Discussion Paper A Step Towards Franchise Balance

Dealers very often invest millions of dollars in acquiring and operating their new car dealerships. They also operate in a very competitive environment in which they compete against a multitude of other brands whilst endeavouring to meet the onerous expectations set by Distributors. Those expectations are generally governed by the Dealer Agreement which is a document that regulates every aspect and operation of the Dealer’s business.

It is therefore not surprising that Dealers very often find themselves in dispute with Distributors. Depending on the nature of the dispute, it can lead to the termination of the Dealer Agreement and the total loss of the Dealer’s investment in the dealership business.

The types of disputes often seen between Dealers and Distributors include disputes over:

  1. notices of termination for failure to meet KPIs;
  2. Distributors not granting renewals of Dealer Agreements;
  3. Distributors not consenting to the assignment of a Dealer Agreement to the proposed purchaser of the dealership business;
  4. claw backs over warranty claims made by Dealers after an audit has been undertaken by the Distributor;
  5. changes to the Dealer’s PMA; and
  6. the level of capital investment a Dealer is required to make to its facilities.

The resolution of disputes in a timely manner is also important as it ensures that the investment in the dealership business is protected, the commercial relationship with the Distributor is preserved and the costs and disruption of legal proceedings are avoided.

The recent changes to the Franchising Code of Conduct (Code) have expanded the means by which Dealers may now resolve disputes with Distributors. It is therefore important for Dealers to understand these changes and how they can be used to their benefit.

Under the previous Code provisions, where a Dealer had a dispute with the Distributor, the Dealer had the right to inform the Distributor in writing (Dispute Notice):

  1. the nature of the dispute;
  2. what outcome the Dealer wants; and
  3. what action the Dealer thinks will resolve the dispute.

Once the Distributor received the Dispute Notice, the Dealer and Distributor had 21 days to agree how to resolve the dispute. If that could not be done, the Dealer or Distributor could refer the dispute to a mediator for mediation.

In its most basic form, mediation is an informal discussion between the Dealer and Distributor to air issues, create solutions and examine options to resolve the dispute. The role of the mediator is to help the Dealer and Distributor focus on the issues and keeps communication going to reach an outcome. A mediator helps participants decide what to do themselves.

Very often the Dealer and Distributor will attend the mediation with their legal representative – but this is not mandatory. At the start of mediation, a mediator describes the process, discusses and clarifies confidentiality and in how any agreement to resolve the dispute can become legally binding. A mediator usually sets guidelines or ground-rules to help guide the process, assists the discussion so it is fair and manages the interactions so that they are respectful. Importantly, a mediator does not give advice or an opinion and does not decide who is right or wrong, take sides, or make a decision about the outcome. It is the participants who decide the outcome.

Dealers who participate in mediation sometime express the view that they expected the mediator to be more proactive in assisting the parties reach a resolution. In that sense, Dealers have in mind that that mediator’s role would be more akin to that of a conciliator or arbitrator. It is in this respect that the Code changes have most impacted on how disputes may be resolved.

The first change is that rather than only being able to refer a dispute to a mediator if the Dealer and Distributor have not been able to agree to agree how to resolve the dispute within 21 days of receiving a Notice of Dispute, the Dealer can now refer the dispute to a mediator or conciliator.

Conciliation shares some features of mediation in that it is an informal process facilitated by an impartial professional to help the parties achieve a resolution. Compared with mediation, however, the conciliator takes a more interventionist role. The conciliator may be asked to express an opinion on the best way for the dispute to be resolved and suggest the terms of a negotiated settlement. The parties may also ask the conciliator to make a non-binding recommendation or finding on the dispute, based on both the facts and legal issues at the heart of the disagreement. The conciliator may also make recommendations to the parties for their consideration.

Accordingly, if a Dealer would like a more robust dispute resolution process with the dispute resolution facilitator taking on a more interventionist role, then they should refer their dispute to a conciliator. However, it is

mportant to remember that neither a mediator nor a conciliator can make binding decisions on the parties to resolve the dispute. Both processes are merely facilitative in nature.

The second change is that a Dealer and Distributor may now by written agreement agree to have their dispute resolved in whole or in part by arbitration. An arbitration is a quasi-private court process that is less expensive, quicker and more flexible alternative to going to an actual court.

The role of the arbitrator is to be an independent decision maker who makes a decision, known as an ‘award’, that is in line with the parties’ rights and is usually binding and enforceable.

Before arbitration starts, an arbitrator confirms the extent of the confidentiality and how the arbitration will proceed. Parties can negotiate time frames up-front with an arbitrator to ensure that the result is concluded faster than what would generally be possible through a court. Agreements can also be made about use of witnesses and experts, time frames for submissions, size of submissions, which aspects of the matter will be included or excluded, how many meetings are to be held and whether these will be in person or on-line and so on. In this way, the arbitrator can customise the arbitration to suit the parties and to ensure that the necessary evidence is available for sound decision making.

The key difference in the two processes is that it is mandatory for a Distributor to participate in a mediation or conciliation if a Dealer refers the dispute to either a mediator or conciliator. However, a Dealer and Distributor can only participate in an arbitration if both parties agree to it.
In the Discussion Paper on Automotive Franchising released by the Federal Government on 11 August 2021, submissions have been requested from industry stakeholders as to whether arbitration ought to be compulsory for disputes between Dealers and Distributors.

The other important change to resolving disputes is that if two or more Dealers have similar disputes with a Distributor, they may refer the dispute to a mediator or conciliator to be resolved jointly. This can give rise to significant cost savings and efficiencies if a number of Dealers or the whole network of Dealers has the same dispute with a Distributor.

As can be seen, understanding the new dispute resolution options is very important for Dealers seeking to resolve disputes with Distributors in a timely and cost-efficient manner whilst seeking to preserve the investment in their dealership business.

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