Mercedes-Benz Australia court case: The story behind the verdict

In a trial that lasted several weeks, but drawn out over a year since the model was introduced locally, Australia’s Federal Court heard the key arguments put forward by each side – from the dealers making their case for compensation, and from Mercedes-Benz Australia defending how the rollout was managed.

As a quick recap, agency models, while varying between brands and markets, typically include the carmaker owning the vehicle stock instead of selling to a dealership – which then of course on-sells to the consumer.

The second major component is a standardised national price on each and every model in a company’s line-up, bringing an end to ‘haggling’ and negotiation on how much someone wants to pay.

Mercedes began using the agency model locally in January 2022, but its origins go much further back than that – with the court hearing how the idea had been discussed (and presented to dealers) since 2017.

According to the dealers, or at least the 38 out of 53 who took the carmaker to court seeking a combined $650 million in compensation, they were made to sign new agreements (to continue selling Mercedes’ cars via the agency model) under duress, and claimed the company did not act with goodwill by going ahead with the change despite dealers being opposed to it.

“The dealers invested in the Mercedes-Benz brand by building businesses; they did so under the vendor and purchaser model,” said Tim Castle, the barrister representing the dealers.

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“We say the end result was an unconscionable taking of property. We still run the business – but it’s now Mercedes-Benz that profits from it.”

Mr Castle alleged that the attitude from Mercedes for proceeding with the move was a ‘because we can’, implying the franchise laws in Australia were too weak to stop this sort of behaviour. It had, he said, failed to pay compensation and had failed to acknowledge the investment and risks they had taken over the years.

“There was a power imbalance that existed in this relationship, they did what they did because they thought they could do it.

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“We say it’s simply not the way business is done here in Australia,” he added.

“The purpose and effect was to increase their [Mercedes’] profitability by reducing our profits and extracting higher profits from customers, and secondly to create a direct relationship with customers to the exclusion of dealers.”

Three key issues at the heart of the case involved the timing of the negotiations, who issued the orders for the agency model – Mercedes-Benz Australia or its parent company Daimler AG – and the very meaning of goodwill.

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The timing

According to the dealers, Mercedes-Benz Australia “issued the non-renewal notices at the first step, we say that was not done in good faith” implying the introduction of the agency model was sprung upon them – however, Merc’s representative, Robert Craig, told the court that the conversations about the possibility of the model began back in 2017.

“The [dealers] were brought in very quickly. So by late 2017 what is known to the dealers is that an agency model is at least the preferred model being pursued or looked at on the part of MBA and that is consistent with the fact that by mid-2017 Australia had communicated its preference,” he said.

“The dealers weren’t kept in the dark, they were told exactly what was contemplated as part of the process…within a month of that meeting occurring on March 1 and 2, on April 5, 2018, MBA informed the National Dealer Council that it was preparing a business case for review to determine if the agency model was financially viable in Australia."

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The court heard that the original date for the agency model to begin in Australia was set for January 1, 2020 – two years earlier than was actually the case, in part because of the COVID-19 pandemic.

“The issue really emerges late [in the] 2021 process…there are, before one even gets the agreements, 38 meetings. Briefings that occurred more formally again after all of that information had been provided once the agency agreements themselves were provided,” continued Mr Craig.

“So this wasn’t a case of ignoring requests in toto, globally we’re not engaging, steps were taken to engage with and provide information, and sometimes items and aspects were changed. And so we say it is a mistake to say there’s been an absence of good faith in a negotiation process where the dealers haven’t got everything they wanted.

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“Ultimately the thing they didn’t want was agency. And when we come back to look at the terms that our learned friends attack as being unreasonable or unfair, they were all really the essential critical terms of an agency model – fixed pricing, no discounting.”

Justice Jonathan Beach asked Mercedes to explain the allegation that dealers had not been given slides of presentations made about the agency model to take away with them from the workshops where it was discussed, as he said it “significantly puts them at a disadvantage in terms of considering what’s being put to them by Mercedes”.

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Mr Craig said the dealers had been given minutes of each workshop, but accepted it did not amount to the same thing.

In turn however, Justice Beach called out Mr Castle on some of the dealers’ language around Mercedes’ actions, saying: “You don’t need to use that sort of adjective do you, or description ‘dishonest’ or ‘dishonesty’.

You can just say, ‘here’s the level of information at a level that was going to allow the dealers to actively participate in a negotiation or make decisions’.”

