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Business Model Changes in the Automotive Industry & Wider Implications of Court decisions

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By Philip Colman, Principal, MST Lawyers

The automotive industry in Australia is undergoing significant changes. Some manufacturers are moving from the traditional dealership model to an agency model, sparking legal battles and raising questions about contractual obligations, misleading conduct, unconscionable practices, and good faith. These changes and the resulting court decisions have implications beyond the automotive sector.

 

There has been much written about the desire of some automotive manufacturers to change the model for selling motor vehicles in Australia from a network of dealers (Dealership Model) to utilising agents it would appoint (Agency Model).

Broadly speaking:

  • under the Dealership Model, dealers would purchase motor vehicles from the manufacturer and would be generally free to set the re-sale price to members of the public and determine their profit margin, whereas;
  • under the Agency Model, the dealer would be the agent for the manufacturer and the manufacture would set the retail sale price and pay a commission to the dealer for effecting a sale on its behalf.

To achieve this outcome the manufacturers either:

  • did not renew the dealer agreements based on the Dealership Model when their terms expired and offered dealers dealer agreements based on the Agency Model to only some of dealers; or
  • terminated the dealer agreements based on the Dealership Model (without just cause) and offered dealers dealer agreements based on the Agency Model to only some of dealers.

There have been two recent cases arising from these types of decisions being made by manufacturers that have much wider application. I discuss these cases and provide my observations below.

Mercedes Benz

Mercedes Benz Australia/Pacific (MBAuP) changed its model and a group of dealers (MB Dealers) took them to the Federal Court (see AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022). The MB Dealers lost. They have lodged an appeal and the appeal decision is pending.

The MB Dealers and MBAuP were parties to dealer agreements and in around 2018 MBAuP issued Non-Renewal Notices (NRN) pursuant to a clause in their dealer agreement permitting either party to terminate the dealer agreement without cause on 60 days’ notice. MBAuP then sought to introduce an Agency Model between the parties.

The MB Dealers argued that:

  • They were subject to economic duress. MBAuP’s’ conduct of issuing the NRNs would end the dealer agreements, forcing them into the agency agreements which would make them financially worse off when compared to under the dealer agreements;
  • MBAuP’s’ conduct of issuing the NRNs contravened the duty of good faith under the Franchising Code of Conduct;
  • Both parties had a duty to cooperate and achieve the objects of the dealer agreement, which is to facilitate the operation of the dealership;
  • The termination clause could therefore only be exercised if the MB Dealer had not met their targets, had not made improvements as required or had breached the dealer agreement;
  • MBAuP exercised this clause with the intention of changing the business model to one of an agency sale model, which contravenes the duty to act reasonably and in good faith, having regard to the objects of the dealer agreement; and
  • MBAuP engaged in unconscionable conduct in contravention of the Australian Consumer Law, by: issuing the NRNs and purporting to terminate the dealer agreement, imposing the agency agreements on the MB Dealers and appropriating the goodwill of the MB Dealers by changing the business model to one of an agency agreement without compensation.

Justice Beach dismissed the claim. He noted that:

  • the MB Dealers sought to ‘rewrite the contractual bargain struck by the dealer agreements into one which better suits their commercial interests’;
  • MBAuP did not coerce the MB Dealers into entering into the agency agreement – MBAuP were simply exercising their contractual right under the dealer agreement;
  • the MB Dealers had the opportunity to either accept the agency agreement, or to reject the agency agreement and allow the dealer agreement to be terminated; and
  • the purpose of the termination clause is straightforward. It allows for either party to bring the dealer agreement to an end. MBAuP exercised the clause for this exact purpose – to end the agreement. The dealer agreements could not be ‘evergreen agreements’ that exist in perpetuity because the termination clause could be exercised by either party without cause.
  • MBAuP’s conduct did not amount to unconscionable conduct even though:
    • the NRNs were issued Australia-wide without considering the circumstances of the individual MB Dealer;
    • the agency agreements being standard form contracts; and
    • the agency agreements were offered to the MB Dealers on a ‘take it or leave it basis’.
    • MB Dealers took a calculated, commercial risk when they entered into the dealer agreement because the MB Dealers would always suffer more loss if MBAuP exercised their right under the termination clause.

In relation to goodwill Justice Beach noted:

  • the legal concept should not be confused with the accounting concept;
  • in the franchising context, goodwill only exists if there is an ability to continue operating the business in a substantially same manner. This means that when the franchise agreement ends, then the goodwill also comes to an end;
  • it is settled law that a franchisee will not be compensated for goodwill if a franchise agreement is not renewed.

