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Asia Pacific Litigation Update - December 2024

December 10, 2024
Business Litigation Reports

High Court of Australia Expected to Clarify Assessment of Damages in Consumer Class Actions Against Manufacturers

            In Australia, consumers are entitled to recover damages directly from a manufacturer of consumer goods, when the manufacturer’s goods fail to comply with statutory guarantees as to quality, established in the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth)) (“ACL”).  Such claims often come as a surprise to international manufacturers supplying into the Australian market, as many are unfamiliar with the wide ambit of the ACL and the broad range of remedies its affords consumers.  With the significant rise in consumer class actions filed in Australia in recent years, large potential damages awards now represent a real risk for companies doing business in Australia.  Large global manufacturers are particularly appealing targets—and it is common for Australian class actions to piggy-back off legal and regulatory action taken against those companies in other jurisdictions, such as the United States, United Kingdom, and Europe.

            Two such class actions against motor vehicle manufacturers, Toyota and Ford, are currently before the High Court of Australia.  Those appeals are expected to clarify a number of uncertainties regarding how damages should be assessed in circumstances where the manufacturers have, by the time of trial, developed and implemented a repair for the defects at no cost to the consumers.

Action for Damages Against Manufacturers for Breach of Consumer Guarantees

            Section 54 of the ACL guarantees that goods supplied to consumers in trade or commerce will be of “acceptable quality.”  Acceptable quality means the goods are fit for purpose, acceptable in appearance and finish, free from defects, safe, and durable.

            Section 271(1) of the ACL creates an action for damages directly against the manufacturer of goods where goods fail to comply with section 54.   Under section 271(1), recoverable damages include any reduction in the goods’ value resulting from the failure to comply with the statutory guarantee, below the lower of (a) the price paid by the consumer for the goods or (b) the average retail price of the goods at the time of supply.  While this formula sounds simple in theory, it has proven complex to apply in practice and resulted in inconsistent judicial interpretation.

Toyota and Ford Class Actions

            In both the Toyota and Ford class actions, plaintiffs established at trial that the vehicles at issue breached section 54 of the ACL due to latent defects that resulted in a propensity to exhibit certain deficiencies.  But the question of damages under section 271(1) was appealed to the relevant appellate courts, and both cases have now been appealed to the High Court.  One of the key appellate issues is how to handle remedial action—specifically, if Toyota and Ford developed and implemented remedies for the defects at no cost to the consumer prior to trial, then what (if any) reduction in value of the vehicles is a result of the defects?  This raises questions about (1) how the true value of consumer goods is assessed and (2) whether post-supply events, such as the availability of a repair, should inform the assessment of this value.

What Is the “True Value” of Consumer Goods?

            Courts have held that “value” in the context of a section 271(1) claim does not mean market value.  Instead, “value” refers to the “true” or “intrinsic” value of the goods as at the date of purchase. 

An analogy can be made to the measure of damages in a tortious action for deceit or a statutory claim for misleading or deceptive conduct under section 18 of the ACL.  For example, in Kizbeau Pty Ltd v W G & B Pty Ltd & McLean (1995) 184 CLR 281 (Kizbeau), the High Court held that where a person has been induced to purchase a business based on fraudulent misrepresentations as to the future takings of the business, the actual takings of the business after the purchase would be admissible both to prove the falsity of the misrepresentations and the true value of the business at the time of purchase.

            But true value is also informed by the nature of the thing in question and the purpose for which it is purchased.  The Full Federal Court in the Toyota class action held that consumers typically do not purchase consumers goods for the primary purpose of generating profit (either through use or resale).   Instead, the intrinsic value of consumer goods to retail buyers lies in their utility, rather than their resale value.  The true value of consumer goods is therefore the price that would have been paid if the consumer had known of the defect at the time of purchase, rather than the price at which they could resell the goods.

            If a utility-based analysis is adopted, the reduction in value damages is assessed based on the loss in utility arising from the defect. The Full Court identified a number of factors that would inform an assessment of the loss in utility, including the probability of the defect consequences arising, the severity of the defect, and whether the defect resulted in any reduction in the useful life of the goods.  

Relevance of Subsequent Events to Calculation of True Value

            The time at which the true value of the goods is to be assessed is the time of purchase.  However, in both the Toyota and Ford cases, the manufacturers had developed a repair for the defects by the time of trial—and they argued that the availability of repairs should be taken into account, to avoid over-compensating consumers.  The relevance of post-supply events on the calculation of value remains a contentious issue.

            In Kizbeau, the High Court held that only subsequent events that arise from the nature or use of the thing itself are admissible, in contrast to events that arise from supervening or extraneous events.  This question arose in another recent class action brought against Volkswagen regarding defective Takata airbags.  Prior to the trial, Volkswagen issued a recall in Australia and replaced all of the defective airbags—at no cost to the consumers and before any defect consequences materialised.  The New South Wales Court of Appeal ultimately found that there was no breach of section 54 (id. Dwyer v Volkswagen [2023] NSWCA 211.)  But the court also held that, even if there had been a breach, the plaintiff had not suffered any loss or damage due to the replacement of the airbag.  Critically, the Court of Appeal’s view was that a reasonable consumer would always have expected Volkswagen to rectify a latent defect due to the inherent nature of the product as a vehicle.  As such, the replacement of the airbag could be taken into account when ascertaining the true value of the cars at the time of purchase.

            The relevance of post-supply events on the calculation of reduction in value damages is one of the critical questions before the High Court in the Toyota and Ford appeals, and the judgments in those cases will hopefully bring much-needed clarity to the assessment of damages for breaches of the consumer guarantees in the ACL.

Key Takeaways

            Understanding the potential quantum of damages awards in consumer class actions will allow international manufacturers to properly assess and manage their risk exposure for breaches of the ACL.  While we await the High Court’s judgments in the Toyota and Ford matters, current case law demonstrates there are key actions that manufacturers supplying into Australia can take to reduce the attractiveness of potential class actions and potentially mitigate large damages awards, including:

  • taking prompt action to investigate defects, including issuing recalls where necessary or appropriate, especially if recalls have been issued in other jurisdictions;
  • remedying defects upfront under warranty by either repairing or replacing the goods; and
  • proactively developing and implementing a remedy for the defect as early as possible.