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11 Jun 2020

Changes to the Franchising Code of Conduct to address car manufacturers' / car dealers' perceived power imbalances

By Adrian Kuti and Carolyn Harris

The Competition and Consumer (Industry Codes – Franchising) Amendment (New Vehicle Dealership Agreements) Regulation 2020 affects end of term notification obligations, capital expenditure and dispute resolution.

Parties to "new vehicle" dealership agreements need to be aware of changes to the Franchising Code of Conduct which took effect 1 June 2020, earlier than anticipated. The changes to the Franchising Code are part of the Government's legislative reform of the automotive industry and follow increased regulatory investigation and enforcement action by the ACCC into the new car retailing market since 2015.

On 28 May 2020 the Government made the Competition and Consumer (Industry Codes – Franchising) Amendment (New Vehicle Dealership Agreements) Regulation 2020 (Amending Regulation) amending the Franchising Code to address the effects on commercial arrangements arising from the perceived power imbalance between car manufacturers as franchisors and new car dealers as franchisees. The Amending Regulation introduces a separate Division into the Franchising Code to deal with issues specifically affecting "new vehicle" dealership agreements.

The Amending Regulation is largely consistent with the Exposure Draft which the Government released on 14 February 2020 (which had, at that time, flagged a 1 July 2020 commencement). The Government received a number of submissions on the Exposure Draft and also undertook targeted consultation with industry representatives prior to finalising the Amending Regulation.

The Amending Regulation will have significant impacts on how renewal and termination decisions regarding dealership agreements will need to be conveyed to the dealer network and what must be included in new disclosure documents going forward. Whether these new requirements will apply to dealers will depend on the status of existing agreements and how the transitional arrangements under the Amending Regulation may apply to any renewals, variations or extensions of those existing agreements.

The changes to the Franchising Code will apply to "new vehicle dealership agreements", defined as agreements for dealerships that predominantly deal in new passenger vehicles seating up to nine persons, and/or vehicles constructed primarily for the carriage of goods and with a gross vehicle mass not exceeding 3.5 tonnes (drawing on the equivalent definitions applicable under the Motor Vehicle Standards Act and the Vehicle Standard (Australian Design Rule – Definitions and Vehicle Categories) 2005). Large goods vehicles, motorcycles, motorised farm machinery, motorised construction machinery, aircrafts and motorboats are excluded.

What are the changes to the Franchising Code for new vehicle dealership agreements?

1. End of term notification obligations

Under the Amending Regulation the notice period for new vehicle dealership agreements with a term of 12 months or longer is now at least 12 months before the end of the term of the agreement or if both parties agree on a later time, before that time. The Franchising Code previously required new vehicle distributors to give notice at least 6 months before the end of the term of an agreement of greater than 6 months' duration (and this continues to be the case for all other franchisors). However, the Government felt this notice period did not provide enough time for a new vehicle franchisee to mitigate any losses if the term of a new vehicle dealership agreement was 12 months or longer.

The Amending Regulation otherwise retains in substance the end of term notification requirements for new vehicle dealership agreements with a term of less than 12 months:

  • if the term of the agreement is 6 months or longer, written notice must be given at least 6 months before the end of the agreement; and
  • if the term of the agreement is less than 6 months, written notice must be given at least 1 month before the end of the agreement.

The Exposure Draft had not proposed end of term notification obligation for new vehicle dealership agreements with a term of less than 12 months.

Interestingly, the Amending Regulation also imposes equivalent end of term notification obligations on new vehicle franchisees. Such obligations have not previously been imposed on franchisees and this continues to be the case for all franchisees other than the new vehicle franchisees to which the Amending Regulation applies. Given that it is most common for dealership agreements to grant the franchisor, but not the franchisee, a right of renewal to be exercised in the franchisor's discretion, it is not clear how this new obligation on new vehicle dealers is intended to operate where, for example, the dealer notifies of an intention to renew or extend an agreement or enter into a new agreement with the franchisor but the franchisor does not propose to do so or, alternatively, the franchisee indicates an intention not to renew but the franchisor proposes to exercise its contractual right to renew under the dealer agreement. The Explanatory Memorandum does not address these issues and, subject perhaps to the more general application of the Franchising Code obligation to act "in good faith", these notification obligations alone will not alter the contractual rights of the parties in this regard.

