High Court of Australia Outlines Proper Approach to Assessing “Reduction in Value” Damages

On November 6, 2024, the High Court of Australia, the nation’s apex court, delivered a landmark judgment in Williams v. Toyota Motor Corporation Australia Limited [2024] HCA 38 (“Williams v. Toyota”). The judgement established how Australian courts are to calculate the damages claimants are entitled to recover for the reduction in value of consumer goods which do not satisfy the guarantee as to "acceptable quality" under section 54 of Australian Consumer Law (ACL). 

The judgment not only has significant implications for the large number of other class actions targeting automotive manufacturers that were filed in Australian courts after the Williams applicants were successful at trial, but also for the broader consumer class actions landscape and law of damages in Australia.

Class Actions in Australia

Australia has a permissive, “opt-out” class action regime which permits one or more representative plaintiffs to commence a class action where at least seven people (the “group” or “class”) have claims that share common questions of law or fact with those brought by the representative plaintiff.  In contrast to jurisdictions such as the United States or United Kingdom, there are no formal class certification requirements.  In this context, Williams v. Toyota was brought as a class action in which the Williams applicants sought “reduction in value” damages under the ACL on their own behalf and on behalf of the class of people who had acquired one of approximately 260,000 Toyota diesel vehicles between around October 2015 and April 2020. 

Entitlement to Recover Damages for Reduction in Value of Goods Which Are Not of Acceptable Quality

The ACL provides a number of statutory guarantees in respect of goods sold to Australian consumers, including passenger vehicles. These include the guarantee as to “acceptable quality” which applies to all goods supplied to Australian consumers in trade or commerce (other than by way of auction). 

Goods are deemed to be of acceptable quality under the ACL if they are as:

• fit for all the purposes for which goods of that kind are commonly supplied;
• acceptable in appearance and finish;
• free from defects;
• safe; and

The standard is whether a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects) would regard the goods as acceptable, having regard to certain prescribed matters, including the nature and price of the goods, statements or representations made about the goods, and other relevant circumstances.

The ACL grants consumers who acquire goods that do not satisfy the guarantee as to acceptable quality a direct right of recourse against the manufacturers of those goods.  The ACL extends this right to people who acquire or derive title to such goods from or through the consumer; the consumer and each of its privies in interest being referred to in the ACL as an “affected person.”

An affected person is entitled to recover damages under section 272(1)(a) of the ACL for any reduction in the value of the goods resulting from the failure of the goods to comply with the guarantee as to acceptable quality, calculated as the difference between the current value of the goods and the lower of:

• the price paid or payable for the goods; or
• the average retail price of the goods at the time of supply.

An affected person is also entitled to recover damages under section 272(1)(b) of the ACL for any consequential loss or damage they suffer as a result of the failure of the goods to satisfy the guarantee as to acceptable quality.

For the reasons that follow, Williams v. Toyota has entrenched the entitlement to recover damages for reduction in value under section 272(1)(a) as a powerful remedy for consumers and other affected people who acquire goods which do not comply with the statutory guarantee as to acceptable quality.

Williams v. Toyota

Factual background

The proceeding concerned approximately 260,000 vehicles fitted with an after-exhaust treatment system which was found, at trial, to be defective. The defect meant that vehicles regularly driven at speeds of over 100km/hr (i.e. 62mph) had a propensity to experience a range of adverse consequences, including emitting excessive smoke and foul-smelling exhaust, increased fuel consumption, and excessive servicing and repairs.  Toyota projected that approximately 50% of the relevant vehicles would fail within five years and approximately 94% would fail within ten years.  In around May 2020, more than four years after becoming aware of the defect, Toyota developed a fix which was held to be effective and began offering to implement the fix in affected vehicles free of charge.

Initial Trial Judgment

The trial Judge, Justice Lee of the Federal Court of Australia, made two key findings in his judgment delivered in April 2022.

