Proposed Changes to the Franchising Code of Conduct – How does it affect YOU?

The proposed changes to the Franchising Code of Conduct (Code) will have an impact on motor vehicle dealers and their legal and commercial dealings with distributors. This article considers those impacts from the Dealers’ perspective.

On 3 April 2014, the Federal Government released an exposure draft of the new Competition and Consumer Amendment Bill 2014 (Bill) and Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Regulation) as well as a timetable for implementation of significant amendments to the Franchising Code of Conduct. Whilst it is expected that the exposure drafts will undergo some minor technical amendments, a number of key themes are likely to remain after the consultation period closes on 30 April 2014, and after the Government moves to enact the Bill and the Regulation.

The new Code is currently scheduled to commence on 1 January 2015 and will apply to Dealer agreements entered into or renewed after this date. However, the date and transition process may be subject to amendment.

Civil Penalties

For the first time, distributors will be subject to civil pecuniary penalties and for fines (issued under an infringement notice) for breaches of certain provisions of the Code. It is intended that contravention of a provision of an industry code where there is a civil pecuniary penalty will result in a civil pecuniary penalty of up to a maximum of $51,000 and whilst this amount alone may not deter those distributors who do not comply with the Code, the brand damage associated with penalties and fines is likely to mean distributors treat a breach more seriously. The infringement notice regime will allow the ACCC to fine a distributor for breach in circumstances where the nature of the breach does not warrant them seeking an order for a civil pecuniary penalty. Accordingly, Dealers will be in a better position to require distributors to comply with the Code.

Prohibition on Significant Capital Expenditure

If the amount of any significant capital expenditure to be incurred during the term is not disclosed in the disclosure document, then it is likely that distributors will have to obtain the consent of the majority of Dealers to incur that expenditure or alternatively justify, through a business case statement, why any significant capital expenditure is required during the term of a Dealer Agreement. A distributor will have to act in good faith when doing so.  If a business case statement is received, it is open to Dealers to dispute the reasonableness of the business case statement. If there is no reasonable business case then it would be a breach of the Code to try and compel Dealers to make the capital investment. Given the lack of tenure of most Dealer agreements it may be difficult for distributors to advance a business case that does not have regard for the interests of both the Dealer and the distributor.

Online Sales

A distributor’s disclosure document will soon have to disclose how online sales are to be managed in the Dealer network, including how to manage the use of websites such as carsales.com.au and Gumtree. The control and management of online sales is an increasing area of dispute in all franchises and the additional disclosure requirements will require greater disclosure and may encourage the development of workable policies that apply to Dealer networks.

Good Faith

The Code will include an express obligation to act in good faith on parties to a franchise agreement. The extent and nature of that obligation is yet to be confirmed. This obligation may apply to negotiations before an agreement is signed, during the term of the Dealer agreement and forms part of renewal negotiations as well as to any dispute. The conduct of a distributor when negotiating, for example, dealership upgrades or marketing initiatives at the time of entering into a Dealer agreement or renewing a Dealer agreement will likely be of more legal significance under the new Code as there will be an obligation on distributors to act in good faith.

Restraint of Trade

One proposed change, which may still be subject to amendment, is that a restraint of trade in a franchise agreement may be unenforceable if a franchisor does not compensate the franchisee for non-renewal. This affects the enforcement of a restraint rather than compelling compensation to be paid for non-renewal. At the moment this provision is limited to renewals; that is where a contractual right to renew exists and the franchisor refuses to renew the franchisee on substantially the same terms as the existing franchise agreement. There are other conditions that must be present as well for that provision to apply. The obligation to act in good faith still applies to renewals. The significance for Dealers of these changes is that the Code is slowly evolving and whilst compensation for non-renewal of a dealership is not yet mandated, there appears to be less room for a franchisor to justify why it would not renew a profitable and compliant franchisee.

The Code contemplates the agreement should contain a right for the franchisee to claim compensation for non-renewal if the agreement does not contain that right or compensation received is not genuine then the restraint may not be enforceable. Whilst the proposed provision does not go far enough to protect Dealers, the greater focus on end of term arrangements and reference to compensation payments is likely to mean that it is more likely that exit negotiations will include requests for compensation.

Jurisdiction

The exposure draft encourages the parties to include an appropriate jurisdiction for any action or proceeding with the franchisor to be the State or Territory in which the franchised business is located. Unfortunately, it does not expressly convey that jurisdiction, but it will render any clause seeking to require an action or proceedings to be held in another State or Territory to be unenforceable. It only relates to actions or proceedings and not mediation (or other forms of alternate dispute resolution).

Minimum Terms in Dealer Agreements

Dealers should not forget that one of the key recommendations to Government was to separately examine the impact that minimum terms and standard contractual terms would have for Dealer agreements and that this should be carried out prior to the next review of the Code which is likely to be in 2018/2019. Depending on the priorities of Government (including elections), continued lobbying of Government is necessary to make sure that this analysis and consultation takes place.

Enhanced Audit Powers

In addition to the ability to seek penalties and fines, the ACCC will have enhanced powers to require distributors to provide information under section 51ADD notices to demonstrate their compliance with the Code (rather than simply requesting documents they are required to create under the Code).

Evan Stents
Lead Partner, Automotive Industry Group – HWL Ebsworth Lawyers

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