UPDATE ON AUTOMOTIVE CODE DRAFT REGULATIONS

Australian automotive Dealers have long known the Franchising Code of Conduct (the Code) has not done enough to protect franchisees in the power imbalances that characterise franchisor-franchisee relationships. Dealers often find themselves in defenceless positions where the Code is unable to help. For example, it is not uncommon for distributors to tell Dealers that Dealer agreements will not be renewed but then failing to give reasons for that decision. The Code provides little protection. To make matters worse, Dealers are often unable to rely on legal remedies as distributors are sophisticated enough to avoid simple contract breaches. Dealers have to rely on misleading and deceptive conduct and unconscionable conduct claims, where the legal threshold required to succeed is much higher than in simple contract claims.

AADA has worked tirelessly to improve protections for Dealers. As a result a number of regulatory developments have occurred during the past year. It began with the Parliamentary Joint Committee on Corporations and Financial Service’s ‘Fairness in Franchising Report’, released in March 2019, and culminated in the recent release of the exposure draft regulations and explanatory statement for public consultation in February 2020. It was hoped these changes would provide additional legal protections for Dealers. An update on the key developments is provided below.

Fairness in Franchising Report (March 2019)

In an attempt to address insufficient existing regulations, the Fairness in Franchising Report (the Report) made 71 recommendations. It recommended the Federal Government establish an inter-agency Franchising Taskforce to examine the feasibility and implementation of a number of the Committee’s recommendations. The Taskforce was subsequently established. Despite the AADA’s calls to establish a separate Automotive Code, the Report failed to recommend it due to fears a separate code would evolve independently from the core Franchising Code, leading to inconsistency. However, the Report was supportive of industry specific schedules to supplement the core Franchising Code.

Regulation Impact Statement (November 2019)

The Regulation Impact Statement (RIS) was developed to inform government decision-making on policy implementation. Following consideration of a range of options, the RIS identified four regulatory interventions it considered would lead to positive outcomes:

  • Option 2A – requiring manufacturers to provide at least 12 months’ notice when not renewing a Dealer agreement.
  • Option 2B – requiring manufacturers to provide a statement to a Dealer whose agreement is not being renewed outlining why the agreement is not being renewed.
  • Option 2D – requiring pre-contractual disclosure of significant capital expenditure to have a greater degree of specificity.
  • Option 2F – enabling multi franchise mediation.
    Exposure Draft Regulations and Explanatory Statement for Public Consultation (February 2020)

The Exposure Draft Regulations seek to implement the four key reforms outlined in the RIS (see above). If implemented, the reforms would apply to new vehicle dealership agreements. The reforms were introduced as an additional part of the Code, i.e. ‘Part 5 – New Vehicle Dealership Agreements’. Consultation on the Regulations closed on 13 March 2020, with 1 July 2020 being the target commencement date for the Regulations.

AADA Response to the Exposure Draft Regulations (March 2020)

The AADA made eight key recommendations as to how the draft Regulations could be changed to level the playing field between distributors and Dealers.

The key recommendations are:

  1. Security of tenure

The AADA recommended the Regulations include a minimum five-year term for Dealer agreements or a link between capital investment and the term of the agreement to enable Dealers to recover their mandated investments. If implemented, this recommendation would relieve much of the anxiety present amongst Dealers, who are financially pressured to sign annual agreements in the hope they will eventually recoup their investment.

2. Stock buy-back mandate

The AADA recommended the Regulations compel distributors to buy back stock in the event of non-renewal. As the AADA pointed out, there is a perverse incentive for distributors to load Dealers with stock and parts before a non-renewal notice is issued. The Regulations, therefore, need to include a clause mandating that distributors buy back all vehicle stock, parts and specialist equipment on commercially fair terms. As Dealers are mandated to purchase the stock from distributors, there is no reason the non-renewal notice should enable distributors to be excused from a fair commercial buy back.

3. Protections for Dealers against unfair warranty clawbacks

The AADA recommended the establishment of a Code of Conduct for appropriate behaviour in relation to warranty and ACL practices to protect Dealers and to benefit customers. The power imbalance between distributors and Dealers allows distributors to reject warranty claims by Dealers on unreasonable grounds. It also allows distributors to engage in the unfair practice of warranty extrapolation, which compromises the bottom line of Dealers. Regulations can help resolve this power imbalance by implementing a Code of Conduct to limit the abuse of power that occurs.

4. Industry Standard for Compensation

The AADA recommend that a principles-based industry standard for compensation should establish a fair and reasonable framework, which informs future compensation by distributors. This recommendation was made in light of the recent exit of Holden from Australia, which offered grossly inadequate compensation for Dealers. This demonstrated the need for an industry framework to determine the elements that reasonable compensation should include and the appropriate method for calculating it.

5. A definition of vehicle distribution in the regulations, capturing future distribution models, including agency models

The AADA recommended the Regulations include a term that provides that the Code covers any form of motor vehicle distribution agreement including a pure Agency Model. This recommendation was intended to close any possible definitional loopholes in the Code even after changes have been made.

6. New end of term obligations

The draft Regulations extend the notice that distributors must provide Dealers from 6 to 12 months. Whilst the AADA welcomed this, concern remained that this requirement only applied to agreements of 12 months or more. This would incentivise distributors to offer sub-12-month agreements and therefore, further the power imbalance between distributors and Dealers by increasing Dealers’ insecurity of tenure. The AADA recommended the requirement that the agreement be 12 months or more should be removed.

7. Multi-party dispute resolution: the issues of compliance and confidentiality

The AADA recommended an amendment to the Regulations to require franchisors consent to franchisees’ requests for a multi-party dispute resolution. Otherwise, this Regulation does nothing other than to formalise an existing right which franchisees have. The AADA also recommended the Regulations address the possibility that franchisees may breach their confidentiality agreements with distributors whilst engaging in multi-party dispute resolution.

8. Penalty provisions for breach of regulations

The AADA acknowledged the allocation of civil penalties to infringements of Regulations was a step in the right direction. However, the AADA considered the current penalty of 300 penalty units ($63,000) for an offence was insufficient given the size of distributors. The AADA, therefore, recommended the Code could be amended to incorporate a penalty regime emulating the ACL, which provides the option for penalties to be assessed as a proportion of the corporate offender’s turnover.

Conclusion

There is much more work to be done to have a Code that adequately protects Dealers and that levels the playing field. The AADA will continue to advocate for stronger protections in coming months.

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

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