Professional Accountants
LegalComplianceApril 19, 2022

Toyota faces $2 billion compensation bill for defective cars

After losing a class action, Toyota must compensate buyers for a 17.5% reduction in value of 264,170 cars sold with a defective diesel exhaust after-treatment system (DPF System).

Toyota’s compensation bill could be over $2 billion.1

Which cars? When? The cars were in the Prado, Fortuner and HiLux ranges. They were sold in Australia across 4.5 years between 2015 and 2020.

Accceptable quality

Excessive smoke & warnings: The cars did not comply with the consumer guarantee of acceptable quality in s 54 of the Australian Consumer Law (ACL). If they were regularly continuously driven around 100km per hour (which was a normal form of usage), they would malfunction and experience one or more “defect consequences”, including: excessive white smoke and foul-smelling exhaust, increased need for inspections, servicing and/or repairs, increased fuel consumption and excessive warnings. If the drivers continued to use the cars despite the warnings, the cars would go into “limp mode”.

High propensity to exhibit symptoms of the defect: The cars had an inherent propensity to experience defect consequence(s) because of the “core defect” present in each car when it was sold. 50% of the cars would fail after 5 years, and 94% would fail after 10 years, according to analysis.

Design defect: The “core defect” was that the DPF System was “not designed to function effectively during all reasonably expected conditions of normal operation and use in the Australian market”. “DPF” stands for diesel particulate filter. Under certain conditions, deposits formed and coking occurred in the diesel oxidation catalyst (DOC). This prevented the DPF filter from effective regeneration, and led to excessive smoke and smelly exhaust and/or warnings that the DPF was “full”. This defect was inherent in the design. Due to the core defect, the cars were worth less at the time of sale.

Defective part vs defective goods: The DPF System was a critically important part of the cars. A reasonable consumer would likely be concerned with its proper functioning. Any attempt to divorce problems with the DPF system from the cars was entirely superficial. The court rejected Toyota’s argument that there was a difference between defective goods and goods that contain a defective part. Getting from A to B was not good enough. The defect consequences substantially interfered with the normal use and enjoyment of the cars. The cars were not suitable for use in all driving conditions. The tens of thousands of complaints showed that the defect consequences were not trivial. Complaints included: being stopped by the police, abuse from other drivers and pedestrians, inability to open windows, poor visibility and lost income due to frequent extra repairs. Toyota’s conduct and internal communications highlighted the defect’s significance. The DPF System’s role was to ensure compliance with emissions rules, which was needed for car registration. It did not matter that the buyers had not tried to prove a failure to comply with emissions standards. No safety allegations were raised. However, “dense white smoke [was] hardly conducive to a safe driving environment” and there was unchallenged evidence that the smoke was “dangerous”. The court placed minimal weight on this factor. “When the DPF System fails, it is the vehicle, not the DPF System, that must be brought in to the dealership for servicing and repair”.

“Reasonable consumer” would not find the car acceptable: A reasonable consumer would not regard the following as acceptable: inability to use the car normally without malfunction, excessive smoke and foul exhaust, foreseeable negative experiences that trigger complaints, and need for frequent, unscheduled repair or replacement of a part.

Find fix? When deciding whether the “reasonable consumer” would regard the cars as acceptable, the “reasonable consumer” does not know whether a fix will be found.

Secondhand buyers can sue the manufacturer if goods are not of “acceptable quality” (unless they buy the goods to resell them).

Secondhand buyers are not the best guide to the “reasonable consumer”, especially if they are ignorant of the defect.

Buyers ignorant of defect: The buyers were not aware of the defect and its consequences.

Substantial price, “Good quality”: The cars were substantially priced light-duty diesel cars ($24,990 to $89,590). Normal use included regular highway driving. Toyota marketed its cars as good quality.

Normal problems vs Defect: Reasonable consumers know that cars may develop problems that need fixing, but this is radically different to accepting a car that is defective when sold and cannot be used normally without malfunctioning and triggering non-trivial, negative consequence(s).

Acceptable quality could be decided on a common basis, because this case was based on a common flaw, with no evidence of a material individual differences.

