AUTOMOTIVE CODE – WHAT IT SHOULD COVER AND DOESN’T!

The recent release of the Competition and Consumer (Industry Codes – Franchising) Amendment (New Vehicle Dealership Agreements) Regulations 2020 sought to address the power imbalances that exist in commercial arrangements between Dealers and distributors.

Below we explain some of the key changes made by the Franchising Code of Conduct (the Code) and offer our analysis and evaluation of those changes. Where we believe the regulations fall short of expectation, we offer our thoughts as to what the changes should have covered. Finally, we discuss the key automotive industry issues that are not covered by the Code at all but should have been.

Key Change 1: Notification Obligations

Explanation of change:

Distributors (per clause 47) and Dealers (per clause 48) are now required to notify each other in writing as to what they intend to do upon the expiry of the existing agreement. If the term of the agreement is 12 months or more, distributors and Dealers are required to provide at least 12 months’ notice. If the term is six months or more, then at least six months’ notice is required. If the term is less than six months, then at least one months’ notice is required.

Analysis and evaluation of the change:

Previously, if a distributor intended to extend or enter into a new agreement, it had to provide Dealers with the maximum notification of six months. Now, however, if the term of the agreement is 12 months or longer, 12 months’ notice is required. Furthermore, distributors (and Dealers) now have the additional obligation to notify franchisees (and franchisors) if they do not intend to either extend or enter into a new agreement. In practice, this was already occurring under clause 18 despite no explicit requirement for distributors to do so.

What the change should have covered:

To reflect Dealer expectations, the clause 47 notification obligation should have been a minimum of 12 months. Additionally, it should have been supported by the regulations enacting Dealers’ calls for longer term Dealer agreements. A minimum term of five years with an automatic renewal of one term upon the Dealer’s choice is not unreasonable given that other industries offer agreements spanning 20 years.

Key Change 2: Reasons Requirement

Explanation of change:

If distributors (per s 47(5)) or Dealers (per s 48(4)) provide a notice that they do not intend to either extend their agreement or enter into a new agreement, the notice must include the reasons for their intention.

Analysis and evaluation of the change:

The requirement for distributors to provide reasons for their intention is terrific news and will make it somewhat easier for Dealers to challenge distributors when their reasons are unjustified and/or they are not acting in good faith. In our view, of all the new regulations, this is the biggest win for Dealers.

What the change should have covered:

This change is in line with Dealers’ expectations and will hopefully put an end to the risk of no-fault termination.

Key Change 3: Obligation to manage winding down of agreement

Explanation of change:

If either the distributor or Dealer provides a notice intending to neither extend the agreement nor enter into a new agreement, the new clause 49 requires that the parties agree to a written plan to manage the winding down of the dealership, and cooperate to reduce the Dealer’s stock over the remaining term of the agreement.

Analysis and evaluation of the change:

As most Dealer agreements contain a plan to manage the winding down of the dealership and for reducing stock, clause 49 is unnecessary. The point that has been missed is that the terms of any buy-back of vehicles and parts should be on commercially reasonable terms.

What the change should have covered:

The only adequate solution to address Dealer concerns is placing an obligation on distributors, in the event of non-renewal, to buy back stock at cost.

Key Change 4: Requirements regarding Significant Capital Expenditure

Explanation of change:

Under the new clause 50, distributors cannot require Dealers to undertake significant capital expenditure during the term of the franchise agreement. The fact that a distributor “considers it necessary” for the Dealer to undertake capital investment is no longer a valid excuse.

Analysis and evaluation of the change:

Clause 50 is an important win for Dealers. Many Dealers have been required to make significant expenditures, rationalised by alleged research and methods lacking the transparency for Dealers to adequately consider and challenge such expenditures.

What the change should have covered:

This change is welcomed and is broadly in line with Dealer expectations for the amendments.

Key Change 5: Multi-franchisee dispute resolution

Explanation of change:

Where a distributor has entered into franchise agreements with two or more Dealers, and two or more of those Dealers have a dispute of the same nature with the distributor, clause 52 enables them to ask the distributor to deal with them jointly in the dispute.

