Automotive snapshot: agency sales, connecting vehicles to the internet, net zero

Agents of change: weighing the commercial benefits of an agency sales model against the potential legal risks

The automotive industry is no stranger to change and the 21st century has already seen an escalation of technological changes which have transformed the very nature of the vehicles being developed and sold.

And with these changes has come a steady rethinking of the ideal method of distribution to consumers.

Traditionally in Australia, the dominant form of distribution has been via a network of authorised independent dealers. However, more recently, there has been a strong push to transition to online sales and an agency model for the sale of vehicles in physical showrooms.

There are clear benefits to OEMs in adopting an agency model, but it is imperative that OEMs also assess the legal risks inherent in the move to agency – both in dealing with existing dealers in the transition and in the operational risks for the OEM thereafter.

The benefits

The key commercial benefit of an agency model is the greater ability to control the sales process.

In particular, the agency model enables the OEM/importer to set the specific prices at which vehicles are sold by removing the resale price maintenance risks inherent in an independent dealer structure.

An agency model can similarly give the OEM/importer greater control over the methods of sale to be adopted by dealers acting on behalf of the OEM/importer in the sale of vehicles to consumers.

The risks

While by no means exhaustive, here's our "top 5" list of risks that need to be considered and managed where possible (through the provisions of dealer agreements or otherwise):

1. Transition risk

The transition of an existing independent dealer network to a new agency model is inherently risky – commercially and legally – if not managed well.

Where dealers feel commercially disadvantaged by the transition, there is a heightened risk of dealers taking legal action, either on an individual basis or via a class action (eg. seeking compensation for investments previously made).

Regulatory enforcement action also cannot be ruled out if there is a perception that the transition was forced through, particularly given the obligation of good faith in the Franchising Code and the "best practice principles" released in December 2020 by the Department of Industry, Science, Energy & Resources.

Regulatory enforcement action also cannot be ruled out if there is a perception that the transition was forced through, particularly given the obligation of good faith in the Franchising Code and the "best practice principles" released in December 2020 by the Department of Industry, Science, Energy & Resources.

The ACCC's recent enforcement activities, public statements and ongoing investigations into the motor vehicle industry indicate that the ACCC could be interested in any allegations made by dealers relating to substantive or process fairness in the communication and implementation of the transition to agency. The ACCC has also consistently identified franchising as a Compliance and Enforcement Priority in the past few years.

2. Direct liability as "supplier" in respect of consumer guarantee remedies

The legal obligations imposed on OEM/importer will change as a result of sitting in the role of "retailer" (through dealers acting on their behalf in the supply of vehicles to consumers).

In particular, OEM/importer will have a direct obligation to provide refunds, repairs or replacements to consumers under the consumer guarantee provisions of the ACL, as opposed to having an obligation to indemnify retailers and otherwise being liable for damages claims as manufacturer.

3. Competition law considerations

There may be potential competition law risks to be navigated where a dealer acting as agent for the OEM/importer also sells competing vehicles (potentially also as agent for that other OEM).

The competition law risks may also be complicated if different models (agency, independent franchise) are deployed for different vehicle ranges.

4. Liability as principal for agent's acts/omissions

Under an agency arrangement, the actions of dealers and dealer staff may be deemed to be the actions of the OEM/importer to the extent that they are acting for or on behalf of the OEM/importer in undertaking those actions.

This could potentially render the OEM/importer liable for loss and damage arising from misrepresentations or other conduct of sales staff in connection with the promotion and sale of vehicles within the dealership.

5. Other legal issues for consideration

The business operations currently in place for the supply of vehicles need not materially change, though OEMs should separately consider any potential accounting or tax implications or systems changes that may be required to cater for their role as retailer principal in the agency relationship with dealers.

The requirements of the Franchising Code, and the obligations imposed on OEM/importer as franchisor, are unlikely to be affected by the appointment of dealers as agents for the sale of vehicles.

The OEM/importer may also need to obtain a retail motor dealers licence specifying each of the premises at which vehicles will be sold on its behalf and ensure that the terms and conditions of the licence (including all physical and non-physical requirements) are met.

Navigating the legal speedbumps to connecting your vehicles

It is clear that the future of private transport will involve motor vehicles which provide occupants with a variety of connected features to enhance their driving experience. These range from navigational services and roadside assist through to driver data feeding into insurance assessments and entertainment, such as video and music streaming. The potential end goal of these strategies is autonomous vehicles that can communicate with other vehicles and road infrastructure to operate the vehicle in place of a human driver.

Vehicle manufacturers are beginning to come to grips with the many areas of law that such applications traverse. These include:

• the collection of personal data and the requirements of the Privacy Act and Australian Privacy Principles;
• protecting against malicious cyber attacks gaining access to vehicle control or vehicle data, offences which are regulated under the Criminal Code Act;
• enabling these services and mitigating potential obligations under the Telecommunications Act and its various related legislative instruments;
• fault, compensation and registration under motor accident insurance schemes; and
• compliance with various road rules, which may differ in each State and Territory including previously anomalous rules relating to driver distraction or remote functionality.