The first was to hold that each of the relevant vehicles failed to satisfy the guarantee as to acceptable quality because the core defect, giving rise to a propensity in the vehicle to experience adverse consequences, was present in each vehicle at the time it was supplied.  Justice Lee held that this was true of each vehicle irrespective of whether the vehicle subsequently manifested adverse consequences as a result of the core defect, reflecting that the assessment as to whether a good satisfies the statutory guarantee is made by reference to the state and condition of the goods at the time they are supplied to the consumer. 

The second was to hold that damages for reduction in value are also to be calculated at the time of supply of the goods (being the same time at which their compliance with the statutory guarantee as to acceptable quality is assessed) having regard to all information which was known or knowable at that time.  Applying this criterion, Justice Lee held that the presence of the core defect in each of the relevant vehicles, giving rise to the propensity in the vehicle to experience adverse consequences, resulted in the value of each vehicle being reduced by 17.5% of its average retail price at the time of supply.  In reaching this conclusion, Justice Lee had regard to the possibility that Toyota would be able to develop a fix for the defect, on the basis that this was conceptually knowable at the time of supply, but not to the fact that Toyota developed a fix for the defect in around May 2020, on the basis that this was not a fact known or indeed knowable at the time at which any of the relevant vehicles was supplied.

Full Court Judgment

The Full Court of the Federal Court of Australia partially upheld an appeal of the initial trial judgment by Toyota, holding that: (a) Justice Lee erred in not taking into account the “availability” of the fix developed by Toyota in May 2020 in assessing reduction in value damages; (b) while typically reduction in value damages will be assessed at the time of supply, where “appropriate” these damages should be assessed by reference to a later state of affairs or adjusted to account for post-supply events; and (c) held that the reduction in the value of the relevant vehicles was 10% (before taking into account the “availability” of the fix developed by Toyota in May 2020).

Both the Williams applicants and Toyota appealed the Full Court’s decision to the High Court, with the key question before the High Court being the relevance to the assessment of reduction in damages of the fact that, some years after the time of supply, Toyota developed a means of repairing the defect that was made available free of charge.

High Court Judgment

The High Court upheld Justice Lee’s finding that damages for reduction in value are to be calculated by reference to the reduction in the value of the goods resulting from their failure to comply with the acceptable quality guarantee at the time of supply.

However, the High Court deviated from Justice Lee’s approach in holding that:

• the reduction in value of goods which do not comply with the guarantee as to acceptable quality at the time of supply is to be assessed having regard to all that is known at the time of trial about the “state and condition” of the goods at the time of supply; and
• the availability, effectiveness, cost, inconvenience and timing of any repair of a defect in the goods, as known at the time of trial, are all characteristics of the “state and condition of the goods” at the time of their supply to the consumer, and are therefore to be taken into account in assessing the reduction in value of the goods resulting from the defect at the time of supply.

As neither Justice Lee nor the Full Court had calculated damages in this way, the High Court remitted the matter back to the trial Judge to calculate damages in accordance with the High Court’s reasons. 

The High Court made several additional findings which will also have important implications for future claims brought by consumers seeking to recover damages in relation to goods which do not satisfy the guarantee as to acceptable quality.

First, an important aspect of the High Court’s decision was its confirmation that damages for reduction in value protect the consumer’s interest in having ownership and control of goods that meet the guarantee of acceptable quality at the time of supply (referred to as the consumer’s “performance interest”).  This underlying finding has two important follow-on consequences: 

• The first is that while a claimant must prove consequential “loss or damage” in order to recover damages under section 272(1)(b), they do not need to do so in order to recover damages under section 272(1)(a). Instead, a claimant need only show that the value of the relevant goods was reduced at the time they were supplied as a result of their failure to comply with the guarantee as to acceptable quality. Essentially, the High Court held that the ACL specified the measure of damages to which consumers are entitled for breach of their performance interest, namely, damages in the amount of the reduction in value resulting from this breach. 
• The second is that while the later development of an effective repair for a defect which causes a good not to be of acceptable quality is a factor the Court will need to have regard to when assessing the amount of reduction in value damages (and thus an incentive to manufacturers to seek to develop an effective remedy for any product defects as quickly as possible), the development of such a fix will not eliminate the consumer’s entitlement to damages for the reduction in value of the goods (and breach of their performance interest) at the time of supply.

