A twist in the road for auto class actions

Volkswagen successful in Takata airbag appeal 9 min read

The New South Wales Court of Appeal has delivered its much-anticipated judgment in Dwyer v Volkswagen Group Australia Pty Ltd.¹ The appeal was dismissed, with the Court of Appeal agreeing with the trial judge that there had been no breach of the acceptable quality guarantee and in any event the representative plaintiff had failed to establish any loss.

This Insight summarises our key takeaways from the decision and includes our reflections on the implications for the class action risk facing automakers.

Key takeaways

• The judgment is one of a number of recent decisions that have grappled with the standard for acceptable quality for motor vehicles and the correct approach to assessing 'reduction in value' damages. The relevant law, and the automotive sector's associated class action risk, are likely to continue to evolve as there are two other judgments which are the subject of appeal or special leave applications that are pending.
• While a mere propensity or risk of a fault emerging can be sufficient to prove a breach of the acceptable quality guarantee in section 54 of the Australian Consumer Law (ACL), the risk must be more than a 'merely speculative theoretical possibility'. A plaintiff bears the onus of proof, and unacceptable quality will not be established merely because the defendant has failed to exclude the possibility of a fault emerging in the lifetime of the product.
• This is the second appellate decision to recognise that events subsequent to supply can be relevant to assessing 'reduction in value' damages under section 272 of the ACL. Where a good is of a type that a reasonable consumer would expect to need regular repairs and maintenance, the fact that a manufacturer rectified a defect at no cost to the consumer can reduce (even to zero) the damages to which the consumer is entitled.
• Whether a defendant can rely on the defence in section 271(2)(a) of the ACL depends on whether conduct of the relevant third party is the sole effective cause of the non-compliance with s54. Steps taken by an original equipment manufacturer (OEM) that are necessary preconditions to liability under s271 (such as actually supplying the goods) will not disentitle the OEM from relying on the defence if they are not the effective cause of the non-compliance.

Background

Consumer class actions targeting automakers have continued to be a significant feature of new class action filings (read more of our Insights on class action risk in 2023 here and here). In these actions the acceptable quality guarantee remains one of the most potent provisions available to consumers in seeking redress. Two of the key reasons for this are:

• recent decisions have imposed a high bar on automakers for the standard of acceptable quality in s54 of the ACL. One reason is that courts have held that a mere risk of, or propensity for, a defect 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.
• uncertainty about the extent to which events subsequent to sale (such as repairs and replacements offered by OEMs to rectify a defect) can be taken into account in assessing entitlements to damages.

The appeal brought by Prof Dwyer against Volkswagen Group grappled with both of these issues. The claim concerned approximately 83,000 vehicles equipped with Takata airbag inflators that were alleged to have a propensity to degrade and fail over time. Volkswagen replaced the airbags at no cost to consumers before any potential issues had materialised. At trial, Justice Stevenson found there was no breach of s54 of the ACL and that, in any event, the representative plaintiff had failed to establish any loss.

The Court of Appeal's findings

The acceptable quality guarantee

The primary question before the Court of Appeal was whether or not the appellant's vehicle breached the acceptable quality guarantee in s54 of the ACL. This turned on whether the relevant vehicles could be considered 'safe' and 'free from defects' as the hypothetical reasonable consumer would regard as acceptable.

The court upheld the finding that the appellant's vehicle was of acceptable quality. The case involved a significant amount of expert and technical evidence, and based on this evidence, the Court of Appeal agreed with the trial judge that the appellant 'did not demonstrate that the risk of rupture could eventuate within any meaningful timeframe'.

The Court of Appeal considered two key ways in which it may be said that a vehicle is not of acceptable quality in a propensity case:

• First, the Court of Appeal confirmed that, following Medtel Pty Ltd v Courtney,² unacceptable quality may be demonstrated on the basis of an inherent risk associated with a product without that risk actually having materialised. However, it is first necessary to establish that the inherent risk actually exists. This case could be distinguished from Medtel because the appellant failed to establish that 'the asserted risk was [anything] more than a speculative possibility'.
• Second, the Court of Appeal considered whether unacceptable quality could be demonstrated by a 'relevant characteristic' that gives rise to 'an unquantifiable risk of serious harm' because the risk of rupture had not been excluded for the realistic life of the good. The Court of Appeal held that this incorrectly reversed the onus of proof. The relevant enquiry is directed to the extent to which the good in fact fulfils the reasonable expectations of a reasonable consumer. Ultimately, the Court of Appeal held that 'a merely speculative theoretical possibility of a risk of rupture of the airbag, not within any meaningful timeframe, would not be regarded as unacceptable by a reasonable consumer'.

