The Federal Government today released the Competition and Consumer (Industry Codes—Franchising) Amendment (Fairness in Franchising) Regulations 2021 (Code Amendments). The Code Amendments represent landmark reforms for new motor vehicle dealers after concerted lobbying by the industry sector for much needed changes to better protect the interests of dealers.
The Code Amendments amend the current Franchising Code of Conduct to address both the franchising sector in general as well as specific changes targeted for New Vehicle Dealership Agreements.
General amendments affecting franchising sector
Dispute resolution and complaints handling
Franchising dispute resolution provisions are strengthened through:
- the introduction of conciliation and voluntary arbitration code dispute resolution mechanisms;
- conferring the functions previously undertaken by the Franchising Code Mediation Adviser upon the Australian Small Business and Family Enterprise Ombudsman (the Ombudsman) and expanding the role to encompass arbitration and conciliation; and
- the express recognition of the availability of multi-franchisee dispute resolution processes, and an obligation for a franchisor to attend such a process conducted by the dispute resolution provider.
Targeted improvements have been made to pre-entry disclosure requirements, which includes:
- the introduction of a new mandatory key facts sheet;
- improvements to the scope of financial disclosure, including requiring additional information relating to goodwill;
- an improved information statement; and
- providing more specific disclosure relating to the supplier rebates received by a franchisor and their methods of distributing any benefits of those rebates.
Exit arrangements and termination provisions
The provisions relating to the termination of franchise agreements are amended to, among other things, provide franchisees with an explicit avenue to request the early termination of their franchise agreement.
Retrospective unilateral variation of franchise agreements
A franchisor is prohibited from unilaterally varying an agreement with retrospective effect unless the written consent of the franchisee is obtained.
Changes specifically affecting new vehicle dealership agreements
Definition of Motor Vehicle Dealership
The definition of motor vehicle dealership has been expanded to expressly incorporate agency models of vehicle sales. The definition captures Australian-based dealers who act as an agent to sell vehicles on behalf of the manufacturer, where the consumer may be directly purchasing the vehicle from the manufacturer. The dealer will no longer need to purchase the stock, and may not be able to control pricing. This is contrasted with a traditional automotive franchising model, where new stock is purchased by the franchisee who then on-sells to customers. For the purposes of the Code, references to a franchisee and franchisor also refer to an agent and principal, respectively.
The Code Amendments introduce an additional factor that courts must consider in determining whether a party to a new vehicle dealership agreement has acted in good faith. In addition to the existing considerations that apply to all franchise agreements, courts are to have regard to whether the terms of the agreement are fair and reasonable. This enshrines the principle that manufacturers should act in good faith in negotiating and offering the substantive terms of an agreement, including terms relating to the duration of the agreement and the proposed calculation of compensation for dealers in the event of early termination.
The Code Amendments provide that new vehicle dealership agreements are to include terms setting out the compensation of the dealer in the event that the manufacturer withdraws or rationalises its Australian market presence, or changes its distribution models in Australia. The compensation term must also specifically address how this compensation is to be determined with respect to lost profit from direct and indirect revenue, unamortised capital expenditure requested by the franchisor, loss of opportunity in selling established goodwill and wind-up costs.
The manufacturer must specify how the franchisor will buy back or provide compensation in relation to new vehicle inventory, party and special tools in the event of early termination or non-renewal of the agreement where a new agreement is not executed. The manufacturer is precluded from including a contractual provision which attempts to deny the dealer compensation if the agreement is terminated early for reasons other than breach by the dealer. If such a term is included, a civil penalty applies.
The Code Amendments expand upon the other capital expenditure requirements applicable to new vehicle dealership agreements by providing that the dealer must have a reasonable opportunity to recoup any capital investment required by the franchisor upon entering into or under the agreement. This addresses situations where the provisions and specified term of the agreement do not give the dealer a reasonable opportunity to make any return on their investments. These changes do not require a franchisor to guarantee a profit or the success of the franchisee’s business. It is not intended to remove the inherent risks of running a business, but is intended to ensure that the term of a franchise agreement is consistent with the level of capital investment required.
The Code Amendments as they as they apply to ‘Compensation Provisions’ and ‘Capital Expenditure’ are civil penalty provisions. The Government has recognised that as a result of the substantial imbalance in bargaining power between vehicle manufacturers and dealers, it is necessary for regulation to provide an effective deterrent to manufacturers from abusing their position by including terms which are substantially unfavourable and uncommercial in their agreements. The risks of considerable harm being done to small business dealers is particularly pronounced in situations where a manufacturer withdraws from Australia or reduces their market presence. The example of GM retiring the Holden brand is a prominent example in this regard. The Government has stated that it is these risks that justify the penalties applicable to imbalanced contractual arrangements, particularly as they pertain to compensation and capital investment.
Timing of changes
The amendments regarding dispute resolution apply to any dispute which arises after the clause commences, even if the franchise agreement was entered into before the commencement of the amending Regulations.
The remaining provisions only affect agreements entered into, renewed, or extended on or after 1 July 2021.
Amendments which require a franchisor to change the disclosure document apply to disclosure documents to be given on or after 1 November 2021. The Code requires franchisors to update the disclosure document within 4 months of the end of financial year. This transitional provision minimises the regulatory impact and compliance burden associated with the transition to the amended Code.
Standalone automotive franchising code
The Minister for Employment, Workforce, Skills, Small and Family Business has also stated that his department will shortly release a discussion paper on the merits of a standalone franchising code.
This article was written by Evan Stents, Partner.