Amendments to Franchising Code of Conduct affecting automotive sector

The automotive industry continues to find itself in the regulatory crosshairs following the Government's release on 14 February 2020 of an Exposure Draft of changes to the Franchising Code of Conduct aimed at further recalibrating the power balance between manufacturers and dealers in respect of new vehicle dealership agreements.

The industry, and in particular the major international automotive brands operating in Australia, have been at the centre of increased regulatory investigations, enforcement actions and legislative change in the period since 2015, with regulatory and legislative scrutiny further increasing significantly off the back of the ACCC's findings in its 2017 new car retailing market study. Those findings included competition concerns stemming from the perceived power imbalance in the commercial relationships between the large car manufacturers and the two other key players in the market – new car dealers and independent repairers.

Alongside increased regulatory investigations and enforcement action by the ACCC (including in relation to Franchising Code compliance), the Government has also actively pursued legislative reform including:

• consultations throughout 2018 and 2019 in relation to possible responses to address concerns raised about the franchise relationships between car manufacturers and new car dealers;
• confirming in October 2019 a commitment to introducing a mandatory information sharing scheme between car manufacturers and independent repairers; and
• confirming a range of other measures directed at multiple industries, including the automotive sector, to be addressed in economy-wide legislation, such as tightening up supplier indemnification rights for the remedying of manufacturing defects and the beefing up of unfair contract term protections for small businesses.

While no specific timetable for the drafting of legislation has yet been announced in respect of the latter two initiatives, on 14 February 2020 the Government released an Exposure Draft of proposed amendments to the Franchising Code which would introduce a separate Division into the Code to deal with issues specifically affecting automotive dealership agreements.

The changes, which are expected to take effect on 1 July 2020, will apply to "new vehicle dealership agreements" being those for a dealership that predominantly deals in new passenger vehicles seating up to nine persons, and/or vehicles constructed primarily for the carriage of goods and with a gross vehicle mass not exceeding 3.5 tonnes. Large goods vehicles, motorcycles, motorised farm machinery, motorised construction machinery, aircrafts and motorboats are excluded.

The overarching purpose of the changes is to address perceived power imbalances between car manufacturers as franchisors and new car dealers as franchisees.

The changes relate to the following key issues:

End of term notification obligations

Currently, the Franchising Code requires a franchisor to inform a franchisee whether the franchisor intends (or does not intend) to extend the agreement or enter into a new agreement at least six months before the end of the franchise agreement term (if the franchise agreement is six months or longer) or at least one month before the end of the franchise agreement term (if the franchise agreement is less than six months).

The Exposure Draft proposes a new provision for automotive dealer agreements of 12 months' duration or longer which would require a party not intending to renew the agreement at the end of its term to provide at least 12 months' notice of that decision (or such longer notice term as agreed between the parties). Unlike the current notice provision, which applies only to the franchisor, the Exposure Draft amends the notification requirement so that it applies to either a franchisor or a franchisee, whoever is the non-renewing party. In addition, if a party gives notice that they do not intend to extend a franchise agreement or enter into a new agreement, then the 12 months' written notice must include reasons for the decision. The purpose of this provision is said to be to allow the franchisee to better assess whether the decision was made in good faith.

Of greater practical significance to franchisors (assuming that a decision on renewal may well already be generally made in practice at least 12 months ahead of time), the Exposure Draft also provides that, in the event of non-renewal, the parties must agree to a written plan (with milestones) for managing the winding down of the dealership (including new vehicles, spare parts and service and repair equipment) over the remaining term of the agreement. The parties must work together to reduce stock over the remaining term of the agreement.

While the extended notice period will give a franchisee more time to mitigate any losses brought about by a non-renewal decision and would allow a franchisor more time to adjust its dealership network to ensure consumers have access to services in the event of a franchisee opting not to renew, the requirement to agree to a written exit plan may lead to some additional administrative and practical difficulties for franchisors seeking to sever ties with underperforming franchisees.

Capital expenditure

The Exposure Draft amends the current prohibition on franchisors imposing significant capital expenditure obligations on franchisees in relation to a franchised business. Under the proposed new clause, expenditure that the franchisor considers is necessary as capital investment in the franchised business will no longer be excluded from the prohibition. The Exposure Draft will require franchisors to provide as much information as practicable about any significant capital expenditure (including expenditure considered necessary for the franchised business). This will include details regarding the rationale, amount, timing, nature, anticipated outcomes and expected risks associated with the expenditure.

Additionally, the Exposure Draft will require the franchisor and franchisee to discuss any required expenditure before entering into, renewing or extending the scope of a dealer agreement. The circumstances under which the franchisee is likely to recoup the expenditure must be discussed.

The proposed changes are aimed at facilitating greater transparency for franchisees and to assist parties to assess their commercial and legal options.

Resolving disputes

While the Franchising Code already imposes compulsory dispute resolution processes, the Exposure Draft will amend those requirements as applicable to the automotive sector to entitle franchisees to deal with a franchisor collectively where two or more of the franchisees each have a dispute of the same nature with the franchisor. Franchisees will have the option to request to participate in multi-franchisee dispute resolution but are not required to do so.

Multi-franchisee dispute resolution will inherently give greater power to franchisees to negotiate a favourable resolution of their dispute with the franchisor.

The Government is now consulting interested stakeholders on the draft regulations and has asked for submissions by 13 March 2020. Subject to any further amendments made following receipt of stakeholder feedback, the changes are expected to take effect on 1 July 2020.

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