News & Insights

To code or not to code – that’s the question the motor dealer sector is grappling with as it considers how to even the power balance between new car dealer franchisees, franchisors and car makers.

The Federal Opposition has promised to introduce a franchising code for new car dealerships if it wins the next election, a move welcomed by the Australian Automotive Dealer Association. The Australian Small Business and Family Enterprise Ombudsman has also called for a code of conduct.

But the Federal Chamber of Automotive Industries is wary, warning a code could hinder the industry’s ability to innovate and be flexible.

There’s no doubt that in a dispute between a car dealer and a manufacturer, the manufacturer has the stronger hand commercially. A manufacturer can refuse to renew an agreement with little reason, leaving a dealer stranded with potentially millions of dollars’ worth of infrastructure and no means to support it.

While a code will undoubtedly attempt to address this power imbalance, we believe the devil will be in the detail.

A code would seek to define what is “unconscionable conduct” when it comes to settling disputes between parties. But what conduct is “unconscionable”?

If a code is created and implemented, we think the most likely outcome will be franchisors and manufacturers being more careful about the wording of their agreements and compliance with a specific code so as to limit dealers’ potential action.

Under the current legislation there is plenty of scope to argue “unconscionable conduct” if a manufacturer behaves badly but it is rare due to costs involved and the risk of non-renewal.

In theory, a code of conduct would place all industry participants on a level playing field and set out the means of settling disputes fairly. However if the code becomes prescriptive in how sales targets are set when multi-franchising is allowed and when renewals can be refused then “compliance” will leave the dealers stranded.

A particular issue we would like to see dealt with in an industry specific code is an obligation on manufacturers to “rationalise” dealer networks where market share is lost.

Clearly, Ford and Holden have lost much market share over the decades that few people in the industry would not support a reduction in dealer numbers. It would be beneficial to all dealers if manufacturers were obliged to rationalise and pay compensation when market share is lost.

If a code had a process stipulated to require rationalisation including a compensation mechanism then dealers would be in a much better position.

Although we are sceptical about the positive outcomes that would be achieved by an industry specific code, we would love to work in an environment that had legislation so powerful that manufacturers were ready to treat dealers with respect on operational matters such as refurbishments, warranty claim audits, product faults, multi-franchising and sales targets.

Unfortunately, only a minority of franchisors currently do and we expect it would be the same franchisors that do this under an industry specific code.

Ultimately, we’d like to see all parties build relationships that allow them to settle any disputes that arise fairly.

For more information or assistance with a Motor Dealer matter, please contact our Motor Dealers team.