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THE power imbalance between car-makers and their dealers has just been tilted the way of the retailers with an announcement today that OEMs will face huge penalties for terminating their dealers’ agreements on unfair terms.

The federal government says that the voluntary Best Practices Principles it announced late last year will now be made mandatory. This is a big win for dealers who watched aghast last year when Holden ignored government ministers and refused to engage in arbitration with retailers.

In addition, penalties for car-makers who unfairly change the terms and conditions of contracts with dealers will face penalties of up to $10 million or 10 per cent of the OEM’s turnover – whichever is the greater.

It also allows for agents to be included in the franchise code.

In order for dealers to get fair treatment and compensation for the changes OEMs make, the government says it will develop a conflict resolution code forcing companies into arbitration should negotiations break down.

The new measures announced today will increase available penalties under the Franchising Code to up to $10 million or 10 per cent of of the OEM’s turnover – whichever is the greater. This will strengthen penalties for willful, egregious and systemic breaches of the Franchising Code by large and profitable multinational companies.

It is understood this will apply to car companies that undertake systemic breaches under the Code, including unilaterally changing contracts, poor compensation and reneging on warranties. 

It will ensure agency agreements are captured by franchising regulations. It will explicitly recognise that dealers operating as a manufacturer’s agent in relation to new-vehicle sales are still protected by the Franchising Code.

It will establish best practice by transforming existing voluntary principles into mandatory obligations under the Franchising Code. This will address concerns multinational manufacturers won’t follow voluntary principles.

It is understood this will mean:

Principle 1

Franchisors must include provisions in new dealership agreements that provide for fair and reasonable compensation for franchisees in the event of early termination resulting from:

  • withdrawal from the Australian market
  • rationalisation of their networks
  • changes to their distribution models

Principle 2

Franchisors must not include provisions that exclude compensation in new dealership agreements.

Principle 3

The ‘fair and reasonable compensation’ as referred to in Principle 1 must include appropriate allowances for the loss a franchisee may incur, which can include:

  •  lost profit from direct and indirect revenue
  • unrecovered expenditure and unamortised capital expenditure where requested by the franchisor
  • loss of opportunity in selling established goodwill
  • wind-up costs

Principle 4

When an agreement is entered into it must provide franchisees a fair and reasonable time to secure a return on investments that have been required by franchisors as part of the agreement.

Principle 5

Agreements must include reasonable provisions for franchisors to compensate or buy back new vehicle inventory, parts and special tools, in the event of:

  • non-renewal
  • withdrawal from the Australian market
  •  rationalisation of their networks
  • changes to their distribution models

Principle 6

Agreements must include provision for timely commercial settlement and dispute resolution.

Regarding agents, it will ensure that the Franchising Code keeps pace with changes to business practice by explicitly recognising that dealers operating as a manufacturer’s agent in relation to new-vehicle sales are still protected by the Franchising Code.

It is understood this will mean the government will also explore mandatory binding arbitration provisions within this new code, similar to those in the Media Bargaining Code, which were developed to curtail the power of the Big Tech platforms.

In addition, the government is committed to working further with the automotive franchising sector and will consult on:

  • Ensuring appropriate protections for automotive dealerships from unfair contract terms in their agreements with manufacturers;
  • Options to achieve mandatory binding arbitration for automotive franchisees, to address power imbalance when there is a dispute; and
  • The merits of a standalone automotive franchising code.

Minister for small business Michaelia Cash has essentially made all these changes happen in a period of just five weeks. Prior to that, the Franchise Code was sitting in the industry department under a different minister, Karen Andrews. That department was ignoring the issues.

Meanwhile the Australian Automotive Dealer Association (AADA), the peak body representing franchised new-car dealers, welcomed the Morrison Government’s “landmark reforms” to the automotive franchising landscape.

It said the “momentous reforms for the automotive industry will protect dealers against the worst abuses by some car companies.

“Today’s announcement will be welcomed by automotive dealers and their 60,000 employees all across Australia. It will give these local businesses the confidence to employ more Australians, take on more apprentices, invest in their communities and continue to support local sporting teams and charities.”

AADA CEO James Voortman said: “These changes will bring a degree of balance to the relationships between new-car dealers and the manufacturers to which they are franchised. The reforms are sensible and fair and will bring all manufacturers up to the standard already being employed by ethically minded car brands operating in Australia,” he said.

“Mandating the principles for new dealer agreements, ensuring agency agreements are captured by these regulations and setting appropriate fines for breaches of the Franchising Code are all very welcome measures. Only manufacturers who ride roughshod over Australian dealers will have anything to fear from what has been announced today,” Mr Voortman said.

“We also look forward to participating in the further work flagged by the government on the merits of a stand-alone automotive code, binding arbitration and unfair contract terms,” he said.

“It has been a difficult 12 months for automotive dealers with General Motors’ termination of 185 Holden dealers and significant changes flagged by a number of other manufacturers. The industry is in a state of rapid change and all dealers ask is that major changes see manufacturers engage in a fair process and provide adequate compensation,” he said.

“Dealers in regional towns and cities all across the country will be thanking the Morrison Government. In particular we would like to thank the Minister for Small and Family Business Michaelia Cash for sticking up for Australia’s dealers and working closely with the industry,” Mr Voortman said.

“During the pandemic, the Morrison Government has helped our industry with JobKeeper, support for apprentices and investment incentives. Today’s changes will further enable the industry to take advantage of the recovering economy,” he said.

“Automotive dealerships are important local businesses which employ Australians, invest in Australia and pay their tax in Australia. Dealers look forward to healthy commercial relationships with their manufacturers, so we can continue to bring many benefits to Australian consumers and communities,” he said.

The Motor Trades Association of Australia (MTAA) and State and Territory Members Associations described the strengthened regulations as “a game changer”.

They said in a statement: “MTAA and Members have worked tirelessly for more than two decades to detail the inadequacies of current competition and consumer laws and the Franchising Code of Conduct to address the growing power imbalance between internationally headquartered car companies, their Australian car dealer networks and Australian consumers and communities.

MTAA says today’s announcement to increase penalties to up to $10m for car manufacturers found guilty of systemic misconduct, making current voluntary principles compulsory obligations, and ensuring ‘agent’ type agreements are covered by franchising and competition regulations, provide increased protections for Australian car retailing businesses and their thousands of employees.

MTAA CEO Richard Dudley thanked the prime minister Scott Morrison, employment and small business minister Senator Michaelia Cash and industry minister Karen Andrews, for listening to and working with MTAA and Members to develop and secure the most comprehensive package of reforms ever undertaken to address the power imbalance with car manufacturers.

“Today’s announcement combined with reforms announced last year securing a specific schedule of amendments to the Franchising Code regulations for car dealers, other substantial changes to the Franchising Code, further improvements to Unfair Contract Terms, and Collective Bargaining, sets the foundations for fundamental reform of car manufacturer/ distributor and dealer relationships.

“The role of Parliamentary Inquiries into Franchising and then the conduct of General Motors Holden and the broader car manufacturer/dealer relationship were also critical in helping uncover the behaviours and conduct of some international car companies and their scant regard for our laws and rules for fairness and equity,” Mr Dudley said.

The MTAA said: “The Commonwealth government, their agencies, and departments and MTAA and Members worked in partnership to resolve these long-standing and critical concerns for dealer members and wider automotive sector industries.

“The willingness to tackle these longstanding competition and consumer concerns and the critical support and stimulus initiatives to recover from COVID-19 are already realising up to a 40 per cent increase in automotive apprentices from pre-COVID-19 levels.”

By John Mellor

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