Honda

Honda Australia also changed its model to an Agency Model and one of its dealers located in Brighton (Brighton Automotive) took them to the Victorian Supreme Court (see Brighton Automotive Holdings Pty Ltd v Honda Australia Pty Ltd (No 2) [2024] VSC 262 – 24 May 2024).

In this case Brighton Automotive claimed loss or damage as follows:

  • loss of opportunity to derive revenue and earn profit by operating as an authorised Honda Dealer or authorised Honda Parts and Service dealer (as applicable) for the term of the dealer agreement until 30 June 2023 (Remaining Contract Period Claim);
  • loss of opportunity to derive revenue and earn profit by operating as an authorised Honda dealer or authorised Honda Parts and Service dealer (as applicable) for any extended or hold over term after 30 June 2023 (Further Contract Period Claim);
  • further or alternatively, loss of the opportunity to sell its business as an authorised Honda dealer or authorised Honda parts and service dealer as a going concern.

Brighton Automotive based the Remaining Contract Period Claim and the Further Contract Period Claim on a breach of the dealer agreement by Honda Australia. Honda Australia accepted that it had wrongfully terminated the dealer agreement mid-term and that it had to pay some compensation but only for the period from the date of termination until the end of the then existing term (30 June 2023).

Remaining Contract Period Claim

As to the Remaining Contract Period Claim, the Court heard evidence from expert forensic accountants called by each side who expressed differing opinions.

In working out how damages should be assessed in relation to the Remaining Contract Period Claim, Commercial Court Judge, Justice Matthews took into account:

  • likely sales volume that would have been achieved if the dealer agreement was allowed to run until 30 June 2023 including the impact of COVID-19 lockdowns on sales;
  • loss of profits from servicing and parts; and
  • the obligation on Brighton Automotive to mitigate its loss.

Ultimately Justice Matthews did not assess these damages, but instead referred that assessment back to the forensic accountant experts retained by the parties in accordance with the guidelines contained in Her Honour’s judgment. Hopefully agreement can be reached.

Further Contract Period Claim

As to the Further Contract Period Claim:

  • Brighton Automotive submitted that in the counterfactual (namely, the dealer agreement being allowed to run its term), it would have had a real commercial opportunity to obtain a further agreement to trade as a Honda dealer or agent, but accepted that the Court should discount the value of this opportunity by reference to the risk or chance that it would not have occurred’.
  • Honda Australia submitted that:
    • but for its repudiation, the dealer agreement would have run its full term – to 30 June 2023 – but that Honda Australia would have thereafter moved to the Agency Model and Brighton Automotive would not have been appointed as an agent; and
    • Brighton Automotive is not entitled to any damages for the Further Contract Period because, even had it not repudiated the dealer agreement, Brighton Automotive would have had no opportunity to derive profit as an authorised Honda dealer or Honda agent after the end of the term of the dealer agreement on 30 June 2023.

In her judgment, Justice Matthews noted that:

  • in considering damages for breach of contract, the Court may award damages compensating a plaintiff for the loss of a commercial opportunity. Unless the probability of that opportunity eventuating is so low as to be ‘speculative’, the Court will take the opportunity into account in assessing damages.
  • in considering an award of damages on this basis, the Court asks the following questions:
  • was there a commercial opportunity of some value, which is more than speculative or negligible?
  • would the plaintiff have pursued the lost opportunity?
  • what is the amount that should be awarded, having regard to the prospects of success if the opportunity had been pursued?

Justice Matthews accepted Honda Australia’s submissions and concluded that the Remaining Contract Period Claim should be dismissed.

Other Claims

Brighton Automotive also alleged that Honda Australia:

  • had engaged in misleading and deceptive conduct by not informing it of plans to move to the Agency Model before it entered into the latest dealer agreement;
  • had engaged in unconscionable conduct through:
    • its wilful and deliberate breach of the dealer agreement;
    • its misleading and deceptive conduct; and
    • its breach of the good faith obligation contained in the Franchising Code of Conduct.

I suspect these claims were made to overcome perceived weaknesses in the Further Contract Period Claim and to allow a different method of assessing damages to that allowed in breach of contract claims.

Justice Matthews dismissed all of these claims.