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Whose idea was it?

A lot of court time was also dedicated to the idea proposed by the dealers that it was parent company Daimler AG in Germany pushing for the agency model, and that it was pulling the strings rather than Mercedes-Benz Australia acting of its own freewill.

However, Mr Craig quashed that idea, saying: “There isn’t a single document which demonstrates that Mercedes-Benz Australia (MBA) had the judgment that the agency model was the wrong thing to be advocating for and pursuing in Australia, or that MBA was being told, directed to do something in the implementation or the actuality of the agency model against its judgment.

“Even if MBAG directed or had a direction to implement the agency model in Australia…exercising its judgment, MBA thought it was the right thing."

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What is goodwill?

While Mr Castle acknowledged that the dealers had signed up to enter the agency model agreements, despite their reservations, he contended that just because Mercedes did not act maliciously during negotiations that this did not constitute acting with goodwill.

“The focus here is on the action…it’s not about generalised good faith, not generally whether people are nice people…[it’s] the issuing of non-renewal notices and the course of conduct that leads to the substitution of the agency agreement for the dealer agreement,” said Mr Castle.

Justice Beach, however, questioned this, asking: “Strictly your complaint is that they give you enough time to negotiate the form of the agency agreement. Are you saying that’s a lack of good faith under the dealer agreement? And we all know that’s coming to an end in December in any event, you’re really talking about that as an absence of good faith in relation to the negotiation of the proposed new agreement aren’t you?”

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To this Mr Castle replied: “Yes, perhaps.”

“Certainly Mercedes-Benz was negotiating on the assumption [the agreement was ending] our assumption was that the notice of non-renewal had been served, which is slightly different,” he continued.

"We all need to continue to work together. What we would say is that a good faith negotiation may have produced a different result. One of the things we could have said is let’s keep talking and see if we can resolve this. That might have been one of the things that came out of it. And Mercedes-Benz might have said ‘well, we will continue dealership’. We don’t know.”

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But the judge wasn’t totally convinced.

“There was a prospect that you might have got Mercedes to pull the notices of non-renewal or postpone the start date for agency, and you haven’t really run that case tied causally into what you would describe as poor behaviour by Mercedes and the negotiations in 2021,” Justice Beach said.

“I’m, at the moment, a little up in the air myself about how some of your criticisms about the 2021 conduct transposed into a cause of action and a remedy, if I find that the notices were validly given. Apart from just injecting poison into the whole case and saying statutory unconscionability. I don’t know what you’re asking from me.”

According to the Mercedes team, the company was bringing the dealership agreement to an end, not the relationship, and in mounting their case and presenting it to the court the dealers had shown a “fundamental misunderstanding of goodwill”.

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While the dealers said: “[It is] something we generate by the way we run our business…the prerequisite gives us the right to operate the business, but the goodwill from operating the business is because of what we do.”

“You attract custom because you are a Mercedes dealer and if you’re a really good one you’re going to attract more custom,” queried the judge. “I’m not convinced of how you’re reading this but anyway…”

“Goodwill will have different sources depending on the facts of the case…The critical point being in our case that the source of the goodwill is the right to sell Mercedes-Benz vehicles using its trademarks and logos under the dealer agreement,” counter-argued Mr Craig.

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“What we’re concerned with is good faith in the decision to exercise non-renewal. A power which can only serve the interests of the party on whom the power is conferred [in this case being Mercedes] – that power having been validly exercised, not in a capricious or arbitrary way, is, we say, the end of the good faith inquiry.

“The applicants have failed to establish that Mercedes-Benz Australia issued the non-renewal notices for the improper purpose of continuing or maintaining the relationship and to transfer the goodwill in each dealership to MBA. [There is a] disconnect between the pleaded case and the case against us in writing in this regard.”

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“It’s quite unusual though isn’t it, an unusual feature of this case that dealers entering into an agreement which has this one-year term with this notice of non-renewal power and yet they are committing whatever resources they have to being a Mercedes dealer,” mused Justice Beach.

“They are taking on quite a degree of risk and you might say why are they doing that? Presumably they are trusting Mercedes in terms of the quality of the brand, the way it paves. It is an unusual feature so there is some element of trust or expectation of behaviour that the dealers, I think, can infer had, and you would have appreciated that.”

“This is the businessman’s gamble,” replied Mr Craig.