The recent Volkswagen controversy that made front page news around the globe has had widespread effects not only on consumers behaviour worldwide, but has also had severe economic and legal effect on German automotive manufacturers and the brand “Made in Germany”. Is it time to consider expanding jurisprudence of legal liability by introducing concept of “kin liability” as a deterrent to wrong doers whose actions have the effect of depleting economic value of enterprises by depleting reputation of much revered German engineering?
With every passing day, the ripple effects of Volkswagen’s emissions controversy seem to get more complicated – what started in US has now spread to regulatory bodies in other jurisdictions, where it was subject to higher standards of scrutiny. This is however, not surprising in today’s hyperactive digital world! Allegations against Volkswagen, one of the world’s leading auto manufacturers, reveal that they gamed the pollutions laws using smartly engineered software that only takes emissions readings when the car is operating under optimum conditions.
The unintended consequences of Volkswagen’s actions were brought to the fore when BMW stocks reported a 10%2 drop after the controversy hit newspapers, despite having denied engaging in similar activities. However, present law prevents BMW and any other companies within the industry from claiming compensation, as the essential privity of contract is not satisfied. Aside from customers, companies within the industry must be allowed to claim compensation when they suffer damage due to the snowball effect from one company’ sanctions. This snowball effect occurs primarily because of the unique nature of the German automotive industry – Volkswagen, along with being a significant contributor to the German automotive industry, also contributes to the German economy – the automotive industry is the single largest industry contributor to German gross domestic product (GDP)3, accounting for 2.7% of it.
Right from the late 1800s when German inventor Karl Benz invented the first car, Germany has been the leading manufacturer and exporter of supreme quality cars, lending credibility to the tag “Made in Germany”. However, due to recent events, there has been general fear amongst German companies that Volkswagen’s acts will have a spill over effect on their brand valuation, eventually corroding the value of this highly sought-after label.
In the present case, Volkswagen has had to recall and replace close to 11 million cars all over the world. Aside from the growing civilian population affected by Volkswagen’s emissions cheating software, the company may have to pay up to $18 million in fines to the United States Environmental Protection Agency.
The central question that requires consideration is whether kin companies should have the right to sue the wrong doer, whose deliberate wrongful actions have had a negative effect on the ecosystem of the entire industry. For example Germany engineering, Swiss watches and other such industries are synonymous with the expertise of those countries. While these industries cannot earn a Geographical Indicator for their products, should law provide protection whereby courts would entertain claims of these affected parties, although they lack the requisite privity of contract?
The legal and economic justification for courts to consider such claims arises from the fact that since these enterprises benefit from using the label of ‘Made in Germany’ or ‘Germany Engineering’, thereby impliedly signifying that the product represents a certain standard of quality. They, thus, owe a higher duty of care to other enterprises in the same industry – abiding by the principle that “he who assumes a role whose performance involves the risk of injury to others is under a moral duty to perform that role carefully.”
In the landmark case of Caparo Industries Plc v. Dickman, proximity, foreseeability and reasonability have been recognized as the requisite elements to satisfy duty of care. Let us test whether we can apply the common principle of duty of care towards kin companies. Proximity is established by virtue of the relationship amongst companies within the industry– the grouping of companies under the common umbrella of a label such as ‘Made in Germany’ indicates that each company is synonymous with the industry. Thus, the actions of one company, affect the brand as a whole, and the several companies it comprises of – as was indicated by the drop in BMW’s stocks immediately following the revelation of Volkswagen’s emissions cheating software.
Foreseeability is established in a similar manner, wherein the knowledge of proximity amongst companies makes the damage caused foreseeable. Here, a consideration of how this damage occurs, alongside the nature of such damage must be considered. Using the BMW example, damage was caused to their stocks, as the public views these companies under the same umbrella of quality. Therefore, any acts that lower the quality of the umbrella, as the acts of Volkswagen did, lead the public to assume a similar deterioration of quality for all companies under the umbrella. The damage caused is primarily a decrease in the intangible assets or goodwill of these companies. In highly specialized cases, such as this, good will forms a major part of their daily operations – with values ranging from $7 to $12 billion of companies like Audi and BMW.
Even minor changes in public opinion regarding the quality of their products imply serious losses in future sales, as the continuation of worldwide popularity rests solely on goodwill generated by these companies due to their quality.
Reasonability of imposing a duty arises as a consequence of proximity and foreseeability between the parties – the origin of this element was to prevent provisions of the law from imposing irrational or arbitrary regulations on parties. However, since proximity between the parties and foreseeability of the effects of one party’s actions on the other has been proven, itis safe to assume that it is reasonable and just to impose such a provision.
It is always prudent to evaluate any concept from the perspective of what possible fallouts could be. Could expanding jurisprudence of claims with ‘kin liability’ have an effect of courts being flooded by unnecessary and mala fide litigation, thereby transforming the concept into an ‘unruly horse’.
In the case of Richardson v Mellish, court observed that,“[public policy] is a very unruly horse, and when once you get astride it you never know where it will carry you”. Since then, the term has been used to describe a concept which has wide scope of misuse; bringing about more harm than good. In the present case, the proposed concept of kin liability has a wide scope for misuse, as any act of negligence on the part of a company could be misinterpreted to cause damage to kin companies. This is especially likely, as these kin companies are, in fact, competitors, who would have the motive to initiate such litigation in an attempt to further their profit-making motives. However as Lord Denning, in Enderby Town Football Club Ltd. v. Football Association Limited11 said, “’With a good man in the saddle, the unruly horse can be kept in control.” This implies that if applied it shall be duty of the court to set very high standards for admitting any claims for kin liability and strict guidelines should be laid down by courts. Further, exemplary costs should be awarded against frivolous and mala fide claims in order to deter misuse.
The facts and circumstances of Volkswagen case perhaps justifies for courts to consider entertaining claims for filing kin liability claim by say BMW. Key aspect of this being:
Concept developed by Justice Borrough in the early 19th Century, to warn against a wide interpretation of the term ‘public policy’
The concept of kin liability, while addressing the gap in the present law, is still at a nascent stage. Research has begun into the area of how the actions of one company affect the other in an industry as close-knit as this, but such investigations and the assertions made in this article thereon, are far from complete. What requires further consideration is the method of determining quantum of claim – as the primary area of damage involves reputational damage, which is intangible to wide set of people who don’t have any privity of contract. The urgency of implementing such limitations also stems from the grave consequences were such limitations not to be formulated – developing countries, which are on the path to establishing a brand for they, such as the ‘Make in India’ campaign, would be dissuaded from doing so, discouraging indigenous manufacturing in developing countries. The current state of the economic and business environment, at an international level, is very delicate, requiring provisions of the law to be adapted in order to meet the needs of the continuously changing world. The provision of kin liability is, thus, part of that process to adapt to the ever-changing business environment
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