A franchisor can reasonably withhold consent for a transfer of a franchise, where the reasons given truly reflect the decision-making process and are genuine or made in good faith, under the Franchising Code of Conduct.
The case of Lockhart v Holden provides an insight into when it is reasonable to withhold consent for a transfer of franchise, especially for car dealerships.
Facts
The case deals with GM Holden (Holden) refusing to agree to transfer a Holden car dealership franchise held by Peter Lockhart Motors (Lockhart) to another, larger car dealership group (Zupps). Lockhart challenged the reasons given by Holden, on the basis of section 20(2) of the Franchising Code of Conduct, which prohibits a franchisor unreasonably withholding consent to the transfer of a franchise.
Holden gave the following reasons:
- The transfer would increase Zupps’s market footprint to an unacceptable level, with possible adverse effects on other Holden dealers in the area.
- If the transfer was to occur, the future of Zupps was not certain as there was no appropriate succession plan for Mr Zupps in case of his death or retirement, and
- No proper business plan was provided for the dealership by Zupps.
The Supreme Court of Queensland held that the reasons provided by Holden were not unreasonable.
What are reasonable considerations for a decision to refuse?
Would the transfer result in unacceptable market concentration?
Holden’s policy set out acceptable levels of market concentration. If Zupps was to acquire Lockhart’s dealership, it would exceed the acceptable market concentration for that area. This policy had been developed after Holden had experienced the collapse of a very large dealership group, after its patriarchal figure’s death. The collapse had significantly affecting Holden’s market share.
Holden had legitimate risk management interest behind this policy, to be able to contain any risk to Holden of an adverse event affecting a large dealer group.
The court also held that it was sufficient that Zupps knew that it was not allowed to acquire more market share, without knowing the specific limit imposed.
Would the transfer result in an adverse effect on other franchisees?
The court accepted that Holden had a genuine interest to protect and maximise its market share and profits against other motor vehicle manufacturers.
Allowing the transfer would create a real risk—even though it may be a hypothetical one—of a larger dealership cannibalising another Holden dealership through the sheer power of its size and stronger economic position.
Does the receiver of the transfer has definite succession plan for its own dealership(s)?
Mr Zupps had hands-on control of the business. Factual evidence supported Holden’s concern that the managers of Zupps’s dealerships had no equity in the business and little incentive to stay. With no trained successors, if Mr Zupp was to unexpectedly exit the business, there was a real fear of the dealerships failing.
This highlighted the previous experience of Holden that formed the basis for the market concentration rule.
Is there a proper business plan in place for after the transfer?
Factual evidence showed no proper business plan was discussed or submitted to Holden by Zupps. It was reasonable for Holden to refuse the transfer because a lack of a proper business plan emphasised the issue of the uncertainty of succession of the Zupps dealerships.
Other considerations
The court focused that it was also legitimate to give consideration to the following when deciding if it is reasonable to withhold consent:
- whether the franchisor was acting in the legitimate, long-term interest of the franchise
- whether the proposed assignee fitted into the franchisor’s overall network, and
- whether the transfer would have an adverse effect on the franchise network, such as profitability of other retailers/franchisees.
This case suggests that the withholding of consent to the transfer of a franchise is likely to be reasonable if it is based on reasons reflecting the decision making process. It is not a high threshold and as long as the reasons are genuine or made in good faith, they are likely to be found reasonable.
These reasons are in addition to the reasonable circumstances set out in section 20(3) of the Franchising Code of Conduct.
This article was written by Alex Zolotarsky, Vacation Clerk.
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