Lockhart’s Case
The Queensland Supreme Court in Lockhart v Holden [2008] QSC 257
The Queensland Supreme Court has just handed down a decision affirming a Franchisor's decision to withhold its consent to the transfer of a franchise.
The Claim
The plaintiff’s, Peter Eric Lockhart and MAP Enterprises Pty Ltd (‘Lockhart’), brought an application for damages before the Supreme Court of Queensland under subsections 82 and 51AD of the Trade Practices Act claiming that GM Holden Ltd (‘Holden’) had contravened section 20(2) of the Franchising Code of Conduct (Code) by unreasonably withholding its consent to a transfer.
Background
Lockhart operated a Holden dealership at Southport on the Gold Coast. A Motor Vehicle Dealership Agreement is deemed to be a Franchise Agreement under the Code. Lockhart requested that Holden agree to the transfer of the dealership franchise held by Lockhart to Zupps South East Queensland Pty Ltd (‘Zupps’).
Holden refused the request claiming that the proposed transfer would have a significant adverse affect on the franchise system. In correspondence with Lockhart, Holden stated that it was concerned that allowing the transfer would:
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increase its risk exposure by concentrating a large portion of its business and market distribution into the hands of one retailer;
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impact adversely on the ability of other retailers in the region to access markets and supply products; and
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the future business model of Zupps had additional risks within the ownership and management structure that were considered to have the potential to increase Holden’s risk within its distribution network.
At trial, Holden clarified the final point by expressing concerns about the future control of the Zupps business upon the death or retirement of John Zupp (the dealer principal). Holden was not satisfied that an appropriate succession plan was in place either through Mr Zupps’ daughter or through other management, none of whom had any shareholding or other equity in the Zupps or its dealerships.
Decision of the Court
Lockhart asserted that Holden’s decision to refuse consent was based on an arbitrary policy not derived from any rational factors which would justify its adoption. The court rejected Lockhart’s claim pointing to an identifiable chain dealer policy adopted by Holden whereby it restricted the market share of larger dealerships to ensure that it retained control over the dealership system and to help ensure the viability and profitability of its smaller dealerships and the dealership system in the long term.
Importantly, Holden were able to provide documentary evidence demonstrating that the policy was in place from as early as 1986 and that existing dealership chains conformed with it. The court was also satisfied that the policy had been disclosed to dealers through circulars informing them that Holden endorsed “multiple ownership through a chain dealer policy with appropriate market share limits”.
On the issue of Zupps’ succession plan, the court was satisfied that there existed sufficient evidence to substantiate Holden’s claim that it was genuinely concerned about Zupps’ succession plan and its impact on Holden’s practice of requiring individual franchise businesses to be operated by a dealer principal holding not less than 25 per cent equity in the business.
At the time of the request, managers of the Zupps’ dealerships had no equity in the business and little incentive to stay. Holden were concerned that should Mr Zupp, the patriarch of the Zupps’ motor dealership, retire or die there would be no one left holding the requisite 25% equity share as dealer principal and this would significantly increase the chances of the Zupps Group collapsing.
The Law
In reaching its decision the court affirmed the Western Australian decision of Masterclass Enterprises v Bedshed Franchisors. In that case, Newnes J, asserted that a franchisor’s refusal would not be unreasonable where:
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it was acting in the legitimate interest of the continuing success of the business in the long term; and
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it required a franchise business to be supervised by someone with a substantial interest in the franchise.
The court was satisfied that while ordinarily, a decision to withhold consent to an assignment would be reasonable only where substantial evidence existed to demonstrate that the proposed assignee was materially deficient with respect to one or more appropriate, performance-related criteria, the continuing, close commercial arrangement between a franchisor and franchisee required the additional consideration of whether the proposed assignee would fit within the franchise system.
Conclusion
It will not be unreasonable for a franchisor to withhold consent to the transfer of a franchise where there is a clearly established and justifiable policy of restricting the growth of large dealerships within a network, or where the franchisor requires the franchised business to be supervised by someone with a substantial interest in the business as dealer principal. As a matter of caution, Franchisor's should adopt, document and clearly communicate transparent policies well before they seek to withhold their consent to a transfer on these grounds.
Derek Sutherland and Belinda Warwick
Please do not hesitate to contact a member of our Franchising team if you have any queries.