Of course, these kinds of cases are highly dependent on the facts and technical evidence before the court. The Court of Appeal observed that findings even in respect of other makes of vehicle fitted with Takata airbags cannot be translated to Volkswagen vehicles, and vice versa, given 'the airbag inflators for Volkswagen vehicles were different from the inflators in other vehicles in ways that might meaningfully affect their performance'.

The relevance of post-acquisition events

Although the court's finding on acceptable quality was decisive of the appeal, it nonetheless considered the proper approach to assessing 'reduction in value damages' for breach of the consumer guarantee. It was common ground between the parties that such damages were to be assessed at the time of supply. The critical question on appeal was what type of events can be relevant to the value of goods at their date of acquisition.

In a win for manufacturers, the Court of Appeal considered that the compensatory nature of the damages provision in s272 meant that events subsequent to supply are relevant to the assessment of reduction in value damages where they 'illuminate or indicate or reflect the value of the good at the acquisition date'. This appears to be a recognition that the court's damages assessment should have proper regard to the nature of the good and the defect in question.

The court observed that motor vehicles are complex products that require regular maintenance and frequently require parts to be repaired or replaced during their lifetime, and that it is inherent in the nature of a vehicle that, upon discovering a latent defect, the defective part will be repaired or replaced as necessary (as occurred in the appellant's case).

Volkswagen's full rectification of the alleged defect at no cost to the appellant was in a manner that a reasonable consumer would have always expected given the nature of the product (ie as a vehicle). It therefore arose from the nature of the product, and so illuminates, reflects or indicates the value of the appellant's vehicle at the time of supply.

The court also observed that allowing the appellant to recover damages in such circumstances would be inconsistent with the 'universal rule' that a plaintiff cannot recover more than he has lost.

Although these comments are all by way of obiter dicta, they are nonetheless helpful authority for automakers who promptly offer repairs under warranty to consumers when defects are discovered.

The applicability of the defence in s271(2)(a)

The Court of Appeal also considered whether Volkswagen could have relied on the defence in s271(2)(a) of the ACL if liability had been established. This defence provides that a manufacturer of goods that breach a guarantee under s54 will not be liable for damages if the non-compliance with the guarantee was 'only because of… an act, default or omission of … any person other than the manufacturer or an employee or agent of the manufacturer'.

The Court of Appeal upheld the trial decision that if Prof Dwyer's vehicle had been of unacceptable quality, Volkswagen could have relied on the defence because Takata, not Volkswagen, was responsible for designing and manufacturing the airbags and for choosing to use the propellant that was claimed to be responsible for the alleged defect.

In doing so, the Court of Appeal drew a distinction between necessary preconditions and an effective cause. Volkswagen's acts in choosing Takata to manufacture the airbags, installing the airbags into its vehicles and releasing the vehicles for sale, were not what would have made the vehicles of unacceptable quality. These factors were only necessary preconditions for liability for any failure to comply with the acceptable quality guarantee. The effective cause of any non-compliance was Takata's design and manufacture of the airbags.

Our take

Overall, the Court of Appeal's decision is a welcome one for OEMs, reducing (at least to some degree) automakers' exposure to class actions under the ACL. It also underscores the importance of using prompt countermeasures (such as recalls and free replacements/repairs of defective parts) to mitigate class action risk.

That said, the law in this area is still in a state of flux. It remains to be seen whether Prof Dwyer seeks special leave to appeal to the High Court and there are other important appeals on foot, such as Ford v Capic (where judgment is currently reserved) and Toyota v Williams (where special leave to the High Court is being sought). Depending on the outcomes of those cases we may see further shifts in the class action risk profile for automakers.