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New Automotive Section in Franchising Code of Conduct

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By Raynia Theodore, Principal

The Federal Government has recently announced proposed changes to the Franchising Code of Conduct (“the Code”) that will introduce provisions relating directly to New Vehicle Dealership Agreements.

The changes will introduce Divisions 5 and 6 to the Code, regulating end of term obligations, capital expenditure requirements and the resolution of disputes through multi-franchisee dispute resolution. The reforms aim to increase protection for parties to a New Vehicle Dealership Agreement, whilst ensuring that fairness and accountability of all parties remains of the highest priority.

Proposed Changes

End of Term Obligations (Division 2)

Proposed changes relating to end of term obligations will only apply to a New Vehicle Dealership Agreement if the term of the agreement is 12 months or longer.  This is different from the current provisions which apply to agreements of less than 12 months. The changes will impose obligations of parties when entering into, extending or winding down a new dealership agreement.

The draft provisions include a requirement for a franchisor to advise of its intentions regarding an extension of the agreement or a new agreement at least 12 months prior to the end of an agreement and also impose requirements for a statement of reasons to be given if the franchisor does not intend to extend the term or grant a new agreement.

An important introduction in this division will be the allowance for a reduced notice period by agreement of both parties, which is reflective of the government’s goal to support flexibility and avoid unnecessary red tape restrictions.  In the event that the agreement will not be renewed or extended, parties must also formulate a written plan stipulating how the wind down of the dealership will be managed, specifically how stock (including new vehicles, spare parts and service and repair equipment) will be managed and reduced over the remaining term of the agreement to reduce ineffective wind downs. Importantly, parties will maintain their pre-existing obligation to act in good faith when engaging with one another.

Capital Expenditure (Division 3)

The government’s proposed provisions relating to Capital Expenditure for New Vehicle Dealership Agreements are in place of the existing clause 30 of the Code. The draft regulations set out that a franchisor must not require significant capital expenditure from a franchisee during the term of the agreement. It does however, note that a franchisor continues to hold the right to require expenditure if:

  • Disclosure is made at the outset;
  • A majority of franchisees agree;
  • Required by legislative obligation; or
  • Agreed to by the franchisee.

If significant capital expenditure is disclosed in the disclosure document, the new provisions require parties to discuss the expenditure and the circumstances in which the franchisee is likely to recoup the expenditure. Such discussions must occur before entering into, renewing or extending the term or scope of an agreement.

The franchisor is also required to include in its disclosure document as much information as possible about the significant capital expenditure including:

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

Resolving disputes (Division 4)

Division 4 explicitly advises of a franchisee’s capacity to request multi-franchisee dispute resolution. This can arise when a franchisor has entered into a franchise agreement with 2 or more franchisees, and when 2 or more of the franchisees each have a dispute of the same nature with the franchisor. These provisions are to be read in conjunction with Part 4 of the Code as it currently stands.

Application, saving and transitional provisions

Amendments to the regulations propose that Subdivision B of Division 2 of Part 3 of the Code (end of term notification obligations) and clause 30 of the Code (capital expenditure) will continue to apply to New Vehicle Dealership Agreements entered into, renewed or extended before the commencement date of the draft regulations (anticipated to be 1 July 2020).

The new regulations relating to Capital Expenditure and clause 30 will apply to New Vehicle Dealership Agreements if the disclosure document is created or updated on or after the commencement date of the regulations and the agreement is entered into, renewed or extended after the creation or updating of the disclosure document.

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