I wrote in this column a few months back concerning the expansion by GM and Chrysler Fiat stop-sale directives on new vehicles to include used vehicles as well.
The question for dealers at that time was whether a manufacturer could prohibit a dealer from selling used vehicles in dealership inventory, which are subject to a stop-sale recall. The answer was that although Federal law did not contain a prohibition on the sale of used vehicles as it does new vehicles, due to liability concerns dealers should seriously consider holding those vehicles in inventory until they could be repaired, either at the dealership or, if the vehicle was a different brand not sold by the dealer, by the neighboring dealer holding that franchise.
Since then, the stop-sale recalls, particularly related to the Takata airbag recall, have expanded exponentially to touch almost all brands.
With the Takata airbag recall, a new twist has been added to the mix – a directive by some manufacturers to confiscate a service customer’s vehicle and send them home with a loaner or rental car. These manufacturers, including Honda and BMW, are telling dealers that the factory indemnification of the dealership will not apply if vehicles subject to the recall leave the dealership.
In Honda’s case, it makes allowances for a customer that accepts the loaner or rental car but wishes to store the recalled vehicle at home. In that situation, Honda requires dealers to have the customer execute a lengthy indemnification agreement which purports to have the customer promise not to allow the vehicle to be driven and, if it is driven, the owner will take full responsibility for any harm resulting from a defect in the airbags. Along these same lines, Honda has directed dealers to obtain a disclosure and release from customers purchasing vehicles coming off of lease.
Let’s tackle each scenario separately.
New Vehicle Recalls
As I have described in the past, Federal law prohibits the sale of any new vehicle with an open recall. The Motor Vehicle Safety Act strictly prohibits franchised dealers from selling new vehicles that are subject to recalls that are issued by either the manufacturer or by the National Highway Traffic Safety Administration (NHTSA), until the recall is completed.
Compensation for Stop-Sales
Federal law requires dealers to be compensated when a “stop-sale” order is issued on new vehicles. These protections include:
- A requirement that manufacturer either repurchase vehicles that are subject to recalls or provide a remedy for dealers to implement immediately.
- The manufacturer must compensate the dealer with one percent (1%) of the price the dealer paid for the vehicle, per month, prorated from the receipt of the “stop-sale” notice until the vehicle is repurchased or the remedy is implemented.
- The manufacturer must also compensate the dealer for parts and labor associated with making the recall repair.
Pre-owned Vehicle Recalls
On the pre-owned side, the short answer is that the Motor Vehicle Safety Act referenced above does not address used vehicles. Thus, Federal law does not prohibit the ability of a dealer to sell a used vehicle subject to recall and, likewise, does not require the manufacturer to compensate a dealer for maintaining a recalled used vehicle in the dealership’s inventory.
Stop-Sale Recall Vehicles
Despite the Federal law’s silence on used vehicle recalls, dealers risk substantial liability if they sell a used vehicle which is the subject of a stop-sale recall. A personal injury attorney would have a field day with that fact pattern – “So, you knew that the manufacturer or National Highway Transportation Safety Administration issued a stop-sale on this vehicle because it contained a faulty airbag that could cause serious injury or death but, despite that information, you sold the vehicle to my client, who was killed by metal shrapnel from the airbag?” Tort law in most states would provide for a claim against the dealership in this situation.
The next question in this scenario is whether the manufacturer would be required to step into the lawsuit and indemnify the dealership. There is no certain answer to this question; however, it stands to reason that the manufacturer would have a very strong argument that by ignoring the manufacturer’s or Federal government’s directive not to sell the vehicle, the dealership lost its right to seek indemnification from the manufacturer. In layman’s terms, the manufacturer’s argument would be that a dealership couldn’t rely upon the manufacturer’s indemnification obligation but ignore the manufacturer’s directives as it relates to a vehicle which could trigger the manufacturer’s indemnification.
The safest approach with regard to used vehicles in inventory which are subject to a stop-sale from any manufacturer is to hold that vehicle in inventory until it can be repaired either at the dealership or the applicable brand dealership in the community.
Non-Stop Sale Recall Vehicles
For used vehicles which have a recall issued on them but do not rise to the level of a stop-sale directive, the dealership is exposed to much less liability if a customer is ultimately harmed as a result of the defective part. In this case, the manufacturer’s indemnification should apply.
We have strongly encouraged our dealer clients to be sure to search the used vehicle for recalls immediately prior to sale. If the dealer is franchised for that vehicle and the part is available then obviously the repair should be made before a sale to the customer.
“the subject of vehicle recalls is complicated and fraught with potential liability for dealers.”
