Our automotive specialists and Professor David Bailey consider the future of product recalls and what they may mean for the automotive sector in the US and UK.
Product recalls have a damaging reputational effect and have huge financial implications for the manufacturer arising from a lack of consumer confidence. In the US, class actions following on from product recalls are a significant risk for many automotive companies. The volume of claimants involved, the availability of punitive damages and the scale of the litigation impose an increased financial burden in addition to the recall itself.
As the automotive industry becomes more and more standardised, product recalls affect more models and brands than ever before. As Professor David Bailey notes, large-scale recalls are set to remain a feature of the industry; "given that it can cost anywhere up to $1 billion to get a genuinely new car to market; car makers are increasingly using common components and platforms across models and brands so as to reduce costs. So if something goes wrong with an accelerator pedal or a seat mechanism it doesn't just affect one model but perhaps six or seven, and across different brands."
He added: "This can have a significant impact on firms - Toyota for example saw a fall in its share price of over 20%, worth some $35 billion - in the wake of the 2009 and 2010 recalls. Fixing the problem literally cost the company billions of dollars."
Is there the possibility of US style consequences for the automotive industry becoming a reality in the UK?
In the UK the equivalent to the class action is the group litigation order. This type of proceeding was introduced by the Civil Procedure (Amendment) Rules 2000 with a specific aim of providing access to justice where large numbers of people have been affected by another's conduct but the individual loss is so small that it makes an individual action unviable. Individual car owners affected by product recalls fall squarely into this category.
However, the process is not without complication. There has to be a register of members and any potential claimant must firstly make an individual claim and then apply to be a member of the group litigation order. This means an immediate cost outlay for the individual and a potential liability for costs going forward.
Up until 31 May 2013 a claimant could take out After The Event insurance and instruct solicitors on a no win/no fee basis and recover both the insurance premium and a success fee from an unsuccessful defendant. This effectively meant no risk litigation. However, the rules have now changed and the inability to recover premiums and success fees from the paying party make litigation less attractive to any would be litigant of modest means.
There is the added feature that in the UK damages are compensatory in nature and a claimant has to prove his/her loss - as a consequence the US may prove a more fertile ground for litigants.
Since their introduction some 13 years ago, there have been 79 group litigation orders in the Courts in England & Wales, only one of which is related to a defective vehicle (here tractors).
The widespread use of internet forums and greater access to knowledge may increase the appetite for litigation and the group litigation order certainly provides an outlet for that, but we are not yet close to a US style landscape.