The meaning of "reduction in the value"
277 Then comes the more concrete question: how does one define the "reduction in value"? TMCA submits that the concept of reduction in value can only be looked at through the prism of market data. By contrast, the applicants rely on the expert reports of Mr Stockton and Mr Boedeker who, respectively, quantify a reduction in value by means of "repair cost" (that is, equating the reduction in value arising from the Core Defect with the cost of repairing that defect) and by the change in consumers' "willingness to pay" (WTP). TMCA raises a number of criticisms in respect of the applicants' approach.
278 It is convenient to set out those criticisms first.
279 First, TMCA submits that Mr Stockton's analysis is circular and involves reading "reduction in value" as, at all times, equivalent to the cost of repair. As a matter of statutory interpretation, it is said, such a reading is not available given various parts of the ACL, including s 271(6), expressly refer to the concept of repairing goods and had the legislature intended to equate "reduction in value" with "repair costs", s 272 could easily have provided as much.
280 Moreover, it is said that Mr Stockton's method of using the average cost of DPF repairs as a "proxy" for the reduction in value of the Relevant Vehicles at the time of purchase must be rejected in the light of Dr Pleatsikas' evidence, namely that:
(1) Mr Stockton's approach of using repair costs as a proxy is erroneous where there is a much firmer base for an economic analysis of loss: that is, readily available market sales data: Stockton and Pleatsikas Joint Report (at [33]);
(2) the amount spent to repair a defect may be higher than the loss in value from the defect or lower and there is no foundation in logic or economics to determine the comparison simply by reference to the defect and the consequence, as opposed to market value: Stockton and Pleatsikas Joint Report (at [22]-[23]). Dr Pleatsikas said during the concurrent evidence (at T216.11-17) that:
[a]s noted in my discussion of warranty repair cost, there is no necessary economic link between the cost of the [2020 Field Fix] and effects on vehicle value, and Mr Stockton has not provided any such link. Instead, Mr Stockton's repair cost model which uses both a hypothetical vehicle and a hypothetical and non-realistic transaction, appears to rest on noneconomic assumptions that are not founded on economic theory, and have no discernible link to reduction in market price, if any, for the affected vehicles.
(3) it is untenable to treat the amount that a manufacturer is prepared to pay under warranty as a proxy for reduction in value, given that the amount that manufacturers may be willing to pay does not necessarily relate to the specific effect that such repairs may have on the marketplace values of the particular vehicles: Stockton and Pleatsikas Joint Report (at [23]); and
(4) reliance on Mr Stockton's analysis also suffers from the logical problem that TMCA paid the cost of repairs, and if recovery on the basis of repair costs were awarded by the Court, group members who have had repairs undertaken will have received the full benefit of the value of those repairs and will be paid the cost of those repairs, with the issue compounded if a group member sold the vehicle, as the new owner would also be a group member: Stockton and Pleatsikas Joint Report (at [24]).
281 In support of this position, TMCA draws an analogy with contractual damages. It is said that in cases of contractual damages, courts may be asked to consider whether to award compensation on two alternative bases: that the damage caused be rectified, or that the change in market value by reason of the damage be paid. TMCA points to the House of Lords decision in Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, where the contract specified that the pool should have a diving area seven feet and six inches deep. Upon completion, the pool was suitable for diving, but the diving area was only six feet deep. There was evidence at the trial that the shortfall in depth had not decreased the value of the pool, and that the pool was safe and suitable for diving. The only method of achieving a pool of the required depth would have been to demolish the existing pool and reconstruct a new one at a cost of £21,560. The House of Lords found that such a cost would have been wholly disproportionate to the disadvantage of having a pool of a depth of only six foot and held that the cost of reconstruction was not recoverable.
282 It is said that while none of the authorities concerning contractual damages apply directly to the present case, there is a relevant analogy between these proceedings and Ruxley. Here, there was a defect in the DPF System in the Relevant Vehicles, but there is no suggestion that the Relevant Vehicles were other than perfectly safe to drive. It is said that the secondary market evidence establishes that there was no reduction in the value of the Relevant Vehicles as at the date of purchase and the cost of repair or rectification of the Relevant Vehicles is borne by TMCA and not the consumer (meaning group members will not bear any cost in connexion with the rectification of the defect). That is, the case is analogous to the facts at trial in Ruxley, where the Court was not satisfied that the plaintiff would use any damages award to rectify the pool. It is said that there is no basis upon which the Court can assess how the costs incurred by TMCA in order to repair the defects compare to the objective amount that is necessary to fix any individual defect.
283 Secondly, in respect of Mr Boedeker's analysis, it is said that using WTP as a proxy for reduction in value is erroneous as it accounts only for the demand side, not the supply side.
