Recent class action decisions set high bar for automakers to comply with acceptable quality guarantee

Vehicle manufacturers and suppliers take note 12 min read

In this Insight, we look at class actions targeting the automotive sector, and draw together key themes from recent decisions that have considered the standard of acceptable quality required for passenger vehicles under the Australian Consumer Law. While the state of the law remains in flux, recent cases establish that a high standard of acceptable quality is expected for all vehicles, regardless of their price point.

Key takeaways

• There has been a steady increase in class action filings over the past decade, with consumer claims becoming dominant in 2021. Claims against car manufacturers and suppliers are on the rise—there have been three judgments in this space in the past 18 months.
• The cases set a high bar for acceptable quality. It is no defence that a vehicle still operates to take a consumer from A to B, and defects do not have to be safety related to found a breach.
• A mere risk or propensity for a defect to manifest may be sufficient to found a breach of acceptable quality across a whole class of vehicles, even if the defect never actually manifests in some vehicles.
• Vehicle manufacturers and suppliers should take prompt action to investigate and address potential defects in their vehicles, including latent defects. Internal systems for addressing customer complaints and ensuring consumer law compliance should be as robust as possible. Taking these steps will reduce the risk of class actions being brought, and limit automakers' potential exposure to any claims that do arise. It will also assist in making timely decisions in relation to voluntary recalls, and responding to inquiries or investigations from the ACCC or other regulators.
• Stay tuned for our next automotive risk Insight, in which we will consider key themes emerging from the cases regarding the calculation and quantum of damages.

Background

Section 54 – Guarantee as to acceptable quality

The Australian Consumer Law (ACL) contains a series of consumer guarantees, which all goods sold in Australia to a consumer (as defined in the ACL), including passenger vehicles, must meet. This includes the acceptable quality guarantee in s54, which provides that goods will be of acceptable quality if they are as:

• fit for purpose;
• acceptable in appearance and finish;
• free from defects;
• safe; and
• durable,

as a reasonable consumer—fully acquainted with the state and condition of the goods (including any hidden defects)—would regard as acceptable, having regard to the matters listed in s54(3). Those matters include: the nature and price of the goods; statements or representations made about the goods; and any other relevant circumstances.

Summary of recent decisions in the auto sector

The standard of acceptable quality for passenger vehicles has been considered in a series of class action judgments over the past 18 months: by the Federal Court in Williams v Toyota¹ and Capic v Ford;² and by the NSW Supreme Court in Dwyer v Volkswagen.³ All three cases involved allegations of defects that meant an entire class of vehicles was not of acceptable quality, and group members were entitled to damages.

While judgments have been handed down in each case, the state of the law remains in flux as each matter is currently at different stages of the appeal process. Dwyer was heard by the NSW Court of Appeal in March of last year, Williams was heard by the Full Federal Court in November, and Capic is listed for hearing in March 2023. The outcomes of these appeals could significantly alter the product liability landscape in Australia, especially for vehicle manufacturers and suppliers. As things stand, the trial judgments represent the current state of the law and will inform the types of class action claims that may be brought against manufacturers and suppliers in the automotive sector.

What is the standard of acceptable quality for passenger vehicles?

These recent decisions establish that the standard of acceptable quality for modern vehicles sets a high bar. While the assessment is multi-factorial, the following key themes stand out from the cases:

1. It is not necessary for the defect to be safety-related. The statutory consumer guarantees require an assessment of whether a reasonable consumer would regard a vehicle as being of 'acceptable quality' based on various factors, of which only one is safety. In both Williams and Capic, the respondents argued that the defects did not pose a safety concern and the possibility of vehicles entering 'limp mode' or losing transmission engagement were remote, and there were no proven instances of injuries being sustained by vehicle passengers as a result of the defects in either case. Notwithstanding this, both courts held that the vehicles were not of acceptable quality. The court in Capic specifically held that the question of whether a defect posed a safety risk was ultimately not the answer as to whether there was a breach of the acceptable quality guarantee. The relevant question is whether the vehicle is of a standard that a reasonable consumer would consider acceptable.
2. Getting from A to B is not enough; more is required to meet the acceptable quality threshold. The court directly addressed this question in Williams, rejecting Toyota's submission that the vehicles did not breach the acceptable quality guarantee because they were still able to function effectively as a mode of transportation. The court held that consumers expect more from modern vehicles than just getting from point A to point B.
3. Cheaper vehicles are not measured by a materially lower standard. While the price and nature of a vehicle is a relevant factor to be considered under s54(3) of the ACL, the courts still apply a high bar in relation to cheaper 'entry level' vehicles. In Capic, the court held that even relatively inexpensive vehicles represent a significant investment for consumers, and as such, there remain high expectations for quality, reliability and durability.
4. Effective repairs performed under warranty are not a defence. The courts have acknowledged that vehicles are complex goods that consumers expect may require repair under warranty. In Dwyer, the court accepted that this expectation included the possibility that vehicles might develop safety problems over time. In both Williams and Capic, however, the courts found that the provision of an effective fix, even one free of charge to the consumer, was no defence where the vehicles were not of acceptable quality. Under the ACL, if a reasonable consumer would not have bought the vehicle if they knew the nature and extent of a problem with the vehicle, there will be a breach of the acceptable quality standard regardless of whether it can be repaired.
5. A mere risk or propensity may be sufficient to breach the guarantee. In all cases, the courts upheld the proposition that even where a defect has never, and may never, manifest in adverse effects in some vehicles, those vehicles may nevertheless breach the acceptable quality guarantee due to the elevated risk that they might experience problems at some point. This stands in contrast to the situation where it can be proven that some vehicles within the class are not affected by the particular fault or issue.

