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Automotive Aftermarket: Overhaul expected from 1 July 2021

Caveat Legal
Market conduct licence categories under COFI
May 17, 2021
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Caveat Legal

Caveat Legal

Caveat Legal
Towards the end of last year, Guidelines for Competition in the South African Automotive Aftermarket (“Guidelines”) were issued by the Competition Commission (“Commission”) and are due to come into effect on the 1st of July 2021.

The Guidelines should not come as a surprise to anyone in the industry, as discussions have been “on the cards” between industry and the Commission for some time now. However, the nature and extent of the changes may come as a challenge to a number of key players, particularly if you draw on the wording of the Guidelines, which state that they were released after “stakeholders failed to reach consensus and/or commit to meaningful pro-competitive reforms in response to the challenges posed”.

Although the Guidelines are non-binding, they generally set and give an indication of the Commission’s intended enforcement approach when it comes to matters falling within its jurisdiction. For this reason, we are likely to see changes being implemented, over time, across the industry by a number of key players and stakeholders and may even see a complete overhaul of the aftermarket industry as we currently know it.

Scope

The Guidelines seek to promote inclusion and encourage competition through greater participation of small and medium enterprises (SMEs) and historically disadvantaged individuals (HDIs), by redressing what the Commission has identified to be several entrenched unfair, exclusionary or foreclosure practices.

The Guidelines only cover the secondary market and do not pertain to the manufacturing, assembly and finishing of new vehicles. Nonetheless, their ambit is still extensive and encompasses:

  1. motor vehicle retail;
  2. maintenance and repair services (in various forms);
  3. value-added products (e.g., car finance);
  4. the sale and distribution of spare parts, tools and components; and
  5. the administration and allocation of motor vehicle repairs in the insurance industry.

Furthermore, the changes will filter across the various levels of the automotive value chain from the Original Equipment Manufacturers (“OEMs”), importers and distributors to the dealers, spare parts and component suppliers, the body-shops and motor body repairers, as well as the insurance, finance and consumer industries. Not to mention that they will also impact the rights and behaviour of individual consumers.

Some of the Key Changes

The Guidelines outline various changes in relation to the selection and appointment of approved dealers and motor body repairers by OEMs and insurers. They propose to expand the number of approved dealers and motor body repairers and to widen the distribution of work/services across the sector, including expanding access to technical information and training.

They also bring about significant changes in relation to (i) the service, maintenance and repair of motor vehicles still in their warranty period, and (ii) the fitment of original spare parts, which is what we are going to focus on.

  1. In-Warranty Service, Maintenance and Repairs by Non-Approved Dealers

New motor vehicles are generally sold with certain warranties granted by the OEM, where it undertakes to replace or repair components and parts of the motor vehicle, in the case of certain defects (normally manufacturing or factory defects) (“OEM Warranty or “In-Warranty””). In South Africa, it is also common practice that a maintenance plan, which covers the maintenance and repair (including fair wear and tear) of the motor vehicle’s components and parts for a certain specified period of time or mileage, is included with the motor vehicle purchase.

Until recently, the service, maintenance and mechanical repair of In-Warranty vehicles have generally been carried out by OEM-approved dealers. One of the reasons for this is that any services carried out by any third-party independent service providers (“ISPs”) (i.e., non-approved dealers) would run the risk of invalidating or voiding the OEM Warranty.

A similar position also existed in relation to the structural and non-structural repairs (e.g., repairing paint, bodywork, glass, the interior and exterior plastic and/or aluminium parts) (“Motorbody Repair/er”) of In-Warranty motor vehicles. OEMs generally appoint a select number of Motorbody Repairers to carry out such repairs. The repair work for motor vehicles still In-Warranty would therefore generally be allocated by insurers to OEM-approved Motorbody Repairers (which generally differs in the case of a motor vehicle out of warranty). This is again due to the risk of voiding the OEM Warranty.

