On 30 August 2023, the Federal Court delivered its long-awaited judgment in an action against Mercedes-Benz Australia/Pacific Pty Ltd (‘Mercedes-Benz’) brought by its local Australian dealers (‘the Dealers’). The Federal Court found in favour of Mercedes-Benz. We have summarised 7 key learning points from the case, which are relevant for all industry stakeholders.
- Non-Renewal Power – Contract is King
The Dealers argued ‘the issuing of non-renewal notices bringing to an end their relationships under the prior dealer agreements were not the product of a genuinely conducted process’.[1] They claimed the agreements were ‘evergreen’, meaning Mercedes-Benz could only exercise its power of non-renewal in a very narrow set of circumstances – namely, where the dealer ‘failed to meet their targets or make mutually agreed improvements’.[2]
However, clause 8 of the dealership contracts permitted Mercedes-Benz to not renew a dealership without cause.[3] While the Judge agreed it was a ‘sensible commercial assumption’ that if the dealership was performing well, Mercedes-Benz would not issue a notice of non-renewal, this ‘was not the contractual bargain that was struck’.[4] Ultimately, Mercedes-Benz merely exercised its non-renewal power ‘for the purpose for which it was created’ – to end the previous agreement.[5]
This point reinforces that contract is king. Any argument that suggests a dealer agreement or franchise agreement is ‘evergreen’ is doomed to fail.
- Good Faith – No Lack of Good Faith When You Gift Contractual Rights
The Dealers argued the issuing of non-renewal notices ‘were not conducted in good faith’[6] and contrary to clause 6 of the Franchising Code,[7] with the exercise of the non-renewal power applied for the sole benefit of Mercedes-Benz and its strategic interests.[8]
The Judge clarified that it is difficult to find lack of good faith in the exercise of a power under a clause drafted in favour of one party. Therefore, given Mercedes-Benz merely exercised a contractual power which had the sole purpose of ending the existing contractual relationship, even if such exercise of power serves ‘only the interests of the party upon whom it is conferred’,[9] a lack of good faith was not made out.
This decision reinforces important issues for dealers when entering into contacts with distributors – they must identify terms that may only benefit one party in the contracts and ensure clauses are evenly balanced.
- Economic Duress – Not Likely for Dealers
The Dealers argued that they signed the agency agreements under economic duress, given Mercedes-Benz’s threat that the Dealers’ relationship to the brand would cease if they did not sign and return the contract. While the reasoning in the judgment for this particular claim has been temporarily redacted due to confidentiality issues, it unambiguously stated the ‘the dealers had a choice’ such that the Judge ‘rejected the economic duress argument’.[10]
This decision highlights that dealers should not expect courts to rescue them when they enter one-sided contracts, and it is up to them to exercise their discretion when entering into agreements. The Judge went as far as to describe the Dealers as ‘well-heeled’,[11] meaning any economic duress argument was doomed to fail.
- Unconscionable Conduct – High Bar
The Dealers argued that, given Mercedes-Benz cancelled the previous agreements and required them to sign a new agreement, resulting in the Dealers being financially worse off while the commercial interests of Mercedes-Benz became better suited,[12] the company was engaging in unconscionable conduct contrary to section 21 of the ACL.[13]
Despite the Judge acknowledging this claim had the greatest merit out of the claims,[14] unconscionable conduct was not successful. The Judge stated, ‘it does not follow that [Mercedes-Benz] has acted unconscionably or failed to act in good faith because a dealer is financially worse off under the agency model as compared to the dealer model’.[15]
This further reinforces that the threshold for unconscionable conduct is still a very high bar and cases hinging on this cause of action are high risk cases.
