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Changes to the Franchising Code of Conduct in 2021

Several amendments to the Franchising Code of Conduct (Code) were announced on 1 June 2021, the majority will commence on 1 July 2021. The amendments are intended to significantly improve the rights of franchisees across all industries with some amendments specific to motor dealers who have a ‘new vehicle dealership agreement’, a concept that was introduced with the recent enactment of Part 5 of the Code.

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Do the amendments benefit motor dealers?

Overall, the amendments enhance the protections afforded to dealers under the Code in circumstances where dealers are particularly vulnerable and likely to suffer loss and damage by:

  • introducing minimum requirements for compensation and tenure to enable dealers to recoup the investment made in their dealerships;
  • streamlining the dispute resolution framework and process;
  • broadening the good faith test by giving courts an additional factor to consider when determining whether a party has acted with good faith; and
  • expanding the application of the capital expenditure provisions previously in Part 5 and limited to ‘new vehicle dealer agreements’ so that all dealers (as well as franchisees generally across all industries) will only be required to undertake significant capital works mid-term in very limited circumstances.

What are some of the major changes?

Below is a snapshot of the major changes affecting motor dealers:

1. Agency arrangements

The definition of ‘motor vehicle dealerships’ in subclause 4 of the Code will be expanded to include agency models to capture dealers who act as agents to sell cars for a distributor. This change means there is no longer any doubt about whether agency arrangements will be subject to the Code.

2. Good faith obligation, clause 6(3A) of the Code

For the purpose of determining whether a party to a ‘new vehicle dealership agreement’ has acted towards the other party with good faith, a court must now have regard to a third factor – whether the terms of the agreement are fair and reasonable. This is in addition to the existing two factors described in clause 6(3) to which a court ‘may have regard’ being:

  1. Whether a party acted honestly and not arbitrarily; and
  2. Whether the party cooperated to achieve the purposes of the agreement.

In respect of ‘new vehicle dealership agreements,’ this implies distributors must act with good faith when negotiating and offering terms of a ‘new vehicle dealership agreement’.

3. Capital expenditure

Part 5 of the Code only applies to ‘new vehicle dealership agreements’; the capital expenditure provisions in Part 5 significantly limited the circumstances within which a distributor could require a dealer to undertake mid-term capital works. Previously, if a dealer was not party to a ‘new vehicle dealership agreement’ then a distributor could require the dealer to undertake significant capital expenditure mid-term if the distributor considered the expenditure was necessary and provided a written justification statement to the dealer.  The amendment to clause 30 removes this exception and transfers the capital expenditure provisions from Part 5 of the Code and into the general provisions of the Code.

Clause 30 will apply to agreements entered into, extended or renewed on or after 1 July 2021 and ‘new vehicle dealership agreements to which clause 50 of Part 5 had applied immediately before 1 July 2021.

This means all dealers and not just dealers who have a ‘new vehicle dealership agreement’ and franchisees across the broader franchising sector will have access to the protections offered by the tightened capital expenditure provisions that previously applied only to ‘new vehicle dealership agreements’. Specifically:

a) Clause 30(2): a dealer will only be required to undertake significant capital expenditure where:

  1. The expenditure was disclosed in the disclosure document given the franchisee before it entered into, renewed or extended the franchise agreement;
  2. If a majority of franchisees approve the expenditure where the expenditure is to be incurred by all or a majority of the franchisees;
  3. The expenditure is required by the franchisee to comply with legislative obligations; or
  4. The franchisee agrees to the expenditure.

b) Clause 30A(2): the disclosure document must provide as much information as practicable about the capital expenditure including:

  1. The rationale;
  2. The amount, timing and nature of the expenditure;
  3. The anticipated outcomes and benefits of the expenditure; and
  4. The expected risks associated with the expenditure.

c) Clause 30A(3) and (4): the franchisor and franchisee must discuss the expenditure which must include a discussion about the likelihood the franchisee will recoup the expenditure, having regard to the geographical area of operations of the franchisee or prospective franchisee.