The Guidelines change this by providing, amongst other things, that:

a. Consumers can choose who they want to carry out the service, maintenance and mechanical repair work for their motor vehicles, regardless of whether that service provider is an approved OEM dealer or not, and the OEM will be obliged to recognise and not obstruct the consumer’s choice.

b. This right to choose is linked back to whether the motor vehicle is still In-Warranty and whether the consumer has insurance. Where

i. a motor vehicle is In-Warranty: a consumer may choose not to use an approved dealer but in such cases the OEM will then not be obliged to pay for the service and maintenance work undertaken by the ISP. This may, however, still carry the risk of voiding the OEM Warranty;

ii. a motor vehicle is In-Warranty and the consumer has insurance: they will have to go to an insurer-allocated approved Motor-Body Repairer for all Motor Body Repairs; and
iii. a consumer does not have insurance: they may repair their motor vehicle at an ISP of their choice at any point during the motor vehicle’s lifespan. However, where the motor vehicle is still in Warranty this may void the OEM Warranty.

Things become more complicated in relation to using ISPs and the risk of voiding the OEM Warranty, as the Guidelines provide that, where work is done by an ISP and voids any or certain provisions of the OEM Warranty then:

a) the other provision/s or portions of the OEM Warranty may still remain severable and enforceable; and
b) the OEM, at its cost, may conduct an assessment to ascertain such damages and liability (i.e., to determine the extent to which it is still liable and has to stand by the remaining portions of the warranty).

This provision seems to place an additional onus and cost on the OEMs where a consumer elects to use an ISP, and then later seeks to claim under their OEM Warranty.

Trying to separate and apportion liability to the different portions of an OEM Warranty may prove to be quite an arduous and complex task. Furthermore, this will likely disrupt the warranty and contractual framework that currently exists in the automotive aftermarket supply chain. This becomes more complicated if you consider the strict liability provisions contained within section 61 of the Consumer Protection Act 68 of 2008 (“CPA”) – which we will discuss further below.

  1. Fitment of Non-Original Spare Parts Under the Guidelines, the position in relation to the fitment of spare parts is similar to the above.

To date, approved dealers and Motor Body Repairers have generally been required to fit original spare parts (i.e., OEM approved manufactured replacement parts) and consumers were prevented from fitting non-original spare parts, without risking invalidating or voiding the OEM Warranty.

The Guidelines seek to change this by providing that:

a) Consumers can fit original or non-original spare parts, at a service provider of their choice (be it an approved dealer, approved Motor-Body Repairer, or ISP) during the In-Warranty period;

b) However, if there is any damage to the motor vehicle arising from the fitment of spare parts by an ISP (and the Guidelines do not specify original or non-original spare parts here), then they may risk voiding certain provision in the OEM Warranty.

As above, the Guidelines then go on to state that:

a) The other provisions of the OEM Warranty may remain severable and enforceable; and
b) The OEM or Approved Dealer may conduct an assessment, at its cost, to determine the cause of the damage and whether the Warranty is voided.

Changes in the Existing Warranty Set Up and Strict Liability

A warranty, in its simplest form, is a promise. In this case a promise by the OEM that its motor vehicle components and parts will last and/or perform for a certain period of time and/or in a certain way, failing which the OEM undertakes to be liable (and generally undertakes to replace or repair such).

Warranties, however, are often given based on and subject to certain conditions and assumptions and an OEM Warranty is no different. It sets out the parameters or scope of the OEM’s promise to the end consumer, including all the conditions and the limitations attached thereto.

In reality, what generally happens is that an OEM Warranty is backed by multiple supplier agreements with various contractual undertakings, warranties and multiple cross indemnifications, whereby the OEM tries to minimise and apportion its risk. In some cases, the risk may also be shared or apportioned with the dealers and Approved Motor Body Repairers. This is generally done through contractual wording, conditions and indemnifications.

The Guidelines change things in that they open the door to allow for the introduction of a number of new players to the market, namely the ISPs. These players will not be subject to the same level and extent of contractual undertakings and indemnifications, even though they could have an impact on the OEMs’ ultimate liability.

