Federal Court of Australia

AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2025] FCAFC 86

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed with costs.

2.    Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground in s 37AG(1)(a), for a period of seven days, there shall be no disclosure, by publication or otherwise, except to the parties, of the Court’s reasons for judgment of today’s date.

3.    Within three business days, the parties provide to the Chambers of the members of the Full Court any proposed form of suppression order in relation to the Court’s reasons for judgment.

4.    There be liberty to apply to seek a variation of paragraphs 2 and 3 above.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

TABLE OF CONTENTS

REASONS FOR JUDGMENT

THE COURT:

Introduction

1    In the proceeding at first instance, a number of Mercedes-Benz new vehicle dealers carrying on business in Australia sued Mercedes-Benz Australia/Pacific Pty Ltd (Mercedes Australia), which is a wholly-owned subsidiary of Mercedes-Benz AG (Mercedes Germany), a well-known manufacturer of motor vehicles. The dealers were franchisees of Mercedes Australia.

2    Before the events that led to the proceeding, Mercedes Australia and the dealers had entered into dealer agreements that gave effect to a “dealership model”. Under that model, the dealers purchased new vehicles from Mercedes Australia and sold those vehicles to customers. At the end of 2020, Mercedes Australia gave non-renewal notices (NRNs) to all the Mercedes-Benz new vehicle dealers in Australia. The notices stated that the dealer agreements would end on 31 December 2021. During the course of 2021, Mercedes Australia proffered new proposed agreements based on an “agency model”. Under that model, the dealers would instead be the agents of Mercedes Australia in relation to new vehicles sales (with the consequence that Mercedes could set the price at which the vehicles were sold to customers). Ultimately, all the dealers entered into agency agreements with Mercedes Australia, albeit “under protest”. The agency agreements commenced on 1 January 2022.

3    The proceeding at first instance was brought by 38 dealers (out of 49 Mercedes-Benz new vehicle dealers in Australia). The proceeding was not a representative proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth). The dealers’ claims included: contractual claims; claims based on breach of the obligation of good faith in cl 6 of the Franchising Code of Conduct, set out in Sch 1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) (Franchising Code); economic duress; and unconscionable conduct in contravention of s 21 of the Australian Consumer Law (being Sch 2 to the Competition and Consumer Act 2010 (Cth)) (the Australian Consumer Law).

4    The cases of four of the dealers (referred to as “exemplars”) were tried before the cases of the other dealers. (Each side nominated two of the exemplars for this purpose.) The trial was on liability only. The four exemplars were:

(a)    the fourth applicant, Baker Motors Pty Ltd, which operates a Mercedes-Benz dealership in Albury, NSW as part of a multi-franchise dealership known as “Baker Motors” (Baker Motors or Albury);

(b)    the twenty-first applicant, NGP Toorak Pty Ltd, which operates a Mercedes-Benz dealership in Toorak, Victoria (Mercedes-Benz Toorak or Toorak);

(c)    the twenty-eighth applicant, Peter Warren Automotive Pty Ltd, which operates a Mercedes-Benz dealership known as “Macarthur Automotive” in Campbelltown, NSW (Macarthur Automotive or Macarthur); and

(d)    the thirty-sixth applicant, Wollongong City Motors Pty Ltd, which operates a Mercedes-Benz dealership in North Wollongong, NSW (Mercedes-Benz Wollongong or Wollongong).

5    Following a trial of eight weeks, the primary judge delivered a detailed judgment comprising 3,752 paragraphs (654 pages) in which he dismissed all of the dealers’ claims: AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022; 303 FCR 479 (J). Subsequently, on 21 November 2023, his Honour delivered a judgment on the form of orders and costs: AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd (No 2) [2023] FCA 1675. His Honour made orders on that date. By paragraph 1 of the orders, the primary judge dismissed the claims of the four exemplar dealers. (The claims of the other applicants were stood over until the determination of the appeal.) By paragraph 5 of those orders, his Honour ordered that the applicants pay 80% of Mercedes Australia’s costs of the proceeding to the date of the order on a party-party basis.

6    By notice of appeal dated 31 January 2024, 36 dealers (of the 38 applicants at first instance) appeal from paragraph 1 (in part) and paragraph 5 of the orders made by the primary judge on 21 November 2023. Insofar as leave to appeal may be required, this was given by the primary judge. The 36 appellants include three of the four exemplars; Macarthur Automotive is not one of the appellants.

7    The appellants’ case on appeal is narrower than their case below. The appeal is limited to two claims: unconscionable conduct in contravention of s 21 of the Australian Consumer Law and breach of the obligation of good faith in cl 6 of the Franchising Code. The appellants rely on four grounds of appeal, which can be summarised as follows:

(a)    The primary judge erred in finding that Mercedes Australia’s conduct, in giving NRNs to all then existing Mercedes-Benz dealers in Australia and entering into agency agreements with all then existing dealers, did not contravene s 21 of the Australian Consumer Law; the primary judge ought to have found that Mercedes Australia engaged in unconscionable conduct in contravention of s 21 (Ground 1).

(b)    Further or alternatively, the primary judge erred in rejecting “accepted and acceptable social and community standards” as an appropriate approach for determining whether Mercedes Australia had contravened s 21 of the Australian Consumer Law (Ground 2).

(c)    The primary judge erred in finding that Mercedes Australia had not acted in breach of the obligation of good faith in cl 6 of the Franchising Code; his Honour ought to have found Mercedes Australia liable for contravention of cl 6 of the Franchising Code and s 51ACB of the Competition and Consumer Act (Ground 3).

(d)    As additional support for Grounds 1-3, the appellants challenge a small number of findings made by the primary judge, namely those set out in column A of Schedule A to the notice of appeal. The appellants contend that the primary judge ought to have made the findings set out in column B of Schedule A to the notice of appeal (Ground 4).

8    In support of Ground 1, the appellants submit, in summary, that Mercedes Australia opportunistically exploited the individual and collective vulnerability of the dealers to capture the benefits of the dealers’ investments for itself. The appellants submit that the dealers had made significant, long-term, idiosyncratic investments, including in facilities valued by Mercedes Australia at over $400 million. The appellants submit that: Mercedes Australia could not contractually require dealers to accept the new agency model, but it had the contractual power to bring all dealer agreements to an end; Mercedes Australia could (and did) use that power to bring about a new agreement on terms of its choosing, by taking advantage of dealers’ vulnerability to their investments being held ‘hostage’ if the existing dealer agreements were terminated; this enabled Mercedes Australia to appropriate to itself the return on investments made by dealers in their new vehicle businesses.

9    The appellants submit that: Mercedes Australia adopted a coordinated plan – ‘aligning’ the dealer agreements, then terminating them as a ‘job lot’; Mercedes Australia had no intention of ending the relationship with the dealers when it issued NRNs; instead, it used the dealers’ vulnerability to set the future commissions “as low as they thought they could get away with” (J[245]); dealers had little meaningful choice other than to accept those terms (under protest) (J[3547]).

10    The appellants’ case in support of Ground 1 largely relies on findings made by the primary judge. The appellants submit that, on the basis of those findings, his Honour should have concluded that Mercedes Australia engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law.

11    By Ground 2, the appellants contend that the primary judge erred in his statement of the applicable principles relating to unconscionable conduct within the meaning of s 21 of the Australian Consumer Law. In particular, the appellants challenge the primary judge’s statements at J[3506], where his Honour said that he “would reject the approach of some judges who seem to have infused the statutory text with notions of so-called accepted and acceptable social and community standards, whatever that means and howsoever identified, and then said that the relevant search was for what those norms and values require”. In a colourful phrase, the primary judge stated in the same paragraph: “There is no thirteenth subject matter in s 22(1) [of the Australian Consumer Law] which licenses a judge to indulge in what is little more than intellectual fairy floss”. The appellants contend that the primary judge’s approach was inconsistent with the principles stated by the High Court of Australia in Productivity Partners Pty Ltd (trading as Captain Cook College) v Australian Competition and Consumer Commission [2024] HCA 27; 419 ALR 30 (Productivity Partners), which was handed down after the primary judge gave judgment.

