Reduction in value can be repaired - latest guidance on damages in consumer claims

What you need to know

• The Full Federal Court considered that a "proper conceptual approach" to the question of any reduction in value of consumer goods arising from the defect, in breach of the Australian Consumer Law, was to determine:
  • the extent of the loss of utility of the consumer good over its useful life measured as a component of the purchase price, having regard to the seriousness of the defect, its consequences and utility of the good despite the defect (rather than the resale value);
  • as at the time of purchase (rather than when the losses first crystallised e.g. when market became aware of the defect);
  • taking into account whether a fix had been available at the time of trial and, if not, the possibility (and uncertainty) of a future fix. 

• The Full Court significantly reduced Toyota's exposure to damages in this class action by limiting the reduction in value damages to only "loss of utility" experienced between the purchase date and the date that the fix became practically available (rather than as a percentage of the total value of the good regardless of any available or potential fix).
• In some consumer actions, damages for breach of the ACL may be able to be determined on a common or aggregate basis depending on the nature of the claims.

What you need to do

• A 'sooner the better' approach to a remediation program to repair defects (alongside a communications campaign to make consumers aware of the defects) can limit damages exposure to potential claims made under the Australian Consumer Law.

Damages awarded for 17.5% reduction in value at first instance

The Toyota Class Action:

• was brought on behalf of people who had purchased certain Toyota diesel vehicles between October 2015 and April 2020, which contained a defective diesel exhaust after treatment system;
• alleged that Toyota engaged in misleading or deceptive conduct and did not comply with the acceptable quality guarantee in breach of the Australian Consumer Law in connection with marketing and selling those vehicles;
• sought damages pursuant to ss 236 and 272 of the ACL, including for reduction in value resulting from non-compliance with the ACL.  

The defective diesel exhaust system would malfunction under certain conditions (including regular continuous driving at ~100 km/hour) causing the emission of white smoke and foul-smelling exhaust, increased service needs, and increased fuel consumption.

In mid-2020, Toyota introduced a "free field fix" which completely remedied the defective diesel exhaust system.

At the initial trial of the Toyota Class Action, Lee J found that:

• the affected Toyota diesel vehicles were not of acceptable quality because of their defective diesel exhaust systems;
• Toyota engaged in misleading or deceptive conduct in connection with marketing and selling those vehicles;
• the value of the affected Toyota diesel vehicles (excluding those vehicles that had already been repaired) at the time of purchase was reduced by 17.5% (measured against average retail price) as a result of the defective diesel exhaust systems;
• the availability of a complete repair after the time of purchase (the 2020 fix) did not reduce damages because it was unknown at the time of purchase. 

Toyota appealed Lee J's decision to the Full Federal Court.

Damages for reduction in value should take into consideration the availability of a remedy

The Full Court found that Lee J erred in failing to take into account the fact that the 2020 fix was available when assessing damages under the reduction in value provision of the ACL (s 272(1)(a)). This approach overcompensated group members by failing to have regard to the fact that, from mid-2020, a complete remedy to the defect was freely available.

The proper conceptual approach to assessing diminution in value damages, according to the Full Court, is to:

• ascertain the component of the purchase price that is attributable to the loss in utility arising from the defect;
• have regard to reasonable expectations as to the availability and timing of a repair that would restore the utility (in this case, having regard to the 2020 fix);
• have regard to any use to which the goods may be put despite the defect;
• make this assessment on the basis of the first three bullet points above as at the time of purchase for the period of time for which the defect was expected to affect the vehicle (before a repair could be found and carried out on the vehicle). 

In re-assessing damages, the Full Court made allowances for:

• the 2020 fix being available at no cost which remedied the defect; and
• the vehicles being still able to be used with the defect (though compromised by the defect).

The Full Court said that the focus under the reduction in value provision of the ACL should be on the utilisation value of the goods, and not (as Toyota had submitted) on their value at the time of any resale. This is because the ACL applies to consumer goods which are ordinarily acquired for use rather than resale, and accordingly their intrinsic value lies in their utility to consumers and not their on-sale price (as opposed to, for instance, commodities whose value lies in their market price). This is particularly apparent with motor vehicles, which are often more valuable to owners than the price they could get for their vehicle on the second-hand market.

A strict arithmetical approach is not required to ascertain any reduction in value following the Full Court's approach – reduction in value can still be determined by the Court doing the best that can be done with the available evidence.

The reduction of value due to the defect was 10% of the vehicle's average retail price before accounting for the repair

The Full Court rejected Toyota's submission that there was insufficient evidence for the Court to make a common sense assessment concerning reduction in value.

Instead, the Full Court re-assessed the reduction of value of the vehicles to be 10% (measured against average retail price) before taking into account the availability of the 2020 fix. The Court reached this conclusion for three reasons.