Analysis and Evaluation of the change:

For Dealers, the insertion of clause 52 is a step in the right direction. Whilst not perfect, clause 52 indicates that the regulators are aware of the power imbalance in negotiations between Dealers and distributors and are encouraging multi party dispute resolution. There are weaknesses in the precise drafting of clause 52 in that it does not impose an obligation on distributors to participate. In our view, consistent failure to commit to multi-party dispute resolution will likely lead to this provision being mandated the next time the Code is reviewed.

What the change should have covered:

To be effective, we believe clause 52 should have mandated distributor compliance with the franchisees’ request.

Key Issues not addressed in the Code

Unfair Contract Terms to be extended to Dealers:

Unfair Contract Terms (UCT) legislation originally applied to consumers but has recently been extended to cover small businesses as well. As most dealerships do not qualify as a small business under UCT legislation, they are afforded no protection under the law. However, Dealers are just as deserving of UCT protection as consumers and small businesses, particularly given their unequal negotiating position with distributors makes it difficult for them to effectively advocate for the removal of unfair terms. UCT legislation could “blacklist” clauses that are unfair and such clauses can be specific to the automotive industry. The regulations could have prohibited clauses that are particularly harmful to Dealers such as clauses that set unrealistic or arbitrary performance targets. However, the regulations failed to mention, let alone address the issue of UCT.

Security of tenure:

The regulations failed to address the insecurity of tenure that Dealers experience due to short term Dealer agreements. The AADA advocated for a minimum five-year term, or a link between the term of the agreement and capital investment. A more ambitious target may be to seek automatic renewal terms (as exist in lease agreements or long term contracts) subject to the Dealer having a right to terminate on 12 or six months’ notice, in accordance with other sectors of the franchise sector.

Fair and transparent target setting:

Dealer performance targets cause a number of issues for Dealers. Targets can be arbitrary and unrealistic, based on faulty research that Dealers are not aware of; failing to meet them can mean termination of the Dealer agreement even where the Dealer is performing well. In our view, the issue of performance targets was a missed opportunity to regulate conduct in the automotive industry. At our breakfast briefing in December 2019 a retired Federal Court judge agreed with us that unfair targets could amount to misleading and deceptive conduct.

Warranty Obligations:

In the automotive industry, Dealers are required to fulfil distributors’ warranty obligations. In theory, any work completed by Dealers should be compensated for by distributors. However, in practice, distributors regularly reject warranty claims for minor non-conformities. Furthermore, distributors engage in practices like the extrapolation of warranty claims in order to to avoid the cost of conducting a full audit. Recommendations regarding warranty obligations insist that distributors act honestly, carry out audits within a reasonable period, ensure that payment regarding warranty claims are made within a reasonable time, and that extrapolation is prohibited. Unfortunately, the regulations did not extend to the issue of warranty obligations.

Industry Standard for Compensation:

The recent exit of the Holden brand from Australia has highlighted the need for a compensation system that ensures Dealers are treated fairly when a distributor exits the country, or drastically alters the way it operates. The compensation offered to Holden Dealers has been criticised as inadequate and validates the need for regulatory intervention rather than reliance on the distributor’s goodwill. The new Regulations were a missed opportunity to provide a framework for fair and adequate compensation.

Whether an agency agreement is covered by the Code:

Concerns have been brewing in the automotive industry for some time now about a possible widespread change from the franchise model of distribution to an agency model. The regulations do not provide a clear answer as to whether an agency model would be captured by the the Code or not. Yet again, we believe the new regulations were a missed opportunity to clarify this issue.

Conclusion

The regulatory changes do cover some key areas of concern for Dealers, such as no-fault non-renewals. However, we consider the regulations are not comprehensive enough in scope to address the majority of issues that matter to Dealers. Certain key issues relevant to the automotive industry (such as warranty obligations or an industry standard of compensation) are not covered by the Code at all. Those gaps certainly ought to be addressed in future amendments to the Code or through some other legislation.

This article was written by Vinesh George, Company Secretary and Legal Counsel, AADA | Principal, VS George Lawyers.

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