Carmakers must prove that a partial or complete reorganization of their franchise networks is necessary if they wish to legally serve early termination on a dealer.

The ruling by the European Court of Justice (ECJ) follows a case in Denmark between the association of VW/Audi dealers and the VW/Audi importer.

Under Block Exemption, the notice period for franchise termination is two years. However, a carmaker can reduce this to one year if it is necessary to reorganize its retail network.

The ECJ heard that following Block Exemption revision in 2002, the VW/Audi importer terminated its 28 dealers on one year’s notice. Only 14 were offered a new contract.

In its ruling, the ECJ said that changes to the dealer network must be significant in substance and geography, and that the carmaker cannot determine alone whether reorganization is necessary.

John Pheasant, solicitor advocate at Hogan & Hartson in London, says: “The carmaker must be able to provide objective justifications for the reorganization on grounds of economic effectiveness, taking into consideration the competitive environment.

“If there is a dispute, it will be up to local courts to decide from the evidence whether there is a reorganized network and whether it is justified. It is for the carmaker to prove both conditions are satisfied.”

Nevertheless, a manufacturer is not forced to give formal reasons for termination or explain its reorganization plans when giving notice to a dealer.

The ECJ argues that dealers are entitled to challenge termination through arbitration or the courts. It is at this point that the carmaker must justify its actions.

“If carmakers don’t provide justification at the time of giving notice, they may encourage litigation,” says Pheasant.

The ECJ is still determining compensation for the 14 Danish dealers not given new contracts.