On 9 July 2025, the Full Court of the Federal Court of Australia handed down a significant decision for Australian franchising and dealer networks. In dismissing an appeal brought by Mercedes-Benz dealers, the Court upheld the car manufacturer’s controversial shift from a dealership model to a Mercedes agency model. The case serves as a key benchmark for determining whether hard commercial conduct amounts to statutory unconscionability or a breach of the duty of good faith under Australian law.
Background: From dealerships to agency
Mercedes-Benz Australia had historically operated under a traditional dealership model where dealers purchased vehicles from the manufacturer and on-sold them to consumers. In late 2020, the company issued non-renewal notices(NRNs) to all Australian dealers, effective 31 December 2021. It offered new “agency” agreements under which dealers would act as sales agents on behalf of Mercedes, with less favourable financial terms. These were offered on a take-it-or-leave-it basis.
All dealers eventually signed the agency agreements under protest, later commencing legal proceedings.
Legal claims
The dealers challenged Mercedes’ conduct on multiple grounds, including:
- Statutory unconscionable conduct under section 21 of the Australian Consumer Law (ACL);
- Breach of good faith obligations under the Franchising Code of Conduct;
- Economic duress; and
- General contractual claims.
The trial judge rejected all claims, and the dealers appealed to the Full Court, focusing on the statutory unconscionability and good faith arguments.
Key findings from the Full Federal Court
Acting in self-interest is not unconscionable
The Full Court reaffirmed that a commercial party is entitled to act in its own legitimate commercial interests, even where that leaves the other party worse off. Mercedes’ use of the contractual non-renewal clause and its insistence on new agency terms was not, in itself, unconscionable.
Statutory test governs unconscionability — not abstract community standards
The Court clarified that section 21 of the ACL embodies its own statutory norms and values. Courts must apply the statutory test, not look to broad or undefined notions of “community standards”.
No breach of good faith in hard-nosed negotiation
Mercedes’ negotiation strategy—where it offered non-negotiable terms and reduced dealer commissions to the minimum it believed it could offer—was not a breach of the good faith obligation under the Franchising Code.
Dealers’ vulnerability was contractually accepted
While the dealers claimed that their substantial investments made them vulnerable, the Court held that any such risk arose from the terms of their original contracts, which had always permitted non-renewal.
What this means for franchisors and businesses
This decision is a major affirmation of the freedom to structure/restructure commercial relationships within the limits of contractual rights and statutory obligations.
For franchisors and manufacturers, the ruling:
- Confirms that take-it-or-leave-it offers are not inherently unconscionable;
- Emphasises the importance of honest conduct over sentimental fairness; and
- Reinforces the legitimacy of pursuing commercial self-interest in negotiations.
For dealers and franchisees, the case is a reminder of the need to:
- Understand the risks embedded in contractual terms, particularly those concerning renewal;
- Consider legal advice before entering into or renewing franchise agreements;
Final thoughts
The Full Federal Court’s decision sends a clear message: when it comes to statutory unconscionability and good faith, tough commercial conduct is not enough to win a case. The focus remains squarely on whether conduct breaches the legal thresholds defined in the Australian Consumer Law and Franchising Code, not whether it appears unfair in hindsight.
If you are considering a change to your business or franchise model and are concerned about potential risks in your agreements, our team can help you understand your rights and obligations.
Contact us to speak to a member of our Corporate Advisory and Franchising team today.
