In October 2021 38 of the then 49 dealers operating Mercedes-Benz dealerships in Australia commenced proceedings in the Federal Court to challenge the non-renewal of their dealer agreements by Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) and the imposition on them of an agency model instead. The case was heard between August and October 2022, and His Honour Mr Justice Beach delivered his judgment last week.
Arguments of the dealers
The applicant dealers argued that:
- the notices of non-renewal of their existing dealer agreements given to them by MBAuP at the end of 2020 were invalidly issued because MBAuP could only exercise its power of non-renewal without cause under the dealer agreements if a dealer failed to meet their targets or make mutually-agreed improvements;
- the non-renewal notices (NRNs) were issued for the purpose of terminating the dealer agreements to force the dealers to enter into an agency agreement with MBAuP to achieve the effect of transferring the goodwill in each dealership to MBAuP without compensation;
- the NRNs were issued by MBAuP to give effect to directives issued by the ultimate holding company of MBAuP, Mercedes-Benz Group AG of Stuttgart (MBAG) to give effect to a global policy of implementing an agency model, without MBAuP exercising its own judgement;
- the NRNs were issued in contravention of the duty of good faith required by clause 6 of the Franchising Code of Conduct (Franchising Code) and therefore in breach of section 51ACB the Competition and Consumer Act 2010 (Cth);
- the pressure applied to the dealers by MBAuP to enter into agency agreements and other related agreements in place of the non-renewed dealership agreements amounted to economic duress and contravened the duty of good faith required under the Franchising Code;
- in not renewing the dealer agreements, imposing agency agreements and other related agreements on the dealers, and failing to compensate the dealers, MBAuP engaged in unconscionable conduct in contravention of section 21 of the Australian Consumer Law.
As Beach J put it-
"Generally, the applicants allege that MBAuP has engaged in the unjustifiable pursuit of its self-interest by appropriating the substantial value of the assets and/or goodwill of the Mercedes-Benz dealership businesses, undermining the basis of the commercial bargain and relationship between itself and the applicants under the dealer model, implementing terms in the agency agreements to allow MBAuP to rationalise its network, and implementing a global directive, strategy or policy of MBAG".
The principal remedy sought by the dealers was the setting aside of the NRNs, and damages for the losses they suffered as a result of the implementation of the agency model in 2022. In essence, they sought orders from the Court that would put them in the position they were in prior to MBAuP's imposition of the agency model on them.
Beach J did not accept the dealers' arguments.
Termination of the dealer agreements and the duty of good faith
The Court said that the purpose of the clause in each dealer agreement which enabled MBAuP to terminate the agreement without cause was to enable MBAuP to bring the term of the agreement to an end. In fact, it was the only means by which MBAuP could bring a dealer agreement to an end in the absence of breach or agreement of the parties, and it symmetrically matched the right of each dealer to terminate the dealer agreement without cause on 60 days' notice.
The Court said further that the only substantive constraint on the exercise by MBAuP of its right of termination was that it had to be exercised in good faith as required by clause 6 of the Franchising Code. In this regard the Court stated-
"The proper inquiry is directed to MBAuP's non-renewal of each dealer agreement and whether the non-renewal was faithful to that contractual bargain. It was. MBAuP exercised the non-renewal power for the purpose for which it was created, being to bring each dealer agreement to an end".
The Court also found that MBAuP introduced the agency model in good faith.
Appropriation of the dealers' goodwill
In respect of goodwill, the Court stated that the legal definition of goodwill arises from the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that has attracted custom to the business. This has particular significance in the franchising context because the business cannot be conducted in substantially the same manner and by substantially the same means in the absence of the rights granted to the franchisee by the franchisor.
Accordingly, there is no Mercedes-Benz dealership business without the rights granted to a dealer under a dealer agreement. As a matter of law a franchisee is in a similar position to a tenant under a lease of premises. Upon the expiration or termination of a franchise agreement, the franchisee has no right to continue to operate the business and no right (in the absence of specific provisions in the agreement to the contrary) to any goodwill that may have accrued to the business while it was operated by the franchisee. Similarly, the benefit of goodwill built up by reason of a tenant carrying on a business from leased premises becomes the benefit of the landlord at the expiration of the term of the lease.
The Court stated -
"Further, the absence of any right at law for a franchisee to be compensated for goodwill on non-renewal of a franchise agreement has long been recognised."
The Court accepted that MBAuP played "hard-ball" in its negotiations with the dealers, and that the agency agreements imposed on the dealers were standard-form contracts presented on a 'take it or leave it' basis with little opportunity to negotiate the terms.
The Court also accepted that when MBAuP exercised its power to issue the NRNs it did not consider each dealer's individual circumstances and adopted a "one size fits all" approach. MBAuP's whole approach was to move from one model – the dealer model – to another model – the agency model – seamlessly and without regard to the individual positions of, and individual effects on, particular dealers. Further, the Court accepted that MBAuP moved to introduce the agency model having regard to the interests of its ultimate holding company, MBAG.
However, the Court did not consider that the conduct of MBAuP in issuing the NRNs and requiring dealers to then enter into agency agreements was unconscionable. The Court stated that it was not unconscionable for MBAuP to give the NRNs to its dealers to pursue an Australia-wide strategy, or a strategy consistent with the global strategy of MBAG, and the dealers were not compelled to enter into the agency agreements.
The Court stated that the dealers had understood the commercial risks when they entered into dealer agreements which enabled MBAuP to not renew the agreements without cause. The Court also observed -
"And on a broader front, the dealers were well-healed individuals and corporations that hardly had any socio-economic vulnerability".
Implications for the Franchising Code of Conduct
The Franchising Code is a mandatory code governing franchising in Australia which was introduced in 1998.
In 2020 the Franchising Code was amended to introduce a number of provisions specific to new car dealer agreements to address what the Australian Government described as "the power imbalance between car manufacturers as franchisors and new car dealers as franchisees". The provisions specifically deal with end of term obligations under new car dealer agreements, capital expenditure requirements, and dispute resolution.
In 2021 the Franchising Code was further amended to include agency arrangements within the definition of "motor vehicle dealership" to ensure that agency arrangements are governed by the Code.
In August this year the Australian Government announced a review of the Franchising Code to be conducted by Dr Michael Schaper. The Terms of Reference for the review include the consideration of a number of issues in respect of the regulation of the automotive sector including the effectiveness of the 2020 and 2021 amendments to the Franchising Code.
The review will undoubtedly consider the global move in new car sales arrangements from a dealer model to an agency model, and the decision of the Federal Court in the Mercedes-Benz dealers' case is likely to be relevant. Further reform of the Franchising Code as it applies to the automotive sector may well be recommended. The review is due to report to the Government by the end of December 2023.
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