With this in mind, OEMs will likely have to re-examine their existing contractual arrangements and warranty set-ups (including the OEM Warranties) in order to assess how these align with the new provisions of the Guidelines, in relation to:

1) The possibility of service, maintenance and repair work by ISPs (with whom they have no contractual relationship);

2) The way in which they will handle cases of “invalidated or voided warranties” and their potential liability for any “remaining” warranties; and

3) The way in which they will manage the assessments used to ascertain the scope and extent of their liability. Keeping in mind that motor vehicles are often made up of several different parts and components and supplied by multiple suppliers, and determining where one part of an OEM’s liability begins and another ends, particularly where an unknown player in the value chain is involved, may be a challenge that is akin to unscrambling an egg.

This situation could become even more complex if we consider the protections afforded to consumers under section 61 of the CPA.

In its General Household Survey (2018) Statistics South Africa found that more than one-third of South African households own a vehicle, which is relevant if we consider the potential impact that the CPA and section 61 could have on the industry.

Section 61 of the CPA imposes strict liability on producers/manufacturers (OEMs), importers, distributors or retailers for any harm caused, wholly or partly, as a consequence of:

1) supplying any unsafe goods;
2) a product failure, defect or hazard in any goods; or
3) inadequate instructions or warnings provided to the consumer pertaining to any hazard arising from or associated with the use of any goods.

This means that a producer, manufacturer, importer, distributor and/or retailer can be held liable irrespective of “whether the harm resulted from any negligence on their part”. Furthermore, the liability extends to suppliers of services whose rendering of services necessitates the application, supply, installation or provision of access to such goods (in other words the dealers, Motorbody Repairers and ISPs). This is relevant as the liability imposed under section 61 is joint and several, which means that any person can have a claim brought against them for any harm arising from another party in the value/liability chain.
What is also significant is that, under section 61, you are unable to contract out of, waive or limit your liability in relation to the end consumer. What is possible though, and is very commonly done, is for a party (manufacturer, producer, supplier etc.) to protect itself and limit its liability contractually with regards to the other parties in the supply chain. In other words, a party will limit its liability contractually against its distributors, retailers and suppliers. The most common way to do this is through contractual indemnifications from the other parties in the supply chain.
In the future these contractual indemnifications will not exist. There will now be a number of new and unknown players in the supply chain with no contractual provisions in place to protect the OEMs and other key players up-stream.
As a result, OEMs and dealers may want to re-examine the wording of their OEM Warranties and to check the provisions and limitations of their liability insurance to assess the extent of their cover and risk.

What Comes Next?
The changes around (i) the service, maintenance and repair, and (ii) the fitment of original spare parts of motor vehicles still In-Warranty are quite significant. However, at this stage it is unclear to what extent the Guidelines will impact the industry. Industry cannot be expected to implement measures that would lead to commercial “absurdity” and the Commission will certainly have to be cognisant of this. With that said, we most likely will see some upfront changes with others being implemented gradually over time. What this will mean or look like though is not yet known.
What is known is that, after the 1st of July, consumers will have the choice of keeping to the traditional set-up or venturing out and using ISPs and non-original spare parts. In reality the choice is still somewhat biased, especially where consumers would be required to pay for the services themselves and/or run the risk of voiding their warranties (even if only in part). The Guidelines do try to mitigate the risk to consumers by incorporating various mitigation measures with regard to using ISPs, such as upfront liability disclosures and promoting access to technical information and training for ISPs. With that said, the choice is not completely without risk.
It is important to note that there is no indication that the ISPs are not necessarily skilled or capable of carrying out services and/or repairs on par with those of any and all approved dealers or Motor Body Repairers. What differs though is the change in the risk apportionment when it comes to ISPs in relation to the value chain, and the fact that this may increase the liability borne by the OEMs. The full extent of this, however, is still to be seen.

Stormme Hobson
Stormme has a BA and LLB from Rhodes University and was admitted as an attorney in 2010 after having completed her articles at Bowmans. She continued at Bowmans as an associate and then senior associate in its corporate and construction team. In 2014 she moved to BASF Holdings South Africa Pty. Ltd as the head of legal and compliance for Market Area Africa. Stormme joined Caveat in 2021 focusing on corporate and commercial work.

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