Amendments that commenced on 1 June 2020
On 1 June 2020, the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 was amended by the Competition and Consumer (Industry Codes-Franchising) Amendment (New Vehicle Dealership Agreements) Regulation 2020 (Amending Regulation).
The Amending Regulation made changes to the Franchising Code of Conduct, but those changes specifically affect only ‘new vehicle’ dealership agreements. However the changes have resulted in a new compilation of the Code.
These changes are limited and separate to the wider ongoing review of the Code conducted by the Parliamentary Joint Committee on Corporations and Financial Services (Joint Committee). On 14 March 2019 the Joint Committee released its comprehensive ‘Fairness in Franchising’ report into the operation and effectiveness of the Franchising Code of Conduct.
These amendments made on 1 June 2020 follow on from the Regulatory Impact Statement Franchise Relationships between distributors and new car dealers that was released for consultation on 20 December 2018 by the Minister at that time the Hon Karen Andrews MP. The Department of Industry, Science Energy and Resources (Department) has continued with consultation with key stakeholders in the sector affected by these changes. The Departmental review and process of consultation relating to the ‘Fairness in Franchising’ report is continuing and is unlikely result in further changes to the Code until the end of this year or potentially 2021.
What has changed?
No new mandatory industry code?
Despite speculation that a separate “car code” for new car dealerships would be prescribed, the Government chose to amend the Code to make changes to the existing code that target greater protections to dealers of new passenger and light goods vehicles.
Accordingly, the changes are not contained in a new separate mandatory industry code, but mainly set out in Parts 5 and 6 of the Code whilst some definitions and amending provisions are scattered in Parts 1-4 of the Code.
What are the essential core changes?
The new Part 5 contains clauses that apply only to new vehicle dealership agreements. They specifically relate to 3 core areas including End of Term obligations and winding up the dealership, capital expenditure requirements and multi franchisee disputes. Part 6 sets out the application, savings and transitional provisions.
A new Clause 17A confirms that the end of term notice provisions in clauses 47, 48 and 49 in Division 2 of Part 5 will apply to the exclusion of clause 18 when those provisions start to apply to the new vehicle dealership agreement. Until that time, clause 18 continues to apply to new vehicle dealership agreements entered into before 1 June 2020.
A new clause 30(3) which confirms that clause 30 will not apply to new vehicle dealership agreements (subject to some transitional provisions) when clauses 50 and 51 of Division 3 of Part 5 will apply to them.
The insertion of a note in clause 35 directing you to Division 4 of Part 5 for new vehicle dealership agreements.
Change in end of term obligations
Notice periods: The period of notice of its end of term decision for new vehicle agreements will be different:
- Where the term is 12 months or longer – a minimum of 12 months’ notice is required before end of term unless the parties agree in writing to a shorter period;
- Where the term is 6 months or longer – a minimum of at least 6 months’ notice is required before end of term; and
- Where the term is less than 6 months – a minimum of 1 months’ notice is required before the end of term.
What the notice must include: Like the current end of term notice obligation1, if the franchisor intends to extend or enter into a new agreement the notice must include a statement to the effect that, subject to clause 16(2) of the Code, the dealer can request in writing a copy of the disclosure document under clause 16(1) of the Code. If the franchisor does not intend to extend the agreement or enter into a new agreement then it must include reasons for that intention.
Civil penalty provisions: The new franchisor obligations are expressed as a civil penalty provisions to which a fine or penalty applies for contravention.
Dealers’ obligation to give a notice: A dealer will also be required to give a notice to the franchisor of its end of term intention and whether it intends to renew the agreement, enter into a new agreement or not renew or not enter into a new agreement. It must also provide reasons if it does not intend to renew or enter into a new agreement. It is not a civil penalty provision.
Application and transition: The application and transitional provisions for end of term obligations are set out in clause 55. Essentially clause 18 will continue to apply to new dealer agreements entered into on or after 1 June 2020 and to Existing Agreements when they are renewed or extended on or after 1 June 2020.
