25th May, 2015 · Dealership Operations

New Franchising Code of Conduct
applies to Conduct on or after 1
January 2015

5 minutes to read

In this article

Prohibition on Significant Capital Expenditure

A distributor must not require a Dealer to undertake significant capital expenditure in relation to a dealership during the term of the dealer agreement.

Good Faith

The Code includes an express obligation on the parties to a Dealer Agreement to act in good faith.

Civil Penalties

For the first time, distributors will be subject to civil pecuniary penalties and fines (issued under an infringement notice) for breaches of certain provisions of the Code.

Enhanced Audit Powers

In addition to the ability to seek penalties and fines, the ACCC will have enhanced powers to require distributors to provide information under section 51ADD notices to demonstrate their compliance with the Code (rather than simply requesting documents they are required to create under the Code).

January 1, 2015 marked the commencement of the new Franchising Code of Conduct (the Code), introducing important conduct provisions that vehicle dealers must be aware of.

In the new Code, there appears to be some disagreement regarding the precise application date of some of the key conduct provisions. In particular, some reports have suggested that pre-1 January 2015 Dealer Agreements do not benefit from important conduct provisions such as the obligation to act in good faith and more importantly, the prohibition on significant capital expenditure.

AADA’s view is that those conduct provisions apply to all Dealer Agreements entered into on or after 1 October 1998 and advice should be sought by Dealers from their legal advisors to remove any doubt.
Application Date
The basis on which AADA relies in forming its view is clause 3(1) of the Code, which states:
‘Subject to subclause (4), this Code applies to conduct occurring on or after 1 January 2015 (other than to discharge an outstanding obligation that arose under the old code) in relation to a franchise agreement entered into on or after 1 October 1998.’

Subclause (4) relates only to the prohibition on release from liability, jurisdiction for settling disputes, costs of settling disputes and the effect of restraint of trade clauses if a franchise agreement is not extended. Some of those provisions do not apply to pre-1 January 2015 Dealer Agreements. It is AADA’s understanding, however, that key conduct provisions such as the prohibition on significant capital expenditure do apply to pre-1 January 2015 Dealer Agreements. The only Dealer Agreements not included would be pre-1 October 1998 Dealer Agreements of which there are unlikely to be any.

The explanatory memorandum provides further support that those conduct provisions apply to pre-1 January 2015 Dealer Agreements as it sets out:

‘The Franchising Code has been drafted to provide the greatest possible coverage of existing and future franchise agreements. Except as provided below, the Franchising Code applies to conduct occurring on or after 1 January 2015 in relation to a franchise agreement entered into on or after 1 October 1998’.

Therefore, it seems that most conduct provisions contained in the Code apply to most, if not all Dealer Agreements.

The key conduct provisions that all Dealers ought to note are set out below.

Prohibition on Significant Capital Expenditure

A distributor must not require a Dealer to undertake significant capital expenditure in relation to a dealership during the term of the dealer agreement.

‘Significant Capital Expenditure’ is not defined but it is said to exclude the following:

  • Expenditure that is disclosed to a Dealer in the disclosure document before entering into or renewing the dealer agreement, or extending the term or scope of the Dealer agreement;
  • Expenditure approved by a majority of Dealers;
  • Expenditure incurred by a Dealer to comply with legislation;
    Expenditure agreed to by the Dealer;
    Expenditure that the distributor considers is necessary as capital investment in the  dealership, justified by a written statement given to each affected dealer setting out:
    • The rationale for making the investment;
    • The amount of capital expenditure required
    • The anticipated outcomes and benefits
    • The expected risks associated with making the investment

This prohibition has interesting ramifications for the compliance processes that will be adopted by distributors.

Distributors may look more closely at the disclosures made in their disclosure documents and opt to reference new capital expenditure requirements in their disclosure documents. AADA notes; ‘Dealers should, therefore, look more closely at an updated disclosure document if one is provided or requested.’

Alternatively, distributors may seek the approval of the majority of Dealers via Dealer Councils. It is unclear whether obtaining the approval of a Dealer Council will be sufficient to comply with the Code as some Dealer Councils are informally set up and not, for example an incorporated association with a Constitution.

Finally, distributors may choose to justify, through a business case statement, why any significant capital expenditure is required during the term of a Dealer Agreement. It is open to Dealers to challenge the reasonableness of the business case statement. Do the numbers stack up?

If a business case is not made out, it would be a breach of the Code to compel Dealers to make the capital investment. Given the short term of most Dealer Agreements, it may be difficult for distributors to advance a business case that does not have regard for the interests of both the Dealer and the distributor.

Good Faith

The Code includes an express obligation on the parties to a Dealer Agreement to act in good faith. That obligation applies to negotiations before an agreement is signed, and during the term of the Dealer Agreement. It also forms part of renewal negotiations and applies to all conduct in any dispute.

The term ‘good faith’ under the common law or unwritten law 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). The courts will also consider whether the party acted honestly and not arbitrarily and whether the party co-operated to achieve the purposes of the agreement.

To date, Dealer Agreements have been standard form agreements with very little room for individual Dealers to negotiate. Some distributors have engaged with Dealer Councils to discuss the terms of the Dealer Agreement but others have applied a ‘take it or leave it’ approach. The period of time surrounding a renewal is often tense and may involve various reviews of performance and facilities. It will be interesting to see how these approaches evolve in future Dealer Agreement negotiations and renewals.

The deputy chair of the ACCC, Dr. Schaper, made clear the ACCC’s likely enforcement policy in relation to the new Code. He indicated the ACCC will focus on particularly serious conduct, including breaches of the ‘key pillars’ of the revised Code.

Specifically, he said: ‘This is likely to include failure to act in good faith, … Fundamentally, good faith will require both parties to a franchise agreement to remain loyal to the contract they have entered into … Acting for an ulterior purpose, or in a way that undermines or denies the other party the benefits of the contract are examples of conduct that may qualify as bad faith.’ (Emphasis added).

Civil Penalties

For the first time, distributors will be subject to civil pecuniary penalties and fines (issued under an infringement notice) for breaches of certain provisions of the Code. Contravention of a provision of an industry code where there is a civil pecuniary penalty will result in a civil pecuniary penalty of up to a maximum of $51,000. Infringement notices will carry a maximum fine of $8500 per contravention for companies and $1700 per contravention for individuals.

Some conduct provisions are excluded from being subject to a civil penalty. For example, the prohibition on significant capital expenditure does not carry a civil penalty but a contravention of good faith or the requirements for termination do carry a civil penalty.

Enhanced Audit Powers

In addition to the ability to seek penalties and fines, the ACCC will have enhanced powers to require distributors to provide information under section 51ADD notices to demonstrate their compliance with the Code (rather than simply requesting documents they are required to create under the Code).

The new conduct provisions and enforcement tools should assist in setting a minimum standard of behaviour amongst stakeholders in the franchising industry.
For further information on the new Franchising Code refer to the Australian Competition and Consumer Commission website: www.accc.gov.au/business/industry-codes/franchising-code-of-conduct

Vinesh George
Franchise Lawyer