The recent Volkswagen (VW) emissions scandal has put the spotlight on the potential legal risks for manufacturing businesses who make false claims as to the performance of their products.  Automotive manufacturers are under particular scrutiny as a result of the recent disclosures from VW. There are, however, ramifications for all manufacturers in relation to how products are marketed to agents and consumers.

VW has been in the headlines since news broke in September 2015 that many diesel fuelled cars sold in the US (and up to 11 million worldwide) had been fitted with a so called “defeat device” which allowed software to detect when the vehicle was subject to emissions testing and to change the vehicle’s performance to keep emissions of nitrogen oxides within legal limits.  The scandal has since spread both in geography, with ongoing investigations from regulators around the world,  and in scope, to include issues with CO2 certification which could also affect petrol vehicles. 

We explore the potential criminal and civil consequences arising from the scandal in the UK and the lessons to be learnt in terms of corporate governance. 

Criminal consequences

The Secretary of State for Transport, Patrick McLoughlin, has written to Louise Ellman, Chair of the Transport Select Committee to advise that although no decision has yet been made, the government is currently considering taking criminal enforcement action in relation to:

  • the provision of materially false information for Vehicle Certification Agency approvals.  The maximum penalty for this under the under the Road Vehicles (Approval) Regulations 2009 is an unlimited fine;
  • prohibited commercial practices, such as unfair commercial practices and misleading actions.  The maximum penalty for this under the Consumer Protection from Unfair Trading Regulations 2009 is 2 years’ imprisonment (for individuals) and/or an unlimited fine; and
  • fraud in relation to knowingly making a false representation or failing to disclose information which there was a duty to disclose with the intention of making a gain or causing a loss.  The maximum penalty for this under the Fraud Act 2006 is 10 years’ imprisonment (for individuals) and/or an unlimited fine.

This is of course in addition to criminal action which may be taken in other jurisdictions.

Civil consequences

There has been a great deal of press coverage concerning class actions brought by consumers. It remains to be seen whether a large number of claims will be issued.

There are possible civil claims for damages open to consumers and dealerships.

Consumer / Dealership Claims

Consumers may have potential claims against the dealerships from whom they purchased their vehicles, or finance houses (if the vehicle is financed).  Such claims would broadly relate to: breach of contract, misrepresentation and breach of statutory duty under sale of goods legislation.

Each claim will undoubtedly turn on its own facts of the purchase: how was the vehicle described in promotional literature? Was the customer induced by representations concerning emissions? Were emissions a key factor in purchasing the vehicle? These questions will have to be answered on a case by case basis.

Consumers who had agreed to purchase a vehicle before the issue was published, but who have not yet taken delivery, may be able to withdraw from the purchase.

The worst case scenario is that some consumers may be able to reject the product and claim a full refund. The vast majority, however, will be limited to recovering damages for financial loss.

Damages awards could cover: loss of value or additional depreciation in the product, increased repair costs, increased road tax based on a less advantageous emissions rating. The insurance industry has stated that the issue will not affect insurance premiums, so increased insurance will not be an issue.

A key factor is that such consumer claims will be against the dealerships (as agents) who sold the products, not directly against the manufacturer.

Dealership / Manufacturer Claims

The manufacturer may face potential claims from dealerships who are agents of the manufacturer. Again, such claims will be based on breach of contract, misrepresentation and sale of goods legislation. The terms of the agents’ contracts with the manufacturer will be critical.

Agents could seek to recover damages that they have had to pay to consumers. They could also seek to recover damages for decreased sales.

Product recalls can actually result in increased revenue for dealerships with franchised repair workshops – they will benefit from the repair work itself (which the manufacturer has agreed to pay) and increased footfall generally. The dynamics of the commercial relationships between dealerships and the manufacturer are such that claims are, perhaps, unlikely. Agents will be reluctant to bite the hand that feeds them, unless there is an imperative commercial need to recover financial losses, the extent of which are unknown at this stage.

The manufacturer must bear the direct costs of correcting the software – that will mean a huge repair bill from the franchised repair workshops that will undertake the work. 

The manufacturer has also agreed to waive stocking charges which are usually levied on dealerships, in light of the decrease in sales.

The manufacturer is also facing potential claims from shareholders who have suffered financial loss through the depreciation in the share price as a result of the issue. Such action is likely to take place in Germany and will affect the corporate entity listed on the Frankfurt Stock Exchange.

Corporate governance

The reputational impact to date has been severe.  The scandal broke just days after the announcement that VW had topped the Dow Jones Sustainability Index for the automotive sector.  This accolade was swiftly rescinded and the fallout continues to dominate the headlines, most recently over the news that European drivers will not join their US counterparts in receiving compensation. 

Perhaps the more important outcome of the emissions scandal is the prompt for industry to look at the overall sustainability of their business models and practices.  As a minimum, businesses need to ensure they are fully compliant with the broad scope of regulation they are subject to.  Moreover, they need to ensure that the standards they profess to work to are in fact met.