Franchising inquiry – what it means for the automotive franchising industry
On 14 March 2019, a report on the operation and effectiveness of the Franchising Code of Conduct (“the Franchising Code”) was released by the Parliamentary Joint Committee on Corporations and Financial Services (“the Committee”). The Committee has made a number of recommendations within the report. At this stage, these remain a set of recommendations which will ultimately need to be worked through the legislative process.
The key recommendations of the Committee are as follows:
It was recommended that an inter-agency “Franchising Taskforce” should be established by the Government to examine the feasibility and implementation of a number of the Committee’s recommendations.
Automotive Industry Code:
Specifically in relation to the automotive industry, the Committee recommended that further consideration ought to be given to reforms that would support the fair handling of capital intensive stock when automotive dealer agreements are not renewed, including:
- distributors to give 12-months’ notice when a dealer agreement is not being renewed;
- dealers not being compelled to upgrade dealership facilities in circumstances where a notice of non-renewal or termination has been given; and
- distributors must buy back stock at cost price for vehicle parts up to three years old, with the cost of any independent valuation of the stock being split evenly.
The Committee is however wary of fragmentation of the Franchising Code and indicated that rather than a separate Automotive Industry Code, any industry specific aspects could be included in schedules to the Franchising Code, thus maintaining the core of the Franchising Code.
It was recommended that the Franchising Code should be amended to ban unilateral variation to the terms of an agreement. The proposed Franchising Taskforce is to consider whether the above restriction on amendment is to also apply to franchise manuals and policies. However, it was also suggested that this restriction should not extend to unilateral variations that have the agreement of the majority of franchisees or a representative elected by them.
Unfair Contract Terms:
The Committee recommended that the proposed Franchising Taskforce should consider whether to make unfair contract terms illegal and subject to civil penalties. It was further suggested that all franchise agreements should be deemed to be a standard form small business contract.
Fair Exit Rights:
It was recommended that franchisees should be given the right to exit franchise agreements in certain situations, such as excessive debt and hardship.
The Committee recommended that goodwill, and the way that it is calculated, should be reviewed by the proposed Franchising Taskforce, with the aim of developing a more transparent method of calculating goodwill in franchise agreements. It is suggested that the amendment should consider how franchisee goodwill is calculated as opposed to site and brand goodwill.
The Committee recommended that franchisees be empowered to take collective action, and collectively bargain with the franchisor in order to resolve disputes. This could occur through mediums such as joint negotiation, mediation, and arbitration.
It was recommended that a mandatory arbitration process be put into place for situations in which mediation is unsuccessful. The thinking behind this is that arbitration will provide a cheaper dispute resolution process than court proceedings. However, parties will still be able to commence court proceedings if the arbitration is unsuccessful, meaning that this additional process could in fact ultimately increase the costs of dispute resolution between franchisors and franchisees.
Civil Pecuniary Penalties:
It was recommended that civil pecuniary penalties and infringement notices should be made applicable to all breaches of the Franchising Code, as currently these penalties only apply to key provisions of the Franchising Code.
Significant Capital Expenditure:
The Committee recommended that section 30 of the Franchising Code be amended to include a clear definition of ‘significant capital expenditure’. This is with a view to ensuring that there are appropriate constraints on the ability of franchisors to impose capital expenditure requirements on franchisees to ensure franchisees:
- are able to make an appropriate return on investment within the remaining franchise term; or
- only have to pay pro-rata the amount of capital expenditure that would allow an appropriate return within the franchise term, with the franchisor to fund the rest; or
- franchisees are paid appropriate compensation if the franchisor subsequently terminates the franchise agreement.
The Committee’s recommendations are likely to have a considerable impact on the way in which franchisors and franchisees interact. While there is some way to go before any of these recommendations are reflected in regulatory provisions, Clinch Long Woodbridge will continue to monitor developments and provide updates.
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