UK: VW Group – A Storm In A Teacup?

We've all seen a lot of media coverage about the 1.2 million Volkswagen/Audi/Seat/Skoda vehicles sold in the United Kingdom that are fitted with "defeat" software and the storm clouds are brewing. But the reality is that nobody quite knows what the consequences will be.

With the brand's reputation under threat, and consumers as well as dealers, financiers and others in the automotive supply chain all potentially suffering, all eyes are on VW to see how quickly, comprehensively and transparently it publishes its plans to appease all those affected.

However, there is a real possibility that the consequences of the scandal could be very far reaching indeed.

It is not yet clear whether other vehicle manufacturers may face similar problems.

What are the legal implications?

There is the obvious threat of litigation by customers who have bought offending diesel powered cars and action groups are being assembled with a view to "class action" type claims. The strategy to be followed by such claims will involve assembling large numbers of comparatively low value claims and bringing them all together as a form of "group" litigation. Those claims may then be made against the dealers in the expectation that the dealers themselves will, in many cases, have recourse to VW.

At present, the focus is on emissions issues, but there could be further claims if there are any undesirable consequences to the fix proposed by VW, for example a loss of performance or reduction in miles per gallon. Along with any tarnishing of the brand and falling out of favour of diesel engines, residual values could be hit, with consumers seeking to claim for the diminution in value of their vehicles as a result of the scandal.

Those in the immediate firing line are likely to be the dealers they bought their cars from. VW approved dealers can expect support from VW who, it is hoped, will compensate for any adverse financial consequences suffered by their dealers. This should cover the costs associated with carrying out remedial work and providing courtesy cars, but over time there will be other knock-on effects to consider like cancelled orders, dealer targets and the bonuses linked to them. It is to be hoped that VW has a fat enough wallet. ...

Independent dealers will also want to be looked after, but may find themselves further down VW's To Do list because they don't sell new cars and have no formal dealership relationship with VW, even though some of the cars they have sold may be ex-finance cars purchased from VW's finance arm.

And then there are the finance houses. Many of their standard products – PCPs and lease arrangements, for example – will involve assumptions made about the residual value of a vehicle when handed back at the end of the contract period. If plummeting residual values leave the funders with a hole in their profits, or losses instead of profits, then they too will be looking for recompense. If there is a significant tapering off in demand for VW products as disillusioned consumers look elsewhere, companies in the automotive supply chain may start to suffer, with limited contractual rights of redress unless they are fortunate enough to have concrete volume commitments.

And if we take a particularly pessimistic look into our crystal ball, we might see stocks of unwanted cars piling up, and the malaise caused by a tarnished brand and a drop-off in demand leading to solvency concerns for some, and of course their bankers and investors.

How can Dentons help?

If you are in any way concerned or affected by the current VW problems, members of Dentons' Automotive Group would be very pleased to speak to or meet with you - existing clients and new contacts alike. The Group is comprised of specialist corporate, commercial, banking and finance, restructuring and insolvency, litigation and property specialists, and between us we can help and advise on the plethora of issues that might arise. We have significant experience in the sector and provide a dedicated resource to those involved in the automotive supply chain, with a particular retail focus. The Group has connections and support throughout Dentons' network of international offices.

In the same way that we try to keep our ear to the ground and talk to our industry clients and contacts in these uncertain times, as the landscape starts to become clear you might just want to talk something through.

Many law firms that specialise in claimant class actions are already assembling groups of customers. A quick search of the internet will identify many of those firms that are actively encouraging customers to register with them for the purpose of making claims. If VW does not accept responsibility for the various claims in negotiation direct with action groups then consumers may well start to attack dealers or finance houses in the United Kingdom with whom they have contracted. These may appear to be easier and more local targets than VW, the manufacturer in Germany, whose product consumers have acquired but with whom they have no direct contractual relationship.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.