284 TMCA relies on Mr Rossi's criticism that, as a matter of economics, the only meaningful and logically defensible measure of value is by a market price, defined through the computation of both supply and demand, that is, WTP is only half of the equation: Rossi Report (at [12], [49]-[55]); T343.15-21, 41-46; T380.5. As Dr Rossi remarked in Dube JP and Rossi P, Handbook of the Economics of Marketing (North Holland, 2019):
It should be emphasized that conjoint analysis can only estimate demand. Conjoint survey data, alone, cannot be used to compute market equilibrium outcomes such as market prices or equilibrium product positioning in characteristics space. Clearly, supply assumptions and cost information must be added to conjoint data in order to compute equilibrium quantities. Conjoint practitioners have chosen the unfortunate term "market simulation" to describe demand predictions based on conjoint analyses. These practices are not simulations of any market outcome and must be understood for their limitations as we discuss below.
285 It is said that while Mr Boedeker accepts this principle in parts of his evidence, he has refused to adjust the supply side in his "but for" world; instead proceeding on the basis that TMCA and Toyota dealers would have been forced to sell the same number of Relevant Vehicles, albeit at prices reduced in the range of 20 to 40 per cent: T344.30-345.10. That is erroneous, it is said, as all economic forces are still functioning unhindered save that the defect is disclosed. As Dr Rossi said during his characteristically forthright style cross-examination (at T329.18-23):
It's not a dispute between Mr Boedeker and myself. It's a dispute between Mr Boedeker and the profession of economics. So what does Mr Boedeker want to do? Mr Boedeker wants to ignore supply altogether, any of the factors that influence the supply of products, and simply compute the vertical difference between the blue demand curve and the yellow, which is the reduced demand when the defect has become open and known in the marketplace …
286 Further, TMCA relies upon the reasoning in Dwyer, where Stevenson J concluded (at [240]-[244]) that a survey that only measures WTP is not a proxy for market value under s 272(1)(a) of the ACL:
Only measured willingness to pay
240. The first is that, as Professor Baddeley accepted, the Discrete Choice Experiments were not directed to ascertaining the market value of the vehicles in question. Rather they were directed to ascertaining a purchaser's willingness to pay for the vehicle; or the "value to the consumer" of the vehicle. Thus, the Discrete Choice Experiments were directed only to the demand side of a transaction that, in the real world, would have a supply side as well.
241. It is no doubt true that in the real world there would not be a market for vehicles known to have a defective airbag, not least because no rational and responsible vehicle manufacturer would offer such vehicles for sale.
242. But it does not follow that, assuming it can be ascertained, a purchaser's willingness to pay for a vehicle can be a proxy for the vehicle's market value.
243. The test posited by s 272 of the ACL is expressed in terms of "price payable" or "average retail price" and thus in terms of value in a market of buyers and sellers.
244. The Discrete Choice Experiments were not directed towards this question and say nothing about market value.
287 TMCA point to the fact that many American courts have also taken the same view and their pronouncements about the lack of utility of WTP in assessing damages are instructive. For example, in a recent US proceeding (MacDougall v American Honda Motor Co., Inc, (CD Cal, SACV 17-1079 JGB (DFMx), 11 September 2020)), the US District Court of California explained the vice of WTP "in the simplest terms" when "striking out" the expert report of Mr Boedeker in that proceeding (at 4):
Put in the simplest terms, measuring damages solely through the lens of a consumer's WTP overestimates a consumer's damages because even if a consumer has a reduced WTP for a defect or undesirable product, the consumer does not suffer any loss if their reduced WTP remains greater than the actual cost of the product. The integration of accurate and realistic supply-side considerations - such as the actual price of a product - therefore plays a critical role in producing an accurate measure of damages in a choice-based conjoint analysis.
288 Other US courts have rejected the evidence of Mr Boedeker on this basis: see In Re: General Motors Llc Ignition Switch Litigation, 407 F Supp 3d 212 (SDNY, 2019); Re General Motors Llc Ignition Switch Litigation, 427 F Supp 3d 374 (SDNY, 2019); In Re: Emerson Electric Co. Wet/Dry Vac Marketing and Sales Litigation, (ED Mo ED, 4:12MD2382 HEA, 28 October 2021).
289 In short, it is said that WTP addresses the demand side but does not address the supply side; that is, the willingness of the supplier to sell at a particular price. It is self-evident, in TMCA's submission, that a consumer will always be willing to pay less, but whether a supplier will supply at that price is another matter. Hence, a market price cannot be derived from WTP alone.
290 There is always a danger in overcomplicating statutory concepts, particularly when expert evidence is involved. After all, it must be remembered that the concept of "reduction in value" is a statutory one; expert evidence, while helpful, cannot bear upon the proper construction of s 272(1)(a). Similarly, there is a danger in shoehorning s 272(1)(a) into a definitional corner with only one precise means of calculation. I accept that in some cases (perhaps the majority), the concept of reduction in value may best be viewed through the prism of market value, but here, where there are issues with ascertaining market value, it cannot be said that one should push on, as it were, and apply a calculation known to be incomplete. TMCA contends that s 272(1)(a) does not provide for the use of estimates or proxies. But nothing in the text of s 272(1)(a) excludes proxies or estimates. Nor was the High Court averse to inexact calculations or estimates of damages based on true value in HTW Valuers (at 663 [50], 664-665 [56]-[57] per Gleeson CJ, McHugh, Gummow, Kirby and Heydon JJ).
