High Court decision confirms relevance of repairs in assessing damages for defective goods

Decision gives important guidance on damages for breach of the acceptable quality guarantee 10 min read

The High Court yesterday delivered judgment in two appeals from decisions of the Full Federal Court in Toyota v Williams¹ (the Toyota Appeal) and Ford v Capic² (the Ford Appeal), both high-profile automotive consumer class actions.

While not yet the end of the road in either proceeding, the High Court's decision has finally clarified the fraught question of how to assess damages for a breach of the acceptable quality guarantee in the Australian Consumer Law (ACL), with ramifications for class action risk into the future.

Key takeaways

• Regarding the nature and calculation of 'reduction in value' damages under s272(1)(a) of the ACL, the High Court held that:
  • this form of damages is a 'performance-based remedy', being the monetary difference between the value of what the consumer bargained for and what they ultimately received;
  • reduction in value damages are not concerned with any actual loss suffered by the claimant; rather the focus is on the position of a hypothetical 'reasonable consumer' at the time of supply;
  • the assessment of damages is to be undertaken having regard to all that is known at the time of trial about the ‘state and condition of the goods’ at the time of their supply. This includes both the nature of the defect and the likely availability, timing, effectiveness, cost and inconvenience of any repairs; and
  • where a good is not of acceptable quality because of a risk or propensity for a defect to emerge at the time of supply, whether or not that defect actually manifests in a particular case is not relevant to the assessment of damages.
• While not necessary for the determination of the appeals, the High Court suggested that the right to claim damages under s272(1)(a) against a manufacturer runs with title or ownership of the goods. This means the claim of the primary purchaser ceases upon any subsequent sale, with the second-hand purchaser being in a position to bring a claim for breach of the acceptable quality guarantee.
• The High Court's decision is a welcome confirmation of the relevance of the availability of repairs/replacements of goods to the assessment of reduction in value damages. In this way, the High Court's decision is more favourable to manufacturers of goods than the trial judgments handed down in the Ford and Toyota class actions (which had held that subsequent repairs/replacements of defective vehicles were of no relevance to the court's assessment of reduction in value damages). However, the High Court's decision also means manufacturers will not negate their exposure through 'field actions', especially where the defect is serious and/or takes a long time to repair.
• Since the High Court granted the parties special leave to appeal in the Toyota class action in November 2023, there has been a noticeable dip in new filings of consumer claims. It will be interesting to see how plaintiff law firms respond to this development. There may be some reason to think class action filings will rebound, but query to what extent.

Background

We have previously explored the background issues relevant to the Toyota and Ford Appeals in our Insights on liability and quantum issues in automotive class actions. However, to recap briefly:

Overview of the High Court's decision

Five judges of the High Court (Gageler CJ, Gordon, Steward, Gleeson and Beech-Jones JJ) gave combined reasons in both the Toyota decision³ and the Ford decision.⁴ The majority held that:

• damages under s272(1)(a) are to be calculated as the amount by which the value of the goods was reduced by the failure to comply with the acceptable quality guarantee at the time of supply. With that said, the enquiry is to be carried out 'having regard to all that is known at the time of trial about the "state and condition of the goods"';
• the acceptable quality guarantee involves a hypothetical inquiry into what a reasonable consumer, 'fully acquainted with the state and condition of the goods'—including any defects—would regard as acceptable. In this way, the inquiry involves attributing to the consumer knowledge about the existence and nature of the defect (including hidden defects), even if such knowledge was, in reality, only acquired later; and
• if knowledge about the existence and nature of a defect, including its potential consequences, is to be attributed to the hypothetical 'reasonable consumer', there is no reason to stop there. That is, later-acquired knowledge about the availability, effectiveness and cost of ameliorating the defect should also be attributed.

While the High Court formally dismissed the automakers' appeals and upheld the plaintiffs' appeals, the position adopted by the High Court, in substance, most closely resembles the 'middle ground' approach advocated by Ford on the question of repairs. As a result, the availability of effective and timely repairs will need to be taken into account when assessing the quantum of damages available to consumers (even if it does not provide a complete defence).