Depending on the structure, the function and the parties involved, a vehicle manufacturer's obligations can vary widely and, if not considered carefully, could be unduly burdensome, costly and onerous.

A well-defined plan of how the features may be implemented is valuable and vehicle manufacturers should give some thought to the legal landscape that may apply when connecting their customers to these services.

Connecting vehicles and providing your customers with various internet-based services is a fast-moving area and one in which the legal rules may not easily be identifiable or fit for their current purpose. Our legal and technical knowledge may assist you is navigating your way through this difficult legal landscape.

Key considerations on the road to net zero

In recent paper, the Grattan Institute argued that the sale of new petrol and diesel cars should be phased out in Australia by 2035 to help cut carbon emissions to net zero by 2050.

The paper called on governments to reduce transport emissions including by making zero-emissions vehicles cheaper and it easier for drivers to charge their electric cars at home, at work, and on the road; and imposing a mandatory emissions limit on light vehicles that reduces to zero by 2035.

This, as well as other media reports from Europe, Scandinavia and the US, has prompted a number of conversations with our clients on the legal and regulatory considerations that might arise with this transition in the Australian landscape.

Some of the key topics we have considered include:

Product safety

• what are the potential safety risks arising from the use of lithium-ion batteries in electric vehicles, and when do they arise?
• what are the potential safety risks associated with recharging electric vehicles, in both a domestic and commercial context?
• what steps should manufacturers take to minimise and, where possible, manage the above risks?

Consumer guarantees

• what steps should manufacturers take to minimise and manage any "expectation gap" between the perceived performance of combustion engine vehicles and electric vehicles held by consumers?
• what are the potential risks is marketing combustion engine vehicles during the transition? What steps should manufacturers take to ensure compliance with the ACL in circumstances where the availability of repair and replacement parts diminishes?
• what steps should manufacturers take to minimise and, where possible, manage the above risks?

Misleading and deceptive conduct

• what are the potential risks is marketing EV during the transition including, for example regarding the "green credentials" of EV?
• what steps should manufacturers take to ensure compliance with the ACL?

Regulatory regime/ product compliance

• navigating the overlapping regulatory regimes (State and Territory-based electrical safety regulators, Australian Competition & Consumer Law and Department of Infrastructure, Transport, Regional Development & Communications).

Please let us know if a discussion on any of these topics would be of interest to you. We would happily arrange a meeting with our relevant matter experts in these areas, or on any other risks and opportunities.

Your chance to have a say on the proposed Franchise Disclosure Register

All franchisors would be expected to lodge disclosure documents on the proposed Franchise Disclosure Register.

In line with recent efforts to increase transparency within the franchising sector, the Federal Government has released the details of its proposed Franchise Disclosure Register, and invited comment from interested parties.

The 2021-22 Federal Budget announced $4.3 million for the development of a new Franchise Disclosure Register, the next in a number of recent changes to improve transparency in the franchising sector in response to the Parliamentary Fairness in Franchising Report.

The Register is intended to assist prospective franchisees to make an informed decision before entering a franchise agreement, via a publicly available, self-service portal through which prospective franchisees can access relevant information provided by franchisors.

Once the Register is established, all franchisors will be required to upload certain documents and information to the portal, including:

• current disclosure documents already required under the Franchising Code of Conduct, but franchisors can exclude:
  • personal information;
  • information about individual franchise sites or franchisees;
  • commercially sensitive information about rebates; and
  • historical information; and
• other information to enhance the franchisor's profile and search functionality, including:
  • simplified information within the existing scope of disclosure;
  • Australian and New Zealand Industrial Classification (ANZSIC) information; and
  • other information volunteered by franchisors, such as a brief description of the business and contact information.

Full and complete disclosure documents must still be provided to individual prospective franchisees in accordance with the Code, such as when negotiating or dealing with a franchisee to buy into a franchise system.

There will be ongoing obligations for franchisors to update the disclosure document and other materially relevant facts on the Register annually. Materially relevant facts are listed in section 17(3) of the Code. To minimise the burden on franchisors, the requirement to update information will operate in line with the current requirements to update existing disclosure documents under the Code. If no updates need to be made, there will be an obligation for franchisors to upload a notice explaining why no changes need to be made.

Civil penalties will be introduced for any failure to provide or update the required information on the Register.

When will the changes come into effect?

The expected go-live date for the Register is early 2022. There will be a transitional period to allow franchisors to understand the new requirements and participate voluntarily.

Under the proposal, all franchisors must have a profile and publish their latest documentation on the Register by 31 October 2022.

Next steps in the consultation process

Interested parties are invited to submit responses to this consultation by 29 October 2021. Submissions can be made to the Treasury at [email protected].

If you would like to explore the proposal's possible impact on your business, or want help to participate in the consultation process, please contact us.