Legal Insights

New franchising regulations proposed for the car retailing market

By Jessica ReidElise Pascoe

• 31 March 2020 • 7 min read
  • Share

Until 14 February 2020 a question mark existed over how, and to what extent, automotive dealers may be called out for special treatment amid the Government’s increasing appetite for franchise regulation.

In early 2019, the franchising sector was placed under a microscope for the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry. The inquiry put forward what it considered to be an abundance of longstanding issues within the franchising sector, by way of the Committee’s report ‘Fairness in Franchising’ (we drafted a quick reference guide to the Report in March 2019, available here).

The Report made a vast number of recommendations for franchising generally, with just two relevant to the automotive industry (generally focused on notice of non-renewal and handling of stock in a wind down scenario). The Report also prompted the establishment of an inter-agency ‘Franchising Taskforce’ (Taskforce), but the Taskforce has not yet dealt directly with reforming automotive franchising.

Proposed draft regulations and their application

On 14 February 2020, separate to the ongoing work of the Taskforce, the Federal Government released draft regulations proposed to amend the existing Franchising Code of Conduct.

If adopted, the Regulations would create new industry specific sections of the Code that apply only to ‘new car dealership agreements’, where the term of the agreement is 12 months or longer. A new car dealership agreement is defined in the Regulations to be an agreement relating to a motor vehicle dealership that predominantly deals in ‘new passenger vehicles’, or ‘new light goods vehicles’, or both. These vehicle types are each given their own respective definition under the Regulations.

The existing Code already includes all ‘motor vehicle dealership agreements’ in the list of agreements that constitute a franchise agreement whether or not the ordinary elements of a franchise are present. However, until now the Code’s obligations did not single out such arrangements for special treatment.

If amendments are made, the remainder of the Code will continue to apply to ‘motor vehicle dealership agreements’ with the new provisions applying to ‘new car dealership agreements’.

Decision not to establish a stand-alone automotive code

The Regulations have now been released for comment after a long period of consultation, during which the establishment of a stand-alone automotive industry code was contemplated, but not actioned.

The desire for there to be a separate code was put forward in submissions to the Parliamentary Joint Committee by car dealer industry associations, for the inquiry and Franchising Report. Dealer associations, the Motor Trades Association of Australia (MTAA) and the Australian Automotive Dealer Association (AADA) both made submissions to the Committee the Report.

MTAA suggested, among other things, that a separate code should be created that also deals with automotive service and repair. AADA’s position was that dealers were subject to a range of unfair practices that needed to be addressed in a new code. Both associations were of the collective view that the current Code did not address the unique characteristics specific to the automotive sector, and that new car dealers were very different from typical franchisees in terms of the scale of investment.

In response, the peak industry body for manufacturers, the Federal Chamber of Automotive Industries (FCAI), considered that the issues raised could and should be dealt with under the existing Franchising Code, and that it adequately be demonstrated that amending the existing regulations would be sufficient.

The purpose and intention behind the regulations

Taking into account the issues canvassed during consultation, the Regulations ultimately seek to address issues arising from the perceived power imbalance between car manufacturers as franchisors and new dealers as franchisees.

Some reasons prompting the refined obligations in the Regulations are:

  • the aforementioned perceived imbalance. Specifically, the fact that significant outlays are involved in operating a new car dealership, and the typical lack of certainty available to dealers in terms of tenure and end of terms arrangements (whilst general good faith obligations and unconscionable conduct prohibitions currently exist, these might not provide dealers with adequate protection, recourse, or security of tenure); and
  • the prevalence of multiple-dealer disputes. One of the changes will confirm that dealer parties can seek to resolve similar issues together with the same franchisor, considered to assist the timely resolution of otherwise costly disputes.

Summary of the amendments

The key proposed amendments are summarised below:

Proposed amendmentWhat does this mean for you?
Dual obligations for the franchisor and franchisee to notify one another, in writing, of their intention to extend the current agreementFranchisors and franchisees will need to provide each other with 12 months’ notice (rather than 6) of their intention (or lack of) to extend the agreement or enter into a new agreement (unless they agree to a later time). If either party intends not to extend the agreement, they must provide the other with reasons for their intention.
Obligation for franchisor and franchisee to create a winding down plan at the conclusion of a franchising relationshipIn the event of the non-renewal/expiry of a franchise agreement, the parties need to agree to a ‘winding down’ plan. This would involve agreeing to such arrangements as managing stock levels over the remainder of the term. The parties will need to commit to various practical milestones to streamline, and ensure amicability for, the relationship’s end. There is no statutory process set out for circumstances where such a plan cannot be agreed.
Removal of the exception that the franchisor ‘considers it necessary’ when requiring a franchisee to undertake significant capital expenditureThe Code already creates limitations for the circumstances where a franchisor may require a franchisee to undertake significant capital expenditure. In short, it is prohibited unless an exception in reg 30 of the Code applies. One such exception is where a franchisor considers it necessary, and franchisees are advised of key justifications in writing.

The proposed provision largely mirrors the Code’s general ‘significant capital expenditure’ obligation with one key difference. Franchisors will not be permitted to require new car dealers to undertake significant expenditure even if ‘the franchisor considers it necessary’ and will need to rely on other exemptions (such as the cap ex being disclosed in the disclosure document or being agreed to by franchisees).

Additional obligations for franchisors relying on the ‘disclosure document’ exception to require a franchisee to undertake significant capital expenditureAnother exception to the capital expenditure provision is where the franchisor discloses the required spend in the disclosure document given to the franchisee.

Under the Regulations, if a franchisor chooses to rely on this exception it will need to, both:

  • ensure the disclosure document (provided before execution) includes as much information as practicable about the expenditure; and
  • engage in a discussion about the expenditure with the franchisee, before it becomes a term of the agreement.

The information that should be included in a disclosure document is outlined at proposed reg 52(2) and includes:

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

The franchisor also needs to engage in a discussion with the franchisee. Proposed reg 52(4) provides this must include how the franchisee is likely to recoup the expenditure, having regard to the geographical area in which the franchise operates.

Opportunity for multi-franchisee dispute resolutionNew car franchisees involved in a dispute against the same manufacturer of the same nature, can request that the manufacturer deal with them together to resolve the dispute.

When will the regulations take effect?

The regulations are due to come into effect on 1 July 2020 (with transitional provisions), however, for now the Government is inviting submissions from interested stakeholders. We await the results from the consultation, and in particular, whether there will be any changes made to the above obligations.

Please contact the Consumer Markets and Franchising Team if you would like to discuss how to take pre-emptive steps to deal with this or other proposed changes to franchising regulation.

Our Franchising Handbook also contains a wealth of practical information on franchising in Australia generally, including the statutory framework. Download a complimentary copy to the right.

Need to discuss pre-emptive steps to deal with proposed changes to franchising regulation?

Get in touch with the Consumer Markets & Franchising team.

By Jessica ReidElise Pascoe

  • Share

Recent articles

Online Access