If either party gives notice that they intend to neither extend a franchise agreement nor enter into a new agreement, then the notice must include reasons for the decision. Previously, a franchisor of a new vehicle dealership agreement was not required to give reasons for its decision not to enter into or extend the agreement under the Franchising Code.

Of greater practical significance, the Amending Regulation provides that in the event of non-renewal, the parties must agree to a written plan (with milestones) for managing the winding down of the dealership (including new vehicles, spare parts and service and repair equipment) over the remaining term of the agreement.

The only change to this requirement from the Exposure Draft is the language used to describe the requirements applying in the event of non-renewal – the parties must "co-operate" (rather than just "work together") to reduce the franchisee’s stock of new vehicles as well as spare parts over the remaining term of the agreement.

While the extended notice period will give a franchisee more time to mitigate any losses brought about by a non-renewal decision and will allow a franchisor more time to adjust its dealership network to ensure consumers have access to services in the event of a franchisee opting not to renew, the requirement to agree to a written exit plan may lead to some additional administrative and practical difficulties for franchisors seeking to sever ties with underperforming franchisees and will need to be worked through carefully to ensure as smooth a transition as possible.

2. Capital expenditure

The Amending Regulation, consistent with existing provisions in the Franchising Code, says that a franchisor must not require significant capital expenditure during the term of a new vehicle dealership agreement. However, the Amending Regulation does not exclude franchisors from imposing significant capital expenditure obligations on franchisees if the franchisor considers the expenditure is a necessary capital investment in the franchised business. The franchisor of a new vehicle agreement can still require expenditure through disclosure, with majority agreement, legislative obligations or as agreed to by the franchisee.

Franchisors must provide franchisees with as much information as practicable about any significant capital expenditure disclosed to the franchisee in the disclosure document (including the rationale, amount, timing, nature, anticipated outcomes and expected risks associated with the expenditure). The franchisor is not required to state the exact amount of the capital expenditure.

Further, the Amending Regulation requires franchisor and franchisee to discuss any required expenditure before entering into, renewing or extending the scope of a dealer agreement. The circumstances under which the franchisee is likely to recoup the expenditure must be discussed. In accordance with the Franchising Code, parties will need to act in good faith when undertaking these discussions

3. Resolving disputes

While the Franchising Code already imposes compulsory dispute resolution processes, franchisees now have the option to request to participate in multi-franchisee dispute resolution. If two or more franchisees each have a dispute of the same nature with a franchisor, the franchisees may ask the franchisor to deal with their disputes together. The Franchising Code does not expressly state that parties must undertaking multi-franchisee dispute resolution.

When will the provisions apply?

The new Franchising Code provisions were made by the Government on 28 May 2021 and nominally took effect on 1 June 2020. However, the Amending Regulation contains transitional provisions affecting its application to existing agreements.

The transitional provisions provide that the amendments to the Franchising Code will apply to new, renewed and extended agreements entered into on or after the commencement date. The provisions of the Franchising Code in operation up to the commencement date will continue to apply to agreements on foot prior to the commencement date.

If an agreement entered into prior to the commencement date is later renewed or extended, then, on or after the renewal or extension, the new end of term notification provisions will apply.

If a disclosure document disclosing significant capital expenditure to a franchisee was created or most recently updated before the commencement date, the new provisions on capital expenditure will not apply, even if the agreement to which the disclosure document relates is entered into, renewed or extended on or after the commencement date. if the disclosure document for an agreement is created or updated on or after the commencement date, the new capital expenditure provisions will apply.

The option to request to participate in multi-franchisee dispute resolution applies to new vehicle dealership agreements that are entered into, renewed or extended before, on or after the commencement date.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.