Regulations introducing a new automotive section into the Franchising Code of Conduct (Franchising Code) are effective from 1 June 2020. Although the regulations largely follow the Exposure Draft issued in February this year, the 1 June implementation date caught many by surprise. This is particularly the case given the consultation process consistently flagged a 1 July 2020 commencement date and the Exposure Draft itself contained an implementation date of 1 July. It’s unclear whether this was an inadvertent error, or whether the Government was keen to move quickly given the economic conditions currently confronting the automotive sector.
Application of the changes
The changes apply to new vehicle dealer agreements entered into on or after 1 June 2020 (New NVDAs), as well as to renewals or extensions of such New NVDAs.1
The new regulations do not apply to all motor vehicle dealerships, only those that come within a new definition of a “new vehicle dealership agreement”. This is defined to mean a motor vehicle dealership agreement relating to a dealership that predominantly deals in new passenger vehicles or new light goods vehicles (or both). So agreements dealing with motorcycles, used cars, farm machinery and trucks would typically not be caught. The reason for this policy distinction is not clear, and the word “predominantly” in the definition is likely to be closely scrutinised by those seeking to avoid the application of the new regulations.
Importantly, the end of term obligations also apply to renewals or extensions of new vehicle dealership agreements entered into prior to 1 June, 2020 (Existing NVDAs). The obligations contained in clause 18 of the Code are expressed to continue to apply to Existing NVDAs instead of the new obligations unless the Existing NVDA is renewed or extended.2 So once an Existing NVDA is renewed or extended, the new end of term notification and wind down management obligations apply to the Existing NVDA.
The application of the new capital expenditure obligations to any Existing NVDA is determined in part by the date of creation or updating of the disclosure document. The existing clause 30 of the Franchising Code, rather than the new clause 50, applies to any Existing NVDA entered into, renewed or extended before 1 June 2020.3 Clause 30, rather than clause 50, also applies to the renewal or extension of an Existing NVDA if the disclosure document was created, or most recently updated, prior to 1 June 2020. However if the Existing NVDA is renewed or extended after 1 June 2020 and the disclosure document was created or most recently updated after 1 June 2020, clause 50 applies. Clause 51 also applies to such a disclosure document.4
New requirements for franchisors when requesting capital expenditure by dealers
Consistent with the existing provisions of the Franchising Code, clause 50 provides that car manufacturers cannot not require significant capital expenditure by a dealer during the term of the agreement. This prohibition is subject to exceptions, such as where the expenditure is agreed with the dealer, or where such expenditure is disclosed to the dealer prior to the entering the agreement. The key difference between the existing clause 30 in the Franchising Code and the new clause 50 is that clause 30(2)(e) has been replaced by a new clause 51. Under the new provisions, when making capital expenditure disclosure to a dealer prior to signing a new vehicle dealership agreement, car manufacturers must provide as much information as is practicable about the expenditure, including:
a. the rationale for the expenditure,
b. the amount, timing and nature of the expenditure;
c. the anticipated outcomes and benefits of the expenditure; and
d. the expected risks associated with the expenditure.
The written disclosure must be supplemented by a discussion before the dealer agreement is signed. Matters to be discussed include the likelihood of recoupment of the expenditure, having regard to the geographical area of operations of the dealer.
These requirements are a significant compliance burden for manufacturers, particularly as they assume the manufacturer is aware of all elements. It would seem quite challenging to satisfy these obligations without incurring additional risk, such as in relation to projecting “anticipated outcomes and benefits”. Section 4 of the Australian Consumer Law provides a person must be able to prove they had a reasonable basis for making any representation as to a future event.
End of term obligations
The new regulations provide that car manufacturers must notify franchisees in writing of their intention to extend or enter into a new agreement, or do neither. Where the term of the agreement is 12 months or more, the franchisor must give at least 12 months’ notice.5 The longer notice period6 is aimed at providing greater flexibility for franchisees to search for another franchise, to sell the site or do whatever is necessary to organise their affairs.
Where the franchisor gives notice that it intends to not extend the franchise agreement nor enter a new one, a statement of reasons must be provided. The statement of reasons is thought to assist dealers in assessing whether the franchisor has acted in good faith.
In the event a franchisor provides notice to a franchisee that it intends not to extend the current agreement nor enter into a new agreement, the parties must work together to agree to a written plan with milestones. The plan should include management of the dealer’s stock of new vehicles and parts, and service and repair equipment over the balance of the agreement. The parties must also cooperate to reduce the franchisees stock of new vehicles and spare parts for the remainder of the term. While car manufacturers are typically proactive in managing outgoing dealer stock levels, a requirement to “agree a written plan” may prove challenging, particularly where the relationship has soured.
Manufacturers are obliged to implement these arrangements “as soon as practicable”7, and notwithstanding dealers may be reluctant to cooperate. It may therefore be appropriate to consider amending Dealer Agreements to give manufacturers the ability to take charge of the process, and possibly use the default provisions under the Dealer Agreement to ensure dealer compliance.
The new regulations provide that two or more franchisees “may ask” the franchisor to deal with the franchisees together about a dispute which is of the same nature. The regulations stop short of mandating that car manufacturers must engage in multi- party dispute resolution, which seems prudent. However manufacturers must still consider and respond to the request having regard to the good faith obligations contained in the Franchising Code.8
Multi-party dispute resolution may provide a cost effective and efficient approach to resolving disputes, and dealers may feel they have more bargaining power as a group than individually. However there are practical complexities with multi-party dispute resolution, such as the potential for breach of confidentiality obligations and conflicts of interest given the broad variation in dealer size, business structure, locations and businesses.
At first glance the regulations look relatively innocuous, and they certainly do not contain some of the more radical amendments requested in some submissions to recent Government inquiries and during industry consultation. However there are important changes that will require manufacturers to review and possibly reconsider their approach to end of term arrangements, capital expenditure and dispute resolution.
There will be two regulatory regimes operating in parallel – the new regulations applying to new vehicle dealership agreements and those applying to the broader category of motor vehicle dealerships regulated by the current Franchising Code. In some situations it will be unclear which regime applies, and care will need to be taken to avoid inadvertently tripping the application of the new regime to existing arrangements.
Manufacturers will need to consider whether they wish to amend their agreements or operating manuals to give greater structure or clarity to end of term arrangements or capital expenditure matters, as the regulations leave plenty to the imagination. The regulations may in fact lead to less disclosure rather than more disclosure in relation to capital expenditure, as it would seem very difficult and high risk to attempt to provide capital expenditure information to the standard required by the new regulations. Another consequence may be to prefer shorter term agreements, or consider other forms of vehicle distribution.
A review of the operation of the amendments made by the new regulations must be conducted before 1 April, 2024. By that time there is likely to have been major changes to the Australian automotive sector, with major restructuring already under way in some networks and global and local economic conditions the worst in living memory for many manufacturers and dealers.
To discuss any aspect of the new regulations, or for more information on automotive industry matters, please contact our specialist team members below.