12    By Ground 3, the appellants contend that the primary judge erred in concluding that Mercedes Australia had not acted in contravention of cl 6 of the Franchising Code, particularly when regard is had to the mandatory consideration (in cl 6(3A)) whether the terms of a new vehicle dealership agreement are fair and reasonable. The appellants’ submissions focus on the negotiation of the financial terms of the agency agreements and associated agreements. The appellants submit that Mercedes Australia’s conduct in negotiating those terms breached its good faith duty. The appellants also submit that the primary judge erred in concluding that the terms of the agency agreements were fair and reasonable within the meaning of cl 6(3A) of the Franchising Code.

13    Little attention was given to Ground 4 in the appellants’ written or oral submissions. In the appellants’ written submissions, the submissions on Ground 4 refer to earlier submissions. It seems, therefore, that Ground 4 is essentially a different way of expressing the same points as made under Grounds 1 to 3.

14    Mercedes Australia has filed a notice of contention, relying on the following grounds (in summary):

(a)    Mercedes Australia’s primary position is that the primary judge did not reject the role of “accepted and acceptable social and community standards” as an appropriate approach for determining whether Mercedes Australia contravened s 21. However, if the primary judge did err as contended in Ground 2, then the primary judge’s orders ought to be affirmed on the alternative or additional ground that, had the primary judge applied the approach for which the appellants contend, the primary judge ought to have found, on the findings of fact made below, that Mercedes Australia did not engage in unconscionable conduct.

(b)    Contrary to the primary judge’s finding (eg at J[3628]) that the applicants are “worse off” under the agency model than under the dealership model, the primary judge ought to have found that the applicants had not established that dealers would be “worse off” under the agency model as compared to the dealership model.

(c)    Contrary to J[3228], the primary judge ought to have concluded that cl 6(3A) of the Franchising Code applies only to parties to a “new vehicle dealership agreement” and does not apply to pre-entry conduct in relation to that agreement. This raises an issue of construction of cl 6 of the Franchising Code.

15    For the reasons that follow, we have concluded that none of the appeal grounds are made out. In summary:

(a)    Starting with Ground 2, no error is shown in the primary judge’s statement of the applicable principles. We do not consider there to be any difference as a matter of substance between the primary judge’s statement of the applicable principles and those set out by the High Court in Productivity Partners.

(b)    In relation to Ground 1, no error is shown in the primary judge’s conclusion that Mercedes Australia did not engage in unconscionable conduct. We are satisfied that, in reaching his conclusion, the primary judge had regard to all relevant matters. The appeal was largely conducted by reference to findings made by the primary judge, as distinct from the evidence led at trial. This tends to make the point that the primary judge considered all relevant matters. To the extent that the appellants criticised aspects of his Honour’s approach, we do not consider any of those criticisms to be justified.

(c)    In relation to Ground 3, no error is shown in the primary judge’s conclusion that Mercedes Australia did not breach its obligation of good faith under cl 6 of the Franchising Code.

(d)    For substantially the same reasons as apply to Grounds 1 to 3, Ground 4 is not made out.

16    It follows that the appeal is to be dismissed. It is therefore unnecessary to consider the notice of contention.

17    Parts of the evidence and of the primary judge’s reasons contain sensitive commercial information. For this reason, the primary judge made confidentiality or suppression orders and redacted parts of his reasons as published to the public. We will give the parties the opportunity to consider if any such orders or redactions are necessary in respect of this judgment. Accordingly, we will make a suppression order in respect of these reasons for a period of seven days, and order the parties to provide within three business days any proposed suppression order in respect of parts of these reasons.

The case run below and the case on appeal

18    To put the primary judge’s judgment in context, it is necessary to understand that the applicants’ case at first instance was significantly wider than the appellants’ case on appeal. The primary judge summarised the applicants’ case at first instance (and some of his Honour’s conclusions) at J[14]-[57]. In the following paragraphs, we outline the applicants’ claims at first instance (based on his Honour’s judgment) and indicate whether those claims form part of the appeal:

(a)    The applicants challenged the non-renewal of their dealer agreements and the imposition on them of the agency model. The applicants said that the dealer agreements were “evergreen”. By “evergreen”, the applicants meant that the non-renewal power was constrained such that Mercedes Australia could exercise the power of non-renewal only if a dealer failed to meet their targets or make mutually agreed improvements: J[14]-[15]. On appeal, the appellants do not pursue their contractual claims.

(b)    The applicants said that the non-renewal power, which could be exercised by Mercedes Australia without cause, did not extend to permitting Mercedes Australia to use that power to continue the existing relationship between Mercedes Australia and each of the dealers on the basis of an agency relationship: J[17]. This contractual contention is not pursued on appeal.

(c)    The applicants said that the NRNs given to them by Mercedes Australia at the end of 2020 were invalidly issued: J[18]. The applicants contended that Mercedes Australia’s conduct in issuing the NRNs was motivated by a purpose which was antithetical to the dealer relationships and dealer agreements, being to take the customer relationships and the profits to be earned from the unexpired lifetime value of their customers, without paying anything to the dealers for that taking: J[20]-[29]. In particular, it was contended that:

(i)    The NRNs were issued in contravention of the good faith duty under cl 6 of the Franchising Code and involved a contravention of s 51ACB of the Competition and Consumer Act.

(ii)    The NRNs were issued in contravention of certain alleged implied duties owed by Mercedes Australia to each of the applicants under their respective dealer agreements, such duties being a duty to cooperate to achieve the objects of each such dealer agreement and a duty to act reasonably and in good faith, having regard to the terms, purpose and object of each such dealer agreement.

(iii)    The NRNs were issued for a purpose foreign to the power of non-renewal contained in each of the three different forms of the dealer agreements.

(iv)    In respect of applicants with a 2002 dealer agreement, it was said at the outset of the trial that the NRNs were not issued during 2021, and so were spent by automatic renewal of those dealer agreements on 1 January 2021 in accordance with the 2002 term provision.

These contentions are not pursued on appeal.

(d)    The applicants contended that they were subject to economic duress. They said that they did not have the opportunity to give their consent freely to enter into any of the agency agreements, by reason of Mercedes Australia’s pressure or threat to treat the dealers’ relationships with Mercedes Australia and the Mercedes-Benz brand as ceasing on 31 December 2021 if the applicants did not sign and return to Mercedes Australia each of those agreements: J[37]. This contention is not pursued on appeal.

(e)    The applicants alleged that other conduct of Mercedes Australia was a contravention of its obligation of good faith under cl 6 of the Franchising Code. The applicants said that Mercedes Australia contravened the good faith duty under the Franchising Code in relation to the negotiation of the agency agreements, the service and parts agreements and the agency-related agreements, and also by imposing unfair terms: J[38]. This contention is pursued on appeal, forming the basis of Ground 3.

(f)    The applicants alleged that Mercedes Australia engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law in three principal respects: J[39]-[43]. The first principal respect was said to be by purporting to bring to an end the dealership model by not renewing each of the applicants’ dealer agreements. The second principal respect was said to be by imposing the agency agreements, service and parts agreements, and agency-related agreements on each of the applicants as the basis for continuing to operate their dealerships. The third principal respect was said to be by failing to compensate each of the applicants for the value of their dealerships, including the loss of the value of their goodwill, as a result of the termination of the dealership model, and the implementation of the agency model under the agency agreements, service and parts agreements, and agency-related agreements. Generally, the applicants alleged that Mercedes Australia engaged in the unjustifiable pursuit of its self-interest by appropriating the substantial value of the assets and/or goodwill of the Mercedes-Benz dealership businesses, undermining the basis of the commercial bargain and relationship between itself and the applicants under the dealership model, implementing terms in the agency agreements to allow Mercedes Australia to rationalise its network and implementing a global directive, strategy or policy of Mercedes Germany. On appeal, the appellants do pursue their claims based on statutory unconscionable conduct (alleging a contravention of s 21 of the Australian Consumer Law).

19    Further, the relief sought by the applicants at first instance was broader than that sought on appeal. At first instance, the relief sought by the applicants included orders that each of the NRNs be set aside and declarations that they were void and of no effect; the applicants also contended that if the NRNs were set aside or were void, then each of the applicants was entitled to have their dealer agreements automatically continued on and from 1 January 2022: J[30]. On appeal, the appellants do not seek reinstatement of the dealer agreements; the relief they seek is limited to damages.

Key factual findings

20    In this section of our reasons, we set out the key factual findings of the primary judge that are relevant to the issues raised by the appeal. Unless otherwise indicated, the findings set out in this section are not the subject of challenge on appeal.

