The Federal Government launched on 11 December 2020 a set of six principles to guide agreements between car dealers and manufacturers. The principles are designed to help steer contract negotiations and build on the introduction of a separate schedule to the Franchising Code of Conduct for the auto industry on 1 June 2020.
The principles are a voluntary guide that should be considered best practice when developing new dealership agreements. They are aimed to improve transparency and fairness in the development of future automotive dealer agreements to make the system fairer and more transparent for consumers, dealers and manufacturers.
The reforms are said by the Government to have been developed in consultation with industry and are in line with existing obligations, rather than creating new obligations. The Government also said that the reforms are the biggest for the industry in years and that it has worked to balance the need to better protect car dealers with an environment that is attractive to manufacturers to invest in Australia.
The principles are as follows:
Principle 1
Franchisors should include provisions in new dealership agreements that provide for fair and reasonable compensation for franchisees in the event of early termination resulting from:
- Withdrawal from the Australian market;
- Rationalisation of their networks;
- Changes to their distribution models.
Principle 2
Franchisors should not include provisions that exclude compensation in new dealership agreements.
Principle 3
The ‘fair and reasonable compensation’ as referred to in Principle 1 should include appropriate allowances for the loss a franchisee may incur, which can include:
- Lost profit from direct and indirect revenue;
- Unrecovered expenditure and unamortised capital expenditure where requested by the franchisor;
- Loss of opportunity in selling established goodwill;
- Wind up costs.
Principle 4
When an agreement is entered into it should provide franchisees a fair and reasonable time to secure a return on investments that have been required by franchisors as part of the agreement.
Principle 5
Agreements should include reasonable provisions for franchisors to compensate or buy back new vehicle inventory, parts and special tools, in the event of:
- Non-renewal;
- Withdrawal from the Australian market;
- Rationalisation of their networks;
- Or changes to their distribution models.
Principle 6
Agreements should include provision for timely commercial settlement and dispute resolution.
The Government acknowledged that the automotive industry is a dynamic and changing industry and will review the relationship between car dealers and manufacturers in two years.
Dealers and Dealer Councils will need to be cognisant of the new ‘best practice’ principles when negotiating new dealer agreements or the renewal of dealer agreements.
This article was written by Evan Stents, Lead Partner, Automotive Industry Group.
