Review of franchising code of conduct released

12 February 2024

On 8 February 2024, Dr Michael Schaeper tabled his report (Report) to the Federal Government on his review of the Franchising Code of Conduct (Code). In accordance with the review’s terms of reference, Dr Schaeper assessed the fitness for purpose of the Code, with particular regard to the role of the Code in regulating the automotive sector.

More than 1,700 franchise entities were invited to participate in the review’s consultation, with 95 formal submissions received, over 40 meetings and roundtables held, and 544 responses across two surveys.

The last review of the Code was undertaken by Mr Alan Weinn in 2013.

Overall, the Report did not recommend any meaningful changes to how the Code affects the automotive sector other than recommending the definition of ‘motor vehicle dealership’ in the Code should be amended to clarify that it includes all sales, service and repair work.

Despite submissions lodged by the AADA and MTAA, the Report did not contain any recommendations to:

  • have a stand-alone Code for dealers;
  • provide better protections for dealers’ investment in goodwill;
  • expand the Code to cover other ancillary automotive sectors such as trucks, farm machinery and motor cycles;
  • remove ‘no fault’ termination rights;
  • expand the operation of the ‘unfair contractual terms’ regime to all franchises/dealers;
  • have minimum terms for dealer agreements; and
  • provide dealers with the exclusive right to exercise a renewal option.

The following findings and recommendations were made that are relevant to the automotive sector:

  • The Code is generally fit for purpose;
  • Overall, Part 5 of the Code (that deals with motor vehicle dealers) appears to have improved the operating environment for new vehicle dealers;
  • The definition of motor vehicle dealership in the Code should be amended to clarify that it includes all sales, service and repair work. This came about due to Distributors seeking to instigate agency arrangements having stand-alone Service & Parts Agreements which are separate from the Agency Agreements. This issue was considered by the Federal Court in the context of the recent Mercedes-Benz decision. Mercedes-Benz contended that its service and parts agreement with the dealers did not meet the definition of a franchise agreement;
  • Reviews of the Code should be conducted in five yearly cycles in the future. The next review of the Code should consider whether Part 5 (dealing with motor vehicle dealers) should be retained and, if so, whether it should be extended to other subsectors such as trucks, farm machinery and motorcycles;
  • The existing requirement that new vehicle dealership agreements must provide a reasonable opportunity to make a return on investment should be extended to all franchise agreements;
  • The Australian Government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee-franchisor relationship;
  • On balance, no further adjustments or changes are recommended regarding the obligation to act in good faith at this time. The current Code obligation is appropriately calibrated to the nature of franchising, as distinct from other business models. Good faith should not operate so as to confer benefits that contradict the express terms of a franchise agreement;
  • The absence of a legal right for a franchisee to be compensated for goodwill in franchising contracts is well established. However, if a franchise agreement is terminated early by a franchisor, through no fault of the franchisee, it appears reasonable to provide some compensation;
  • The lack of success of the voluntary binding arbitration mechanisms to date may point to the need for government to consider alternative solutions to achieve speedy and cost-effective resolution of disputes in the sector. However, the current Code cannot be amended to provide for the mandatory arbitration of disputes. As such, it is worth considering the utility of an ex ante regulatory scheme to deliver binding dispute resolution in a cost-effective manner; and
  • The existing requirement that new vehicle dealership agreements must include provisions for compensation for franchisees in the event of early termination should be extended to all franchise agreements.

The Government has stated that it will carefully consider the findings and recommendations from the Review before making a response.

A full copy of Dr Schaeper’s Report is available, click here to view.

This article was written by Evan Stents, Lead Partner – Automotive Industry Group

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