The exemplars

21    The dealer agreements of each of the applicants below were represented by the four exemplars. The exemplars also represented a range of different operating characteristics of the applicants generally as described at J[270]-[275]. The primary judge noted the following aspects:

(a)    First, there is the dimension of geographical diversity. Toorak is a suburban dealership, Macarthur is an outer-suburban dealership, Wollongong is a regional city dealership, and Albury is located in a rural area.

(b)    Second, 34 of the 38 dealerships (at first instance) were multi-brand. All four exemplars were multi-brand. Two operated on stand-alone sites, being Toorak and Macarthur. Two operated on combined sites, being Albury and Wollongong. Also, in the case of Toorak, the same parent company owns other Mercedes-Benz dealerships at Brighton and Mornington.

(c)    Third, 35 of the 38 dealerships (at first instance) also sold Mercedes-Benz vans and commercial vehicles. Each of Albury, Macarthur and Wollongong sold vans, but Toorak did not.

(d)    Fourth, 21 of the 38 dealers (at first instance) also sold Mercedes-Benz EQ electric vehicles. Albury, Toorak and Wollongong sold EQ vehicles, but Macarthur did not.

(e)    Fifth, as to the ownership structure, Albury is a family-owned business, Toorak and Wollongong form part of a private company structure, and Macarthur is owned by a listed public company.

Baker Motors

22    The primary judge found that the reason Baker Motors entered the dealer agreement on the terms of that agreement was because it wanted to have enough brands to ensure a particular level of throughput, and to have enough brands at different points in the customer purchasing profile; and that the same motivation led Baker Motors to enter the agency agreement: J[291].

Wollongong dealership

23    Wollongong City Motors Pty Ltd, which operates a Mercedes-Benz dealership in North Wollongong, NSW, was purchased through a share sale agreement by the Wakeling automotive group in 2019, at a time when Mercedes Germany and Mercedes Australia were still considering the business case parameters for Business Case 1.0 (discussed below): J[347].

24    Mr Scott Wakeling, who is the dealer principal of the Wollongong dealership, gave evidence at trial and readily accepted that he acquired the Wollongong dealership cognisant of a proposed change to Mercedes Australia’s business model from dealership to agency, with the qualification that he was not aware of any specific details of the new model, such as the proposed remuneration: J[350].

25    During the cross-examination of Mr Wakeling, it became apparent that Mercedes Australia did not have due regard to the flow-on effects of the introduction of the agency model on other parts of the dealers’ businesses, such as arranging financing for customers, ultimately depriving Mr Wakeling of the ability to utilise his entrepreneurial skills to further develop the Wollongong dealership: J[351].

26    The primary judge stated that Mr Wakeling’s evidence in this regard demonstrated an important consequence of the agency model, being the fundamental shift from the entrepreneurial dealership model in which dealers, as business owners, made investments and took risks to have the opportunity to earn profits, to the agency model, where dealers work in effect for a wage (in the form of a “commission”) as agents of Mercedes Australia: J[352].

Investments by the dealers

27    The primary judge made the following findings regarding investments by the dealers (at J[251]):

I accept that in some respect [Mercedes Australia] encouraged the dealers to make long term investments in some of the facilities. But where this occurred this was usually reflected in a longer term being negotiated under the dealer agreement. Further, with such terms and the various renewals, there is no evidence that dealers have not earned a reasonable rate of return on their assets and also in many instances also recouped their capital investment over time.

See also J[744].

28    At J[3602], the primary judge found:

Each of the dealers made significant long-term investments of money, being $400 million between 2013 and 2020, as well as time, effort and entrepreneurial efforts with the attendant financial risks. Those investments were made by the dealers on expected long-term returns as retailers of [Mercedes-Benz] vehicles, parts and other products and services under the dealership model. …

Growth in sales

29    Mercedes Germany and Mercedes Australia adopted growth strategies in the period from the mid-1990s to 2020: J[989]. Mercedes Australia’s growth strategy under the dealership model resulted in the Australian market growing from about 10,000 cars per year in 2001 to about 40,000 cars per year by 2017, and achieving the number one position in the luxury car market: J[990].

30    The primary judge found that Mercedes Australia’s growth in annual sales was a direct consequence of dealers’ investments in their dealerships, which provided the largest footprint nationally amongst the luxury brands with which it competed, namely, BMW and Audi. The financial consequence for Mercedes Australia of this sales growth was sustained increases in its annual revenue: J[385].

31    The primary judge found (at J[400]):

Further, [Mercedes Germany’s] growth strategy required constant increases in sales in Australia for [Mercedes-Benz] vehicles, which also required a commensurate increase in both the distribution channel to sell the vehicles and to service the vehicles. As the applicants correctly point out, it was fundamental to this strategy to attract investments from experienced dealers and to expand existing dealerships or create new dealerships to grow the customer base and develop long term relationships with [Mercedes-Benz] vehicle buyers through investment in both the sales process and also servicing. And it was important to [Mercedes Germany’s] overall growth strategy for the dealers to make investments in the dealer network, rather than [Mercedes Australia].

(Emphasis added.)

See also J[405].

The dealership model

32    Before 1 January 2022, Mercedes Australia distributed passenger vehicles in Australia under a wholesale dealership model where dealers purchased new passenger cars from Mercedes Australia and sold those cars to customers. This can be contrasted with the agency model that commenced from 1 January 2022: J[577].

33    Dealers entered into a written dealer agreement with Mercedes Australia for the sale and servicing of Mercedes-Benz vehicles and associated parts: J[579].

34    Dealers acquired new cars from Mercedes Australia at a price determined by Mercedes Australia, which was the local list price (LLP), under a floorplan finance facility between the dealer and, typically, Mercedes-Benz Financial Services Pty Ltd (MBFS), a subsidiary of Mercedes Australia. Under this facility, dealers paid for the new cars by drawing down on their floorplan facilities and paid interest on the facility monthly. MBFS gave the dealers 28 days interest free. If the dealer sold the new car within 28 days of taking delivery of it, no interest was payable by the dealer; interest was payable from the 29th day. Mercedes Australia funded the interest-free period for dealers by paying the interest to MBFS: J[580].

35    Dealers sold vehicles to customers at prices negotiated by the dealer with the customer. The invoice for the passenger car was rendered directly from the dealer to the customer: J[581].

36    Mercedes Australia did not sell passenger cars directly to customers online and dealers did not have any contractual right to sell passenger cars online: J[582].

37    In substance, Mercedes Australia paid dealers what could be described as a dealer margin. Under the dealership model, profits for dealerships on new cars were a function of the dealer margin paid by Mercedes Australia to the dealer, less any customer discount negotiated with the customer, and less the dealership’s direct (variable) costs and indirect (fixed or overhead) costs: J[583].

38    The dealer margin was calculated as a percentage of the LLP, with variable and fixed components. The dealer margin contained three components, as detailed in J[584].

39    Dealers did not have a right to earn any particular margin. Moreover, the margins for each year were set unilaterally by Mercedes Australia and communicated to dealers through dealer bulletins and the yearly Commitment to Excellence (CTE) program: J[585].

40    Under the dealership model, Mercedes Australia provided financial support to dealers. This was provided in various ways. First, there was a “special discount”, being a sum allowing dealers to further discount a car when selling it to a customer, allowing dealers to retain more of their margin. Mercedes Australia provided around $[REDACTED] per annum of this support in the period 2016 to 2019. Second, there was the funding of the 28 day interest-free period on each dealer’s floorplan. Third, there was the provision of financial support for demonstrator vehicles based on their age and number of kilometres driven. Fourth, there was from time to time the guaranteeing of variable margin payments regardless of dealer performance: J[586].

41    Under the dealership model, Mercedes Australia had access to and control over the customer data gathered by dealers: J[589].

42    The primary judge highlighted a number of aspects of the dealership model at J[594]-[602]. These included (at [599]):

… for the dealers, there was the opportunity to invest in their dealerships and earn commensurate profits from selling [Mercedes-Benz] vehicles to their customers. For [Mercedes Germany/Mercedes Australia], there was the opportunity to use other people’s time, money, effort, entrepreneurial skill and risk-taking to create and build a market for the sale of their vehicles, from which they could earn a wholesale margin, and also benefit from economies of scale at the production level.

