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Volkswagen Group: testing times

Next steps for retail networks

Background

On 18 September 2015, the US Environmental Protection Agency (EPA) issued a notice of violation to Volkswagen (VW).

VW is charged with circumventing emissions restrictions imposed by the Clean Air Act through the use of a "defeat device" in a number of its vehicles. This device detects when the vehicle is undergoing emissions testing in order to turn the vehicle's emission controls on to meet the required emissions standards; the device deactivates during normal driving, resulting in much higher levels (30-40x) of nitrogen oxides than that recorded during official testing.

Since the EPA's announcement, VW has indicated that up to 11 million vehicles have been manufactured using the defeat device worldwide resulting in global scrutiny. Government-led investigations have been opened in at least 10 countries worldwide to date, including the UK. 

Today, Volkswagen announced that up to 1.2 million vehicles (cars covering the VW, Audi, Seat and Skoda brands, together with 80,000 VW commercial vehicles) sold in the UK are fitted with the defeat device.

It follows that the company (and certain of its personnel) is likely to face a number of potential legal actions including for instance civil claims for breach of contract and misrepresentation and criminal prosecutions for fraud and breaches of environmental and consumer protection regulations. 

Notwithstanding the potential liability that VW faces, the EPA's announcement and its subsequent fall-out will inevitably have a wider effect on other individuals and organisations. 

This briefing note highlights some of the potential implications faced by VW dealers (and dealers of its other brands) in the UK. 

Note: Should it emerge that other manufacturers have also undertaken the same or similar practices as VW, much of what is set out below will also apply in relation to those manufacturers.

As a UK dealer (of a potentially affected brand) what do I need to know right now?

Keep calm and keep your customers calm - all new Volkswagen vehicles that fulfil the EU6 norm valid throughout Europe should not be affected.

Even for those vehicles which have been sold and which are affected, all such vehicles are technically safe and roadworthy.

Although certain VW Group vehicles sold in the UK have had defeat devices fitted, VW has outlined a plan of action to address initial customer concerns. This plan is as follows:

  • VW will shortly release VIN details of affected cars to dealers.
  • In addition, VW will set up a self-serve process for customers to check if their vehicle is affected.
  • Step by step, affected customers will be contacted, with details of a process to get their vehicles corrected in the near future.
  • Under the action plan, VW will present the technical solutions and measures taken to relevant responsible authorities in October.
  • Customers with affected vehicles will be kept informed over the coming weeks and months. VW will set up national websites for affected brands to update customers on developments.

What about vehicle returns and claims for compensation?

Regardless of any technical solution presented by VW, as a result of recent developments, VW dealers may still be faced with customers wishing to return VW Group brand vehicles which they have purchased or pulling out of purchases they previously committed to.

Each case will need to be assessed on an individual basis; however dealers may be legally obliged to refund and/or compensate customers in certain circumstances, although this is certainly not the case across the board as many vehicles are unaffected and, in any event, a disgruntled customer would have a number of hurdles to overcome.

In this regard, although not the dealer's fault, misrepresentation is likely to be one of the most common grounds upon which customers will return or seek compensation for vehicles which they have purchased from VW dealers (although such customers will also have potential claims directly against VW). 

In order for a customer to rely on misrepresentation vis-à-vis the dealer, they will need to be able to establish that they relied upon a false statement of fact made by the VW dealer in deciding to purchase a vehicle. 

In addition, since 2013 consumers have had the statutory right to damages and in certain circumstances to unwind a contract where they have purchased goods as a result of a misleading sales practice.

Customers who have bought a vehicle which was fitted with a defeat device may argue that they were incorrectly told or given the impression that the vehicle was more environmentally friendly than it actually was. If they are able to show that this misstatement or misrepresentation formed part of their decision to purchase the vehicle for the price which they paid, they are likely to be entitled to certain remedies depending on whether or not the misrepresentation was innocently made to them.

Customers who have purchased other non-faulty VW goods may also be able to argue that they relied on false statements about VW as a company in purchasing the goods, for instance how "green" it is.  

Finally, the vehicle road tax rates applied to vehicles fitted with a defeat device may need to be adjusted in light of any investigation by the DVLA. This could also have an impact on the residual value of the vehicle and potential damages claims. However, the way vehicle road tax is calculated is due to change in the future so this may not be an issue.

The extent to which dealers are able to pass back the costs of any customer claims to VW will depend upon the terms of the supply agreement between them and, of course, their commercial relationship. That said, for dealers who have suffered loss as a result of VW's recent actions, while resorting to litigation is unlikely in view of the dealer's dependency on the manufacturer, dealers may wish to explore their legal options (as outlined below – please see section 'What remedies are available to VW dealers?').

In any event, affected dealers are now likely to be very reluctant to pursue large scale investment projects for VW, without the strongest VW brand support, until it is very clear the present crisis has passed.  

Moreover, VW's approach to targets will have to be significantly moderated in light of the adverse impact of its actions on dealers' current and anticipated ability to achieve targets.  

Dealers will inevitably wish to seek concrete, considerable and long term concessions in both investment and targets, together with significant support from the manufacturer against new sales, in the testing times ahead.

Reduced sales

As indicated above, it is quite possible that dealers will be faced with a loss in future sales of VW vehicles. 