- Goodwill – Is Dead
The Dealers argued that, regardless of whether the underlying relationship between the Dealers and Mercedes-Benz changes, ‘the goodwill in the dealership continues because customers are still attracted to the dealership by the assets deployed by the dealer’.[16]
However, the Judge distinguished between goodwill in the ‘accounting’ sense, and goodwill in the ‘legal’ sense. While the former reflects goodwill as ‘the excess that a purchaser is willing to pay for a business or the discount a seller is willing to accept for the same’,[17] the latter tethers goodwill to ‘the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means which in the past have attracted custom to the business’.[18]
Thus, in terms of a claim at the end of a franchise term, the concept of goodwill is virtually dead. The efficacy of the terms in the Franchising Code which seek to protect ‘established goodwill’[19] are dubious –the meaning of the term remains unclear if courts consistently find there is no goodwill at the end of the term. However, with renewed focus on the reform of the Code,[20] clarifying the meaning of ‘established goodwill’ may be high on the agenda.
- Negotiations – Hard Negotiations are the Way Forward
In August 2018, we presented to a prominent group of dealers, including Mercedes-Benz dealers, and specifically advised that they should not sign agency agreements unless the terms were acceptable.
If the Dealers had used their collective strength and refused to sign, they surely would have been in a better position. After all, would Mercedes-Benz have commenced 2022 with no appointed agents/dealers? What was the commercial/legal alternative?
It was particularly impressive to see Dealers use their collective strength to run this long and expensive court proceeding. It is the first time an automotive class action of this nature has taken place in Australia, and we know that many international markets were closely following events. Although ultimately unsuccessful due to the weak nature of the claims, the case demonstrates an ability to collectively take action and hold distributors to account. We hope that dealers can unite in the future in a similar way and achieve better outcomes than in this instance.
- New Legal Strategies – Representations as to Future Matters and Loss of Opportunity
Representations as to Future Matters
In December 2019, we hosted a breakfast seminar in Sydney where we presented on ‘representations as to future matters’. We discussed the issue of future targets; specifically, where a distributor fails to set reasonable targets, leading to a loss of bonuses. We advised that a claim for losses based on ‘representation as to future matters’ was possible. A retired Supreme Court judge was a panellist and endorsed the legal approach.
In early 2020, we specifically raised with Mercedes-Benz dealers the likely timing of Mercedes-Benz non-renewals and advised a clear commercial and legal strategy was required to deal with the forthcoming commercial pressure.
It is clear Mercedes-Benz made many ‘representations as to future matters’ given the Judge said that Mercedes-Benz had represented that no dealer would be worse off, when plainly this was false.
This cause of action could have been used, and still can be used, by the Dealers against Mercedes-Benz Furthermore, it is open to all dealers in relation to unrealistic sales targets amongst other things.
Loss of Opportunity
The Franchising Code recently introduced the concept of ‘loss of opportunity in selling established goodwill’.[21] In contract law, to assess damages for breach of contract, including for loss of an opportunity, a court may take into account the prospect that the contract would be renewed. We consider this an area of strength for dealers. The principles set out in some leading contract law cases may assist in interpreting the text and intention of clause 46A(b)(iii) in the Code.[22] Although the Code changes came too late for the Mercedes-Benz dealers it is a legal argument that future dealers may use.
[1] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, [3].
[2] Ibid [15].
[3] Ibid [79].
[4] Ibid [44].
[5] Ibid [33].
[6] Ibid [3].
[7] Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth) sch 1 cl 6.
[8] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, [184].
[9] Ibid [214]-[215].
[10] Ibid [249].
[11] Ibid [248].
[12] Ibid [40]-[43].
[13] Competition and Consumer Act 2010 (Cth) sch 2 s 21.
[14] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, [48].
[15] Ibid [46].
[16] Ibid [173].
[17] Ibid [97].
[18] Ibid [121].
[19] Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth) sch 1 cl 46A(b)(iii).
[20] ‘Franchising Review’, Australian Government Treasury (Web Page) <https://treasury.gov.au/review/franchising-review>.
[21] Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth) sch 1 cl 46A(b)(iii).
[22] Ibid.