Further Code changes to protect dealer interests

The Federal Government has now amended the Franchising Code of Conduct (Code) to introduce significantly higher penalties and new penalties for specified contraventions of the Code. The amendments are contained in the Competition and Consumer (Industry Codes – Franchising) Amendment (Penalties and Other Matters) Regulations 2022 (Amending Regulation). The amendments made will take effect on 15 April 2022.

Super Penalty – $10M+

On and from 15 April 2022, the Code will include a new ‘super’ penalty to contraventions of a small number of important provisions of the Code. These ‘super’ penalties will apply for contraventions that occur on or after 15 April 2022. Importantly, the ‘super’ penalties apply to clauses of the Code aimed at protecting dealer interests.

The new ‘super’ penalty for a franchisor will be:

• If the franchisor is a body corporate, the greater of:
  • $10M;
  • if the Court can determine the value of the benefit, whether a direct benefit or indirect benefit, obtained by the franchisor (or a related body corporate of the franchisor) attributable to the contravention – 3 times the value of the contravention; or
  • if the Court cannot determine the value of the benefit – 10% of the annual turnover of the franchisor in the prior 12 months from the contravention.
• If the franchisor is not a body corporate – $500,000.

The relevant super penalty provisions include:

• Clause 17 – which deals with the obligation to ensure a franchisor gives ongoing disclosure of financial details (such as those listed in Item 21) and changes in materially relevant facts listed in clause 17(3) of the Code;
• Clause 33 which deals with the obligation not to engage in conduct that restricts or impairs a franchisees ability to form an associate or associate with other franchisees for a lawful purpose; and
• Clauses 46A(1), (2) and (3)and 46B which apply only to New Vehicle Dealership Agreements.

Ongoing disclosure of materially relevant facts

Clause 17 of the Code obliges a franchisor to give ongoing disclosure to a prospective franchisee, franchisee or transferee of materially relevant facts. It has two distinct limbs, one limb deals with financial details and the second limb deals with other changes in materially relevant facts listed in clause 17(3) that are not otherwise contained in the disclosure document. These obligations are not new and have been in place for many years.

The first limb requires a franchisor to give a prospective franchisee any new director solvency declaration, financial statement or audit report that comes into existence after the date the franchisor gave the disclosure document but before the prospective franchisee enters into the franchise agreement. This typically can occur during the 4 month disclosure update period when prospective franchisees may have been given a disclosure document that has financial details relating to the prior financial year and the franchisor subsequently creates a new solvency declaration or obtains new financial statements or an audit report before the franchisee signs the franchise agreement.

The second limb of clause 17, is the requirement that a franchisor update all franchisees (including prospective franchisees and transferees) when certain events occur. A franchisor has a maximum of 14 days to tell all franchisees. The specific events are set out in clause 17(3) and include events relating to a change in majority ownership of the franchisor, a change to ownership of intellectual property, Court judgments and certain Court proceedings, including proceedings commenced by public agencies like the ACCC.

Association of franchisees or prospective franchisees

Clause 33 of the Code will now be the subject of a super penalty. Clause 33 prevents a franchisor from engaging in conduct which would restrict or impair franchisees from forming an association or associating with each other for a lawful purpose. This is particularly important with respect to automotive distributors who seek to discourage dealer groups from forming Dealer Councils.

Clauses which apply only to new vehicle dealership agreements

Clauses 46A(1), (2) & (3) and 46B of the Code will now be the subject of a super penalty. These clauses were part of the most recent changes to the Code aimed at protecting new vehicle dealer interests. In particular:

• Clause 46A(1) provides that a franchisor must not enter into a franchise agreement unless the agreement:

1. 1. ​provides for the franchisee to be compensated if the franchise agreement is terminated before it expires because the franchisor:

1. 1. 1. withdraws from the Australian market;
      2. rationalises its networks in Australia; or
      3. changes its distribution models in Australia; and

1. 2. specifies how the compensation is to be determined, with specific reference to the following:

1. 1. 1. lost profit from direct and indirect revenue;
      2. unamortised capital expenditure requested by the franchisor;
      3. loss of opportunity in selling established goodwill; and
      4. costs of winding up the franchised business.

• Clause 46A(2) provides that a franchisor must not enter into a franchise agreement unless the agreement contains provision for the franchisor to buy back or compensate the franchisee for new road vehicles, spare parts and special tools if:

1. 1. the franchise agreement is not renewed and a new agreement is not entered into; or:
   2. the franchise agreement is terminated before it expires because the franchisor:

1. 1. 1. withdraws from the Australian market;
      2. rationalises its networks in Australia; or
      3. changes its distribution models in Australia.

• Clause 46A(3) provides that a franchisor must not enter into a franchise agreement that contains a provision that purports to exclude any compensation to which the franchisee may be entitled, other than under the agreement, if the agreement is terminated before it expires other than because the franchisee has breached the agreement.
• Clause 46A(2) provides that a franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement.

In seeking to incorporate the operation of the new clauses 46A(1), (2) & (3) and 46B of the Code, we have seen instances in which motor vehicle distributors have sought to restrict or read down the benefits available to dealers from these clauses in their amendments to Dealer Agreements. The new super penalties that will now apply to these clauses ought to discourage motor vehicle distributors from seeking to restrict or read down the benefits available to dealers from these clauses in their Dealer Agreements.

Increased penalty units and new super penalties

The amendments also increase the maximum penalty for contravention of other civil penalty provisions of the Code from 300 penalty units ($66,600) to 600 penalty units ($133,200).

Most of the existing civil penalty provisions have been increased to 600 penalty units. The amendments mean that some existing provisions of the Code (that are not currently civil penalty provisions) will become civil penalty provisions on and after 15 April 2022. In addition certain new provisions will also be subject to a civil penalty. The table below sets out the new provisions of the Code where a penalty will apply if a contravention occurs on or after 15 April 2022.

A copy of the new compiled version of the Code with these changes will become available shortly after the provisions commence on 15 April 2022.

Conclusion

Dealers and Dealer Councils will now be placed in a much stronger position with respect to their right to organise themselves and operate as dealer representative bodies and to negotiate amendments to Dealer Agreements that are aimed at incorporating clauses of the Code intended to benefit and protect the rights of dealers.

The Amending Regulation does not deal with the proposed new Franchise Disclosure Register as that will be dealt with separately by the Government. We expect that next week the Government will release an amending regulation to establish and set out the framework of the new Franchise Disclosure Register that will commence to be publicly searchable on 15 November 2022.

If you require advice on these changes please contact a member of our Automotive Industry Team.

This article was written by Evan Stents, Partner, Sean O’Donnell, Partner and Derek Sutherland, Partner.