What this means in practice is that, in the case of Toyota, the Full Court was correct to take into account the 'fix' that was offered to customers. However, the Full Court was also required to take into account the length of time after acquisition of the vehicles that the fix would become available, and the 'inconvenience and cost that would be occasioned to a hypothetical reasonable consumer in the meantime'. The Court observed that any additional cost and inconvenience experienced by an individual consumer over and above that of a reasonable consumer, while not recoverable under s 272(1)(a), may be recoverable as consequential loss under s 272(1)(b).

Whether or not a latent defect actually emerges is not relevant

A consequence of the Court's decision is that—where a risk or propensity for a defect exists at the time of supply—whether or not the defect actually emerges in a given consumer's case is not relevant to the assessment of damages under s272(1)(a).

The Court used the example of a vehicle that, at the time of supply, carries a 50% risk of the brakes failing in five years. All other things being equal, there will be no difference in the amount of damages under s272(1)(a) payable to a consumer whose brakes failed and one whose brakes did not (assuming they bought their vehicles at the same time and for the same price). Whether the brakes eventually failed would not affect the conclusion that, at the time of supply, both vehicles carried the same defect that rendered them non-compliant with the guarantee in s54. However, a consumer whose brakes did fail may also be able to recover for 'loss or damage' under s272(1)(b).

The consumer's use and enjoyment of the good is not relevant

Similarly, the Court held that a plaintiff's use and enjoyment of the relevant good (even absent any repair) is not relevant to the assessment of reduction in value damages, except to the extent it has some bearing upon what a reasonable consumer would have expected at the time of supply about the performance of the good without any repair.

The nature of damages under s 272(1)(a)

The Court observed that the term 'damages' is not confined to compensation for loss suffered and, accordingly, there is no requirement to show loss or damage (beyond the reduction in value at the time of supply) in order to recover damages under s272(1)(a).

Second-hand purchasers

Although it was not strictly necessary to either decision, the Court suggested that an entitlement to damages from a manufacturer under s272(1)(a) runs with the title or ownership of the goods. This means the claim of the primary purchaser of goods ceases upon any subsequent sale, with the second-hand purchaser being in a position to bring a claim for breach of the acceptable quality guarantee. All consumers in the 'chain of possession' of affected goods may be entitled to claim consequential damages under s272(1)(b).

Implications for class action risk

Considering the High Court's decision in context of the various judgments below, it is clearly more favourable to manufacturers of goods than the trial judgments handed down in the Ford and Toyota class actions. Those trial decisions held that subsequent repairs and replacements of defective vehicles were of no relevance to the court's assessment of 'reduction in value' damages (and thus goods manufacturers were significantly constrained in their ability to mitigate class action risk following the identification of a defect).

While the High Court's approach now gives recognition to 'field actions' carried out by manufacturers, the availability of such repairs/replacements is unlikely to provide a complete answer to a claim for damages (unless, for example, a manufacturer could show that the nature of the defect and the timing of any repairs was such that a hypothetical reasonable consumer would still have paid the exact same price). Further, where the defect is serious and/or takes a long time to repair, the potential exposure to damages may be considerable.

Bearing all of this in mind, the High Court's decision keeps open the door to the ongoing filing of new consumer claims alleging breach of the acceptable quality guarantee. This case theory has been a mainstay of consumer class actions in recent years, and a standout area of class action risk—with 24 filings in 2023 (40% of all filings).

Since the High Court granted the parties special leave to appeal in the Toyota class action in November 2023, there has been a noticeable dip in new filings of consumer claims (potentially out of concern that reduction in value damages may not be available). It will be interesting to see how plaintiff law firms respond to this development. There may be some reason to think class action filings will rebound, but it remains too early to tell whether they will return to the levels seen in prior years before these questions were taken to the High Court.

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