By Billy Riddle, Lawyer

Changes to the Franchising Code of Conduct (Code) were released on 22 June which affect franchising agreements classified as “new vehicle dealership agreements” under the Code. “New vehicle dealership agreements” are defined to mean a motor vehicle dealership agreement relating to a dealership that predominantly deals in new passenger vehicles or new light goods vehicles (or both).

Though the changes were released on 22 June, they apply from 1 June 2020 onwards. They are wholly contained in a new Part 5 of the Code.

Notification obligations

For all dealership agreements entered into on or after 1 June 2020, the franchisor must notify the franchisee of the franchisor’s intention to either extend the existing agreement, enter into a new agreement or do neither with at least 12 months’ notice (if the term of the agreement exceeds 12 months) or at least 6 months’ notice (if the term of the agreement is less than 12 months). For non-motor vehicle dealership agreements, the requirement to notify the franchisee of the franchisor’s intention for end of term arrangements is set at 6 months regardless of the length of the franchise agreement.

If the franchisor is intending to extend or enter into a new agreement, the franchisor must provide reasons for the franchisor’s stated intention. If the franchisor gives notice that it intends to enter into a new agreement, the notice must include a statement that the franchisee is entitled to request a disclosure document from the franchisor.

End of term arrangements

The new Code now requires the franchisee and franchisor to agree to a written plan for managing the winding down of the dealership if the franchisor has given notice it does not intend to renew or extend the agreement.   The plan must provide for how the franchisee’s stock (including new vehicles, spare parts and service and repair equipment) will be managed over the remaining term of the agreement. The parties must also cooperate to reduce the franchisee’s stock of new vehicles and spare parts over the remaining term of the agreement.

These obligations also apply to renewals or extensions of new vehicle dealership agreements entered into prior to 1 June, 2020.

Capital expenditure

Consistent the existing clause 30 of the Code, motor vehicle dealers cannot require franchisees to undertake significant capital expenditure during the term of the franchise agreement. There are exceptions, which are:

1. expenditure that is disclosed to the franchisee in the disclosure document that is given to the franchisee before:
   1. entering into or renewing the agreement; or
   2. extending the term or scope of the agreement;
2.  if expenditure is to be incurred by all or a majority of franchisees—expenditure approved by a majority of those franchisees;
3. expenditure incurred by the franchisee to comply with legislative obligations; and
4. expenditure agreed by the franchisee.

The crucial difference applying to new motor vehicle dealership agreements that was introduced by the recent amendments to the Code relates to the franchisor’s disclosure obligations. The franchisor dealer must now provide as much information as practicable about the capital expenditure in the disclosure document, including:

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 franchisor and franchisee must also discuss the expenditure verbally. The discussion must include a discussion of the circumstances under which the franchisee or prospective franchisee considers that the franchisee or prospective franchisee is likely to recoup the expenditure, having regard to the geographical area of operations of the franchisee or prospective franchisee. It is recommended that detailed file notes are kept of these discussions, including the subjects discussed, to ensure you can prove compliance.

Dispute Resolution

If the franchisor has a dispute “of the same nature” with multiple franchisees, the franchisees may request that the franchisor deals with the franchisees together about the dispute. The franchisor is not obligated to comply with this request, but must consider the request in good faith (pursuant to clause 6 of the Code). This amendment recognises that there is often a power imbalance between franchisees and franchisors in disputes, and allows franchisees to combine their resources to reach an outcome, however stops short of mandating that the franchisor must engage in the dispute in a “multi-party” fashion.

Disclosing

Even if this has no direct bearing on your franchise business, this also serves as an important reminder to always ensure you attach the most current version of the Code to any disclosures going forward. In addition, if you are a franchisor with obligations under the Code, you should consider providing a correct Code to those franchisees who you have disclosed to from 1 June to 22 June. To those franchisees who you have disclosed to since 22 June and who may still in their disclosure period, we strongly recommend sending them the updated version of the Code.

If you have any further questions about any of the above, or need assistance with a particular matter, please don’t hesitate to contact Lawyer Billy Riddle (+61 3 8568 9628).