Does your brand set an annual sales target of, say, 50,000 units then divide that brand target between its Dealer network and link significant bonus payments to meeting that target?

What happens if the brand falls significantly short of its annual sales target? Where does the fault lie – the brand, the product or the Dealer?

If the annual sales target is unrealistic and not based on sound reasoning, there may be significant commercial and legal ramifications for both the distributor and the Dealer.

Targets

The majority of Dealer Agreements contain clauses that allow distributors to set sales targets. Dealers may receive large financial bonuses for meeting these targets. Such bonuses are often critical to the profitability of the business.

A failure to meet these targets may result in the business not being profitable during that financial year. It may also have further significant consequences for Dealers including the non-renewal of the franchise, or termination of the franchise agreement, if Dealers persistently fail to achieve the targets set for them.
Given the importance of such targets, it is prudent that they are accurate reflections of what brands are able to sell.

Many brand issues are beyond the control of the Dealer. Why then, does the Dealer suffer when it fails to meet an unrealistic brand target?

Unfortunately, not all distributors apply sound reasoning and fact-based evidence when setting targets for Dealers. Too many distributors simply set targets instituted by global headquarters or, alternatively, set an aspirational target in order to outdo a rival. An inappropriate target, not based on sound evidence and that cannot reached, can have severe financial impacts on Dealers. Given the importance to profitability and, in some cases, viability, it is only fair that targets are based on sound reasons and fact-based evidence that is achievable.

Misleading Representations

So what can Dealers do in the face of these issues?

Section 4 of the ACL states that a representation with respect to future matters is misleading if the party (in this case, the distributor) does not have reasonable grounds for making their representation (that is, the annual sales target).

An annual sales target set by the distributor and authorised by the terms of the Dealer Agreement may be regarded as a prediction or projection about a future matter, especially given the significant financial implications that flow from the prediction or projection.

A distributor is taken to not have reasonable grounds unless evidence is adduced to the contrary. Importantly, the onus is on the distributor to prove that the targets were based on reasonable grounds. It is worth noting that the intention of distributors to mislead Dealers is irrelevant.

The ‘reasonable grounds’ test can involve consideration of many factors, which will be dependent upon the circumstances of each individual case. For the target-setting process, some factors may include: whether leading professionals in the field were consulted to help make accurate assessments; whether all available data and information, such as location and demographic factors, were taken into account; whether the brand has a particularly ‘hot’ product; whether the brand intends to invest significantly in marketing; whether the Dealer or Dealer council was consulted and agreed the target, and whether business and legal advice was obtained as required.
If distributors set annual sales targets without reasonable grounds, evidence and sound reasoning, they may be guilty of making misleading representations (that is, breaching section 4 of the ACL).

Remedies: What can be done?

Parties in a commercial partnership are not seeking to litigate. It is my experience, in acting for Dealers over many years, that litigation with its commercial partner is the last resort.

Despite any breach of law, distributors can retrospectively amend targets to ensure that the severe financial consequences that may flow from a misleading representation about targets does not occur. This is a practical commercial resolution.

The alternative to a practical commercial resolution is unfortunately litigation. Section 4 of the ACL works closely with Section 18 of the ACL which relates to misleading and deceptive conduct. To succeed, a Dealer will also have to prove it relied on the misleading representation, in which case it may be able to establish a claim for breaches of section 4 and 18 of the ACL. The types of orders a court could impose include: varying or amending the Dealer Agreement or target, declaring all or part of the Dealer Agreement void and or ordering compensation to be paid.

There are other similar legal claims such as unconscionable conduct that may apply but which are beyond the scope of this article to discuss. Such claims may also require consideration but would, of course, be dependent upon the particular circumstances of a case.

For further information, contact Vinesh George
on 0404 077 078 or email vinesh@vsgeorge.com.au

 

Vinesh George
Company Secretary and Legal Counsel, AADA | Principal,
VS George Lawyers