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Perspective

Agency arrangements and dealer reforms are revving up for the automotive industry

Public and private hearings and submissions into the regulation of the relationship between car manufacturers and car dealers were held before the Senate Education and Employment Committees (Committee) on 19 and 24 November 2020, highlighting the need for further franchise and other legislative reforms to better protect dealers from exploitative conduct.

Representatives from NADA in the USA informed the Committee of State legislation in 50 States which protects dealers from arbitrary terminations, non-renewals and which prevents distributors changing business models without compensation being paid to dealers. According to the NADA representatives these legislative protections have not impeded the growth of the retail automotive industry.

Dealer concerns have arisen in response to the withdrawal of Holden from the Australian market and recent announcement by Honda and Mercedes-Benz to change to an agency model of distribution. Toyota Australia confirmed before the Committee that it has no plans to change its approach.

Dealers, and their representative bodies, are pressing for the introduction of both

  • mandatory principles as to standards of conduct within the industry, and
  • arbitration as a mechanism for settling disputes between dealers and distributors.

The Committee recognises that the large number of confidential submissions (more than 20) are due to concerns by dealers about the fear of recriminations by distributors. It was significant that Astoria Honda, being a Honda dealership that is not being renewed and offered an agency agreement, provided a public submission and the owners of the dealership made powerful oral submissions to the Committee about the conduct of Honda.

Distributors have opposed the proposal for the introduction of mandatory principles and arbitration, presenting a view that there are only a small number of dealer terminations and making any further changes would be pre-emptive following recent amendments to the Franchising Code in June 2020 which have not yet been tested . Distributor representatives, including those from Toyota Australia, Mitsubishi Motors, Honda Australia and Mercedes-Benz, however, indicated during the Senate Committee hearing on 24 November 2020 that they would not leave the Australian market if the proposed principles or arbitration become mandatory.

Mandatory arbitration

The proposal to introduce mandatory arbitration would require arbitration between the parties when mediation is unsuccessful. This approach however fails to acknowledge the consensual foundation of private arbitration and may, in some circumstances, be ineffective on the basis that it is viewed as an attempt to confer judicial power on the arbitrator which according to departmental representatives is likely to be unconstitutional. In any event, it would appear pointless to have mandatory arbitration unless additional dealer protections are put in place.

Mandatory principles

The introduction of mandatory principles as proposed by Government agencies to standards of conduct to be included in new dealer agreements would ensure a number of protections for dealers entering into new vehicle dealership agreements with distributors, such as a requirement for the agreement to include terms which provide for fair and reasonable compensation in specific circumstances and fair and reasonable time to secure a return on investment made by dealers in the business which are often significant.

While dealers and their representative bodies are fully supportive of the principles being made mandatory, the distributors are opposed to them being made mandatory stating that the June 2020 amendments need time to work. Of course, the distributors have a track record of opposing regulation –  they did not join the former voluntary Franchising Code, they continue to assert that they are not in franchising and they did not remove unfair contract terms in dealer agreements following the introduction of the Motor Vehicle Dealers and Repairers Act in NSW in 2013.

Unfair contract terms

Next year the Federal Government will release legislation to expand the scope of unfair contract laws to dealers and to impose substantial penalties for the inclusion of unfair contract terms in dealer agreements.

Historically, requests by dealers for the removal of unfair contract terms (UCT) in dealership agreements have been mostly rejected by distributors on the basis that unfair contract laws do not apply to dealership agreements. Whilst Part 6 of the Motor Vehicle Dealers and Repairers Act 2013 in NSW provides that a UCT is void, a court ruling is required to deem a term unfair.

Following a recent consultation attracting submissions from almost 80 interested parties, the Treasury has released a Regulation Impact Statement for decision on enhancements to Unfair Contract Term protections which includes proposed changes to make UCT unlawful and to amend eligibility thresholds to access those protections. Earlier in the month the Minister for Consumer Affairs announced that it would raise the threshold test from 20 employees to 100 and agreed to provide an alternative threshold test of turnover of less than $10 million per annum. Whilst the proposed changes may offer legislative protections for some dealers who previously could not access them, not all dealers will meet the eligibility criteria. Secondly, we consider it is not likely distributors will have two different versions of dealership agreements to offer to dealers – one with UCT and another with fair terms to those dealers who are eligible for protection under the unfair contract laws.

Release date for Senate Committee Report

The Senate committee is set to report its findings on 10 December 2020. Once released we will provide insights into the findings.

What can a dealer do now to protect their interests, in relation to new agency proposals?

  • Dealers, and their dealer councils, should be reviewing their dealer agreements to see whether they can be changed to an agency model. In the recent Honda agency arrangement it appears that Honda is asserting that it jointly owns the customer data, however during the Committee hearing when questioned on what basis it is able to make such claim, Honda was unable to provide any basis. The key determinants are:
    • whether it has a common start and end date for all dealers, and
    • whether there is a data sharing agreement between dealers and distributors that protects the dealer from distributors asserting that they own the data.
  • In addition, dealer councils should write to distributors seeking disclosure of any plans or intentions to move to an agency model.
  • To protect the interests of dealers, all dealer councils should immediately write to their respective distributors seeking to enter into a data sharing agreement, making it clear that dealers only share customer data for product recall and other specified purposes and confirming that the dealer owns the customer data. It is also open to dealers to request an updated Disclosure Document from distributors.

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Recent additions to the FCW Lawyers team include automotive industry stalwarts Peter van Rompaey, and consultant Bob Gardini, with over 30 years’ experience advising to clients in the Motor Dealer industry.

Peter and Bob join Sotheary Bryant, Principal Lawyer, to boost our team’s expertise in assisting Motor Dealer clients with their compliance obligations and succession plans.

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Heightened levels of stress around the pandemic is also a relevant factor. An April 2020 study reported 88% of the participants (US employees) faced moderate to extreme stress during the pandemic and nearly 70% faced the most stressful time of their professional career.

Paul Evans

Managing Director, Toro Digital

Psychological hazards of e-working during the pandemic is a relevant factor. The Australian Psychological Society identified these hazards as conflicts between work and family, workload and over-working, future uncertainty and isolation/loneliness.

Heightened levels of stress around the pandemic is also a relevant factor. An April 2020 study reported 88% of the participants (US employees) faced moderate to extreme stress during the pandemic and nearly 70% faced the most stressful time of their professional career. Participants noted their productivity consequently declined by at least one hour a day for 62% and at least two hours for 32%.

Unsurprisingly, there has been a marked rise in mental health related prescriptions since March 2020.

These risks can be mitigated by undertaking appropriate risk analysis for each employee, ensuring controls are instituted that mitigate those risks, ensuring regular communication between management and employees around individual circumstances, setting clear expectations including around joint goals and objectives, scheduling regular informal team gatherings, and ensuring access to support and resources.

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