Automotive snapshot: proposed changes to the Franchising Code, automotive litigation

Have your say on proposed changes to the Franchising Code

On 7 May 2024, the Federal Government announced that it had agreed (at least in principle) to all the recommendations of the independent review of the Franchising Code of Conduct (Code) that commenced in August 2023. The move is consistent with the Government's promise to deliver "a better deal" for small businesses.

The Government proposes to release an exposure draft of the Code later this year for comment. There are a number of proposed reforms that will affect the automotive industry set out in more detail below. The exposure draft will provide an opportunity for the automotive industry to have its say on the proposed changes to the Code.

Key Recommendations:

1. Service and repair work conducted by motor vehicle dealerships to be explicitly captured by the Code: The Government has agreed to clarifying that service and repair work performed by motor vehicle dealerships is within the scope of the Code.

2. Greater enforcement and increased penalties: The Government has agreed to increasing the scope of penalties under the Code to 600 penalty units ($187,800) for all substantive obligations placed on parties under the Code. The Government will also consider the suitability of increasing the amount of penalty units to 60 penalty units ($18,780) for infringement notices issued under the CCA for a breach of the Code.

3. Prospective franchisors to be given a single source of information: The Government has agreed to streamlining information made available to franchisees to reduce unnecessary compliance burden costs while maintaining protections. In practice, the Government has said this will effectively involve merging the key facts sheet into the disclosure document.

4. Simplified disclosure obligations for franchisors: The Government has agreed to simplifying disclosure obligations in relation to existing franchisees, including where a franchisee is renewing or extending an existing agreement. By way of example, existing franchisees would be able to opt out of disclosure and cooling off requirements designed to protect new franchisees.

5. Franchise Disclosure Register to include information about adverse actions brought against franchisors: The additional information will relate to dispute resolution and adverse actions brought by enforcement agencies to promote greater transparency for both current and prospective franchisees.

6. Termination provisions for serious breaches to be simplified: The Government has agreed to revisit and simplify the mandatory termination provisions and will work with the sector to do so. By way of example, the Review has suggested that this may include strengthening the rights of franchisors to terminate immediately if appropriate compensation is paid to a franchisee.

7. Unreasonable restraints of trade clauses to be limited: The Government will direct the Competition Taskforce to consider how restraints of trade and other uncompetitive terms in franchise agreements may be affecting franchise workers, and will request that the ACCC provide further guidance on when a restraint of trade provision may constitute an unfair contract term.

8. ASBFEO to name and shame franchisors who do not participate in meaningful alternative dispute resolution: The Government will amend relevant legislation to provide the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) with the power to publicly name franchisors that fail to participate meaningfully in ADR.

9. Franchisees to be given assistance where disputes arise: The Government has agreed to provide greater assistance to franchisees who raise disputes, including low-cost advice by the ASBFEO and the establishment of a designated complaints function within the ACCC. The Government will also consider whether access to "no adverse costs" orders should be introduced for matters brought by franchisees against franchisors in respect of breaches of the Code or Australian Consumer Law (ACL). We expect that this may see an increased number of complaints made.

10. Introduction of a licensing regime: The Review has recommended that the Government consider the feasibility of a licensing regime for franchisors to regulate most aspects of the franchisee-franchisor relationship.

This would potentially operate similar to the financial services industry regime and may include rules about who can hold a franchise licence, introduce powers to prevent harm or penalise breaches of the Code and build a framework for binding dispute resolution mechanisms.

The Review also recommended that franchising agreements provide an opportunity to make a return on investment and for compensation in the event of early termination to all franchise agreements. However, this recommendation will bring all franchising agreements into line with new motor vehicle dealership agreements rather than impose any change affecting the automotive industry.

Around the grounds on automotive litigation

Over the last six months, there have been a number of developments in major automotive litigation, including in class actions against a range of OEMs over various alleged manufacturing issues, and the conclusion of major ACCC enforcement proceedings over compliance issues under the Australian Consumer Law.

Those cases illustrate that OEMs remain a target of plaintiff law firms looking for the next big class action controversy (and who continue to be incentivised by plaintiff-friendly remuneration structures in the major jurisdictions, including contingency fees and common fund orders, which reward funders and plaintiff firms by reference to the amount of settlement or judgment sum obtained). In a number of the proceedings referenced below, multiple plaintiff law firms have commenced competing class actions over the same issue.

Recent developments:

1. Ford PowerShift Litigation: This is class action against Ford Motor Company of Australia in the Federal Court of Australia relating to allegedly faulty "PowerShift" transmissions in certain vehicle models (at which the Plaintiff was partly successful at initial trial).An appeal before the High Court of Australia was heard in April 2024 with judgment reserved. Before the class action went to trial, Ford accepted an Enforceable Undertaking, a $10 million penalty and costs in relation to this issue. There are other class actions pending against other OEMs regarding other allegedly faulty components, such as diesel particulate filters.

2. Mazda ACCC penalty proceedings: In February 2024, after a successful appeal to the Full Federal Court, Mazda Australia was fined $11.5 million (along with other adverse orders including publishing of a corrective notice on Mazda Australia's website, notifying dealers of the court outcome and paying most of the ACCC's costs). The ACCC's regulatory enforcement proceedings alleged misleading or deceptive conduct under the Australia Consumer Law arising from the way in which Mazda Australia managed nine consumers who sought remedies after making complaints about their vehicles.

3. Hyundai and Kia class actions: There are currently two different class actions underway against Hyundai and Kia entities, one o allegations regarding ABS, and another concerning allegedly defective engines. These proceedings are each at a relatively early stage.

4. Emissions class actions: There are multiple class actions on foot against various OEMs regarding diesel emissions allegations, including Mercedes-Benz Australia Pacific. Most of those proceedings are presently at an early phase, including case management of a variety of interlocutory issues.

5. Mitsubishi Fuel Efficiency Labelling: This saga continues. Mitsubishi was first dragged into this issue when in May 2019 the Victorian Civil and Administrative Tribunal found in favour of a consumer (Mr Begovic) who alleged that the fuel efficiency label which was applied to his vehicle was not accurate and therefore misleading or amounted to a breach of consumer guarantees under the Australian Consumer Law. There were multiple appeals culminating in the High Court of Australia deciding in December 2023 that affixing the fuel label in accordance with the regulatory regime did not of itself constitute misleading or deceptive conduct. Since then, a class action about the same issue has been commenced, and continues notwithstanding the High Court's finding in relation to Mr Begovic's individual case. 

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