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The Federal Court recently handed down a judgment which will likely change the way new cars are sold in Australia and the structure of car dealerships significantly.

In October 2021, 38 Mercedes Benz dealers issued legal proceedings after Mercedes-Benz Australia/Pacific (Mercedes), served them with notices refusing to renew their dealer agreements. Instead, Mercedes offered them agency agreements. The dealers argued that these agency agreements were issued improperly and overall had less favourable terms.

The Case for the Dealers

Under the original agreements, the dealers received the benefit of being covered by the Franchising Code of Conduct (Code). This Code affords franchisees with additional protections and rights that are often left out of general commercial deals. This significantly helped the dealers in their case.

The crux of the dealers’ case leveraged their rights under the Code. In particular, they argued that the non-renewal notices issued by Mercedes were for an improper basis and were not issued in good faith. This was contrary to clause 6 of the Code and section 51ACB the Competition and Consumer Act 2010 (Cth).

The dealers also argued that Mercedes imposed the agency agreements on a take it or leave it basis, which placed pressure on the dealers and entirely removed them of any negotiating power. In doing so, it was alleged that Mercedes engaged in unconscionable conduct in breach of section 21 of the Australian Consumer Law.

Court Decision

The Court was sympathetic and receptive to the dealers’ arguments, with one of the Court Justices commenting that whilst the facts were on their side, the law was not. This ultimately led to the Court finding in favour of Mercedes.

Some of the key points made by the Court, include:

  1. The purpose of the termination clause in each dealer agreement was to enable either party to bring the agreement to an end. It was also the only way Mercedes could end the agreement where there had been no breach. This right was also exercisable by the dealers;
  2. Mercedes had issued the non-renewal notices for the purpose of ending the agreements. This, of itself, did not breach the duty of good faith;
  3. The less favourable terms and financial detriment that the dealers may experience under the new agency agreements did not mean that Mercedes had acted unconscionably.
  4. Upon the expiration/termination of a franchise agreement, the franchisee cannot continue to operate the business and has no right to any goodwill that may have accumulated while it was operated by the franchisee.

Does the Code Need Updating?

In August this year, the Australian Government announced a review of the Code. This review includes the consideration of a number of issues, one of them being “the role of the Code in regulating the automotive sector”.

The review will consider the global move in new car sales arrangements from a dealer model to an agency model, and this case is likely to play a large role. The review is expected to be provided to the Government by the end of this year.

What do you need to do?

If you are in the automotive industry or a franchisee and have concerns that your agreements may be terminated or replaced, you should:

  1. Ask the franchisor to consult with you about the changes;
  2. Negotiate terms with the franchisor. These negotiations should be in writing and stored safely – they are likely to play a big role later on;
  3. Consider whether to sell your business. This case confirms that if your agreements terminate or expire, you will lose the goodwill you have built.

If you need help navigating the changes in your business, please contact one of our experienced commercial lawyers on (03) 9481 2000 or info@tauruslawyers.com.au.

Posted by Taurus Legal Management