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Dealers welcome franchise reform, but timing an issue

Closer scrutiny: Under proposed amendments to the franchising code, the ACCC will have greater powers to investigate breaches, but fines will be capped at $51,000.

Return on dealer investment still an issue amid positive franchise code reform: AADA

7 Apr 2014

THE industry body representing new-car dealers has expressed disappointment that significant amendments proposed for the Franchising Code of Conduct, including fines, will only apply to agreements signed after January 1, 2015.

This is the date when the amendments to the code will come into force, which means all existing dealer agreements will be “grandfathered”.

The Australian Automotive Dealer Association (AADA) is concerned there will be no immediate or formal requirement for car-makers to act ‘in good faith’ or to clearly justify why large capital expenditures are required.

The fines, the ‘good faith’ clause and protection against unexpected large capital outlays are some of the improvements contained in a series of proposed amendments released last week by federal minister for small business Bruce Billson.

The proposed amendments are open for public comment until April 30.

AADA chief executive Patrick Tessier told GoAuto that many of the proposed changes were expected by the industry, but it still has concerns.

“There is a concern that the draft code does not address the undue influence OEMs (car-makers) exert on dealers in terms of substantial investments in dealership facilities without adequate consideration of tenure security and return on investment,” Mr Tessier said.

He said Alan Wein, the independent expert who conducted a survey of the franchising sector before the government drew up its amendments, had recommended more work be done on this before the amendments were finalised.

“Alan Wein recommended that an analysis of the impact of a minimum term and standard contractual terms for motor vehicle dealership agreements should be undertaken before any changes were made to the code,” Mr Tessier said.

“But AADA is unaware of whether any consultation has taken place.”

Mr Tessier also sounded a note of caution over the grandfathering of existing agreements.

“It should be noted that the amended code will only apply to franchise agreements or renewals after 1 January, 2015, and the obligation to ‘act in good faith’ may not apply to existing and longer term agreements,” he said.

A spokesman for minister Billson confirmed that view when contacted by GoAuto, suggesting problems would have been created if the amended code was made retrospective so that it would cover existing agreements.

“It is expected that the reforms to the franchising code will only apply to franchise agreements entered into or renewed on or after the commencement of the amendments,” Mr Billson’s press secretary Kane Silom told GoAuto.

“Previous amendments to the franchising code were implemented on the same prospective basis to avoid legal and constitutional issues that may arise from interfering with existing contractual rights between the parties.

“This approach avoids imposing unnecessary regulatory complexity and uncertainty on existing franchise arrangements.”

Under the proposed amendments, the Australian Competition and Consumer Commission (ACCC) would have greatly strengthened investigative powers for examining breaches of the franchising code.

The ACCC would also have the power to levy “on the spot” fines of between $1700 and $8500 without going to court and could issue a fine of up to $51,000 for serious breaches if it did win in court.

Mr Tessier said the AADA supported many of the proposed changes, particularly the requirement for parties to a franchise agreement to always act in good faith.

He pointed out that this good faith clause included an obligation to act honestly and not arbitrarily and to co-operate to achieve the purposes of the franchise agreement.

In releasing the amendments last week, Mr Billson said the government’s inquiry had received consistent anecdotal reports of questionable behaviour in franchise arrangements.

Another addition to the code also designed to address the power imbalance between franchisor and franchisee will be a ban on the imposition of heavy capital expenditure requirements unless certain criteria are met.

Mr Billson said the proposed changes would reduce red tape by eliminating a number of documents a franchisor has to provide to potential franchisees and by eliminating unnecessary and sometimes unclear provisions.

“The government’s changes strike the right balance between the needs of franchisors and franchisees that reflects the unique nature of the franchise relationship,” Mr Billson said.

The biggest change is the introduction of fines for companies or people who breach the amended code, which will be policed by the ACCC.

The ACCC will be able to issue an infringement notice without going to court if it has reasonable grounds to believe there has been a contravention. The notice has to be issued no more than 12 months after the alleged breach occurred.

These “on the spot” infringement notices will carry fines of between 10 penalty points and 50 penalty points and will not need a court order.

A penalty point currently has a value of $170 so these fines would be worth between $1700 and $8500.

However, the ACCC may seek to impose a fine of 300 penalty points ($51,000) by taking a serious breach to court and winning a court order.

Mr Billson said the introduction of these civil penalties for breaches of the code was designed to act as a deterrent, and that he was aware of the evidence identifying questionable behaviour in franchise relationships.

“As franchisors are usually in a more powerful economic and contractual position than the franchisee, poor conduct by franchisors can have a disproportionate effect on franchisees,” Mr Billson said.

He also acknowledged that poor behaviour by a franchisee could affect the reputation of the system as a whole.

As a result, he has also decided to introduce into the code a requirement that parties are obliged to act in good faith at all times.

“This obligation will apply to all aspects of the franchising agreement including during negotiations, throughout the agreement, in dispute resolution and as part of renewal discussions,” he said.

“This will improve conduct in the franchise sector, ensuring that both parties to a franchise agreement act honestly, co-operatively and not arbitrarily.”

The amended code will give the ACCC power to obtain documents that a franchisor has relied on to support statements made in a disclosure document.

“This will facilitate more effective and robust franchising audits by giving the ACCC the ability to test the accuracy of the information behind a franchisor’s disclosure document,” Mr Billson said.

In addition, franchisors will not be able to “improperly interfere” with a prospective franchisee’s ability to speak with ex-franchisees.

“This will mean that prospective franchisees will have more information available to them before they take the decision to invest in a franchise business,” the minister said.

The amendments will see a reduction in the number of documents franchisors will have to present to potential franchisees.

There will no longer have to be double disclosure in situations where there is a master franchisor and a foreign franchisor and no longer any need for a summarising document.

Mr Billson said the disclosure document was not meant to be a substitute for the franchise agreement.

Some other documents will also be deleted from the code.

However, franchisors will be required to provide potential franchisees with an explanation of the risks and rewards of franchising, covering unforeseen capital expenditure, the importance of education and the conducting of due diligence and the prospect of franchisor failure.

Franchisors will also have to detail their online trading operations, revealing how extensive it is and explaining its potential impact on traditional stores.

Franchisors also have to tell franchisees they are entitled to the latest disclosure document when their franchise is up for renewal.

The amended code will also give franchisees more detail about the way their franchise fees are used on their behalf.

Franchisors will have to detail how marketing funds are spent. These funds will also have to be kept in a separate account.

In addition, the amended code will give franchisees the option to vote for an annual audit of the marketing budget.

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