Australia: Hold on to your steering wheel - unfair contract and unjust conduct regime to motor vehicle dealer agreements in NSW

Last Updated: 13 December 2013
Article by Greg Hipwell, Stephen Giles and Mira Guirguis

Australia's automotive industry looks set to face more challenges following the introduction of the Motor Dealers and Repairers Act 2013 (Act) in New South Wales last week.

Submissions by various peak industry organisations expressing serious concerns with Part 6 of the Act failed to make an impact with the NSW Minister for Fair Trading advocating what he says is an Act that "cuts red tape," modernises existing legislation and supports good businesses "getting on with their job of selling and repairing cars." Unfortunately, manufacturers, distributors and dealers are all likely to experience the far reaching implications of Part 6 of the Act in NSW (and beyond, should the Minister stay true to his promise to champion similar legislation in other States).

Part 6 of the Act prohibits "unfair" provisions in a "supply contract" and "unjust conduct" that "occurs in connection with a supply contract and is dishonest or unfair" or is "authorised by an unfair term of a supply contract." According to the Act, a supply contract is "unfair" if:

  1. it would cause a significant imbalance in the parties' rights and obligations under the contract; and
  2. it is not reasonably necessary in order to protect the legitimate interests of the party who would be disadvantaged by the term; and
  3. it would cause detriment (whether financial or otherwise) to a party if it were to be relied upon.

Part 6 of the Act goes on to provide examples of "unfair" contract provisions, which include terms that permit one party but not another to terminate the contract, penalise a party for breach of contract, vary the contract, or vary the goods to be supplied under the contract.

Sound familiar? The nature of dealer arrangements is such that most dealer sales and service agreements include these types of terms to cope with innovation and developments in, and changes to product ranges and operating policies. In NSW, it may now be necessary to have a negotiation with individual dealers each time a manufacturer wants to implement such a change.

The troubles with the new "unfair" and "unjust" provisions are three-fold.

First, Part 6 of the Act conflicts with and duplicates the existing regulatory framework. To date, the Franchising Code of Conduct (Code) and the Competition and Consumer Act have sought to protect all stakeholders in the franchising sector, including those involved in the automotive industry. The Australian Competition and Consumer Commission has wide powers and avidly enforces the Federal regime. The Code was recently subject to an extensive review which stressed the franchising sector's overwhelming desire for a single, national regulatory scheme. The introduction of Part 6 of the Act is likely to undermine the existing Federal regime by causing uncertainty and increasing compliance costs and red tape due to inconsistent state and Federal regulation of the sector.

Second, the terms "unfair" and "unjust" are arbitrary and are not legally tested concepts. The NSW legislation presupposes that manufacturers always have superior bargaining power and deeper pockets to fund litigation. This is simply not always the case. There is now a real prospect that large dealers will threaten a test case on the meaning of "unfair" or "unjust" should they not get what they want in a negotiation. For example:

  1. a dealer who is not given the right to sell a new product range due to a manufacturer's desire to market the product as part of an alternative dealer network could challenge that legitimate business decision as being "unjust" conduct;
  2. a manufacturer's decision not to approve a transfer of a dealership on grounds set out in a dealer agreement could be challenged on the basis that the agreement is "unfair" or that the manufacturer is behaving "unjustly." In Lockhart v GM Holden Ltd a 2008 decision of the Supreme Court of Queensland found that Holden's refusal to consent to a franchise transfer (because of market concentration risks and perceived succession planning problems) was reasonable given their established risk management policies. However, in light of the new provisions and the powers of the new Consumer, Trader & Tenancy Tribunal, the outcome of this case might be determined differently.

The examples above demonstrate how the new dispute resolution mechanism provided for in the Act (discussed below), potentially places the Consumer, Trader & Tenancy Tribunal in a position to overrule a manufacturer on key strategic decisions regarding who its dealers will be and what products they will be entitled to distribute.

Third, the Act is retrospective in its application. This puts into question the validity of what might be deemed "unfair" contract provisions in all existing dealer agreements, operations manuals and performance standards and policies. Should manufacturers now review, consider and re-negotiate existing agreements in light of Part 6 of the Act? The likely answer is yes, and time will tell to what extent this plays out. The uncertainty likely to be caused by Part 6 of the Act will inevitably lead to increases in costs and increases in red tape – both of which are contrary to the asserted purpose of the Act.

Part 6 of the Act also introduces a new dispute resolution mechanism. Complaints will be referred to the NSW Small Business Commissioner in the first instance with the intention being that the Commissioner will encourage dispute resolution via mediation. Failing this, complaints will progress to the newly established Consumer, Trader & Tenancy Tribunal.

The Tribunal has extensive powers in relation to "unfair" and "unjust" conduct, including the ability to declare a contract void and the ability to direct a party to pay compensation, without any limitation as to the amount of compensation. The Tribunal's sweeping powers are likely to undermine the role of the Small Business Commissioner in seeking to encourage dispute resolution through mediation (or any other manner) as parties will no doubt seek to fast-track matters to the Tribunal. The new dispute resolution mechanism seemingly ignores the successful mediation dispute resolution mechanism provided for by the Code (which captures the majority of relationships regulated by Part 6 of the Act), which to date has had a success rate of resolving approximately 80 per cent of disputes.

Additionally, the Act is drafted so that a party bringing action under Part 6 of the Act is not limited or restricted from also bringing action under the operation of other laws. Parties therefore have the opportunity to forum shop or to pursue what often end up being unsubstantiated claims in multiple forums. This will no doubt increase costs and decrease dispute resolution efficiency.

The legal framework of Australian motor vehicle distribution has suddenly become inconsistent across state jurisdictions and uncertain in NSW. The next time a dealer in NSW doesn't like a decision or change introduced by a manufacturer, they can challenge it as being made in accordance with an "unfair" term in a contact and seek to have the dealer agreement declared void or challenge the introduction of the change as being "unjust" conduct. Surely manufacturers will be questioning whether having independent dealers in NSW will inhibit the manufacturer's ability to nimbly react to changing market conditions and whether reverting to company owned dealerships is the safest option in the circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Greg Hipwell
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