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Franchising and the Automotive sector in Australia in 2023 and beyond   

By June 7, 2023 No Comments
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Franchising and the Automotive sector in Australia in 2023 and beyond    

A lot has happened in the automotive industry over the last few years.

As Ted Mulry Gang, said in 1974 “c’mon jump in my car!” It doesn’t seem so long ago on one hand, but it is nearly 50 years, I was in Year 11 at Camberwell High, just got my license and bought my first car, a Datsun 1600 for $1,300, a great car!

Since then, a lot has changed in the automotive sector and the world!

We have had major local manufacturers leave the country, the rise in the EV market, a number of overseas manufacturers coming into the market and the recent class action by Mercedes Benz dealers against Mercedes when they changed their distribution model to an agency model.

Dealerships invest significant capital taking up a dealership and when they are terminated at short notice, they are left with significant debt and stock.

This was an issue reviewed by the ACCC since approximately 2018 with recent reforms implemented to balance the rights more fairly, between manufacturers and dealers.

 

Mercedes Benz Case

Mercedes Benz dealers (regional and city) launched legal action in the Federal Court in 2022 seeking $650 million in compensation from the car maker.

The previous dealer model was that dealers used to buy cars from Mercedes and dealers could set their own sale price. 

Mercedes changed to an agency model, which came into effect in January 2022, by which Mercedes retained ownership of the cars and the dealers became agents and obliged to sell cars at a fixed price for a set commission. 

Dealers no longer owned the stock and consumers could no longer negotiate on price.

This is interesting as it would be considered price fixing if the dealers fixed prices amongst themselves but under the agency model as Mercedes owned the vehicles, they are not in breach of the Australian Consumer Laws (ACL).

Mercedes argued the agency model would lead to more transparent pricing for consumers and provide a fairer supply of cars to dealers.

Dealers say they were forced to sign the new agency model which dramatically reduced their profits and could potentially wipe out years of goodwill with customers.

The dealers allege Mercedes had this plan in place to convert dealers and undertook a sham consultation process to push the changes through despite objection by the majority of Australian dealers. 

The allegations claim that Mercedes had broken the consumer laws by engaging in unconscionable conduct, breached the Franchise Code’s good-faith provisions and also engaged in misleading and deceptive conduct to redirect the profit that dealers were making to Mercedes own pocket.

An interesting twist along this long and winding road is that Deloitte’s (a top tier Accounting Firm) were engaged by the Dealers in 2019 to do modelling as to the impact on dealers of the agency model for dealers.

Deloitte’s found that under the agency model a dealer’s profit would decline by possibly more than 50% compared to the dealership model.

Deloitte’s were then also engaged by Mercedes to provide a report which Deloitte’s later admitted relied on flawed sales data provided by Mercedes (sales data from 2018 which was a disastrous year for sales) to create modelling that showed the changed model would benefit dealers, which was misleading.

One might question how the same firm can be engaged by both parties to provide reports with 2 different outcomes and why no one raised the issue that there may be a conflict in Deloitte’s engagement for the dealers and Mercedes.

The case continues with considerable ramifications for the franchise and automotive sector.

The case does come back to 2 key issues which are often the causes of action in any franchise dispute:

1. Did Mercedes act in good faith as required under the Code?

2. Did Mercedes provide sales data that was misleading to Deloitte’s who then provided modelling that was misleading and deceptive and induced dealers to take up the Agency model. (noting the dealers say they were given little choice by Mercedes)?

3. Did Mercedes conduct constitute unconscionable conduct under the ACL, noting that acting legitimately in their own commercial interests does not mean Mercedes acted unconscionably.

The case continues so watch this space!

 

The New Vehicle Dealer Regulations

After extensive consultation with the sector new regulations were introduced which came into effect 1 June 2020 aimed at supporting dealers.

The Competition and Consumer (Industry Codes – Franchising) Amendment (New Vehicle Dealership Agreements) Regulations 2020 (Amending Regulations) was introduced to address the power imbalance between car manufacturers and new car dealers (franchisees).

The changes apply to new vehicle dealer agreements entered into on or after 1 June 2020 and to renewals or extensions of them. 

The new regulations only apply surprisingly to new vehicle dealership agreements that is, a dealership that predominantly deals in new passenger vehicles, new light goods vehicles (or both).

