[Insert Title]

Presented by [Insert Speaker]

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Motor Vehicle Dealers – Your Ideal Franchise

Agreement

Presented by Evan StentsLead Partner – Automotive Industry Group

HWL Ebsworth Lawyers

10 July 2014

Bad News &

Good News

Bad News: There is no such thing as an ideal Franchise Agreement

Good News: There are changes in the legislative landscape that may see improvements to Franchise Agreements

There are existing legal protections for dealers and their Franchise Agreements

Bad News & Good News

Sales – circa 1 million cars

Cars manufactured in Australia – circa 200,000

Toyota, Holden and Ford will cease production in 2017

Import duties 0% - 5%

Over 50 brands sold in Australia

Snapshot of the Australian Automotive Industry

Fragmented market

Chinese entering the market

Increased competition from the internet & erosion of PMAs

Diminishing margins and reliance on holdback

Traditional dominant brands have not adjusted their marketing approach

Unrealistic glass box investments

Unrealistic KPIs

Lack of security of contractual tenure

Snapshot of the Australian Automotive Industry

Current reviews:

Franchising Code of Conduct

Unfair contracts

Competition Policy

Changes to legislative landscape

The Federal Government has released an exposure draft and timetable for implementation of amendments to the Code

The new Code (at this stage) will commence on 1 January 2015

Proposed amendments include:

Imposing an express requirement to act in good faith on parties to a franchise agreement;

The introduction of civil penalties and fines for breaches of certain provisions of the Code;

A requirement to provide a ‘risk’ statement to a prospective franchisee prior to giving disclosure;

A prohibition on a franchisor seeking to impose significant capital expenditure upon a franchisee during the term unless it has already been disclosed or the franchisor has issued a statement demonstrating that there is a business case for it to be incurred;

Amendments to Franchising Code of Conduct (Code)

An inability of a franchisor to enforce restraints of trade in certain defined circumstances where the Franchisor does not renew a franchise agreement

A requirement that disputes have to be litigated in the State where the franchise is operated;

Imposing a greater limitation on the type of circumstances in which a franchisor may immediately terminate a franchise agreement.

The amended Code will only apply to franchise agreements or renewals which happen post 1 January 2015

Amendments to Franchising Code of Conduct (Code) (cont.)

Under the Competition and Consumer Act 2010 (Cth) (CCA), a term of a contract is unfair if it:

Would cause a significant imbalance in the parties’ rights and obligations; and

It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

It would cause detriment (whether financial or otherwise) to a party if it were to be relied on

Currently, protection from unfair contracts is only available to consumers

On 23 May 2014 Treasury released a Consultation Paper that considers extending the current unfair contract provisions contained in the CCA to apply to small businesses in business-to-business contracts

Submissions close on 1 August 2014

Review of ‘unfair contracts’ protection

The Competition Policy Review Panel has released an Issues Paper arising out of its review of Australian competition policy and law

AADA Ltd has submitted to the Panel that its review should consider (among other things):

Abolition of luxury car tax

The impact of removing prohibition on importation of second-hand vehicles

International price discrimination by OEMs

Classification of dealers as SMEs for the purposes of competition law given dealers’ relative size in business-to-business dealings with OEMs

Review of competition policy

Australian Consumer Law (ACL) – unconscionable conduct

Common law duty of good faith

Motor Dealers & Repairers Act 2013 (NSW) (MDR Act)

Protection under existing law

A person must not, in trade or commerce, engage in unconscionable conduct in connection with the supply or acquisition of goods or services (except to or from a listed public company) (section 21(1));

The Court may consider whether the supplier (section 22):

had a relatively stronger bargaining power than the customer;

forced conditions on the customer not necessary for the protection of the legitimate interests of the supplier;

made sure the customer could understand the contract;

used any undue influence, pressure or unfair tactics;

charged the customer more than the customer could achieve elsewhere;

ACL – Unconscionable Conduct

treated the customer differently to like-customers in similar transactions;

breached any applicable industry code;

disclosed any risks to the customer that the supplier was aware of;

disclosed the terms of the contract, as well as the supplier’s willingness to negotiate;

has the right to unilaterally vary a term of the contract;

has acted in good faith.

ACL – Unconscionable Conduct cont.

In franchise agreements, there is an implied term of ‘good faith and fair dealing’ which requires each party to ‘exercise the powers conferred upon it by the agreement in good faith and reasonably, and not capriciously or for some extraneous purpose’ (Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310)

In addition, franchisors are required to act ‘reasonably and honestly’, not to act for an ulterior motive, to recognise and have regard for the legitimate interest of both parties to the contract, and to avoid rendering the franchisee’s interest under the contract worthless (AMC Commercial Cleaning (NSW) Pty Ltd v Coade[2010] NSWSC 832)

There is also an obligation on a franchisor to do everything on its part to ensure the franchisee has the benefit of the contract (Laurelmont Pty Ltd v Stockdale & Leggo (Queensland) Pty Ltd v Anor [2001] QCA 212)

Common law duty of good faith

The Motor Dealers & Repairers Act 2013 (NSW) (MDR Act) sets standards of conduct to protect dealers from unfair contracts and unjust conduct

MDR Act commenced on 27 November 2013

Motor Dealers & Repairers Act 2013 (NSW)

The MDR Act:

Restores the unfair contracts protections previously available under s 106 of the Industrial Relations Act

Prohibits unjust conduct by manufacturers and distributors

Provides for resolution of disputes between dealers and manufacturers and distributors

Provides dealers with a low cost alternative to court proceedings through the NSW Civil and Administrative Tribunal (NCAT)

Motor industry bodies and the Small Business Commissioner can act on behalf of dealers

Rights for dealers under MDR Act

Under the MDR Act, a contract is deemed to be unfair if it:

Would cause a significant imbalance in the parties’ rights and obligations; and

It is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and

It would cause detriment (whether financial or otherwise) to a party if it were to be relied on.

What is an MDR Act unfair contract?

Permits one party to avoid or limit performance of the contract;

Permits one party (but not another party) to terminate the contract;

Penalises one party (but not another party) for breaches or termination of the contract;

Permits one party (but not another party) to vary terms of the contract;

Permits one party to unilaterally vary the characteristics of the goods to be supplied under the contract

Permits one party to unilaterally vary the goods required to be sold or the place at which goods are required to be sold by the motor dealer;

Unreasonably limits the assignment by the motor dealer of the motor dealer’s rights under the contract or the sale of the motor dealer’s business;

Limits one party’s right to sue another party.

Examples of an MDR Act unfair contract

Under the MDR Act, unjust conduct is:

Conduct that occurs in connection with a supply contract and is conduct that is dishonest or unfair; or

Conduct that is authorised by an unfair term of a supply contract.

What is MDR Act unjust conduct?

Complaint lodged with Small Business Commissioner

Mediation facilitated by Small Business Commissioner

After mediation, if the dispute remains unresolved, complaint can progress to NCAT

Process of a complaint under the MDR Act

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