number of difficulties with the survey', his Honour accepted the 'general picture' that emerges from the conjoint analysis 'is still of some limited utility in coming to a landing on a figure for any reduction in value'; and
• cost of repair evidence: evidence which indicated the 'minimum' reduction in value, as measured by reference to the cost of repairing the vehicle, in the range of 2.9–7.3%. Justice Lee described this approach as 'an inherently conservative measure' but accepted that it was of some use in identifying a 'minimum floor'.

In quantifying the reduction in value, Justice Lee considered that the applicants' 25% reduction in value was 'simply too high' but concluded that the reduction in value must still be a figure of significance, settling on a reduction of 17.5%. Justice Lee held that the reduction in value should be calculated:

• on a disaggregated basis across vehicles that are alike, of the same series and sold in the same time period (rather than across a whole product line); and
• exclusive of the cost of accessories that may have been added to the vehicle at the time of supply.

Aggregate damages

Toyota submitted that because the number of group members was unknown, the number of cars that have received the field fix continues to increase, and the fact that any claimed reduction in value requires an assessment of the car and the extent to which (if at all) it suffered from any of the defect consequences, an award of aggregate damages ought to be refused. Justice Lee rejected those submissions.

His Honour stated that the more substantive issue related to the effect of different permutations of ownership of the cars. His Honour stated that there was no difficultly in calculating damages where a group member has held a car for the entire period. For those members, Justice Lee held that the evidence adduced provided a basis for the Court to make an award of aggregate damages pursuant to s33Z(1)(e) of the Federal Court of Australia Act 1976 (Cth).

However, his Honour considered that the situation is complicated where group members have bought and/or sold a car on the secondary market (Partial Period Group Members), stating:

'The bottom line is that without knowing the price at which, or the time at which, the Partial Period Group Members bought and sold Relevant Vehicles on the secondary market, one cannot determine on a principled basis how the compensation for the owners of those Relevant Vehicles ought to be assessed or distributed.'

Thus, Justice Lee declined to make an award of aggregate damages in respect of the Partial Period Group Members. Rather, the award of such damages is to be made on an individualised basis, having regard to their individual circumstances.

It is noted that the applicants sought aggregate damages under s33Z(1)(e) or, alternatively, s33Z(1)(f). Justice Lee concluded that s33Z(1)(e) was the appropriate head of power to award aggregate damages.

His Honour rejected the s33Z(1)(f) claim. His Honour stated that the Court's power in s33Z(1)(f) is premised on the condition set out in s33Z(3) being satisfied. That is, aggregate damages may only be awarded if a 'reasonably accurate assessment can be made of the total amount to which group members will be entitled under the judgment'. The applicants submitted that the Court could arrive at a 'reasonably accurate' amount by applying a methodology with a number of integers. Justice Lee considered this calculation to be inconsistent with s272 of the ACL (which provides two alternative bases upon which the calculation of damages is to be assessed, namely, any reduction in value below the lower of (i) the price paid or payable by the consumer for the goods; or (ii) the average retail price of the goods at the time of supply). His Honour considered the applicants' calculation 'cuts across' and 'proposes a proxy' for s272. Therefore, Justice Lee concluded: 

'While it may be readily accepted that the purpose of s33Z is to allow a broad-brush approach to the assessment of aggregate damages, it cannot be the case that a general provision such as s33Z of the Act can override the specific terms of s272 of the ACL, which creates the entitlement to statutory compensation… Indeed, while the proxy contended for by the applicants may provide a convenient short cut to the question of aggregate damages, it undermines the text and statutory purpose of s272 of the ACL. The s33Z(1)(f) claim must be rejected.'

Other loss and damage

Justice Lee held that group members were entitled to recover the excess GST they paid, as the tax payment formed part of the 'overpayment' at the point of supply.