The new regulations do not cover motorcycle, used cars, farm machinery and truck dealerships. Somewhat strange and we are not sure if this was intended by the legislators.

The regulations are complex as the end of term manufacturer obligations (see heading below) do not apply to renewals or extensions of new vehicle dealership agreements entered into prior to 1 June,2020.

Once an existing agreement is renewed or extended, the new end of term notification and end of term management obligations apply.

The new capital expenditure obligations apply to existing dealers but depend on the date of creation or update of the disclosure document.  

Confused?  you are not alone !

Where an existing dealer agreement is renewed or extended after 1 June 2020 and the disclosure document created or updated after 1 June 2020, the new Code provisions do apply (Clause 50 and Clause 51).

 

The New  Requirements

 

Disclosure of capital expenditure

The new regulations (Clause 50) provides that car manufacturers cannot require significant capital expenditure by a dealer during the term unless the dealer agrees with the expenditure, or the expenditure is disclosed to the dealer prior to entering the agreement.  

The key difference between the old clause 30 and new clause 50 is that under the new provisions, when making capital expenditure disclosure to a dealer, the manufacturer must provide as much information as is practicable about the expenditure which includes:

1. the rationale for the expenditure,

2. the amount, timing and nature of the expenditure;

3. the anticipated outcomes and benefits of the expenditure; and

4. the expected risks associated with the expenditure.

The written disclosure must be supported by “discussions” with the dealer about the likelihood of the dealer recouping the expenditure (having regard to the geographical area of the dealer) before the agreement is signed and any representations made must be supported by independent and objective data.

 

Resolving disputes

The new regulations allow 2 or more franchisees to ask the franchisor to deal with the franchisees together about a common dispute. But it does not require car manufacturers to engage in multi-party dispute resolution. 

The new regulations may mean manufacturers give less disclosure in relation to capital expenditure and the trend may be to offer shorter term agreements and look to other distribution models.

The Government is to review operation of the amendments before 1 April 2024. 

 

End of term obligations

The regulations require manufacturers and dealers to:

1. provide at least 12 months’ notice if they intend not renewing a dealer agreement (if the agreement is 12 months or longer).

2. discuss, plan and agree on end of term arrangements if not renewing an agreement; and

3. provide a statement to the dealer outlining why the agreement is not being renewed that is reasons for the refusal.

This gives the dealer time to plan and make arrangements to sell the site or take up another dealership. 

If the manufacturer gives notice not to extend or enter into a new agreement with the dealer, the parties must work together to agree on a written plan with milestones including management of the dealer’s stock of new vehicles and parts, and service and repair equipment over the balance of the term. 

The parties must cooperate to reduce the dealers stock of new vehicles and spare parts for the remainder of the term and manufacturers must implement these arrangements “as soon as practicable” even where the relationship has deteriorated.

Dealers need to carefully review their agreements and renewals as manufacturers may try to include greater control over the process.

 

Why are dealership agreements a franchise arrangement?

You may not think a dealership or even a distribution agreement would be considered a franchise but it is often the case. Under the Code there is a franchise agreement if these features are present:

  • One person (franchisor) grants another person (franchisee) the right to carry on a business in Australia supplying goods or services under a specific system or marketing plan. 
  • The business is substantially determined, controlled, or suggested by the franchisor or its associate.
  • The business is associated with a particular trademark, advertising or a commercial symbol owned, used, licensed, or specified by the franchisor or its associate.
  • The franchisee must make, or agree to make, certain types of payments to the franchisor or its associate, before starting or continuing the business.

Not all distribution and dealership agreements are however, a franchise arrangement and you need specialist advice to determine the position as a breach of the Franchise Code (which is a mandatory Code) carries substantial fines and penalties.

Apart from the Franchise Code and the Australian Consumer Laws there are also a myriad of other laws that you need to be aware of such as the unfair contract provisions, OH &S provisions, Workplace laws that you need to consider.

The ACCC has developed a free online education course for people thinking about buying a franchise which is highly recommended to prospective franchisees.

The Franchising Code limits terms in a franchise agreement such as restraints at the end of the term if the franchise agreement is not extended, the franchisors no longer have right to charge legal costs or make retrospective changes to the agreement and there are a number of other restrictions.

So, c’mon jump in my car and turn on the radio …and you might hear a classic tune like Ted Mulry or The Cars!