The crisis surrounding the Volkswagen (“VW”) emissions scandal provides timely warnings for manufacturers on the importance of product compliance, creating a strong message that any company in a similar situation should completely avoid it, or get out of it as soon as possible. As clearly highlighted below, failure to do so could result in huge, sometimes catastrophic, costs and brand/ reputational damage.

If a manufacturer is found to be in breach, regulators may face questions regarding their prior knowledge of the position – the VW scandal highlights that any connivance on their part will not provide an excuse when things go wrong.

THE SCANDAL

The scandal relates to “defeat devices”. The cars’ software used an algorithm that incorporated information about steering patterns, engine use and atmospheric pressure, to allow it to recognise when the car was being tested and to switch emissions controls on and off accordingly. This would cheat the tests in a laboratory setting, but when on the road with emissions controls switched off, cars would pump out nitrogen oxides (NOx) at up to 40 times the legal limit.

VW’s admission that approximately 11 million cars worldwide, including 1.2 million in the UK, across VW, Audi, SEAT and Skoda models are affected, has led them to set aside some £4.8 billion to cover the costs of recalling these cars. However, with further evidence emerging in Europe that VW has experienced “irregularities” in tests to measure carbon dioxide emissions levels that could impact a further 800,000 cars, including some fuelled by petrol, it remains to be seen whether this provision will be anywhere near sufficient.

MOUNTING COSTS

Beyond the £4.8 billion, VW is set to suffer substantial regulatory penalties and civil damages. It is already facing criminal investigations in several jurisdictions with up to $18 billion (£12 billion) in penalties under the US Clean Air Act. In the EU “defeat devices” are expressly prohibited by Article 5 of the Emissions Regulation No 715/2007. This requires member states to provide for penalties where manufacturers use defeat devices, but the precise details of the sanctions may differ depending on the implementing legislation.

Alongside the criminal penalties, is potential for civil claims by consumers depending on the laws of each jurisdiction. In England and Wales, it may be argued that by advertising certain information on fuel consumption or emissions, a manufacturer could be giving the end consumer a warranty, in consideration of the consumer entering into a contract with a retailer, thus creating a direct contractual relationship for a claim against the manufacturer.

In order to receive civil compensation, consumers must prove they have suffered loss as a result of VW’s breach. In this context, there are two potential areas of loss to be claimed against:

  1. The resale value of VW cars has taken a hit since the scandal emerged. While this may recover with time, affected consumers will, as matters stand, be entitled to claim the difference between the actual resale value of  their cars and the value they could achieve were the cars to perform at the levels promised. With over 11 million cars involved, even a small fall in value for each of those vehicles could result in a huge total liability.
  2. A second clear area of loss is the difference between the rates of car tax that consumers believed they would have to pay when purchasing the car and the level they will actually be made to pay.

To mitigate this particular loss, in the UK the Government has announced motorists will not be forced to pay more in car tax even if their vehicles are found to be fitted with illegal software. However, not all countries will be taking such an understanding approach; in other jurisdictions this may leave VW open to claims to make up any differences in tax that consumers are made to pay.

Product recalls and VW’s complicated manufacturing and supply chains may lead to many claims from suppliers too.

A SILVER LINING?

One positive aspect that may emerge is the software used by VW to cheat the emissions tests could be used for legitimate purposes. This may even provide some partial explanation for VW’s conduct.

For example, NOx emissions, which are poisonous and associated with causing respiratory problems in humans who suffer higher than normal exposure, could be reduced in inner city areas in favour of emitting higher levels of CO2 or an increase in fuel consumption. In contrast, in less densely populated countryside areas, where NOx emissions are of lesser concern, emissions or fuel consumption could be reduced in favour of higher NOx emissions.