The recent case of AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 before Beach J of the Federal Court of Australia dealt with a number of interesting legal matters regarding Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) issuing notices that it would not renew its franchise agreements (NRNs) before later seeking to implement an agency model of business.

A point to be noted is that only 267 paragraphs of the decision have been published as of the date of this article and that 3,484 paragraphs were redacted due to confidentiality claims.[1] This article is therefore necessarily limited to the subject matter and views of Beach J raised in those 267 paragraphs.

Background

Towards the end of 2020, MBAuP issued NRNs to its Australian franchisees (Dealers) and approximately six months later issued those businesses with a proposal to operate their businesses moving forwards under a new model (Agency Model).[2]

Under the proposed Agency Model the Dealers would sell Mercedes cars as agents of MBAuP, which was said to produce a worse financial outcome to all or some of the Dealers.

Arguments raised by the Dealers

The Dealers put a number of arguments before the Federal Court, including that:

1. the NRNs were issued invalidly as the agreements were “evergreen”;
2. the NRNs were issued in breach of the obligation on MBAuP to act in good faith;
3. the NRNs and subsequent imposition of the Agency Model was an appropriation of the Dealer’s goodwill;
4. the NRNs were issued on direction of MBAuP’s ultimate holding Company Mercedes-Benz AG (MBAG);
5. they were subject to economic duress and did not have the opportunity to give free consent to enter into the agency agreements; and
6. MBAuP engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law.

Invalid issue of NRNs

The Dealers argued that the commercial bargain struck by the parties was that the NRNs were only to be issued in circumstances were a dealer failed to meet their targets or make mutually agreed improvements and that the agreements were effectively “evergreen”.[1]

However it was held that this was not made out in the construction of clause 8 which governed MBAuP’s right to give NRNs.

Beach J found that clause 8’s purpose was to create a right by which MBAuP could conclude an agreement with a Dealer (importantly this clause prescribed their only right to do so, subject to breach by a Dealer or agreement to terminate) and that this right was only subject to the obligation to act in good faith.[2]

Of some interest is that Beach J noted, that while ordinarily “a subsidiary is entitled to take direction from and act in the interests of its immediate or ultimate holding company”, “it would be acting outside the contractual power if MBAuP was merely to be an automaton acting solely on the direction of MBAG without any independent consideration of the matter”.[3] However on the evidence it was held that MBAuP was not acting as an automaton at MBAuP direction.

Good Faith

Regarding the duty of good faith obligation, this is imposed by clause 6 of the Franchising Code of Conduct[4]he Dealers submitted that the issuance of the NRNs was in contravention of this duty.

In finding that MBAuP acted in good faith Beach J noted:

1. that “any duty of good faith and to act with fidelity to the bargain between the parties is necessarily informed by the nature of the power which is to bring that bargain to an end.”;[5] and
2. that the question should be phrased in the context of whether the non-renewal is faithful to the bargain struck by the parties.[6]

Finding that MBAuP used its non-renewal power for the intended purpose (ending an agreement),[7] the failure to act in good faith was not made out.

Goodwill

The Dealers argued that MBAuP acquired or appropriated their goodwill by issuing the NRNs and transitioning to the Agency System and that such transfer without compensation is unconscionable.[8]

This argument was not accepted by the Court, which relied substantially on Federal Commissioner of Taxation v Murry (1998) 193 CLR 605. Beach J set out that the use of goodwill has significantly different meaning in accounting and legal circles and that the proper legal formulation is that goodwill is “legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it”.[9]

However, this goodwill could not continue to exist or be appropriated upon termination of the franchise agreements. Beach J held:

“the franchise business cannot be conducted in substantially the same manner and by substantially the same means absent the rights granted to the franchisee by the franchisor. In other words, in the context before me, the continued existence of goodwill as asserted by each of the dealers before me turned upon the continued existence of a dealer agreement, which was the source of the legal right or privilege to conduct the business in substantially the same manner and by substantially the same means that had attracted custom”.[10]

Conclusion

This case reiterates the importance of the contractual terms and that where a party has been granted a right, subject to any express qualifications, exercise of that right is likely difficult to overturn.

As the Franchise Code of Conduct is undergoing review, it will be interesting to see whether the termination of franchise agreements becomes subject to stricter regulation.

We have seem commentary reporting that while delivering the judgment Beach J stated: "Given the facts of this case, leading to an adverse result for the applicants, it may be that further consideration needs to be given to the terms of the Franchising Code and possible modification. And that is a matter for another day. And obviously, in another forum”.

This is an important reminder to franchisees and franchisors alike that the end of term arrangements in a franchise agreement are crucial and must be carefully drafted, understood, and planned for.

Hillhouse Legal Partners has extensive experience drafting and negotiating commercial agreements. Please feel free to contact us on (07) 3220 1144 or email the writer at john@hillhouse.com.au.

[1] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [15].

[2] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [79].

[3] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [219 – 221].

[4] Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) Schedule 1, 6.

[5] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [32].

[6] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [33].

[7] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [33].

[8] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [95 - 96].

[9] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [91 - 93].

[10] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [94]

[1] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022.

[2] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022, at [193]