4. Best practice principles

It seems each of the 6 best practice principles (Principles) which are mandatory for all ‘new vehicle dealership agreements’ have been reflected in the amendments to Part 5 of the Code by insertion of clauses 46A and 46B in a new Division 2:

Compensation

a) Clause 46A(1) adopts Principles 1 and 3. A ‘new vehicle dealership agreement’ must:

  1. Include an arrangement that requires a distributor to compensate a dealer where the agreement is terminated before its expiry because the distributor:
    • withdraws from Australia
    • rationalises its network in Australia
    • changes its distribution model in Australia
  2. Specify how the compensation will be determined and must specifically refer to:
    • Lost profit from direct and indirect revenue
    • Unrecovered expenditure and unamortised capital expenditure requested by the franchisor
    • Loss of opportunity in selling established goodwill
    • Costs to wind up the business

b) Clause 46A(2) adopts Principle 5. A ‘new vehicle dealership agreement’ must require a distributor to buy back or compensate the dealer for new road vehicles, parts and special tools in the event of:

  • Non-renewal of the agreement
  • Withdrawal from the Australian market
  • Rationalisation of networks in Australia
  • Changes to its distribution model in Australia.

c) Clause 46A(3) adopts Principle 2 to a limited extent. While distributors must not include provisions in a ‘new vehicle dealership agreement’ that preclude a dealer from seeking compensation this prohibition will apply in circumstances where the agreement is terminated before the expiry date and provided the termination is not due to the dealer breaching the agreement.

Tenure

a) Clause 46B adopts Principle 4 and requires a ‘new vehicle dealership agreement’ to provide a dealer with a reasonable opportunity to make a return, during the term of the agreement, on any investment made by the dealer which was required by the distributor as part of entering into or under the agreement. It appears the intention is to give tenure to dealers consistent with the level of any investment they make in the dealership at the request of a distributor.

5. Dispute resolution

New clauses and new concepts (such as ‘ADR practitioner’ and ‘ADR process’) have been introduced into the general provisions of the Code; the effect is to capture other forms of alternative dispute resolution such as conciliation and where it is agreed, arbitration. These new provisions will apply to all franchisees including dealers. Notably:

a) Clause 40A(5): the Australian Small Business and Family Enterprise Ombudsman (Ombudsman) is required to appoint an ADR practitioner within 14 days of a request.

b) Clause 40B(6): in a multi franchisee dispute, if any of the franchisees or the franchisor cannot agree on:

  • how to resolve the dispute it can be referred to an ADR practitioner for a single ADR process for all their disputes; or
  • who should be the ADR practitioner, a party may request the Ombudsman to appoint an ADR practitioner for a single ADR process for all their disputes;

the appointed ADR practitioner may conduct the ADR process even though the franchisor does not agree:

  • for there to be a single ADR process for all the disputes; or
  • to the appointment of ADR practitioner.

Therefore, a franchisor will be required to engage in the ADR process chosen by the ADR practitioner to attempt to resolve the dispute.

It appears these provisions seek to prevent a franchisor from engaging in conduct that will delay or obstruct the efficient resolution of multi franchisee disputes for example, by insisting that each franchisee engages in an ADR process separately with the franchisor rather than collectively.  It was recently reported by a media outlet that Holden was seeking to have each dealer’s case dealt with separately (rather than proceeding as a class action) which would have prolonged the hearing and increased legal costs associated with a trial.

c) Clause 43A: the parties to a dispute may agree to have the dispute resolved by arbitration. In effect this provision allows parties to refer the dispute for a binding and final determination outside of the court system which in some circumstances may be more time and cost-efficient.

6. Penalties

The following provisions are civil penalty provisions meaning franchisors and distributors will be liable for significant pecuniary penalties for non-compliance:

a) Clauses 46A and 46B: the intention appears to be to deter distributors from exploiting their stronger bargaining position by including unfavourable and uncommercial terms in ‘new vehicle dealership agreements’.

b) Clause 41A(3) and (4): each party to a dispute must attend the ADR process and the party must be represented in the ADR process by a person who has authority to enter into an agreement to settle the dispute. Seemingly, the intention is to ensure one party does not abuse the ADR process by wasting the other party’s time and efforts.

Next Steps

We appreciate the consistent work undertaken by industry bodies such as the MTAA and its member associations to secure these significant and positive outcomes for the automotive industry.

These amendments will further assist dealers in bargaining with distributors to redress the power imbalance.  However, the reform agenda is not concluded, we eagerly await the release of draft legislation broadening the eligibility test under the unfair contract term laws to apply to franchise arrangements and capture more businesses in the automotive industry.

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