The dealer agreements

43    The legal framework that underpinned the investment by the dealers in their Mercedes-Benz dealerships, and the relationship between Mercedes Australia and the dealers, was the dealer agreement between Mercedes Australia and each dealer.

44    The dealer agreements were similar but not identical. Generally speaking, there were three forms being the 2002 dealer agreement, the 2015 dealer agreement and the Wollongong dealer agreement: J[657].

45    Under the dealer agreements, Mercedes Australia decided what products and parts would be supplied to a dealer and the prices at which it would supply them. It determined the allocation of the products to the dealer: J[688].

46    Further, the dealer agreements did not give dealers an entitlement to any particular margin or any particular remuneration: J[689].

47    Clause 8 of each dealer agreement set out the term. The length of the initial term(s) varied across the agreements, but all agreements ultimately reverted to an annual term. Uniformly, however, Mercedes Australia had the right to bring the dealer agreement to an end by informing the dealer of its intention within a specified time: J[719]. For example, in relation to Baker Motors, as set out at J[721], clause 8 provided that the agreement commenced on the date it was made and shall:

expire on the last day of the calendar year in which it was made. Unless written notice of non-renewal is given by [Mercedes Australia] to the Dealer at least 6 months before the date of expiry … then upon expiry this Agreement shall revive automatically and continue in force until the last day of the next calendar year and thereafter shall be renewed automatically on its expiry at the end of each calendar year unless and until not less than 6 months prior written notice of non-renewal shall have been given by [Mercedes Australia] to the Dealer prior to any expiry date. [Mercedes Australia] will be deemed to have notified the Dealer of [Mercedes Australia’s] decision to renew the Agreement unless written notice of non-renewal is given by [Mercedes Australia] to the Dealer in accordance with this clause.

48    Correspondingly, a dealer could terminate the agreement without cause on 60 days’ notice: J[18].

49    The primary judge highlighted a number of omissions from the dealer agreements at J[728]-[733], namely:

(a)    There was no term requiring the dealer to pay an entry or exit fee on entering or exiting the network.

(b)    There was no term conferring on the dealer any right to online sales.

(c)    There was no term concerning any entitlement to dealer remuneration or any particular margin.

(d)    There was no term concerning the demonstrator car program including how many demonstrators a dealership could register, the required time for demonstrators to be registered or the sale to end customers.

(e)    There was no term restraining the ability of the dealer to trade or compete with Mercedes Australia and its dealers on exiting the network.

The dealership businesses and investments

50    Under the dealership, the businesses operated by the exemplar applicants at their respective Mercedes-Benz dealerships included the sale of new Mercedes-Benz vehicles, the sale of pre-owned vehicles, including but not limited to pre-owned Mercedes-Benz vehicles, the servicing of Mercedes-Benz vehicles, the sale of Mercedes-Benz parts, the sale of after-market accessories and arranging finance and insurance for purchasers of new vehicles or pre-owned vehicles: J[748].

51    The dealers had invested some hundreds of millions of dollars in establishing or purchasing their dealerships. There is no doubt that Mercedes Australia was aware of the quantum of the investment, and that Mercedes Germany was also aware of the quantum: J[755].

52    The primary judge detailed investments made by the exemplars, including the construction of “Autohaus” showrooms, at J[755]-[785]. The primary judge said that, using dealer investments in an Autohaus showroom as an example, modifications to suit the needs of an alternative brand may be costly, or may not be viable if it is not possible to locate an alternative luxury brand on site: J[779].

Moving away from the dealership model

53    The primary judge addressed certain matters that he accepted were partial reasonable justifications by Mercedes Australia for moving away from the dealership model, at least from its perspective at J[823]-[834]. These included:

(a)    Online marketing and the resultant decrease in search costs for customers increased intra-brand competition and reduced the effectiveness of the prime marketing areas (PMAs) in protecting dealers from one another as well as increasing inter-brand competition.

(b)    Aggregators, who act as middlemen between dealers and customers, capture customer data and have the ability to control the customer interaction by charging dealers a fee for leads, start bidding wars between dealers for leads, offer customers competing brands and, in respect of other revenue sources for dealers, offer alternative finance products. There was a loss of customer data from dealers to aggregators which in turn meant that dealers could no longer price discriminate by tailoring discounts or prices to individual consumers in accordance with their willingness to pay, but had to discount aggressively to win the sale. And there was a loss of dealers’ ability to influence future vehicle purchases. Further, there was a loss of other revenue streams including finance.

The period from 2015 to 2020 (inclusive)

54    The primary judge made detailed findings about the development within Mercedes of new business models, and interactions between Mercedes Australia and the dealers about new models, in the period from 2015 to 2020 (both inclusive) at J[1002]-[1916]. A form of agency model was referred to as “model D” in some of the documents.

55    The primary judge discussed a number of Business Cases relating to the move to an agency model prepared by Mercedes Australia during the period 2019 to 2020. We note the following chronology:

(a)    In June 2018, Business Case 0.0 was presented by Mercedes Australia to Mercedes Germany: J[1282].

(b)    In July 2019, Business Case 1.0 was presented by Mercedes Australia to Mercedes Germany: J[1546]. A final iteration of this Business Case was presented in November 2019: J[1552], [1605].

(c)    In July 2020, Business Case 2.0 was presented by Mercedes Australia to Mercedes Germany: J[1808].

(d)    In September 2020, Business Case 2.1 was presented by Mercedes Australia to Mercedes Germany: J[1830].

(e)    In October 2020, Business Case 2.1 was approved by Mercedes Germany’s MS ExCom (the Marketing and Sales executive committee): J[1861]-[1862], [1868]. (This Business Case was subsequently updated: J[2380].)

56    The primary judge’s judgment includes, at J[2378], a table that summarises key elements of each of the above Business Cases. That table was extracted in an aide memoire that the appellants provided to the Court, and relied on, during the appeal hearing. We return to that table below at [158].

Mercedes Australia issues the NRNs (29 December 2020)

57    On 29 December 2020, Mercedes Australia issued the NRNs to the dealers (J[1909]), explaining that their dealer agreements would expire on 31 December 2021 and that:

…[n]otwithstanding the issuing of this notice, it is not [Mercedes Australia’s] intention for the relationship between the parties to cease. In Q1 2021, [Mercedes Australia] will provide you with a suite of documents relating to its proposed new business model for your consideration as an alternative to the current arrangement between the parties.

58    It appears that the reason why 12 months’ notice was given was to comply with provisions of the Franchising Code, which had been modified from 1 July 2020: see J[3061].

59    The primary judge found that Mercedes Australia exercised the power to give the NRNs without regard to the individual circumstances of each of the dealers, including their investments, their performance, any custom or reputation built up with customers, and the potential effect of the agency model on the individual dealer: J[183]. See also J[230].

60    Further, his Honour found that the exercise of the power was done solely for the benefit of both Mercedes Australia and Mercedes Germany and their strategic interests: J[184].

61    The primary judge found that the purpose of Mercedes Australia in issuing the NRNs involved pursuing an Australia-wide strategy and, in essence, treating all dealers uniformly: J[188].

Causal break

62    One of the applicants’ submissions at trial was that the power to issue the NRNs could only be used for the purpose of terminating a relationship between Mercedes Australia and the dealer rather than changing or creating a new relationship with the dealer, that is, one of agency: J[192]. The primary judge rejected this argument. In the course of doing so, his Honour stated (at J[193]) that there was a “causal break” in the facts. This statement is the subject of challenge by the appellants on appeal. It is important therefore to set out the paragraph in which the primary judge made that statement ([193]);

… The power [to issue the NRNs] was exercised to terminate the pre-existing relationship under the dealer agreements, even if [Mercedes Australia] had it in mind or was offering the possibility of a new relationship. Termination of the pre-existing relationship was a necessary anterior step, and so a proper purpose. The fact that [Mercedes Australia] also had it in mind that there might be the creation of a new relationship does not impugn the contractual purpose. Moreover, there is a causal break in the facts. The NRNs were given at the end of 2020. There were no conditions attached regarding agency. Offers concerning agency were given in mid-2021. Of course, [Mercedes Australia] had an expectation when giving the NRNs that the dealers would enter into the agency agreements when later offered. But strictly the two events occurred at different times with the former not being conditioned on the latter. The dealers were always free to accept or reject the latter.

(Emphasis added.)