Misleading conduct

Marketing was misleading: Toyota’s conduct in marketing the cars as being of acceptable quality was misleading. The representations claimed that (1) the DPF System was good quality, reliable, not defective etc and (2) would be good quality etc in the future, (3) the cars were good quality etc and comfortable, and (4) would be good quality etc and comfortable in the future. Toyota made the future representations without reasonable grounds. Toyota conceded that the first category of representations were misleading, in breach of ss 18, 29(1)(a) and (g), and s 33 of the ACL. Toyota disputed that the third category were misleading, but the court held that the reasonable consumer would understand a claim that the cars were not defective to mean that the components that comprise the cars were not defective.

Misleading silence about defect and its consequences: Toyota engaged in misleading conduct because it failed to (adequately) disclose information to potential buyers. Since Toyota had continuously claimed that the DPF System was not defective and the cars were suitable for use in any driving environment, there was a reasonable expectation that Toyota would disclose if the opposite was true. That expectation was even stronger where Toyota knew the DPF System was defective. Toyota’s efforts to fix the problems could not affect whether its non-disclosure was misleading.

Deciding misleading conduct on a common basis: Toyota’s conduct could be characterised as misleading without reference to individual circumstances because the representations were directed at a class of persons (during marketing). It was useful to decide the issue of misleading conduct on a common basis, even if causation, reliance and damage must be dealt with individually.

Damages for reduction in value

What price would need to have been offered? To determine the “reduction in the value” of the cars, the correct question was: what price would need to have been offered by Toyota in order to sell all 264,170 cars, if the buyers knew of the core defect and its consequences. The question was not what price the manufacturer or supplier would have been prepared to sell the cars for.

Calculating “reduction in value”: Market value may be the best way to calculate reduction in value in some (perhaps most) cases, but it did not have to be used if there were issues with ascertaining market value. Repair cost and consumers’ “willingness to pay” (WTP) are useful indicators in ascertaining any reduction in value.

Assess reduction in value at time of sale: The reduction in value should be assessed by reference to the time when the cars were sold, without reference to subsequent events. However, subsequent information relevant to assessing the value at the time of sale can be taken into account. Reduction in value should not be assessed by reference to the date when the loss crystallises.

Reduction in value damages do not vary between group members based on the extent to which the defect consequences actually manifested. A product can be defective at the time it was sold, even if it has continued to perform up to the time of trial.

17.5% reduction: The defect consequences were serious when they manifested. The reduction in value should be a significant figure, and above the repair cost (2.9% to 7.3%). The buyers advocated for a 25% reduction in value, but this was too high. A 17.5% reduction in value was appropriate. A car valuer indicated that the reduction in value was 23% to 27.5%. His evidence was based on one car, but it was a helpful indication. The survey evidence indicated that the reduction was between 10% and 40%, most likely around 20% - 30%. The survey evidence was a very general indicator of a significant reduction in value.

“Price paid or payable” excludes tax: Under s 272(1)(a), reduction in value damages are calculated based on the lower of the “price paid or payable” and the the “average retail price” of the goods at the time of supply. The price paid is the purchase price excluding taxes (GST, luxury car tax, stamp duty), other statutory charges and window tint, but including dealer delivery.

Average price — same series, same time, exclude accessories: In calculating the “average retail price” in s 272(1)(a), averaging should occur across cars in the same series and sold in the same time period. The average retail price should exclude accessories.

Calculate “average retail price” as follows: For each car, start with the MSRP (recommended retail price, including taxes but excluding accessories). Take the actual new car sales data of the top 29 dealers. Remove transactions where sales prices exceeded MSRP (because they probably included substantial accessories). Remove any GST (by dividing by 1.1) or luxury car tax. Calculate the average sales prices as a percentage of the MSRP, to yield an average discount rate. Apply the discount rate to the MSRP for any particular car. This was a reasonable approach since evidence of actual sales prices excluding accessories was not available. The data from the top 29 dealers covered 41% of the 264,170 cars. It was sufficient to use a reasonably indicative dataset.

Damages methodology: The following methodology should be used to calculate the damages recoverable under ACL s 272(1)(a): (1) Each car had a true value of 82.5% of the average retail price for that type of car at that time, (2) Calculate the average retail price (see above) (3) Use the lower of the actual price and the average retail price as the comparator (4) the difference between the true value and the comparator is the amount of damages recoverable.

Who gets reduction-in-value aggregate damages?

