THE YEAR OF REFORM FOR THE AUTOMOTIVE INDUSTRY

2021 is looking set to see an unprecedented level of regulatory reform to the Australian automotive new vehicle industry which will benefit new vehicle Dealers. These reforms have largely come about due to the advocacy and lobbying carried out at an industry level to give better protections to automotive Dealers under the Franchising Code of Conduct.

Momentum for regulatory reform started gaining traction when on 27 February 2020, the Senate referred the inquiry into the announcement by General Motors Holden on 17 February 2020 to withdraw the Holden brand and operations from Australia, to the Education and Employment References Committee (Senate Committee). Originally the Senate Committee was to meet and report back to the Senate by May 2020. However, subsequent extensions were granted to allow the Senate Committee to hear evidence from stakeholders in the automotive sector and examine the regulation of the relationship between car manufacturers and car Dealers in Australia more generally.

During the period of the Senate Committee’s terms of reference, Honda Australia announced that it was terminating a large percentage of its Dealer network in Australia so that can move to an ‘agency’ retail model. Whilst some sectors of the automotive industry have denied any regulatory reform is necessary, the decision by Holden to exit the Australian market and Honda’s decision to move to an agency model had a profound impact on the minds of the Senate Committee and the Federal Government. What the ‘Holden’ and ‘Honda’ restructures have demonstrated is that the concerns raised by Dealers for a ‘more level playing field’ were real and not just part of an ambit push for more favourable industry trading conditions in what is otherwise a highly competitive industry sector.

This year has already seen the registration on 12 January 2021 of an amended Franchising Code of Conduct containing a new ‘Part 5’ that deals exclusively with new vehicle Dealer agreements. In summary, the key amendments to the Dealer Code include amendments to:

  1. End of term arrangements requiring:
      a. manufacturers to give 12 months’ notice in writing of their intention to (or not to) extend or enter into a new agreement at the expiry of an existing term (replacing the previous clause requiring 6 months’ notice);
      b. manufacturers to give the reasons for their decision if it is to not to renew or extend a Dealer agreement upon its expiry; and
      c. manufacturers and Dealers a agree to a ‘wind down plan’ for managing the winding down of the dealership if the manufacturer decides not to renew or extend a Dealer agreement.
  2. The prohibition on imposing significant capital expenditure by manufacturers on Dealers.
  3. Allowing multi-party dispute resolution between Dealers and a manufacturers.

Without even waiting for the Senate Committee to table its report, the Federal Government announced on 12 March 2021 that it intended to make further significant reforms for the automotive industry aimed to address the significant power imbalance between Dealers and multi-national car companies. These changes include:

  1. increasing penalties under the Franchising Code to up to $10 million to international car companies that undertake systemic breaches under the Franchising Code, including unilaterally changing contracts, poor compensation and reneging on warranties. The Government indicated that strengthening penalties for wilful, egregious and systemic breaches of the Franchising Code by large and profitable multinational companies will act as a strong deterrent to this kind of conduct;
  2. introducing a new mandatory automotive code to establish best practice and address concerns multi-national manufacturers won’t follow the six voluntary principles launched by the Federal Government on 11 December 2020 to guide agreements between car Dealers and manufacturers. The principles were designed to help steer contract negotiations and build on the introduction of a separate schedule to the Franchising Code of Conduct for the auto industry on 1 June 2020;
  3. ensuring the Franchising Code remains relevant and keeps pace with changes to business practice by explicitly recognising that Dealers operating as a manufacturer’s agent in relation to new vehicle sales would still gain the protections afforded by the Franchising Code. This reform is targeted at manufacturers such as Honda and Mercedes who have announced moving to an ‘agency’ distribution model.

The Federal Government also announced that it is committed to working further with the automotive franchising sector to consult on:

  • ensuring appropriate protections for automotive dealerships from unfair contract terms in their agreements with manufacturers;
  • options to achieve mandatory binding arbitration for automotive franchisees, to address power imbalance when there is a dispute; and
  • the merits of a standalone automotive code.

Along with the reforms to the Franchising Code, on 22 October 2020, the ACCC announced a class exemption that, from early 2021, will provide new vehicle Dealers (as franchisees) with an exemption from normal competition laws to allow them to form bargaining groups and collectively negotiate with their manufacturers without needing to apply for ACCC approval.

Dealers for many years now have formed Dealer Councils to, amongst other things, represent them in their dealings and negotiations with manufacturers. These dealings and negotiations particularly arise when a manufacturer wishes to propose a new Dealer agreement, amend the terms of a Dealer agreement or amend KPIs or the payment of bonuses. Often these negotiations are constrained by the concern not to contravene provisions in the Competition and Consumer Act 2010 (CCA). This has sometimes led to Dealer Councils applying to the ACCC for an ‘authorisation’ to engage in collective bargaining. The ACCC authorisation process can be slow and costly. The new class exemption means that Dealer Councils can now collectively negotiate terms of Dealer agreements, KPIs and bonuses ‘without needing to worry about a possible competition law breach.’

Finally, On 6 November 2020, the State, Territory and Federal Consumer Affairs Ministers agreed to strengthen and extend the unfair contract regime in the Australian Consumer Law. One of the factors that has prevented Dealers to date from seeking protection under the unfair contract regime was a requirement that the applicant was a ‘small business’ employing less than 20 employees. One of the key reforms is to change the eligibility to less than 100 employees – which will capture many more Dealers.

Much of the detail of these new regulatory reforms will be known once legislated during the course of this year. What is clear is that these reforms will go a long way in levelling the power imbalance between Dealers and manufacturers and better protect the significant investments Dealers make in their dealership businesses.

This article is written by Evan Stents, Lead Partner, Automotive Industry Group, HWL Ebsworth Lawyers

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