The recent announcement by the EPA and investigations which are currently underway into VW are likely to have a knock-on effect on the high reputation that VW has built up in its vehicles and potentially a loss of faith in the company. This could be particularly problematic for dealers who have large stocks of VW vehicles (or vehicles in the Volkswagen group such as Audi and Seat). 

That said, it is unwise to discount a bounce as a result of canny customers now seeking to secure the best possible deals on new and used VW Group cars. 

Inevitably, some fleet and retail orders will be cancelled as part of a knee-jerk reaction to the present crisis, but many sophisticated buyers – taking a long term view – are unlikely to be too fazed depending on the speed and effectiveness of any technical fix and any deal on new (both affected and unaffected) stocks that can be struck. Time will tell.

Vehicle recalls

As already suggested, any vehicles in the UK which are found to be fitted with the default device will be recalled by VW in due course. Although the recall itself will most likely be funded and organised by VW, it will still result in additional work for VW dealers which of course comes at a cost. VW should not overlook this expense and effort on the part of its dealer networks.

Additionally, where affected vehicles are remedied, it will be important for VW to produce an effective technical fix. It has been suggested that any alterations are likely to compromise the vehicle's performance in terms of fuel efficiency and horsepower. If this is the case, it may have an impact on the vehicle’s resale value (although this did not happen in the context of the past Toyota recall, albeit one relating to other issues, according to certain commentators). In any event, it will be a consideration for those dealers holding large stocks of affected vehicles to the extent they wish to pursue a claim against VW or broker other concessions.

Resale value is a tricky issue, particularly for a company like VW who tends to write a significant part of its finance on the back of higher residuals. Ultimately, aside from any temporary damage to the brand, an effective technical fix together with the high underlying quality of the vehicle ought to reduce the impact of the present crisis on residual values. 

A decrease in the value of VW vehicles could nevertheless reduce profitability for dealers who have sold vehicles on finance, at least if they have guaranteed to purchase vehicles from customers at the end of the contract for a pre-arranged price. That said, this scenario is less common nowadays and, given the preponderance of PCP deals, if an adverse impact on residuals occurs, customers are more likely to hand the vehicle back if there is no 'equity' in it. Of course, previously loyal VW customers are perhaps, as a result, more likely to switch brands.

VW will need to bear this in mind in terms of maximising the support it offers to its dealer network in the years ahead.

Potential claims

One final point is that VW dealers may be wise to review any marketing and advertising materials that they have produced, displayed or circulated in relation to the VW products that they sell. That said, given the inevitable and urgent review of emission regulation and testing that will sweep across different markets as a result of the present crisis, they will need to press manufacturers for clearer guidance on this first. 

Going forward, not simply as a result of the present crisis, but also in the UK because of the implementation of the Consumer Rights Act 2015, dealers will need to be even more careful that they are not – particularly as a result of their manufacturers' public pronouncements on emissions or fuel efficiency – exposing themselves to claims that they are potentially misleading customers.  

This does not just relate to claims made by a manufacturer in respect of its own vehicles; where for instance, comparisons have been drawn between VW brands and other manufacturers, these comparisons should be reassessed in light of recent events. Litigation could follow, particularly where rival manufacturers consider that they have lost sales to VW as a result of any misleading claims. 

In other words, there is the possibility of legal claims from competitors if it is the case that incorrect information on emissions has been used to compare VW vehicles against other makes. 

This is perhaps less likely in the EU where much of the focus will now be on updating emissions testing and regulation to ensure they are fit for purpose.

What remedies are available to VW dealers?

There are a number of contractual and non-contractual remedies potentially available to VW dealers. These remedies will become clearer as events unfold. They will also depend to some extent on what is contained in the contract they have with VW for the supply of their vehicles, and any limitations/exclusions contained therein.  

VW Group dealers may also be able to rely on misrepresentation in order to seek compensation or even to terminate any contract which they have with VW. In this instance, the main focus for dealers will be to establish whether any misrepresentations made by VW were not innocent.

If it can be established that VW was either fraudulent or negligent in making any such misrepresentations, dealers may have significant recourse against VW. They may, for example, be able to end the contract which they had with VW and/or claim damages. 

It is relatively early days in the potential fall out from the defeat device scandal and VW has a lot of key strategic decisions to make. One of those key decisions will be how to manage the dealers and adequately compensate them (alongside other customers) for any loss arising.  

Alienating the dealership network is not something that is likely to be in VW's best interests, especially when it will need to work closely with its dealers to rebuild the confidence and value in the VW brand in the future.

One question that has not been answered so far is why did VW engage in this type of conduct in the first place? 

The answer is complex. It may range from VW's obsession with growth and its resulting desire to crack the US market; it may also be a question of cost, in that it is often cheaper to hide a problem than to fix it. Finally, it is impossible to discount the impact of an excessively permissive EU and domestic regulatory regime on VW's attitude to risk.  

For 10 years, EU governments have continually indulged and deferred to manufacturer interests on a wide range of issues, affecting everything from fuel efficiency claims to acute unfair trading practices which continue to harm dealer networks.  

It follows that while the present crisis is unlikely to present anything but discomfort in the short and medium term for those affected by VW's deception, it can be hoped that it will also encourage governments to be more circumspect in their dealings with their 'national champions' in favour of smaller and weaker businesses that have to trade with them.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com


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