The Case for an Industry-specific Code

When the Franchising Code of Conduct was introduced in 1998 it was designed – within the framework of Australia’s competition and fair trading laws – to specifically regulate the conduct of franchisors toward franchisees. The Franchising Code has been reviewed and amended several times. However, it is an umbrella code aimed at covering all franchised businesses, from an ice cream shop retailer to a multi million dollar new car dealership employing dozens of people.

Despite the introduction of the Franchising Code, motor vehicle Manufacturers (who are now all large offshore multi-national corporations) are still able to exploit their negotiating power with Dealers in a manner that does not contravene the Franchising Code. Also, most Dealers are not covered by the ‘unfair contract’ provisions in the Australian Consumer Law. The extent of the imbalance of power between motor vehicle Manufacturers and motor vehicle Dealers leaves Dealers highly vulnerable to some Manufacturers’ demands given the scale of the investment Dealers make in acquiring, maintaining and growing their businesses.

This is a significant problem for Dealers because while there is a natural ‘structural imbalance’ of power between franchisors and franchisees in any industry, the imbalance of power in the retail new motor vehicle industry goes beyond that expected imbalance to the point where there is an identifiable problem with some Manufacturers’ specific behaviours that needs specific regulatory intervention to address.

To date, regulators have introduced a number of industry-specific codes which are tailored to address issues in specific markets where franchising is prevalent – for example, the Oil Code which applies to franchised petrol stations. Therefore, for example whilst petrol station owners are afforded the protection of a specific industry code, new motor vehicle Dealers are not.

Establishing Minimum Standards of Conduct

The need for a specific industry code in the retail new motor vehicle industry is not to make Dealers and Manufacturers ‘equal’. It is also not to address conduct which may be considered unconscionable or lacking in good faith. There are already existing laws that address unconscionable and conduct lacking in good faith. The fact that such laws exist yet Dealers are still being ‘legally’ exploited reinforces the need for a Dealer specific industry code.

The purpose of a specific industry code it is to create minimum standards of conduct which:

1. are binding on Manufacturers and Dealers;
2. are simple to regulate and enforce;
3. restore Dealers’ confidence in investing in their dealerships notwithstanding the highly competitive market for vehicle sales and the dynamic nature of the market itself;
4. eliminate specific exploitative behaviours of Manufacturers which are too easily facilitated within the current regulatory framework; and
5. protect consumers.

In specific terms, an ideal ‘Dealer Code’ would establish minimum standards of conduct which would:

1. enshrine a minimum tenure period including a renewal option commensurate with the level of investment required in the particular dealership;
2. make renewal options exercisable by Dealers (not Manufacturers) provided the Dealer is not in breach of their Dealer agreement;
3. alternatively to 2, prohibit Manufacturers from issuing non-renewal notices without first issuing a written statement setting out why the Manufacturer has decided not to renew that Dealer, what steps the Dealer could take to address those reasons and what rights the Dealer has to challenge those reasons if the Dealer disagrees;
4. require Manufacturers to buy back Dealers’ inventory of new and demonstrator vehicles, parts and tools required to have been purchased by Dealers, at the Dealers’ cost price, upon the expiry or termination of their Dealer agreements;
5. prohibit Manufacturers from requiring, encouraging or facilitating Dealers to engage in ‘pre-retail’ or ‘cyber car’ sales reporting;
6. prohibit Manufacturers from terminating Dealers for failing to meet performance targets which are unrealistic given Manufacturers’ market shares;
7. prohibit Manufacturers from unilaterally varying the terms of their Dealer agreements by using ‘policies’ incorporated into the Dealer agreements by reference – in particular ‘policies’ which set out fundamental aspects of the Dealer/Manufacturer relationship such as:
   (a) sales performance targets;
   (b) classification of dealerships within existing performance frameworks (e.g. ‘metro’ or ‘provincial’)
   (c) dealership fitout standards;
   (d) conditions of multi-franchising; and
   (e) Dealer remuneration or bonuses;
8. prohibit Manufacturers from altering Dealers’ prime market areas within the minimum tenure period (including any renewal option);
9. prohibit Manufacturers from requiring Dealers to relocate their dealerships within the minimum tenure period (including any renewal option);
10. prohibit Manufacturers from giving estimates of capital expenditure in the form of a range that is not reasonably precise or confined;
11. prohibit Manufacturers from imposing undisclosed capital expenditure during the term of a Dealer agreement beyond a threshold amount (under any circumstances – including ‘in preparation for a new agreement’) – unless there is an accompanying guarantee of a minimum extension of tenure sufficient to allow the Dealer to recoup their investment;
12. prohibit Manufacturers from prescribing how Dealers must respond to consumer requests, complaints, claims or legal proceedings in circumstances where Dealers owe independent statutory obligations to consumers;
13. prohibit Manufacturers from interfering in the sale of a dealership business by assignment other than after an application by a Dealer for the Manufacturer’s approval of an assignment is made;
14. prohibit Manufacturers from engaging in unjust conduct or entering into unfair contract terms as is the case in the Motor Dealers & Repairers Act 2013 (NSW) (see sections 142 and 143); and
15. otherwise incorporate the terms of the Franchising Code.

There will always be an imbalance of power between Manufacturers and Dealers. It is a commercial relationship where both parties make huge investments in either the vehicle being sold or the business of selling it. However, the current generic Franchise Code framework does not sufficiently protect Dealers from the exploitative behaviours of some Manufacturers.

Establishing minimum standards of conduct under a Dealer specific franchising code is the most simple and effective way of eliminating exploitative behaviours in the industry and restoring confidence in Dealers taking on the significant capital risk in owning and running a modern new car vehicle dealership. It is time that a Dealer Code is adopted.

This article was written by Evan Stents – Lead Partner, and Christian Teese – Senior Associate, Automotive Industry Group | HWL Ebsworth Lawyers

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