On 14 February 2020, the Australian government published a draft version of proposed amendments to the Franchising Code specifically for new car sales franchises.
A public consultation period regarding the Competition and Consumer (Industry Codes – Franchising) Amendment (New Vehicle Dealership Agreements) Regulations 2020 (Draft Regulations) is open until 13 March 2020, inviting interested stakeholders to submit their feedback. This follows a consultation period in late 2018/early 2019 prompted by concerns raised by new car dealers that the current Franchising Code of Conduct is insufficient in dealing with the new car sales industry and franchise relationships between dealer franchisees and car manufacturer franchisors. The draft has the potential to significantly curb business practices of franchisors and they should consider making submissions in this consultation phase.
The Draft Regulations proposes the following changes to the Franchising Code:
1. There will be additional notification obligations for franchisors and franchisees in new car sales franchises, including that:
o At least 12 months written notice (or longer if agreed) must be given by the franchisor and the franchisee as to whether either intends to extend the agreement or enter into a new agreement;
o If a franchisee or a franchisor elects not to extend the current agreement or not enter into a new agreement, they must provide reasons;
o If a franchisor elects to enter into a new agreement with the franchisee, the franchisor must notify the franchisee that they can request a disclosure document.
2. If a party agrees not to extend the agreement the parties must agree to a written winding down plan, with milestones, including how vehicles, parts, and service and repair equipment will be managed.
3. The current obligation under section 30 of the Franchising Code regarding significant capital expenditure will not apply for new vehicle dealership agreements. Instead, a franchisor will be prohibited from requiring a franchisee to undertake significant capital expenditure during the term of a franchise agreement, except if the following exclusions apply:
o The expenditure is disclosed to the franchisee in the disclosure document that is given to the franchisee before they enter into or renew an agreement, or when the term or scope of a franchise agreement is extended;
o If expenditure is to be incurred by all or a majority of franchisees and a majority of franchisees approve the expenditure;
o The expenditure is required to comply with legislative obligations; or
o The expenditure is agreed by the franchisee.
In addition, the franchisor will be required to include in the disclosure document "as much information as practicable about the expenditure", including the rationale, amount, timing and nature of the expenditure, the anticipated outcomes and benefits, and the expected risks of the expenditure.
4. With regard to disputes, franchisees can request multi franchisee dispute resolution if two or more franchisee have a dispute of the same nature with the franchisor.
5. The specific provisions for new vehicle dealership agreements will only apply to those agreements that have a term of 12 months or longer, and only for dealerships that deal predominately with passenger vehicles having up to 9 seating positions, and light goods vehicles with a gross vehicle mass not exceeding 3.5 tonnes. This definition will exclude those dealerships that, for example, predominately deal in trucks or motorbikes, and for franchise agreements with a term less than 12 months, which will continue to be dealt with under the existing provisions of the Franchising Code.
It is proposed that the Draft Regulations would come into effect on 1 July 2020. Franchisors and franchisees in the new vehicle dealership industry should watch this space, and be prepared to execute these changes in any new agreements in FY21 should the Draft Regulations be implemented. If you would like any assistance in preparing submissions on the draft legislation the Bird & Bird team in the Sydney office are well equipped to assist.