Agency offers (2021) and entry into the agency agreements

63    The primary judge made detailed findings about the interactions between Mercedes Australia and dealers during 2021 at J[1917]-[2199]. It is sufficient at this stage to note the following key matters.

64    A document referred to as “Financial Alignment with Peter Schymon” dated 16 April 2021 (FAPS) contained an updated version of Business Case 2.1. This was also referred to as Business Case 3.0 in some documents: J[2380]. The primary judge said that there were methodological deficiencies in relation to the business case presented in the FAPS: J[2421]. Those methodological flaws were also present in Business Case 2.1, on which the FAPS was based: J[2421]. The primary judge identified the deficiencies at J[2422]-[2434]. These included:

2426    Fifth, it was apparent that [Mercedes Germany/Mercedes Australia] were looking to impose a break-even model on the dealers in respect of new vehicle sales, and require them to obtain their profit from other parts of the dealership.

…

2429    Eighth, the key determinant of the dealership RoS [return on sales] of [REDACTED]% was the use of the 2019 base year, when the level of discounting was about 5%. But the market changes due to supply shortages in 2020/2021 meant that effectively no discounting was required, in which case there would have been a very significant difference between the financial outcomes under dealership and the agency model for the dealers.

65    On 3 May 2021, Mercedes Australia issued letters to dealers, attaching the agency overview 1.0 and the indicative draft agency agreement: J[430].

66    From 21 to 23 July 2021, Mercedes Australia sent emails to all dealers attaching the agency documents, including execution copies of the agency agreement, the service and parts retailer agreement, a safety net letter, an “Agency Overview version 2.0” document and other documents: J[2125].

67    On 14 September 2021, Mercedes Australia sent an email to dealers that required dealers to enter into the amended agency agreement by 16 September 2021 or “your relationship with our brand will cease once your agreement(s) expire on 31 December 2021”: J[431].

68    As noted above, all dealers signed the agency agreements (albeit under protest). The agency agreements commenced on 1 January 2022.

69    The agency offers, the agency agreements and associated documents were all in standard form: J[230].

The agency model

70    The primary judge described the characteristics of the agency model that commenced on 1 January 2022 at J[836]-[848]. The primary judge’s description included:

(a)    Mercedes Australia is responsible for setting new car prices which include all applicable taxes and fees for the State or Territory in which the customer resides.

(b)    Customers are no longer required to negotiate the new car price with a salesperson at a dealership.

(c)    Mercedes Australia retains ownership and the associated risk of the new cars until they are sold to end customers. The new cars remain at a central vehicle processing centre and are available for all agents to offer to customers. Therefore, rather than customers previously under the dealership model being limited by the stock available at any particular dealership, under the agency model customers have the ability to select vehicles from Mercedes Australia’s full inventory of new vehicles, no matter where they are in the country.

(d)    In addition to this central pool of vehicles, Mercedes Australia provides showroom vehicles, stock vehicles and demonstrator vehicles to agents to display and use at their facilities as well as a “regional demonstrator fleet”. Mercedes Australia bears the logistics cost of vehicle transportation.

(e)    The agents facilitate the sale of new cars to customers but Mercedes Australia invoices customers directly.

(f)    Mercedes Australia sells vehicles directly to customers online. Vehicles sold online are delivered to customers via the agents.

(g)    Mercedes Australia pays agents a commission for offline sales facilitated by the agent and online sales made by Mercedes Australia where the agent is nominated by the customer as the delivering agent.

(h)    Mercedes Australia now bears some of the financial risks that used to sit with the agents, including the risks of purchasing, financing, holding, insuring and transporting vehicles sold to customers. As a result of the centralised vehicle processing facilities, agents also no longer need to pay floorplan costs.

(i)    Mercedes Australia has not required dealers to make any capital expenditure in order to enter into the agency agreement and it had, for some five years before the implementation of the agency model, stopped approving proposals for significant investments in relation to site expansion, site acquisition or substantial refurbishment that was not necessary for a dealer’s business to remain sustainable. The primary judge stated that, of course, though, in offering the agency model only to pre-existing dealers, Mercedes Australia has in effect leveraged off the massive pre-existing capital investments of and funded by the dealers under the dealership model: J[845].

(j)    The only people considered for the new agency agreements were existing dealers with existing dealership businesses. That is because the purpose of the agency model was to continue the customer-facing operations of the dealerships for the benefit of Mercedes Australia. The primary judge found that this enabled Mercedes Australia to profit from dealers’ investments in their businesses: J[847].

(k)    Mercedes Australia has full access to, and control over, the customer data pursuant to the agency agreements.

The agency agreements and related agreements

71    The main agreements applicable to all applicants were the agency agreement and the service and parts agreement, together with the safety net letter: J[849].

72    The term of the agency agreement is from the commencement date (1 January 2022) until 31 December 2025 (a period of four years), unless it ends sooner in accordance with the agency agreement: J[853]-[855].

73    The commission paid by Mercedes Australia to the dealers, who are described as agents, is set out in the table at J[873], calculated on the LLP of each Mercedes-Benz vehicle sold. Details of the commission structure are set out at J[874]-[876].

74    The primary judge found that the final version of the agency model as implemented was the product of extensive discussions, feedback and negotiations with the dealers: J[896].

75    The primary judge found that Mercedes Australia did take into account the dealers’ views on the treatment of demonstrators and trade-ins, pricing structure, PDI reimbursement amount and structure, the basis and components for target setting and the calculation of commission: J[897].

76    The primary judge found that, in some instances, such as in relation to demonstrators and trade-ins, the views expressed by dealers evolved over time and Mercedes Australia’s treatment of them was in line with the current dealer view. For example, with demonstrators, initially Mercedes Australia proposed that the dealers retain control, but the dealers changed their position, and this slowly evolved to the final position where Mercedes Australia took responsibility from the go-live date: J[898].

77    Further, operational topics that were the subject of discussion and negotiation are summarised in the agency overview which is incorporated into the agency agreement: J[899].

78    The primary judge recorded that he had been provided with tables by Mercedes Australia that summarised the changes made to the agency overview and the agency agreement in response to dealer feedback. The primary judge noted that it was not suggested that the tables were substantially inaccurate: J[900]-[902].

79    Under the agency agreement it was required that, contemporaneously with entry into the agency agreement, the dealer enter into a service and parts agreement with Mercedes Australia: J[934].

80    The service and parts agreement maintained the existing relationship under the dealer agreement, whereby the dealer was an independent proprietor with obligations in relation to premises, staff and investments to maintain the required standards: J[935].

81    The effect of this structure was to split the dealer’s business into two: new cars (agency) and service (dealership): J[936].

Further findings about the introduction of the agency model

82    Mercedes Australia’s and Mercedes Germany’s financial analysis that underpinned the various versions of the Business Cases was modelled on the average dealer. The primary judge found that, on any view, the dealers in the top 30% were likely to do worse under the agency model than if the dealership model had been left in place: J[231].

83    The primary judge stated (at J[242]) that, on one view, Mercedes Australia “cherry-picked” the best parts of the dealers’ businesses. This statement is relied on by the appellants on appeal. The primary judge’s statement was as follows (at J[242]):

… on one view [Mercedes Australia] cherry-picked the best bits of the dealers’ businesses on which the agency model was imposed and left the dealers with less desirable features. So it was that the dealers had to also enter into service and parts agreements, but as vendors/retailers rather than agents. So risk was left with them. No doubt this was seen by [Mercedes Australia] to be advantageous to it by leaving the allocation of risk elsewhere.

(Emphasis added.)

84    The primary judge found that dealers ultimately had a “lack of choice” concerning the terms of the agency agreements. His Honour found that, ultimately, the agency agreements were presented on a “take it or leave it” basis. The primary judge also found that the dealers were given little time to negotiate the final form of the agency agreements and the associated agreements: J[244].

85    The primary judge also made the following findings, which are relied on by the appellants on appeal. The primary judge stated at J[245]:

… there is no doubt that [Mercedes Australia] played hard-ball in its negotiations with the dealers. There was no meaningful negotiation that the new model to be imposed would be an agency model. There was, however, some negotiation over the detail of some aspects. But on the financial aspects, [Mercedes Australia] only made concessions on rats and mice issues. And on the main commission aspects, in my view [Mercedes Australia] and [Mercedes Germany] ratcheted this down as low as they thought that they could get away with.