In relation to the misleading and deceptive conduct claim Her Honour found that on the evidence Honda Australia did not have any plans to move to the Agency Model before it entered into the latest dealer agreement, which commence in 2018. Hence there was nothing that it ought to have disclosed to Brighton Automotive before it entered into 2018 dealer agreement and therefore no misleading or deceptive conduct.

In relation to the unconscionable conduct claim, Her Honour noted:

  • it could not be based on the misleading and deceptive conduct claim, because, as set out above, it was not made out;
  • it could not be based on the good faith claim, because, as set out below, it was not made out – in this regard Justice Matthews noted:
    • it is not a breach of good faith for a company to, without more, pursue its own commercial interests at the expense of a second party to a contract. Something more is required for the conduct to constitute a breach of good faith. True it is that Honda Australia’s early termination of the dealer agreement denied Brighton Automotive the contractual benefit it would have otherwise enjoyed during the Remaining Contract Period. However, this was not Honda Australia’s intention in terminating the dealer agreement.
    • The evidence showed that once the decision was made to change to the Agency Model, Honda Australia provided its dealers with early notice of its intention to terminate. The decision to terminate the dealer agreements was not made lightly and Honda Australia fully intended to properly compensate its dealers.
    • Not much turned on the fact that Honda Australia did not contact its dealers to ask if they might accept an early termination. Honda Australia was not required to do so under the terms of the dealer agreement and doing so would not have changed the fact that Honda Australia had decided to end the dealer agreements early, whether doing so was accepted by the dealers or not.
  • there was authority for the proposition that the mere fact that a party intentionally breaches a contract does not mean the party has engaged in unconscionable conduct – the notion of unconscionable conduct requires ‘a high level of moral obloquy’. Not every breach of contract, even a deliberate breach, necessarily involves the moral obloquy that the authorities suggest needs be present for unconscionable conduct.
  • Honda Australia had given 15 months’ notice of its intention to change to an Agency Model and immediately acknowledged that it would be liable to compensate Brighton Automotive for its losses as a consequence.

Outcome

For Brighton Automotive it received a partial win, that relating to the Remaining Period Contract Claim. As Honda Australia admitted liability for this claim but only fought the case on quantum, it may have made Calderbank offers to Brighton Automotive. If it did so and it is ultimately found that Brighton Automotive unreasonably rejected those offers the Court may impose significant costs penalties on Brighton Automotive. It remains to be seen.

Observations

In the Honda judgment there are references to lots of information (including figures) showing how Honda’s business was substantially bleeding in Australia. One of the downsides of fighting a case to trial and judgment is that a lot of private and confidential information can become public. This is a factor all litigants should take into account when considering a commercial resolution.

The outcomes of these and the legal principles applied and created in these decisions are not confined to claims in the motor vehicle industry where a manufacturer has sought to change its model. They apply to all types of franchise disputes as well as disputes not involving franchising.

Both the Honda Australia case and the Mercedes Benz case demonstrate how difficult it can be to succeed in cases where there are allegations of misleading and deceptive conduct, unconscionable conduct or breach of the good faith obligation. I often say to prospective plaintiffs “you have to successfully jump 4 hurdles – your opponent only has to beat you on one and you will lose.

That is not to say these cases should never be run provided the proposed plaintiff is fully aware of the risks, costs and personal impact of being involved in litigation. Some cases that look weak are won and some cases that look strong are lost. Litigation is fickle.

These cases also provide support for the proposition that a franchisee has no goodwill once the franchise agreement has come to an end, a view that I have always held. It will be interesting to see what an appellate court says about this.

The Honda Australia case contains some very useful passages about how damages are assessed in claims of the type brought by Brighton Automotive. This is good reading for lawyers or anyone who is contemplating or facing such claims.

My team at MST Lawyers regularly acts for both franchisors and franchisees in these types of claims. We provide frank, practical and technically correct legal advice.

Most matters we handle tend to settle at or around the time of mediation as required by the Franchising Code of Conduct, but some go further. Sadly, many franchisee claimants do not have the resources to fund litigation and, without external funding being made available or a law firm being prepared to run a matter on a “no win no fee” basis these claimants do not get access to justice.

Our franchise lawyers, which advises franchisors and franchisees at the front end of transactions also keeps abreast of these decisions and can provide sound and practical advice at the outset. For example, they will advise a franchisee to not let the term of the franchisee agreement to run out if they wish to obtain an amount for goodwill developed in the franchised business.

Please contact me at philip.colman@mst.com.au or 0417 438 259 if you wish to further discuss the matters raised in this article and how it may affect your business.