First, due to the seriousness of the defect and its consequences for the utility of the vehicle in the hands of the consumer. In this regard, the Court found that:

• the defect was present in all vehicles and inherent in their design;
• regular continuous driving at approximately 100 km/hr caused the defect to manifest;
• there was a high likelihood that a vehicle would suffer a defect consequence, and those consequences included excessive white smoke, foul smelling exhaust, and warnings which if ignored would prevent the vehicle going into fifth gear and would limit acceleration;
• there was an increase in the need for vehicle services, and a decrease in fuel economy.

Second, the Full Court took into consideration the fact that much of the vehicles' utility was unaffected by the defect and its consequences, even though these consequences occurred in relatively common driving conditions. The Full Court noted there was no suggestion of safety issues, or of the vehicles being unroadworthy.

Third, the Court found that Lee J erred in the significance his Honour gave to the Plaintiffs' expert valuation evidence (which suggested a reduction in value of between 23% and 27.5%) in assessing the reduction in value figure of 17.5%. The Full Court criticised this valuation evidence for emphasising the 'salvage' price of a vehicle, effectively treating the relevant vehicles as write-offs unless repaired, and, in so doing overstating the seriousness of the defect and the reduction in value. The valuation evidence did not grapple with the possibility of a free remedy becoming available (as occurred), and did not allow for use of the vehicles in the meantime before being remedied.

The Full Court remitted the matter to Lee J to determine the reduction in value taking into account the repair

The Full Court did not have sufficient material before it to determine what allowance should be made for the 2020 fix when determining reduction in value, and accordingly remitted the matter to Lee J.

The Full Court discussed (but did not ultimately determine) an example formula for determining reduction in value which involved:

• starting with the reduction in value of the vehicle at the time of supply (e.g. 10% of a $50,000 average retail price, being $5,000);
• multiplying this value by the period of time the group member owned the vehicle before the 2020 fix became practically available to consumers (e.g. 24 months); then
• dividing the result by the effective life of the vehicle in months (e.g. 15 years is 180 months). In this example, damages for reduction of value would be $5,000 x 24 ÷ 180 = $667. 

It is now open Lee J to determine whether any such formula can be applied to all group members on an aggregate basis, applied differently to sub-groups, or not applied on a common basis at all.

A registration process is still required before the total number of group members who will participate in any settlement or final judgment is known.

Implications for reduction in value damages

The Full Federal Court's decision offers useful guidance as to the circumstances and extent to which damages can be awarded for reduction in value.

The availability of a complete, free repair is plainly a relevant consideration under the reduction in value provision of the ACL. The Court's decision suggests that reduction in value damages may only be available for any (lengthy) period between supply of defective consumer good, and the availability of a free remedy – assuming a defect is "serious" and it has consequences for the good's utility.

Even in circumstances where a full repair is not yet available at the time of the trial, the potential for a future remedy is a relevant consideration according to the Full Court.

This decision sought to balance two competing factors about the possibility of repair:

• on the one hand seeking to avoid the possibility of consumers being over-compensated by receiving both a free full remedy and being compensated for reduction in value for the lifetime of the goods; and
• on the other hand compensating consumers for any lengthy delays before a full remedy to a defect becomes available.

Liability under the ACL can be determined on a common basis

The Full Court upheld Lee J's finding that the affected vehicles were not of acceptable quality and that Toyota engaged in misleading or deceptive conduct.

The Court confirmed that any breach of the acceptable quality guarantee can be determined on a common basis in class action proceedings. To establish otherwise, it may have been sufficient to rely on evidence of materially different relevant circumstances between different group members: even just evidence of one different circumstance rather than evidence of the circumstances of each individual purchase of the approximately 265,000 relevant vehicles in the class.

Defective parts cannot be separated from the vehicle 

The Full Court also rejected the argument that a defect in the diesel exhaust after treatment system (a single component of the vehicle) was distinct from a defect in the vehicle – and upheld Lee J's finding that to divorce issues with the diesel exhaust system from the vehicle is entirely superficial.

Damages determined on an aggregate basis

At trial, Lee J determined that a claim for aggregate damages (by way of a formula for the assessment of individual claims) was appropriate pursuant s 33Z(1)(e) of the Federal Court of Australia Act because the Court need only be satisfied, in accordance with the general damages principles, that the proposed methodology would sufficiently approximate the reduction in value of the relevant vehicles resulting from the defect as at the date of acquisition.

The Full Court did not consider its ability to award damages on an aggregate basis in determining the Toyota Class Action pursuant to s 33Z of the Act.  It is likely that the extent of the power to award aggregate damages will be the subject of further consideration in other cases.