86    The primary judge also made the following findings (at J[248]), which were the subject of attention in the parties’ appeal submissions:

... I accept that the dealers were ultimately placed in a position of situational disadvantage and possibly constitutional disadvantage in terms of the agency model. But in a sense this was in part self-induced by the dealers’ entry into the dealer agreements and a willingness, it must be inferred, to accept the risks and the risk allocation enshrined in those agreements including the risks inherent in the contractual power of [Mercedes Australia] to issue the NRNs without cause. They made the relevant capital investments knowing of or when they ought to have known of such risks. And on a broader front, the dealers were well-heeled individuals and corporations that hardly had any socio-economic vulnerability.

87    The primary judge found that various themes put by Mercedes Australia to dealers in relation to the agency model were either exaggerated or turned out to be incorrect: J[253]. These included:

(a)    It was put that the substantial reason justifying the agency model was because of the problem of disruptors, aggregators and future on-line transactions. The primary judge said that this was all exaggerated in terms of the relevant time horizon that his Honour was dealing with, which on one view, at the time the NRNs were given, was only out to 2026. The primary judge stated that these so-called concerns were also used in an effort to spook the dealers: J[254].

(b)    A theme was run at one stage to the effect that the “dealers wanted agency”. The primary judge found that this was also incorrect: J[255].

(c)    The theme was run from time to time that “no dealers would be worse off” under the agency model. The primary judge found that this was clearly not correct in relation to the top 30% of dealers at least: J[256].

(d)    Mercedes Australia persistently ran the line that a concern was the intra-brand discounting between dealers and that the agency model was designed to avoid this. The primary judge found that the reality was that most of the intra-brand discounting was brought about by Mercedes Australia’s and Mercedes Germany’s conduct in causing over-supply to increase market share and also the incentives to discount that Mercedes Australia itself created flowing from its commission structure with the dealers: J[257]. See also J[368], [645].

88    The primary judge made the following findings about the advantages for Mercedes Germany and Mercedes Australia of the agency model (in the context of discussing the evidence of Mr Florian Seidler, the CEO of Mercedes Australia from 1 January 2021) at J[520]:

[Mr Seidler] properly and refreshingly conceded that the major advantage of an agent-based sales system was the possibility of centralised price-setting as well as the ownership of customer data. The major advantage had little to do with the online problem, disruptors and young women not liking to haggle with dealers over price. All of these latter themes were pushed by [Mercedes Australia] on dealers and indeed on me as the principal justification for the agency model, but quite unconvincingly. The major advantage of shifting to agency from [Mercedes Australia’s] and [Mercedes Germany’s] perspective was all about profit maximisation including price setting, avoiding discounting and reducing costs, which principally involved reducing the take of the dealers.

(Emphasis added.)

89    To like effect, before discussing in detail Business Case 2.1 and its update, the primary judge made the following observation at J[2377]:

… I should observe that its evolution [that is, the evolution of Business Case 2.1] powerfully demonstrates that [Mercedes Australia] and [Mercedes Germany] sought at each evolution of the various business cases to enhance their potential profitability under the proposed agency model at the expense of the dealers by cutting back on the dealers’ margin.

90    The primary judge found that Mercedes Australia’s conduct in introducing the agency model constituted a clear case of “franchisor opportunism”: J[2274]. The primary judge explained what that expression meant at J[2245]:

The term franchisor opportunism refers to actions taken by a franchisor to their benefit, and to the possible detriment of the franchisee, after the franchisee has made investments specific to the franchise relationship. Such actions could be considered opportunistic because of a fundamental transformation of the relationship after relationship-specific investments have been made.

91    Having considered, and accepted, the expert evidence of Professor Nicolas de Roos (called by the applicants), the primary judge found at J[2274]:

In my view, the applicants have established a clear case of franchisor opportunism. Of course, [Mercedes Australia] could also have engaged in a different form of franchisor opportunism under the dealer agreements such as increasing the wholesale price, reducing the holdback margin, reducing the CTE variable margin or the like. But so to accept does not deny that [Mercedes Australia] has engaged in franchisor opportunism in the events which have occurred concerning the giving of the NRNs and the shift to the agency model.

(Emphasis added.)

92    In a section of the primary judge’s judgment headed “Analysis of Expert Evidence – Dealers Worse Off”, commencing at J[2585], the primary judge considered the expert evidence called by the parties as to whether dealers will be worse off under the agency model than they were under the dealership model. The experts called by the parties in relation to this issue were Mr Michael Potter (called by the applicants) and Ms Dawna Wright (called by Mercedes Australia).

93    The primary judge made the following finding at J[2647]:

I am inclined to accept Mr Potter’s analysis and his methodology which inter-alia relied upon Deloitte models and applied appropriate sensitivity testing, in relation to both the comparator years and the potential CTE outcomes. His conclusion which I accept is that most dealers will be worse off under the agency model.

(Emphasis added.)

94    The primary judge expressed this finding in the following way at J[2655]:

For these reasons, in my view the expert evidence on balance discloses that most dealers will be worse off under the agency model than they were under the dealership model.

95    The above finding is challenged by Mercedes Australia in its notice of contention.

Key conclusions of the primary judge

96    The primary judge’s consideration of the applicants’ claims commences at J[2771] and continues to the end of the judgment. That part of the judgment is structured under the following headings:

(a)    Non-renewal notices and contractual claims (J[2771]-[3043]);

(b)    Statutory Duty of Good Faith (J[3044]-[3223]);

(c)    Unfair and unreasonable terms (J[3224]-[3361]);

(d)    Economic Duress (J[3362]-[3453]); and

(e)    Statutory Unconscionable Conduct (J[3454]-[3750]).

97    The sections that are directly relevant for the purposes of the appeal are (b), (c) and (e) above. However, those sections need to be read in the context of the primary judge’s consideration of the other claims.

98    In the section dealing with the statutory duty of good faith (in cl 6 of the Franchising Code), subject to considering the applicants’ claim that the agency agreement contained unfair and unreasonable terms, the primary judge rejected the applicants’ case concerning a lack of good faith as to Mercedes Australia’s conduct in dealing with the dealers and implementing the agency model (J[3223]).

99    In the section dealing with unfair and unreasonable terms (see cl 6(3A) of the Franchising Code):

(a)    the primary judge disagreed with Mercedes Australia’s contention that cl 6(3A) of the Franchising Code applies only to parties to a “new vehicle dealership agreement” and does not apply to pre-entry conduct in relation to that agreement which might otherwise be captured by cl 6(2) (J[3228]) (this conclusion is the subject of challenge in the notice of contention);

(b)    insofar as the applicants contended that the terms of the agency and related agreements were not fair, the primary judge rejected that contention (J[3324], [3328]); indeed, the primary judge concluded that none of the identified terms came close to being unfair terms (J[3328]);

(c)    focussing on the agency agreement, the primary judge rejected the applicants’ claim that the terms set out in the agency agreement were not fair and/or reasonable and/or were a contravention by Mercedes Australia of the duty of good faith under cl 6 of the Franchising Code (J[3330], [3347]);

(d)    focussing on the service and parts agreement, the primary judge concluded that the applicants had failed to establish that any aspect of that agreement could be reasonably said to be unfair or unreasonable (J[3353]).

100    In the section dealing with statutory unconscionable conduct, the primary judge’s conclusions included:

(a)    there was no substance to the applicants’ case concerning unconscionable conduct that could be said to impugn the giving of the NRNs; and even accepting that there was spin or half-truths by Mercedes Australia in communications with dealers prior to the giving of the NRNs, that went nowhere (J[3534]);

(b)    the giving of the NRNs by Mercedes Australia was an exercise by Mercedes Australia of its contractual power; there was no other relevant exploitation of any other power; Mercedes Australia did what it was contractually entitled to do (J[3535]);

(c)    it is in that setting that one comes to consider the agency model and the “imposition” on the dealers of the agency agreement and associated agreements (J[3537]);

(d)    after setting out 10 points at J[3538]-[3552], the primary judge stated that “the applicants’ case based on unconscionable conduct must fail, and certainly so far as the exemplar applicants’ claims are concerned” (J[3553]);

(e)    the primary judge addressed the main themes of the applicants’ case in the context of the considerations set out in s 22 of the Australian Consumer Law (at J[3554]-[3740]) and considered the circumstances of the exemplar applicants (at J[3741]-[3749]); the primary judge then concluded that none of the exemplar applicants’ claims concerning unconscionable conduct had been made good (J[3750]).

