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Mandatory principles for car dealer agreements

Late last year we expressed concerns that distributors would not adopt the voluntary best practice principles for new car dealership agreements and called for the principles to be mandatory. In what is a landmark decision, the Prime Minister announced last week that all best practice principles would be made mandatory under the Franchising Code.

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We understand that it is the intention of the Government to incorporate the best practice principles into Part 5 of the Franchising Code of Conduct (Code) which applies to new vehicle dealership agreements entered into after 1 June 2020, or new vehicle dealership agreements entered into before 1 June 2020 that are renewed or extended after 1 June 2020.  While this means not all existing dealer agreements will have the benefit of any of the best practice principles given that dealer agreements are generally for terms of 5 years or less, dealers can take comfort that when their existing dealer agreements are renewed the principles will need to be included in the dealer agreement.

The principles, as set out below, are intended to:

  • guide negotiations and improve transparency and fairness when agreeing on the terms of new dealer agreements; and
  • make distributors accountable in the event they engage in unfair conduct in breach of, or inconsistent with, conduct the principles mandate.

Principle 1: Provide for ‘fair and reasonable’ compensation to dealers in the event of early termination resulting from specific events such as, a distributor exiting the Australian market or changing its business model.

Principle 2: Do not expressly prohibit compensation payable to dealers.

Principle 3: Define ‘fair and reasonable’ compensation, referred to in Principle 1, as including loss suffered by a dealer such as goodwill and the loss opportunity to realise capital expenditure.

Principle 4: Provide dealers with a fair and reasonable time to secure a return on investments that have been required by as part of a dealer agreement at the time it is entered into.

Principle 5: Reasonable provisions to compensate or buy back new vehicle stock, parts and special tools in the event of non-renewal, withdrawal from the Australian market, network rationalisation or changes to the business model.

Principle 6: Dealership agreements to include provision for timely commercial settlement and dispute resolution.

Enforcing the above principles will provide a number of protections for dealers entering into new vehicle dealership agreements with distributors and limit the conduct of distributors that, in the past, had a significant impact on dealers – such as not providing for fair and reasonable compensation or fair and reasonable time to secure a return on the investment made by dealers upon the termination of a dealer agreement.

The issues surrounding the lack of an existing requirement for distributors to provide fair and reasonable compensation or a reasonable time to secure a return on investment were recently highlighted following the exit of Holden from the Australian market, and the drastic reduction in the number of owners and dealers in the Honda network.

Financial penalties under the Franchising Code of Conduct and other reforms

It was also announced by the Federal Government on Friday that financial penalties for wrongdoing under the Code will be introduced and a new automotive code will be strongly considered, including consideration for mandatory binding arbitration provisions to be included within this new code.

It has been revealed that penalties of up to $10 million could apply to distributors who undertake systemic breaches under the Code – which shall include breaches of the six best practice principles once introduced as part of the Code.

The proposal to introduce mandatory arbitration would require arbitration between the parties when mediation is unsuccessful. However, this approach 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 may be unconstitutional. In any event, it would appear pointless to have mandatory arbitration unless additional dealer protections are put in place – such as financial penalties for breaches under the Code.

The Government has stated that it is committed to working further with the automotive franchising sector and will engage in further consultation in relation to protections for dealers from unfair contract terms, achieving mandatory arbitration in the event of a dispute between a dealer and distributor and the consideration of the introduction of an automotive franchising code.

The Government’s announcement is a significant and positive development and we are hopeful that the regulatory framework governing the automotive industry will continue to further evolve to protect dealers and provide a fairer environment within which dealers operate.

As more details are released we will provide an update.  In the meantime, contact our motor dealer industry group to see how we support dealers to leverage existing laws to protect their interests and improve their position with distributors.

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