Are events following the sale of a vehicle relevant in assessing acceptable quality?

The question of the point in time at which acceptable quality is assessed may be critical, as it determines whether a court will consider events that have occurred following the sale of a vehicle. Events subsequent to sale might be of assistance to vehicle manufacturers and suppliers if, for example, a vehicle or vehicles never actually experienced any performance issues, repairs were performed under warranty (or otherwise) to resolve the defect, or the vehicle has been used in an abnormal way, or damaged, by a customer after sale.

The decisions in Capic and Williams upheld previous authority that acceptable quality is determined at the time a good is supplied and does not account for events that occur subsequently. This view provides the basis on which group-wide findings regarding acceptable quality can be made as it removes the need to consider the individual experience of each vehicle. In Dwyer, the court appears to have favoured the alternative view that acceptable quality is to be determined on the basis of all relevant information known at the time of trial, including any subsequent repairs. However, the court was not required to explore this particular issue in detail given other shortcomings in the plaintiff's claim.

We note that the ACL does provide a defence where a defect that renders a vehicle not of acceptable quality is repaired within a reasonable time.⁴ In this context, 'reasonable time' is measured from the point that the consumer requires the manufacturer or supplier to provide a remedy and will be dependent on the specific facts of a given case. However, these provisions relate to a consumer's right to damages as opposed to determining whether a vehicle was of acceptable quality at the time of supply. We will consider these provisions further in our forthcoming automotive risk Insight on the calculation and quantum of damages in recent automotive class action decisions.    

What percentage of vehicles need to be impacted before class-wide arises?

The cases indicate there is no fixed percentage of impacted vehicles within a class resulting in negative consumer experiences before a court will be prepared to make group-wide findings of breach across the entire class. In Williams, the projected failure rate without the repair was approximately 50% of the class over five years, while in Capic, the projected failure rate for particular components was as low as 20% over a similar period.

Rather than focusing on percentages, the court in Capic sought to determine whether there was a 'real risk of failure' and placed significant weight on internal engineering documents of the manufacturer in finding that a real risk of failure existed for each of the components. Conversely, in Dwyer the court found that the plaintiff had failed to establish that there was any 'relevant, functionally significant propensity' for the propellant to degrade in the Takata airbags installed in Volkswagen vehicles in particular, and on that basis there was no breach of the guarantee.

Are the individual circumstances of supply relevant to assessing acceptable quality?

The factors to be considered under s54(3) of the ACL when determining acceptable quality include a number of matters that might differ depending on the circumstances in which a vehicle is sold. For example, a dealer might make certain representations to one consumer regarding the expected operation of a vehicle that are not made to another consumer that purchases the same vehicle. This argument was put forward by Toyota in Williams as the basis for a submission that it was not possible for the court to make a group-wide finding as to whether all of the vehicles were of acceptable quality. The court ultimately rejected Toyota's submission and found that—where it is alleged that a good is not of acceptable quality by reason of a common characteristic and there is no evidence of material differences in the matters listed in s54(3)—nothing prevents the courts from making findings on a common basis. This is consistent with the approach taken in Capic.

The circumstances of individual sale might also include a dealer drawing a customer's attention to an issue with the vehicle prior to sale. In those circumstances, s54(4) of the ACL provides that the vehicle does not breach the acceptable quality guarantee because of that issue.

Actions you can take now

1. Treat all reports of potential defects impacting a particular class of vehicles with care, regardless of whether they are safety related or only impact customer comfort or satisfaction, and including reports arising in foreign jurisdictions.
2. Take steps to ensure internal systems for addressing customer complaints, and compliance with the Australian Consumer Law, are sufficiently robust to reduce customer complaints where possible and mitigate risks associated with additional inquiries or investigation by the ACCC.
3. Take prompt action to investigate and address potential defects, including latent defects that only impact a subset of a vehicle class or may not manifest for some time.
4. Remedying defects early and under warranty will limit the number of affected consumers and reduce the attractiveness of potential class action claims in the future.