Ground 2 (unconscionable conduct – principles)

101    It will be convenient to start with Ground 2. This is because if the primary judge erred in his statement of the applicable principles, that would be a straightforward way for the appellants to establish error (as they must, to succeed in the appeal).

102    By Ground 2, the appellants contend that the primary judge erred in rejecting “accepted and acceptable social and community standards” as an appropriate approach for determining whether Mercedes Australia had contravened s 21 (J[3506]), and that his Honour ought to have found that the consequence of Mercedes Australia’s conduct was so far outside societal norms of acceptable commercial behaviour as to warrant condemnation for the purpose of s 21. We will focus on the first part of this ground, which concerns the applicable principles. If that part of the ground is unsuccessful, it is not necessary to consider the second part of the ground.

103    Section 21 of the Australian Consumer Law must be read with s 22, which sets out a list of matters to which the Court may have regard for the purpose of determining whether a person has contravened s 21. Sections 21 and 22 of the Australian Consumer Law are set out in the primary judge’s judgment at J[3494] and therefore need not be set out here.

The primary judge’s statement of the applicable principles

104    The primary judge discussed the applicable principles regarding ss 21 and 22 at J[3495]-[3530]. At the time that the primary judge published the principal judgment (30 August 2023), Productivity Partners had not been handed down by the High Court. (It was handed down on 14 August 2024.)

105    The primary judge commenced his discussion of the principles by stating that s 22(1) sets out a non-exhaustive list of the factors to which the Court may have regard to the extent relevant in the particular case for the purpose of determining whether there has been a contravention of s 21: J[3495]. His Honour also stated that the matters enumerated assist in understanding the scope of the meaning of unconscionable conduct, though the presence of one or more matters listed or indeed their absence is not necessarily determinative: J[3495].

106    The primary judge next noted that he had distilled the applicable principles in his judgments in Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) (No 3) [2020] FCA 208; 275 FCR 57 (ASIC v AGM (No 3)) at [357]-[379] and Australian Securities and Investments Commission v Westpac Banking Corporation (Omnibus) [2022] FCA 515; 407 ALR 1 at [21]-[33]. His Honour indicated that what followed was a modified distillation.

107    The discussion that followed (at J[3497]-[3530]) was structured around fourteen propositions. It is necessary to have regard to the whole of that passage of the judgment. However, for present purposes, we will focus on the parts of his Honour’s distillation regarding the notion of accepted and acceptable social and community standards, as this is the focus of Ground 2.

108    At J[3501], the primary judge (as his third proposition) set out the following passage from his judgment in ASIC v AGM (No 3) at [365]:

… [O]ne cannot simply align the statutory concept of unconscionable with something not done in good conscience in the sense in which equity has so treated the matter. It is clear from s 12CB [similar to s 21 of the Australian Consumer Law] and the factors that may be taken into account under s 12CC(1) [similar to s 22 of the Australian Consumer Law] that one is dealing with a broader notion. But reference to intellectual ideas of customary morality and societal values without further delineation and ready identification may be at too high a level of abstraction to be an objective touchstone. Further, such general themes may distract attention from the values that need to be considered, namely the values explicitly or implicitly enshrined in the text, context and purpose of the ASIC Act, the Corporations Act and any other relevant statutory framework applicable to the activities in issue. But in identifying and applying those values, and indeed in considering the relevant matters under s 12CC(1) applicable to the particular case, societal or community values may also be implicitly satisfied. For example, in considering conduct affecting a particular sub-group, for example an indigenous community, the application of each relevant matter under s 12CC(1) may take into account and may need to be tailored to the characteristics of that sub-group and the alleged contravener’s interaction therewith, consistent implicitly with community standards. But if unconscionable conduct is found, it will not be because of some characterisation of it as being against community values without more. Rather, it will be so characterised as being against the statutory construct informed by the values that I have identified and which I will partly expand upon in a moment, as applied to the characteristics and conduct of the participants involved in the commerce in question.

(Emphasis added.)

109    At J[3502]-[3507], the primary judge discussed the question of conscience. After referring to the way in which conscience is understood in equity (by reference to the judgment of the High Court in Kakavas v Crown Melbourne Ltd [2013] HCA 25; 250 CLR 392 at [15]-[16]), the primary judge said:

3503    As I said in Australian Competition and Consumer Commission v Medibank Private Ltd (2018) 267 FCR 544 at [239], with which Perram and Murphy JJ agreed, in the present context dealing with the element of conscience in statutory unconscionability, the “construct of values and standards” is extended beyond the boundaries and content of what equity would normally embrace. The metaphorical term of “conscience” in the present context has an enhanced dimension. Moreover, it is not just a juridical conscience to use Pomeroy’s description. It is a statutorily created or recognised conscience with its construct of values and standards informed by the explicit and implicit values enshrined in the text, context and purpose of the relevant statutory framework and any applicable industry or other codes such as the Franchising Code. It is a “statutory norm of conscience” (Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1 at [47] per Kiefel CJ and Bell J). …

3504    Further, as Gageler J explained in Kobelt at [87] in relation to a cognate legislative framework:

…The correct perspective is that s 12CB operates to prescribe a normative standard of conduct which the section itself marks out and makes applicable in connection with the supply or possible supply of financial services. The function of the court exercising jurisdiction in a matter arising under the section is to recognise and administer that normative standard of conduct. The court needs to administer that [standard] in the totality of the circumstances taking account of each of the considerations identified in s 12CC if and to the extent that those considerations are applicable in the circumstances.

3505    And as Nettle and Gordon JJ said in Kobelt at [153]:

…[At] least in the Australian statutory context, what is involved is an evaluation of business behaviour (conduct in trade or commerce) in light of the values and norms recognised by the statute…

(Emphasis added.)

110    It is the next paragraph of the primary judge’s judgment that is the subject of specific challenge by Ground 2. His Honour stated:

3506    I should also say here that in applying what was said in Medibank and also High Court authority that has decided questions of statutory unconscionability, I would reject the approach of some judges who seem to have infused the statutory text with notions of so-called accepted and acceptable social and community standards, whatever that means and howsoever identified, and then said that the relevant search was for what those norms and values require. Rather, the correct approach is to ask what the statute requires rather than to inject and then engage in intellectualisation on meta-themes. To be frank, the latter is likely to produce only unadulterated waffle. But to be fair, the verbiage manifesting such a vice has understandably only occurred in the varnishing or garnishing of obiter. Indeed, one may ask: what case decided in this area has ever really required more than a synthesis or weighing of the statutory considerations or factors applied to the facts without the need for a super-structure or sub-structure? I would venture to suggest, none. Indeed the accepted and acceptable social and community standards if they be relevant have already been infused into and enshrined in the statutory words used by the legislature considered in the context of the broader statutory framework including the Franchising Code where this would be picked up by ss 22(1)(g). There is no thirteenth subject matter in s 22(1) which licenses a judge to indulge in what is little more than intellectual fairy floss.

(Emphasis added.)

111    That paragraph needs to be read together with the next paragraph, in which his Honour said:

3507    Now Gageler J said in Kobelt at [92] that the ultimate question may require considering whether the conduct is “so far outside societal norms of accepted commercial behaviour that it warrants condemnation”, but that is no licence to embark on a voyage of discovery of social and community standards. Rather that is the ultimate judgment.

112    The primary judge referred at J[3509] to the decision of the High Court in Stubbings v Jams 2 Pty Ltd [2022] HCA 6; 276 CLR 1 (Stubbings). The primary judge stated that nothing in that case significantly altered Australian Securities and Investments Commission v Kobelt [2019] HCA 18; 267 CLR 1 (Kobelt). The primary judge noted that only one of the five judges, Gordon J, found the need to specifically discuss and decide the case on statutory unconscionability (as distinct from equitable notions of unconscionability). The primary judge stated that he had carefully considered her Honour’s discussion.