291 Indeed, the first of TMA's contentions that "repair cost" is not an appropriate methodology for assessing reduction in value damages under s 272(1)(a), is difficult to reconcile with the reasoning of Derrington J in Vautin. In that case, accepting imperfections in calculation (and no expert evidence having been adduced), his Honour treated the repair cost of the good (a vessel) as the prima facie amount of the reduction in value. His Honour stated (at 769-770 [300]-[302]):
300. As at the date the vessel was delivered it was newly constructed and it can be accepted that it was worth its purchase price of $4,233,801.03. The contrary was not suggested by any party and the contract to acquire it appears to have been an arm's length transaction. As will be discussed below, the value of these types of vessels depreciates rapidly over time and a determination of its value as at the date of trial needs to take into account that decline in value. However, such questions of depreciation are not relevant to its value when it was brand new. That being so a relatively rough calculation can be made as to the value of the vessel as at the date of supply on the assumption that the putative purchaser would have been aware of the existence of the defects in the vessel as well as the cost of remedying them. On the basis that the total cost of putting Revive into the condition of a Category A vessel would be $2,995,505.70 (as is discussed below), prima facie, its value as at the date of supply was no more than the purchase price less that amount or approximately $1,238,295.33.
…
302. Overall, and accepting that a broad-brush approach is necessary in the assessment of damages, it is not appropriate for the Court to hazard a guess as to the valuation figure of Revive at the date of sale. That is a matter on which the Court requires expert evidence and none was adduced at trial. The best that can be done on the evidence which was adduced is to conclude that, at the date of the supply, Revive's value was, at the most, the purchase price less the cost of undertaking the necessary repairs to render it fit as a Category A vessel or $1,238,295.33. The amount of the diminution in value of the vessel is equal to the cost of repairs at $2,995,505.70.
292 Further, TMCA's reliance on Ruxley is misplaced. Ruxley was a case where the House of Lords found it would be unreasonable to award the plaintiff its rectification costs in circumstances where the diminution in value resulting from the failure to build the pool to the correct depth was nil. The case does not stand for the proposition that repair cost cannot be used to calculate reduction in value resulting from a defect when the amount the hypothetical reasonable purchaser would pay is otherwise unknown. Whether or not it is appropriate to do so is a question of fact.
293 As to the second criticism relating to the use of WTP to measure reduction in value, it is again necessary to emphasise that Dr Rossi's views as an economist cannot bear upon the proper construction of s 272(1)(a). Nor should I be swayed by the approach taken by US Courts to approaching the legal analysis relevant to the application of an Australian statutory provision: cf Eastern Express Pty Limited v General Newspapers Pty Limited (1992) 35 FCR 43 (at 71-72 per Lockhart and Gummow JJ); Boral Besser Masonry Limited v Australian Competition and Consumer Commission [2003] HCA 5; (2004) 215 CLR 374 (at 464 [278] per McHugh J). In any event, the US courts do not speak with one voice on whether WTP is an appropriate measure of damages. There are two competing lines of authority, with one supporting the use of WTP, and the other rejecting it: see Fisher-Price Rock 'N Play Sleeper Marketing, Sales Practices and Products Liability Litigation, F Supp 3d (WDNY, 2021) (at 6-7). The conclusion reached in that case at a preliminary stage was as follows (at 7):
What these two lines of cases indicate is that there is a legitimate difference of opinion, both among judges and experts, about the significance of supply side information in calculating loss of value. Mr. Weir's methodology is not wrong or "fake" - it is simply different in a principled way from Dr. Rossi's analysis …
294 The question for the Court in this proceeding is whether, as a matter of legal principle, it is appropriate to focus on the WTP of the hypothetical reasonable consumer when assessing reduction in value loss for the purposes of s 272(1)(a) of the ACL.
295 The criticism that a consumer still recovers damages notwithstanding that the level of their reduced individual WTP may exceed the level at which a supplier wishes to supply is somewhat of a false issue. The reduction in value loss arises because the vehicle's true value at the time of purchase (which is objectively assessed) was less than the purchase price, not because the individual consumer's true WTP was less than the purchase price. In this regard, Mr Boedeker calculated the reduced WTP for the marginal consumer, which approximates the price decrease that would have been required in order for TMCA to sell the same number of Relevant Vehicles with the defect disclosed. This represents the true value, because it is the price that would need to have prevailed in the marketplace in order for the same volume of vehicles to have been sold in the light of market knowledge of the Core Defect.
296 In making these comments, I accept what was said by Stephenson J in Dwyer (at [242]). But it is important not to conflate reduction in value under s 272(1)(a) with a "market value" that assumes a market equilibrium (that is, one that takes into account both supply and demand forces). As noted above, the correct approach is to ask at what price TMCA would need to have sold the vehicles in order to sell the same volume with the defect disclosed. This would be the relevant "market value". That is not to say there are not real issues with Mr Boedeker's survey, to which I will come, but I do not think his method of examination is meaningless when looking to the statutory concept of reduction in value - it is a helpful indicator.
297 To my mind, it is erroneous to shoehorn any conception of "reduction in value" as only being able to be derived by comparison to market value. Concepts such as repair cost and WTP are useful indicators in ascertaining any reduction in value.