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Comment from Andrew Jackson, Partner at Thomas Eggar LLP

The news that three million cars – including 152,000 on British roads – are being recalled because of possible problems with passenger airbags. The recall involves Toyota, Nissan, Honda and Mazda.

It’s news that will no doubt send a chill through the automotive industry, especially in light of Toyota’s October 2012 recall of some 7.4 million vehicles following the discovery of a fault with the electronic windows.

Although it is too early to say what impact this latest recall will have, Toyota will only be too aware of the inevitable legal implications that it suffered last time around in early 2010 following the discovery of a fault with the accelerators on a number of its models. In the US in particular, Toyota faced numerous lawsuits for “lost value” claims by current vehicle owners, in addition to the traditional product liability claims, and potential actions by shareholders for the loss in value of the company’s share price. Nonetheless, Toyota’s share price rose four per cent after this year’s recall.

Even if there are any injuries for which the company is liable, these present a manageable legal risk for a company the size of Toyota, provided it carries out the relevant repairs to solve the problem and seeks to settle any proceedings rather than face additional bad publicity in any potential trial.

Any proceedings based on “lost value” arguably pose a more significant potential risk for the company, where a Claimant seeks to recover damages for the value of their cars lost because of the fault which has led to the recall. Technically, every owner of a defective Toyota, Nissan, Honda or Mazda car is a potential Claimant. However, in both the UK and Europe, such an action would face significant obstacles, particularly issues of causation, proof and evidence.

Are we seeing a sea change in the response to and management of product recall?

Recalling a vehicle can be a costly business for car makers, suppliers and dealers both financially and in terms of reputational damage but there is an increasingly upward trend in safety related recall incidents affecting vehicles in the UK.

Claims of “lost value” could possibly prove to be a potential new area of considerable legal liability for companies, to be invoked whenever a company initiates a recall. If lost value becomes an accepted theory of recovery, this could have serious implications for the management of future potential recall situations. In the future, company executives might wish to take a risk-averse position, opting for a recall as the course of action that best protects consumers, even if the facts of the situation do not necessarily require such an action.

Institutional shareholders of global vehicle manufacturers such as Toyota, Nissan, Honda and Mazda may also consider possible action for damages arising from any decline in the company’s share price which may follow a recall. Although it is not necessarily the case in these latest recalls, if it is shown that a company was aware of the defect and (deliberately) failed to act or inform its shareholders/potential investors promptly or at all, shareholders/investors may well have a cause of action. However, again, any such claim is likely to face huge difficulties particularly as to knowledge of the company at the relevant time that a fault was first indentified and its duties of disclosure in such circumstances.

It remains to be seen whether “lost value” or shareholder claims will be made as a result of these latest events but given the increasing number of mass product recalls by safety conscious automotive manufacturers, these types of claim are likely to become increasingly common.

Andrew Jackson
Thomas Eggar LLP

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Tue. July 16th, 2024

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