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Mercedes Benz defeats dealers but does the law on franchising need to change?

Mercedes Benz defeats dealers but does the law on franchising need to change?

Published on February 2, 2024 by Ebony Billett and Robert AlgieEbony Billett and Robert Algie

In October 2021, proceedings were commenced in the Federal Court of Australia against Mercedes Benz Australia/Pacific Pty Ltd (MBAuP). The proceedings were commenced by 38 of its approximate 50 dealers who submitted that the terms included in their new contracts issued by MBAuP had left them financially worse off.

On 30 August 2023, Beach J delivered his judgment. The dealers alleged that Mercedes Benz had breached its obligation to act in good faith and engaged in unconscionable conduct based on forcing them to convert from their previous dealership model to an agency model. Beach J found that Mercedes Benz did not engage in unconscionable conduct and did not breach the obligation to act in good faith. However, in making this finding, Beach J further commented that franchising laws within Australia need to be reviewed.

The Court ultimately found that Mercedes Benz had acted within the law when it changed its dealer agreements, which led to the introduction of non-negotiable fixed prices for its new cars. The Court rejected the claim that Mercedes Benz had engaged in unconscionable conduct and concluded that an exercising party is to act honestly in matters connected to its performance of the contract and its exercise of the non-renewal power.

The Court concluded that non-renewal notices could be given without cause, with the only constraint being that it is to be exercised in good faith.

And finally, the Court concluded that no compensation was payable to the dealers in terms of goodwill lost by the dealers as the goodwill was lost by a contractually valid exercise of a non-renewal notice. This article summarises the AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 case and the reasons for the judgement in favour of MBAuP.

What allegations were made by the dealers?

On 1 January 2022, Mercedes Benz commenced a new fixed priced agency model. This changed their previous dealership model, where Mercedes Benz dealers were afforded the flexibility of choosing their selling price to their customers. The introduction of the agency model diminished the benefit that dealers had under the previous dealership model in terms of potentially earning higher profits by setting higher sales prices. The 38 dealers sought $650 million in damages based on the following claims:

  1. The implementation of the new fixed fee model and the issuing of non-renewal notices for the old model were not the product of a genuinely conducted process and were not conducted in good faith. A non-renewal notice is document where one party permanently ends a contractual relationship with another party. MBAuP issued these for the purpose of terminating the previous dealer agreements to force the dealers to enter into an agency agreement. This brought an end to the relationships Mercedes Benz had with their dealers, and the dealers submitted that this was not a product of a genuinely conducted process and was not conducted in good faith [3].
  2. That MBAuP was recklessly indifferent and that its dealers would be “worse off” under the new model, which was imposed on by dealers in “contumelious disregard of their interests” [4].
  3. The issuing of non-renewal notices was to give effect to directives issued by Mercedes Benz AG to MBAuP, as well as giving effect to implement the agency model. This was introduced by MBAuP without exercising its own judgment [23]. The dealers claimed that the purpose of a non-renewal notice was to allow MBAuP to bring the relationship to an end between MBAuP and a dealer, and to not continue the relationship on different terms imposed by MBAuP [24].
  4. That MBAuP engaged in unconscionable conduct [39].
  5. The dealers had lost value in their goodwill due to the termination of the dealership model [42].
  6. That MBAuP engaged in the pursuit of its self-interest by appropriating the substantial value of the assets and/or goodwill of Mercedes Benz and undermining the basis of the commercial bargain and relationship between itself and the dealers under the new dealer model [43].

Is there a duty to act in good faith?

The 38 dealers who took action against the dealership, alleged that MBAuP’S exercise of their contractual right to not renew the previous dealer agreements, and the replacement of those agreements, was not consistent with the Franchising Code (Code). This Code specifically stated that there is an obligation to act in good faith, which applies to any matter arising in the franchising relationship. It is an obligation that cannot be excluded or limited by another clause in a different document, including a franchising agreement.

When Beach J delivered his judgement, he considered how the obligation and duty of good faith per the Code should be applied to a termination without cause provision. Beach J came to his conclusion on two (2) grounds:

  1. The very purpose of such a power is to bring the existing contractual relationship and implicit bargain to an end [214]; and
  2. Such a power can serve only the interests of the party upon whom it is conferred [215].

At [32] it was stated that the purpose of the non-renewal power is to bring the existing contractual bargain to an end, and that it is the obligation of MBAuP to act honestly to bargain between the parties and to recognise the nature of the power in bringing that bargain to an end.

The Court concluded at [217] that good faith duty applied to a power of non-renewal without cause does not convert to an agreement to enter into a contract of indefinite duration. The Court held that it does, however, require that the party exercising its rights, always act honestly with respect to the performance of the contract and its exercise of non-renewal power.

Did Mercedes Benz engage in unconscionable conduct?

Unconscionable conduct refers to actions that sit outside the expected good conscience standard. In this instance, the Court accepted that the new agency agreements imposed on the dealers were standard-form contracts.

Beach J noted “there were various themes that from time-to-time MBAuP put to dealers that were either exaggerated or turned out to be incorrect” [253]. However, no allegations were pleaded that MBAuP made false, misleading, or deceptive representations and so the Court did not make any findings in this regard.

The Court held that Mercedes Benz did not engage in unconscionable conduct and did not breach its obligation to act in good faith. Beach J stated at [32], “the very purpose of the non-renewal power is to bring the existing contractual bargain to an end” and therefore, to use this clause to terminate the franchise agreement could not be considered to constitute unconscionable conduct.

The judgment has not yet been fully published due to claims of confidentiality arising. Beach J noted in his judgment that his reasoning for concluding that Mercedes Benz did not engage in unconscionable conduct would be addressed “later” in his judgment. It is highly likely that his reasoning will be addressed when the judgment has been fully published.

What are the implications for the Franchising Code?

The Franchising Code is a mandatory code which has governed franchising within Australia since 1998.

There is currently no right for a franchisee to be compensated for goodwill for non-renewal of franchise agreements. Beach J noted that the only relevant limitation is a good faith exercise requirement, either arising under clause 6 of the Code or under the express implied terms of the contractual provisions [197]. In the present case, the good faith requirement was not enough to get the dealers’ case over the line.

The Australian Government, in August 2023, announced that a review of the Code is to be conducted by Dr Michael Schaper. The review will consider the issues regarding the automotive sector and prior amendments that were made in 2020 and 2021, to outline their effectiveness and the impact they have on the industry.

The report is due to be reviewed by the Government at the end of this year.

Key Takeaways

  1. The judgment is important for franchisors and franchisees to understand the contractual bargain/relationship between them.
  2. Franchisees need to be aware of the implications and risks when they enter into a franchising agreement, particularly in circumstances where a franchisee has freely and willingly entered into the agreement.
  3. It is important that a party who is exercising its rights, always acts honestly in relation to the performance of the contract and its exercise of non-renewal power.
  4. If a party wishes to terminate a franchise agreement, they cannot be found to have engaged in unconscionable conduct as that is the purpose of a non-renewal power, to bring the existing contractual bargain to an end.
  5. It is also important that parties do not engage in their own self-interest and undermine the basis of the commercial bargain and the relationship between them.
  6. Finally, there is an obligation for parties to act in good faith in any matter arising in the franchising relationship. For example, where a non-renewal notice is issued, this should be conducted in good faith.

Please note that this article does not constitute legal advice. If you are seeking professional advice on any legal matters, you can contact Carroll & O’Dea Lawyers on 1800 059 278 or via our Contact Page and one of our lawyers will be able to assist you.

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