GOVERNMENT MOTORS THROUGH CHANGES TO THE FRANCHISING CODE

11 Jun 2020

GOVERNMENT MOTORS THROUGH CHANGES TO THE FRANCHISING CODE

On 1 June 2020 the Federal Government announced the early introduction of the changes to the Franchising Code of Conduct (Code) that will impact new vehicle dealership agreements, defined to mean motor vehicle dealership agreements relating to motor vehicle dealerships that predominantly deal in new passenger vehicles or new light goods vehicles (or both).

The changes have come one month earlier than anticipated and have introduced new provisions to the Code, regulating end of term obligations, capital expenditure requirements and the resolution of disputes through multi-franchisee dispute resolution.

End of Term Obligations

If the term of a dealership agreement is 12 months or longer, the franchisor must advise the dealer of its intentions regarding a renewal or an extension of the dealership agreement or a new agreement at least 12 months prior to the end of the dealership agreement. If the franchisor does not intend to extend the dealership agreement nor enter into a new agreement with the dealer the franchisor is required to set out in its notice the reasons for the franchisor’s decision.

Reciprocal obligations are imposed on dealers. A dealer must notify the franchisor, in writing, whether the franchisee intends to renew the dealership agreement or enter into a new agreement or neither renew the agreement nor enter into a new agreement. If the dealer does not intend to extend the dealership agreement nor enter into a new agreement the dealer is also required to set out the reasons for its decision.

In the event that the dealership agreement is not to be renewed or extended or a new agreement entered into by the parties the parties are required to agree to a written plan (with milestones) for managing the winding down of the dealership, including how the franchisee’s stock (including new vehicles, spare parts and service and repair equipment) will be managed over the remaining term of the dealership agreement.

It is important to note that the new end of term obligations apply to dealership agreements entered into, on or after 1 June 2020 and do not apply to agreements in force immediately before that date until such time as the agreements are renewed or extended.

Capital Expenditure

A franchisor must not require significant capital expenditure from a dealer during the term of the agreement unless the expenditure:

  •  is disclosed to the dealer it the dealer’s disclosure document given at the outset;
  • is agreed to by a majority of dealers;
  • is required by legislative obligation; or
  • is agreed to by the dealer.

If the disclosure document discloses significant capital expenditure the franchisor must include in the disclosure document as much information as practicable about the expenditure, including:

  • the rationale for the expenditure;
  • the amount, timing and nature of the expenditure;
  • the anticipated outcomes and benefits of the expenditure;
  • the expected risks associated with the expenditure.

Franchisors and prospective dealers and existing dealers are also required to discuss significant capital expenditure before entering into, renewing or extending the term or scope of their dealership agreement. Such discussions must cover the circumstances under which the dealer or prospective dealer considers that it is likely to recoup the expenditure, having regard to the geographical area of operations.

Again these provisions will apply if a disclosure document is created or updated after commencement of these new regulations and the dealership agreement is entered into, renewed or extended after the disclosure document was created or updated.

Resolving disputes

The new provisions explicitly permit dealers to request multi-franchisee dispute resolution. So, if a franchisor has entered into a franchise agreement with 2 or more dealers, and these dealers each have a dispute of the same nature with the franchisor they may ask the franchisor to deal with the dealers together about the dispute.

The Explanatory Statement makes it clear that the aim of the new regulations is to address the effects on commercial arrangements arising from the power imbalance between car manufacturers as franchisors and new car dealers as franchisees.

DISCLOSURE WARNING

A consolidated version of the Code incorporating the above changes is not yet available accordingly, in order to comply with their obligations under the Code all Franchisors should now be providing to franchisees a copy of the Code and a copy of the amending Regulations.

If you have any queries please do not hesitate to contact Raynia Theodore in MST Lawyers’ Corporate Advisory and Franchising Team.