Manage wind down: The amendments require the parties to agree on a plan with milestones to wind down the dealership over the balance of the term remaining2. That obligation will not apply until a notice under the new provisions of clauses 47 or 48 is given that the dealership agreement will not be extended or renewed or no new agreement entered into. Essentially the mutual obligation is to agree on a plan to have agreed milestones for managing the reduction in the stock of vehicles, spare parts, repair and servicing equipment and for the parties to work together to achieve that plan. The obligation is not expressed as a civil penalty provision.
Change in Capital Expenditure requirements
Prohibition: Currently the Code prohibits a franchisor seeking to require a franchisee to incur a significant capital expense during the term.3 That prohibition is subject to certain exceptions4 which includes circumstances where the franchisor provides the franchisee with a written business justification statement for incurring the significant capital expense5.
Business justification statement: A franchisor’s ability to rely on a business justification statement6 to compel a dealer to incur a significant capital expense will no longer apply once a franchisor updates its disclosure document on or after 1 June 2020. The business justification for significant capital expenses must then be set out in the disclosure document itself outlining the rational for making the investment, the amount of capital expenditure required, the anticipated outcomes and benefits and the expected risks associated with making the investment before they enter into the agreement.
Application and transition: The application provisions relating to significant capital expenditure are set out in clause 56. The existing business justification statement exception in the Code7 will continue to apply to Existing Agreements until they are renewed or extended. That exception will cease to apply once a dealer enters into or renews an Existing Agreement on or after 1 June 2020. However to be able to compel the dealer to incur the expense, a franchisor must have updated its disclosure document on or after 1 June 2020 to include that business justification statement. Once that occurs a new disclosure document with that change included must be given before entering into a new vehicle dealership agreement. If the franchisor does not include that statement a franchisor can only require a dealer to incur a significant capital expenditure if it meets one of the other exceptions listed in clause 50(2).
Multi franchise disputes
Clause 52 allows franchisees who each have a dispute ‘of the same nature’ with the franchisor to ask the franchisor to deal with the franchisees together about the dispute.
Clause 57 sets out the application provisions of clause 52 and it makes it clear that it applies to all new vehicle dealership agreements entered into, renewed or extended before, on or after 1 June 2020.
Application – Who do the changes apply to?
The changes made are limited to dealerships for new passenger vehicles and light goods vehicles. There are many franchise agreements and motor vehicle dealership agreements to which these changes will not apply.
When did they commence?
The Amending Regulation commenced on 1 June 2020.
Which agreements do they apply to?
The changes will apply to all new vehicle dealership agreements that are entered into, renewed or extended on or after 1 June 2020.
The changes will also apply to existing new vehicle dealership agreements that were entered into before 1 June 2020 (Existing Agreements) when that existing agreement is renewed or extended on or after 1 June 2020.
Specific application, saving and transitional provisions for each of the core changes in Part 5 outlining when the new provisions apply to an Existing Agreement are described above and contained in Part 6 of the Code.
Obligation to cause a review and report
Unlike other changes that have been made to the Code over the years, the amendments contain a new clause 58 that oblige the Minister to cause a review of the operation of the amendments made to be conducted before 1 April 2024 and to cause a written report of the review to be prepared and tabled in each house of Parliament within 15 sitting days of that House after the report was given to the Minister.
New compiled version of the Code
On 22 June 2020 a new version of the Competition and Consumer (Industry Codes-Franchising) Regulations 2014 compiled with amendments up to 1 June 2020 was registered on the Federal Register of Legislative Instruments.
A link to a obtain a copy of the new compiled regulation incorporating all amendments up to 1 June 2020 is available here.
It is this version that should be disclosed to all prospective franchisees on or after 1 June 2020 and not the earlier 1 March 2017 version.
Contact our team
If you have any questions about the changes to the Code contact a member of our franchising team.
This article was written by Derek Sutherland, Special Counsel.
1. Clause 18(3) of the Code
2. Clause 49 of the Code
3. Clause 30 of the Code
4. Clause 30(2) lists 5 exceptions
5. Clause 30(2)(e)
6. Clause 30(2)(e) of the Code
7. Clause 30(2) of the Code