In the recent case of AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023], the Federal Court of Australia rejected claims brought by 38 Mercedes-Benz dealerships (Mercedes Dealerships) against Mercedes-Benz (Mercedes-Benz) relating to the end of the dealers’ franchise agreements and the offering of alternative agency agreements. The decision has important implications for the franchising sector.
Mercedes-Benz operated a dealer network in Australia under which all Mercedes Dealerships were granted the right to sell and service new Mercedes-Benz luxury motor vehicles (this was the ‘dealership model’).
Most of the existing fixed term dealership agreements in Australia were all due to expire at the end of 2021. At the end of 2020, Mercedes-Benz issued non-renewal notices to over 49 Mercedes Dealerships in Australia in respect of their arrangements.
Mercedes-Benz proceeded to offer dealers an ‘agency model’ arrangement, offering different terms and conditions to the dealership model but continuing the relationship and association in some form. Under the agency model, the dealers would no longer own Mercedes-Benz showroom stock, or be able to negotiate with customers on price.
The dealers whose agreements were expiring were given until September 2021 to enter into new agency agreements or Mercedes-Benz would cease supply of new vehicles.
The Mercedes Dealerships commenced proceedings against Mercedes-Benz seeking $650 million in compensation.
Contravention of goodwill: The Mercedes Dealerships claimed that “it is said that the agency model implemented in Australia involves the appropriation of the dealers’ goodwill and customer relationships for no or inadequate compensation”1. The difference between the two agreements was radical, in that it would change the car-dealer business model to an arrangement which would lead to non-negotiable fixed prices.
Contraction of alleged implied duties: The Mercedes Dealerships claimed that Mercedes-Benz owed a duty to each of the dealerships to cooperate to achieve the objects of each dealer agreement and a duty to act reasonably, having regard to the terms, purpose, and object of the dealer agreement.
Misuse of non-renewal power: The Mercedes Dealerships claimed that the purpose of the non-renewal power was to allow Mercedes-Benz to bring the relationship to an end, not to continue the relationship on different terms.2 The non-renewal notices were therefore invalidly issued.
Unconscionable Conduct: The fourth claim brought by the Mercedes Dealerships was that Mercedes-Benz, by cancelling the dealerships current agreements and compelling the dealers to sign new agency agreements, with heavily reduced levels of commission, amounted to unconscionable conduct in contravention of the Australian Consumer Law.
Justice Beach dismissed the claims of the Mercedes Dealerships that the transition to the agency model resulted in any breach by Mercedes-Benz of its good faith obligations under the Franchising Code. He ruled that “such claims have not been made out”3 and therefore the claim must fail.
Justice Beach further determined that Mercedes-Benz use of the power of the non-renewal clause was in good faith to the contractual bargain at hand and that it expressly used such power to bring the dealer agreements to an end.
The Mercedes Dealerships class action was ultimately dismissed.
The Court closely considered the terms of the agreements and the concept of goodwill. The Court reiterated that goodwill at law is not equivalent to a going concern valuation or an accountant’s concept of goodwill; rather, goodwill represents a pre-existing relationship arising from a continuous course of business.
Further, the Court found that ‘goodwill’ built-up by a dealer in its business can end when the agreement expires and is not renewed, or it is terminated before its expiry and the right or privilege to conduct the dealership ends.
It is apparent from the decision that there should not be a general overarching right to compensation for franchisees at the end of a franchise agreement. Making that recommendation would substantially and fundamentally change long established legal principles of property and contract law.
Understanding the terms of any contract is important for you and your business.
If you require advice on any matters relating to litigation and dispute resolution, or simply need assistance with contract preparation and advice please contact Millie Richmond-Scott or Iain Freeman.
[1] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023], 19.
[2] Ibid at 24.
[3] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023], 38.