Second, the High Court made plain that in considering the “availability” of any repair for a defect in the goods, regard must be had not only to the development or existence of the repair, but also the practical realities of implementing the repair across the cohort of affected goods and the inconvenience and cost occasioned to consumers in availing themselves of the repair.  In this regard, in remitting the assessment of reduction in value damages back to the trial judge in accordance with the High Court’s reasons, the Court referred to the “practical availability” of the fix developed by Toyota in circumstances where this fix needed to be rolled out to hundreds of thousands of vehicles across Australia.

Third, the High Court held that the entitlement to recover damages for reduction in value (but not to recover damages for consequential loss or damage) passes with title and ownership of goods which do not satisfy the guarantee as to acceptable quality.  This means that: (a) a consumer who acquires a good which is not of acceptable quality (and thus overpays) but then subsequently sells that good, loses their entitlement to recover reduction in value damages for their overpayment (although they retain their entitlement to damages for any consequential loss or damage they might have suffered in the meantime); and (b) the person who acquires the good second-hand becomes entitled to recover damages for the reduction in value of the goods at the time of they were supplied to the first-hand purchaser (as well as being entitled to recover damages for any consequential loss or damage they suffer as a result of the good failing to comply with the statutory guarantee).  In this way, a manufacturer may be liable to multiple affected persons in respect of the same non-compliant good.

How the High Court’s Approach in Williams v. Toyota Compares with That Adopted in the Rest of the World

The High Court’s decision in Williams v. Toyota decisively answers in the affirmative the question of whether a consumer is entitled to recover damages under the ACL for having overpaid when purchasing a defective good with a propensity to experience adverse consequences irrespective of whether their particular good has in fact manifested those adverse consequences.  While this may not surprise anyone acquainted with the ACL, elsewhere around the world, whether and when these types of claims are viable are hotly contested questions.

In the United States, claims for diminution of value are not new, but remain heavily contested in the product defect context.  While some courts have upheld these claims, others have ruled that they do not warrant class action treatment and/or that a plaintiff cannot seek damages for defects that have not manifested themselves.

By way of example:

• In In re Aqua Dots Prod. Liab. Litig., 654 F.3d 748, 750 (7th Cir. 2011), the Seventh Circuit held that a harmful substance present in a children’s toy caused economic injury to plaintiffs who suffered no physical injury, because they had “paid more for the toys than they would have, had they known of the risks”; and
• In In re Whirlpool Corp. Front-Loading Washer Prod. Liab. Litig., 722 F.3d 838, 857 (6th Cir. 2013), the Sixth Circuit adopted reasoning analogous to the High Court in Williams v. Toyota when it suggested that all plaintiffs who purchased a defective product (in that case, a washing machine) had been economically injured by paying a price premium, even if the defect does not manifest for some plaintiffs, such that all product owners were properly included within the certified class.

By contrast,

• In In re Polaris Mktg., Sales Pracs., & Prod. Liab. Litig., 9 F.4th 793, 794 (8th Cir. 2021), the Eighth Circuit ruled that the plaintiffs lacked standing to bring a class action for economic damages due to the presence of a defect in the engine of an off-road vehicle, because they did not allege that their vehicles “exhibited any damage or degradation”; and
• In Flynn v. FCA US LLC, 39 F.4th 946, 952 (7th Cir. 2022), the plaintiffs’ argument that they had overpaid for vehicles with an alleged cybersecurity defect (which never manifested except in a controlled hack) survived several pleading-stage challenges, but failed a factual challenge to standing, as the Seventh Circuit ruled that the plaintiff must “provide evidence of a legally cognisable injury in fact”.

As such, although the High Court’s decision in Williams v. Toyota has garnered attention around the world, it must be understood in the context of Australia’s class action regime, the relevant provisions of the ACL and the specific facts of the case.  It remains to be seen whether similar outcomes may be achieved in other jurisdictions or indeed in cases relating to different goods with different defects carrying different propensities to exhibit adverse consequences.  As always, caution should be exercised before seeking to extrapolate from decisions made in one factual and legal context to another.