If the part is not available or the dealer is not franchised for that brand vehicle then we have encouraged our clients to still have the repair performed prior to sale or to at least have the customer execute a disclosure form. Such a form serves to give the customer notice the vehicle is subject to a recall for which a replacement part is not currently available or which the dealer is not authorized to repair and that the customer will receive notice from the manufacturer when the replacement part is available or should contact the appropriate dealer for repair. This will enable the dealership to say that the customer was on notice and was responsible for taking care of the issue.
As an aside, we are not at all comfortable that such a disclosure would provide protection to the dealership in the case of a stop-sale recall vehicle. In that case, the dealership is likely to be considered the “expert” on vehicles such that a judge or jury would brush aside the customer’s disclosure and, instead, place a duty on the dealership not to sell a used vehicle it knows could cause injury or death as the customer is simply not knowledgeable enough to make an educated decision as to whether or not it is safe to drive the vehicle.
Stop-Sale Recall Vehicles
Some of the manufacturers, including Honda, have directed dealerships to offer loaner vehicles or rental cars to customers who bring a stop-sale vehicle in for service. Honda has agreed to reimburse dealers for the cost of those loaners and rental cars. This is certainly a good practice in that it helps both the dealership and the manufacturer avoid liability associated with injury or death resulting from the recalled part.
For customers accepting the loaner or rental car, Honda has directed dealers to tell the customer that he or she must either leave the recalled vehicle at the dealership or store it at their home. It is our understanding that most dealerships do not have the space to store many customer vehicles awaiting the repair.
If the customer wants to take the vehicle home, Honda has provided the dealership with an indemnification agreement it requests the customers to sign acknowledging that they want drive the vehicle or allow anyone else to drive the vehicle. This, of course, is an effort by Honda to limit its exposure if someone was to be hurt or killed as a result of the faulty part. We have encouraged our Honda clients to follow the procedures laid out by Honda with regard to service customers so that Honda will not have any ability to try to wiggle out of its indemnification obligations to the dealership.
If the customer refuses the loaner/rental car or accepts the loaner/rental car but refuses to sign the indemnification agreement promises not to drive the recalled vehicle, then we suggest that the dealership include within the underlying customer repair order a disclosure containing an acknowledgment that the vehicle should not be driven and the customer refused the dealership’s offer of a loaner or rental car. This disclosure is placed within the body of the repair order and initialed by the customer. Obviously, such a disclosure is intended to help protect the dealership in the case someone is injured or killed as a result of the recalled part.
In the case of a dealership that is not franchised for that brand but has the customer bringing their vehicle in for service (i.e. customer brings Honda vehicle into Ford store for service), dealerships should already have a process in place for searching for recalls when any vehicle is brought in for service. The dealership should include in the customer repair order a similar disclosure as described above without the reference to an offer of a loaner or rental car but which does include notice that the vehicle is subject to a stop-sale recall and should be taken immediately to the nearest authorized dealership.
Non-Stop Sale Recall Vehicles
After checking whether the vehicle is subject to a recall, if the dealership cannot make the repair because either the part is not available or the dealership is not franchised for that brand vehicle, then a disclosure should be included in the customer repair order similar to the disclosure described above under the discussion of the non-stop sale recall of a used vehicle being sold by the dealership.
Customers who agree to lease a vehicle have a contractual right to acquire the vehicle at the end of the lease period. However, that does not get the dealership off the hook in terms of being concerned about liability.
Some manufacturers, namely Honda, have provided dealers with a disclosure form which customers should sign if they wish to purchase an off-lease vehicle subject to stop-sale recall. Curiously, Honda has not expressly directed dealers to immediately offer these customers a loaner or rental car while the purchased off-lease vehicle stays at the dealership or at the customer’s home.
I am not clear on the difference between a customer bringing a stop-sale recall vehicle in for service to which Honda has directed dealers to make the offer of a loaner/rental car, along with a request to keep the recalled vehicle, and a customer acquiring a vehicle off-lease which is the subject of a stop-sale recall.
It would seem that the safest approach is to treat the off-lease purchase customer the same as the service customer. Both vehicles are subject to a stop-sale directive and subject the dealership and the manufacturer to substantial liability if someone is injured or killed as a result of the recalled part. Thus, the customer purchasing their leased vehicle should be offered a loaner or rental car and asked to keep their vehicle either at the dealership or at home without anyone driving the vehicle.
The same indemnification agreement should be signed by the customer who accepts the offer of a loaner or rental car and for those that do not, the same acknowledgement as described under the service customer stop-sale vehicle section should be signed by the customer as part of the lease purchase transaction.
As you can see, the subject of vehicle recalls is complicated and fraught with potential liability for dealers. Accordingly, I strongly recommend that you contact your experienced franchised motor vehicle dealer counsel for advice on each of the above scenarios.