The Threat of Termination of an Automotive Dealership

There is no greater threat to a Dealer’s investment in their dealership business than the threat of termination. The threat can occur in a variety of circumstances, all of which are very serious. Termination means the end of your dealership business and the loss of your investment including any goodwill you have developed in the business over the years. If you are faced with the threat of termination, you need to act quickly and understand your legal rights.

Termination Governed By Franchising Code of Conduct

Dealer Agreements for the sale of motor vehicles are deemed by the Franchising Code of Conduct (Code) to be franchise agreements and are therefore governed by the Code. The Code protects Dealers by, among other things, specifying conditions that must be satisfied before a manufacturer can terminate a Dealer Agreement, and having a mandatory dispute resolution process that Dealers can invoke.

Under the Code, a manufacturer can terminate a Dealer Agreement in three different ways. Namely, where:

  1. there has been a breach of the Dealer Agreement by the Dealer;
  2. there has been no breach by the Dealer; or
  3. special circumstances apply.

Each of these circumstances is described below.

Termination for Breach

Where a manufacturer asserts a Dealer has breached a Dealer Agreement, the manufacturer must:

  1. send the Dealer a notice that identifies the alleged breach;
  2. tell the Dealer what the manufacturer requires to be done to remedy the alleged breach; and
  3. give the Dealer a reasonable time to remedy the breach (which does not need to be more than 30 days).

If the alleged breach has not been remedied within the specified time, the manufacturer is entitled to terminate the Dealer Agreement.

Termination where No Breach

Some Dealer Agreements purport to allow a Manufacturer to terminate ‘for convenience’, when there has been no breach by the Dealer. Under the Code, if a manufacturer intends to terminate a Dealer Agreement where there has been no breach by the Dealer, the manufacturer must give the Dealer:

  1. reasonable written notice; and
  2. reasons for the termination.

Termination in Special Circumstances

The Code has a termination for ‘special circumstances’ section which allows a manufacturer to section is replicated in the Dealer Agreement.

The ‘special circumstances’ include but are not limited to situations where the Dealer has lost its Motor Car Trader’s Licence, or become bankrupt or insolvent, or deregistered by ASIC. It also includes where a Dealer has operated a dealership in a way that endangers public health or safety, or acted fraudulently.

What if you are served with a Breach Notice?

You need to act quickly and be proactive. Get legal advice as soon as possible, do not expect the manufacturer to ‘help you out’ of the situation.

If there has in fact been a breach of the Dealer agreement, and it can be remedied, then remedy the breach within the time specified. If there hasn’t, you will need to raise a dispute with the Manufacturer. Also consider whether the breach alleged against you is widespread in the Dealer network, but you are being singled out by the Manufacturer. If you are, you may have grounds to challenge the Breach Notice.

If you are a New South Wales Dealer, or NSW law applies to your Dealer Agreement, the Motor Dealers and Repairers Act 2013 (NSW) (MDR Act) will apply (alongside the Code). The MDR Act allows a Dealer to sue for compensation and other relief against a Manufacturer for ‘unjust conduct’ or ‘unfair contract terms’. These are broad concepts that  might apply in your particular circumstances.

Disputing a Breach Notice

Just because you are served with a Breach Notice, does not mean you must necessarily accept the claims made in it as being accurate. There may be one or more grounds to dispute the Breach Notice either on questions of fact of law. For that reason it is important to seek legal advice as soon as you receive a Breach Notice.  If there are grounds to dispute the Breach Notice then a Dispute Notice should be served on the Manufacturer.  Pursuant to the Code, a Dispute Notice must set out:

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

A Dispute Notice compels a Manufacturer to make genuine attempts to try to resolve a dispute, including through mediation. Furthermore, if the MDR Act applies to your dealership, you can seek mediation through the NSW Small Business Commissioner.

Lastly, if a Manufacturer has served a breach notice, threatened to terminate your dealership, and continues to threaten to terminate your dealership whilst you are engaging in the dispute resolution process foreshadowed by the Code, consider obtaining an injunction to restrain the Manufacturer from doing so until your dispute resolution process is completed.

What if the Manufacturer wants to terminate when there has been no breach?

If a Manufacturer informs you it intends to terminate your Dealer Agreement even though you have not breached it, the Manufacturer must give you reasonable notice and state its reasons for wishing to terminate your Dealer agreement.  The concept of ‘reasonable notice’ is not based on the longevity of your relationship to the manufacturer. Rather, it means giving you enough time to recoup your investment and redeploy your assets.  If you have already recouped your investment in the dealership, ‘reasonable notice’ may be no more than 3 to 6 months.

You should also carefully consider the Manufacturer’s reasons for terminating without a breach. Do they really amount to dissatisfaction with performance – or in other words, a breach of the Dealer Agreement? If they do, then the Manufacturer must follow the procedures set out in the Code to terminate for breach rather than attempt to use the ‘no cause’ termination process under the Code.

Also consider whether, in all the circumstances, the reasons given for termination lack good faith. In such circumstances, Courts have held that a termination will not be in good faith if the termination is capricious and not for a legitimate business purpose.

If any of these circumstances apply, then the Dealer should serve a Dispute Notice on the manufacturer and seek to have the termination notice withdrawn or reach some other commercial resolution.

Termination for ‘special circumstances’?

This is the most serious of all termination risks, because if the ‘special circumstances’ exist and the Dealer Agreement contains the ‘special circumstances’ termination clause, the Manufacturer will be entitled to terminate your Dealer Agreement immediately.

If you are served with a termination notice invoking the ‘special circumstances’ clause, you should immediately consider obtaining an injunction against the Manufacturer to restrain it from terminating or acting on the termination. In particular, some of the special circumstances are highly subjective in their interpretation. For example, where you are said to have been convicted of a ‘serious offence’, operated the dealership in way that ‘endangers public health or safety’, or if you are alleged to have been acting ‘fraudulently’ in operating your dealership.

Each of those examples may be capable of being challenged. However, if you wish to preserve your dealership whilst challenging the termination notice, you must immediately seek an injunction to restrain the termination.  Once the termination has taken effect both legally and practically, a Court will not grant an injunction, and your only right is to seek damages for the loss of your dealership, assuming you can establish that the termination was wrongful.

So if you are threatened with termination, you stand to lose your dealership if you do not take steps to protect your position. It is important that you act quickly and obtain legal advice in order to ascertain what rights you have to challenge the threatened termination. If possible, send a Dispute Notice to the manufacturer and invoke the dispute resolution process provided for in the Code.

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

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