On 8 February 2024, the High Court refused lead plaintiff Phillip Dwyer special leave to appeal the NSW Court of Appeal’s ruling in Dwyer v Volkswagen Group Australia Pty Ltd [2023] NSWCA 211. In the September 2023 decision, the NSW Court of Appeal held that Volkswagen had not breached the consumer guarantee of acceptable quality under section 54 of the Australian Consumer Law (ACL) due to its installation of the globally re-called Takata airbags in their vehicles.

Background

In May 2015, the world’s largest automotive recall began in the US, arising out of allegations that the chemical phase-stabilised ammonium nitrate (PSAN) in the inflator of Takata airbags could cause the airbag to explode. Subsequently, the ACCC coordinated Australia’s largest ever compulsory recall, requiring manufacturers to replace the Takata airbags installed in some 3 million motor vehicles.

In 2017, Phillip Dwyer commenced proceedings on behalf of 83,000 Australian consumers who alleged that Volkswagen AG (VW) had breached the consumer guarantee of acceptable quality by installing Takata airbags in their vehicles. Similar class actions were commenced against the Australian entities of Toyota, Subaru, Honda, BMW, Nissan and Mazda, who would later agree to a collective $52 million pay-out to settle the proceedings. VW wasn’t a party to that settlement and contested the allegations in the Supreme Court of NSW.

In June 2021, Justice Stevenson of the Supreme Court of NSW ruled against the class members in favour of VW and dismissed the proceedings with costs. We set out below a summary of the NSW Court of Appeal’s decision, which the High Court recently affirmed.

The appeal proceedings

The NSW Court of Appeal was required to consider 3 key issues:

• whether the relevant vehicles fell short of the ACL standard of acceptable quality;
• the proper assessment of ‘reduction in value’ damages payable to consumers caused by the breach of the guarantee; and
• whether VW, who did not manufacture the airbags, could be liable for any breach of the acceptable quality guarantee.

This article will focus on the first two of those issues, with a third issue to be the subject of a further article in the near future.

Did the airbags breach the guarantee of acceptable quality?

Both at trial and on appeal, the class members’ central claim was that VW had breached the consumer guarantee requiring goods to be of an “acceptable quality” by installing Takata airbags in their vehicles from 2011 to 2018.

The ACL (relevantly) provides that goods will be of an “acceptable quality” if:

…(2)….they are as:

(a) fit for all the purposes for which goods of that kind are commonly supplied; and
(b) acceptable in appearance and finish, and
(c) free from defects; and
(d) safe; and
(e) durable;

as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects of the goods), would regard as acceptable….

The class members argued that the propensity of PSAN to degrade over time and potentially cause the airbag to rupture or mis-deploy created an unacceptable risk of defect or an unacceptable safety risk to consumers.

At trial, the class members' claim failed because there was insufficient proof that the Takata airbags installed in VW vehicles were unsafe. The NSW Supreme Court accepted VW’s evidence that no Takata airbag installed in some 20 million VW vehicles worldwide had ever been found to have mis-deployed or exploded. The Plaintiffs attempted to prove the alleged safety risk by relying on expert evidence and an empirical study by VW that found only one instance of airbag rupture in approximately 20,000 VW installed Takata airbags tested. At the trial, experts agreed this lone result was an ‘outlier’ that likely occurred due to ‘manufacturing issues’. Justice Stevenson found that while separate evidence did establish a “general propensity” of PSAN to degrade when exposed to moisture and temperature fluctuations, the class failed to prove that this propensity created a risk of malfunction in VW airbags that was more than a “theoretical possibility”. The Court held that this level of risk fell short of the reasonable consumer test under the ACL as he was not satisfied that the hypothetical reasonable consumer would consider an unquantified possibility of mis-deployment as meaningful enough to be ‘unacceptable’.

On appeal, the class members contended that the trial judge had failed to grapple with the true nature of the risk in VW vehicles as an “an unquantifiable risk of serious harm”. The class accepted that the evidence had been unable to quantify the probability of airbag rupture in VW vehicles, but argued that the inability to exclude “an unquantifiable risk of serious harm”, or the possibility of airbag rupture, was a sufficiently unacceptable risk to the hypothetical reasonable consumer under the ACL.

The Court rejected the class members’ argument. It held that for a risk of defect to render a product of unacceptable quality, it must first be established on the balance of probabilities that it is an “inherent risk” that the product carries due to a systematic cause. The Court deemed that on the available evidence, the class had failed to demonstrate the ‘inherent risk’ of PSAN degradation to a rupture- causing level, had occurred in VW vehicles or could occur in VW vehicles “…within any meaningful timeframe..”. As such, the Court of Appeal held that the asserted risk was merely a ‘speculative possibility.’

Were the plaintiffs entitled to ‘reduction in value’ damages’?

The class members also claimed that, on the basis that VW had breached section 54, they were entitled to damages that compensated them for the diminished initial value of their vehicles, equivalent to the difference between the purchase price of their car and their car’s “true value” at the time of supply due to the Takata airbag defect. At trial, Justice Stevenson held that as VW had replaced all the defective airbags at no cost as a part of the Australian recall, nor had any class member experienced vehicle issues from the alleged defect, the class members had suffered no actual financial loss.

On appeal, the class members argued that ‘reduction in value’ damages were compensatory damages that have the purpose of compensating a consumer for the diminished value of the good at the time of supply, due to the manufacturer’s breach of the acceptable quality guarantee. The Court of Appeal held that to ignore post-supply events, such as the repair of a defect, could lead to a breach of the universal “double recovery” rule in the sense a consumer could be double-compensated for the same loss by way of damages and the repair of a defect. The Court held that, when assessing damages for diminished value under section 272, post-supply events inherent to the good’s value at the time of supply should be taken into account. The Court deemed VW’s replacement of the defective airbags at no cost was a post-supply event that would be expected by the reasonable consumer given the nature of motor vehicles. Further, the replacement had rectified the cause of the class members’ loss meaning the class had suffered no actual loss for which they could be compensated.

The High Court’s refusal to intervene

As noted above, on 8 February 2024, the High Court refused lead plaintiff Phillip Dwyer special leave to appeal the NSW Court of Appeal’s ruling. The decision is a positive one for OEMs as it reduces the scope of their exposure under the ACL. It also serves as an important reminder for OEMs to quickly rectify safety issues at their own expense in order to reduce exposure to class actions (and regulator intervention) at a later date.

Toyota and Ford next on the High Court’s agenda

Notably, however, OEMs should prepare for two upcoming High Court decisions in similar ‘acceptable quality’ class actions involving Toyota and Ford. While the parties in those proceedings are not challenging findings on liability, they are seeking to have the High Court clarify how ‘reduction in value damages’ should properly be calculated and whether such damages must be calculated at the time the relevant vehicles were purchased. Specifically:

1. Toyota – on 17 November 2023, the High Court granted special leave applications by both Toyota and the lead applicant in proceedings regarding defective diesel exhaust after-treatment system; and
   
2. Ford – on 13 February 2024, the High Court granted a special leave application by the lead applicant in proceedings regarding defective PowerShift transmissions.

We will provide another update on these proceedings later this year.