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Good Faith, Goodwill and Unconscionable Conduct: The Case between Mercedes-Benz and its Australian Dealers

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On 30 August 2023, the Federal Court of Australia handed down its decision in the case of AHG (WA) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022. Justice Beach further clarified the meaning of ‘goodwill’, and the duty of good faith and unconscionable conduct in exercising non-renewal clauses.

Background

Mercedes-Benz dealers (‘MB dealers’) brought a class action claim against Mercedes-Benz Australia/Pacific Pty Ltd (‘Mercedes’).

MB dealers and Mercedes were parties to dealer agreements and in around 2018 Mercedes 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. Mercedes then sought to introduce an agency model between the parties.

MB dealers argued that:

1. They were subject to economic duress. Mercedes’ conduct of issuing the NRNs would end the dealer arrangements, forcing them into the agency agreements which would make them financially worse off when compared to under the dealer agreements;

2. Mercedes’ conduct of issuing the NRNs contravened the duty of good faith under the Franchising Code of Conduct.

  • a. Both parties had a duty to cooperate and achieve the objects of the dealer agreement, which is to facilitate the operation of the dealership.
  • b. 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.
  • c. Mercedes 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.

3. Mercedes engaged in unconscionable conduct in contravention of the Australian Consumer Law, by:

  • a. issuing the NRNs and purporting to terminate the dealer agreements;
  • b. imposing the agency agreements on the MB dealers; and
  • c. appropriating the goodwill of MB dealers by changing the business model to one of an agency agreement without compensation.

Decision

Justice Beach dismissed the claim, and stated that MB Dealers sought to ‘rewrite the contractual bargain struck by the dealer agreements into one which better suits their commercial interests’.

A. Economic duress

The court found that Mercedes did not coerce MB dealers into entering into the agency agreement – Mercedes were simply exercising their contractual right under the dealer agreement.
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.

B. Good faith

The purpose of the termination clause is straightforward. It allows for either party to bring the dealer agreement to an end. Mercedes 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.
The Court compared this matter with the case of Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; 69 NSWLR 558, which found that the franchisor had breached “the implied terms of reasonableness and good faith” because its conduct sought to prevent the franchisee from performing its obligations under the agreement.

C. Unconscionable conduct

Mercedes’ 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 Mercedes exercised their right under the termination clause.

In relation to goodwill:

  • 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.

Takeaways

Despite the Franchising Code obligation to act in good faith, Franchisors can still exercise their contractual rights in accordance with their franchise agreement and advance their legitimate business interests.

Franchisors who would like further guidance on this decision and complying with their duty to act in good faith and other obligations under the Franchising Code should contact MST’s Franchising Lawyers on +61 3 8540 0200 or as follows:

Raynia Theodore on (03) 8540 0242 or raynia.theodore@mst.com.au

Louise Wolf on (03) 8540 0273 or louise.wolf@mst.com.au

Esther Gutnick on (03) 8540 0267 or esther.gutnick@mst.com.au