All except repaired cars and secondhand buyers/sellers: Group members except those whose cars received the 2020 Field Fix and “Partial Period Group Members” were entitled to recover damages for a reduction in value of their cars at this stage under s 272(1)(a).

Aggregate damages only for buyers who kept car from 2015 to 2020: Aggregate damages should not be awarded to “Partial Period Group Members” who bought and/or sold a car secondhand between 1 October 2015 and 23 April 2020. Damages for these group members must be assessed on an individual basis, based on the price or time of the secondhand sale.

Buyers with repaired cars can’t sue for reduced-value damages: The 2020 Field Fix effectively fixed the defect and its consequences. If a buyer has required a manufacturer to repair the goods under an express warranty, they cannot sue for damages for a reduction in the value of the goods under s 272(1)(a) unless the manufacturer fails to fix the failure in a reasonable time: s 271(6) of the ACL. However, such buyers can still sue under s 272(1)(b) for damages for any reasonably foreseeable loss or damage they suffered because of the failure to comply with the consumer guarantee. The consumer guarantee of acceptable quality in s 54 applies to all sales of a relevant car in this case, even if s 271(6) applies to some group members.

Repairs

Chosing not to repair cars doesn’t mean cars were fine: Some group members of the class action chose not to take up the 2020 Field Fix. This did not mean that they did not see their cars as significantly affected by the defect. They may be put off by earlier, ineffective or exacerbating “fixes”, may not know about the 2020 Field Fix, or had not yet organised to take it up.

Buyers not required to ask for a repair: Section 271(6) does not compel a consumer to ask for their goods to be repaired under warranty. Consumers may choose between a repair or suing for damages for a reduction in value under s 272(1)(a). Failing to take up a repair does not cause any reduction in value loss, because that loss resulted from the defect present at the time of sale, before the 2020 Field Fix was available. A later repair does not compensate a consumer for having paid more than the car was worth at the time of sale.

Damages for consequential loss

Damages should not be reduced due to tax: Group members “should be awarded the full amount of the reduction in value of their Relevant Vehicle with no deduction on account of income tax not paid”.

Excess GST, stamp duty & financing costs recoverable: Group members (including those who received the 2020 Field Fix, but not Partial Period Group Members) were entitled to damages for excess GST (10% of the 17.5% reduction in value), on an aggregate basis. Excess stamp duty was 3% of the sum of the reduction in value and the excess GST. Excess financing costs were the interest paid on the extra amount borrowed due to the overpayment.

Lost income recoverable: Damages were awarded for lost work opportunities while trying to fix the cars.

No damages for excess fuel: The court declined to award damages for excess fuel, based on an individual assessment of the representative applicant. Fuel consumption increased between 0% and 3%, but there was no indication of what that increase actually was.

Damages for misleading or deceptive conduct

Same amount: The amount of damages for misleading or deceptive conduct would be the same as damages for unacceptable quality. However, damages under s 236 are unaffected by s 271(6) (which dealt with repairs). Toyota’s misleading conduct caused the representative applicant’s reduction in value loss, the excess tax and financing costs and lost income. The same difficulties arose in relation to increased fuel costs. Reliance was subjective and must be determined case by case. Double recovery is not allowed.

Cut through the “bewildering complication”: “If there was ever a case demonstrating unnecessary and bewildering complication in the law, it is this one.” Lee J started his rather scathing 153-page judgment with these words. We unpack this case for you in our headnote (coming soon).

Source: Williams v Toyota Motor Corporation Australia Ltd (Initial Trial) (2022) ATPR ¶42-777; [2022] FCA 344, 7 April 2022.

Check out our interactive Consumer Guarantee Case Finder at ¶30-1000 and Misleading Case Finder at ¶26-1000 on CCH Pinpoint, and our tables comparing cases about consumer guarantees and misleading conduct at ¶30-025 and ¶26-005. See our Practical guide at ¶30-023 and Roadmap for consumer guarantees at ¶30-020. Find out about the consumer guarantee of acceptable quality at ¶30-170. See our Practical guide — Selling goods or services at ¶25-520.

Free 14-day trials for any CCH Pinpoint practice area are now available. CCH Pinpoint is an invaluable resource for legal professionals, with in-depth content across 33 practice areas.

  1. Toyota could pay more than $2 billion to customers in class action over faulty DPFs - ABC News
Back To Top