Government Releases Draft New Vehicle Dealer Code Targeting July 2020 Commencement

On 14 February 2020, the Federal Government released an exposure draft of the ‘New Vehicle Dealership Agreements’ regulations which amend the existing Franchising Code of Conduct to apply specifically to new motor vehicle dealers (Dealer Code).

The release of the draft Dealer Code has come after the 2017 ACCC market study of new car retailing and the 2019 Parliamentary Joint Committee on Corporations and Financial Services ‘Fairness in Franchising’ report both of which identified concerns at the power imbalance in commercial relationships between large car manufacturers and new car dealers (among other things). A regulatory impact statement was subsequently released which identified four specific amendments to the Franchising Code of Conduct which Government considered addressed key concerns raised by stakeholders in the new motor vehicle industry regarding end of term arrangements, capital expenditure disclosure and access to dispute resolution.

The draft Dealer Code sets out draft clauses which seek to implement four key reforms outlined in the regulatory impact statement. If enacted, they will apply to ‘new vehicle dealership agreements’. This is defined as dealership agreements relating to a motor vehicle dealership that predominantly deals in new passenger vehicles, or new light goods vehicles (or both). This excludes all other motor vehicles such as motorbikes and trucks, meaning that motor vehicle dealerships which predominantly sell motorbikes and/or trucks will not benefit from the new Dealer Code.

In summary, the key amendments to the Dealer Code include:

1. Amendments to End of Term Arrangements – Notice and Reasons
   1. Clauses 48(1) & (2) of the draft Dealer Code provides that franchisors must now give 12 months’ notice in writing of their intention to (or not to) extend or enter into a new agreement at the expiry of an existing term. This replaces the previous clause requiring 6 months’ notice. The rationale for this amendment, as set out in the explanatory statement accompanying the draft Dealer Code, is that 6 months’ notice does not provide enough time for new motor vehicle dealers to mitigate any losses brought about by a non-renewal decision;
   2. Clause 48(4) of the draft Dealer Code provides that if manufacturers decide not to renew or extend a dealer agreement upon its expiry, then the 12 months’ written notice to the dealer must now include reasons for the manufacturers decision. The rationale for this amendment is that the absence of reasons has made it difficult for dealers to assess whether manufacturers have exercised the right to issue a non-renewal notice in good faith; and
   3. Once the Dealer Code comes into effect, Clause 48 will apply to all dealer agreements (including retrospectively, to dealer agreements entered into before the commencement date of the Dealer Code). This means that any non-renewal decision made after the commencement date of the Dealer Code will require 12 months’ written notice incorporating the manufacturer’s reasons for non-renewal.
   4. Clause 50 of the draft Dealer Code provides that in the event of a non-renewal, the manufacturer and the dealer must:
      1. agree to a ‘winding down plan’ – that is, a written plan (with milestones) for managing the winding down of the dealership, (including new vehicles, spare parts and service and repair equipment) will be managed over the remainder of the term; and
      2. work together to reduce stock over the remaining term of the agreement.
   5. The rationale for clause 50 given in the explanatory statement is that co-operation pursuant to an agreed plan between manufacturers and dealers in relation to the management of stock levels will reduce the likelihood of a ‘fire sale’ of excess stock and give the parties a practical means of ensuring that they act in good faith.
   6. As with clause 48, clause 50 will apply to all dealer agreements (including retrospectively) once the draft Dealer Code comes into effect.
2. Amendments to the Prohibition on Imposing Significant Capital Expenditure
   1. Clause 51 of the draft Dealer Code in effect amends the prohibition on manufacturers imposing significant capital expenditure obligations on dealers. The new clause:
      1. no longer excludes from this prohibition ‘expenditure that the franchisor considers necessary’;
      2. requires manufacturers to provide more precision about capital expenditure requirements in disclosure documents – for example, specifying, as far as practical, the amount, timing and nature of the expenditure;
   2. Clause 52 of the draft Dealer Code requires:
      1. manufacturers to discuss any required expenditure with dealers before entering into, renewing or extending the scope of a dealer agreement; and
      2. any discussion about expenditure to include a discussion about the circumstances under which the dealer is likely to recoup the expenditure to be invested – having specific regard to the geographical area of operations of the dealer.
   3. The rationale in the explanatory statement for the new clauses 51 & 52 is that they are intended to require manufacturers to convey more information to dealers about capital expenditure requirements to enable dealers to make a clearer assessment of whether they can recoup their expenditure of the term of the agreement. It is not intended that dealers be given a guarantee that they will be able to recoup their costs and it does not remove the potential for manufacturers to exert pressure on dealers to undertake capital expenditure. However, parties will need to act in good faith when undertaking these discussions.
   4. Clause 52 applies to all disclosure documents updated after the draft Dealer Code comes into effect.
3. Amendments regarding multi-party dispute resolution
   1. Clause 53 specifies that dealers may now ‘request’ multi-franchisee dispute resolution where more than one dealer has a dispute of the same nature with a manufacturer. The rationale in the explanatory statement is that this will empower dealers by strength in numbers to formalise their complaints and seek a resolution – particularly if a problem is systemic.
   2. Clause 53 applies to all dealer agreements (including retrospectively) once the draft Dealer Code comes into effect.
   3. It is important to be aware that clause 53 simply provides that dealers may ‘request’ multi-franchisee dispute resolution. It does not require manufacturers to agree to participate in such an approach.  Furthermore, neither the draft Dealer Code nor the explanatory statement acknowledges or deals with the potential impact of confidentiality obligations within dealer agreements. These obligation present a potential threshold issue to ‘multi-franchisee dispute resolution’ in the event that the disclosure of certain facts or circumstances about a dispute by one dealer to another constitutes a breach of confidentiality obligations owed by dealers to manufacturers. This may be an aspect of clause 53 which industry stakeholders seek to address during consultation.

The new draft Dealer Code has been released for consultation on the Department of Industry, Science, Energy and Resources Hub. Consultations close on 13 March 2020. The draft Dealer Code specifies a target commencement date of 1 July 2020.

A copy of the exposure draft Dealer Code can be accessed here [https://consult.industry.gov.au/industry-growth/automotive-franchising-draft-regulations-2019/].

This article was written by Evan Stents, Partner and Christian Teese, Senior Associate.