113    The primary judge’s statement of principles included:

3510    Sixth, as to relevant underpinning or implicit values and conceptions:

(a)    fairness and equality are values and conceptions underpinning s 22(1)(a), (b), (d) to (f) and (i) to (k); more particularly, s 22(1)(a), (j)(i) and (k) recognise asymmetry of power;

(b)    a lack of understanding or ignorance of a party is the conception underpinning s 22(1)(c);

(c)    the risk and worth of the bargain are the conceptions underpinning s 22(1)(e) and (i); a broader and related although not explicit concept is the question of asymmetry of information; and

(d)    good faith and fair dealing are values and conceptions underpinning s 22(1)(l).

3511    Now I should say that I have synthesised the last paragraph from Allsop CJ’s exegesis in Paciocco v Australia and New Zealand Banking Group Ltd (2015) 236 FCR 199 at [263] to [299] making the necessary currency conversion. But I should also say that I do not subscribe to the view that “the values and norms that inform the living Equity” (Paciocco at [283]) play much of an additional useful role in the context of statutory unconscionability to the extent that they are not already enshrined in ss 21 and 22. Sections 20 and 21(4)(a) are hardly an endorsement to infuse or inflate statutory unconscionability with whatever is said to “inform the living Equity”. Moreover, she may be described as “the living Equity”, but she is beyond child-bearing age in the contemporary setting of statutory unconscionability, particularly as applied to commercial conduct.

114    The primary judge referred to “community standards and values” at J[3529] in the context of discussing the relevance of the Franchising Code. We set out a larger passage to provide context for that reference:

3527    Finally, although I have touched on this, duties expressed in the Franchising Code including the duty of good faith under clause 6 inform the evaluative judgment required for the purposes of statutory unconscionability under ss 21 and 22.

3528    Moreover, notwithstanding that these two provisions address different questions and apply different tests, there is at least the potential for the authorities on good faith to inform that evaluative judgment, whilst recognising that a finding for or against good faith is not determinative of the statutory unconscionability question.

3529    There is no dispute that the dealer agreements and agency agreements are franchise agreements and that, insofar as these agreements were concerned, [Mercedes Australia] and each of the applicants was subject to the Franchising Code as an applicable industry code within the meaning of s 22(1)(g), embodying the community standards or values in the franchising and motor vehicle industries.

3530    But as the language of the Franchising Code itself provides, [Mercedes Australia] and the applicants were required to act in good faith in respect of any matter arising under or in relation to the dealer agreements (clause 6(1)(a)), any dealing or dispute relating to a proposed franchise agreement (clause 6(2)(a)) and the negotiation of that proposed agreement (clause 6(2)(b)), as well as any other matter arising under the Franchising Code (clause 6(1)(b) and 6(2)(c)).

(Emphasis added.)

The appellants’ submissions

115    In oral submissions, senior counsel for the appellants said that the appellants’ central submission is that his Honour did not apply the correct principles to the question of unconscionable conduct, namely those stated by the High Court in Productivity Partners.

116    Senior counsel submitted that the essential holding of the High Court was that the court must evaluate the impugned conduct against a normative standard of conscience which is permeated with accepted and acceptable community standards to determine whether s 21 has been contravened.

117    Senior counsel submitted that there were three key aspects of the High Court’s reasons in Productivity Partners:

(a)    First, the proper judicial method for assessing statutory unconscionable conduct is to conduct an evaluative assessment of impugned conduct against the standard he had referred to. Senior counsel relied on Productivity Partners at [50]-[64] per Gageler CJ and Jagot J (especially at [60]) (Gleeson J agreeing at [310], Beech-Jones J agreeing at [340]). Senior counsel also relied on [282] per Steward J.

(b)    The second aspect of judicial method is that set out in Paccioco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50; 236 FCR 199 (Paccioco) at [263]-[299] per Allsop CJ. The norms and values demanded in one case may be different from those in another, to cover broad and evolving practices in different sectors of the business community. These norms and values include certainty in commercial transactions, honesty, the absence of trickery or sharp practice, fairness when dealing with customers, the faithful performance of bargains and promises freely made and the protection of the vulnerable. Critically, opportunistic conduct is conduct which the courts have identified as potentially offending those norms and values. Senior counsel submitted that various members of the High Court in Productivity Partners adopted the reasons of Allsop CJ in Paccioco: see Productivity Partners at [100] and [105] per Gordon J, [284] per Steward J, [314] per Gleeson J, [340] per Beech-Jones J.

(c)    The third aspect is that the matters listed in s 22 of the Australian Consumer Law embody in a non-exhaustive way statutory values and norms which may indicate that conduct was unconscionable. Section 22 provides a frame of reference for identifying the values expressed under the statute which, in turn, informs whether conduct or a course of conduct is unconscionable within the meaning of s 21. Section 22 does not act as statutory criteria that determine the metes and bounds within which the normative standard prescribed by s 21 is to be applied. Senior counsel relied on Productivity Partners at [100]-[105] per Gordon J (Steward J agreeing at [282], Gleeson J agreeing at [314], Beech-Jones J agreeing at [340]).

118    Senior counsel submitted that Gordon J’s approach was “completely contrary” to the approach taken by the primary judge in the present case. Senior counsel submitted that the primary judge’s reasoning, particularly at J[3506], demonstrated error. Senior counsel submitted:

Far from being intellectual fairy floss, the search for accepted and acceptable social and community standards is the central task to the court’s role in seeking to identify whether the conduct was unconscionable. The trial judge erred in holding to the contrary and that necessarily truncated his analysis of the circumstances.

(Emphasis added.)

119    Later in oral submissions, senior counsel for the appellants submitted that the primary judge rejected the analysis of Gordon J in Stubbings, but that analysis is now the law. He submitted that the primary judge said that you cannot go beyond the analysis in ss 21 and 22 and that those sections set the limit. He submitted that that approach has been rejected and is just wrong. He submitted that the primary judge’s distillation of principles described as “intellectual fairy floss” were the very statements of principle which have been adopted by the High Court as the proper approach.

Consideration

120    In our opinion, the appellants’ submissions cannot be accepted.

121    As we understand the argument, it is essentially that: (a) Productivity Partners stands for the proposition that the task of the court, in applying ss 21 and 22, is to search for and apply accepted and acceptable community standards; and (b) the primary judge erred by rejecting the search for, and the application of, such standards.

122    In our view, the premise of the argument is not correct. We do not read the judgments in Productivity Partners as establishing that the task of the court is to search for and apply accepted and acceptable community standards. Rather, we read those judgments as standing for the proposition that ss 21 and 22 recognise or embody certain accepted and acceptable community standards. Importantly, it is the statutory notion of unconscionability against which conduct is to be evaluated.

123    Productivity Partners was a proceeding brought by the Australian Competition and Consumer Commission against Productivity Partners Pty Ltd (trading as Captain Cook College) (the College), a vocational education and training provider. At first instance, the trial judge found that the College had engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law and that Mr Wills (the acting CEO of the College for part of the relevant period) was knowingly concerned in the College’s systemic unconscionable conduct. On appeal to the Full Court of the Federal Court, by a majority, the appeal was dismissed. The Full Court did, however, interfere with the trial judge’s decision as to the date from which Mr Wills was knowingly concerned in the College’s contravention of s 21. The College and Mr Wills appealed, with special leave, to the High Court of Australia.

124    The High Court dismissed the appeal, a conclusion in which all seven members of the High Court joined. All members of the High Court affirmed the conclusion of the trial judge and the majority in the Full Federal Court that the College engaged in unconscionable conduct in contravention of s 21. Further, all members of the High Court were of the view that the date from which Mr Wills was knowingly concerned was the date decided by the trial judge. Separate judgments were delivered by: Gageler CJ and Jagot J; Gordon J; Edelman J; Steward J; Gleeson J; and Beech-Jones J. In relation to the meaning of “unconscionable conduct” in s 21 of the Australian Consumer Law, Steward J (at [282]), Gleeson J (at [314]) and Beech-Jones J (at [340]) agreed with the reasons of Gordon J. In relation to the disposition of grounds one and two of the College’s appeal (which concerned whether the College engaged in unconscionable conduct), Gleeson J (at [310]) and Beech-Jones J (at [340]) agreed with the reasons of Gageler CJ and Jagot J. We will therefore focus on the judgments of Gageler CJ and Jagot J, and of Gordon J.

125    Gageler CJ and Jagot J rejected the College’s contention that s 22 of the Australian Consumer Law limited the scope of s 21: at [50]. Their Honours also rejected the proposition that the presence or absence of each matter specified in s 22(1)(a)-(l) constituted, in and of itself, a mandatory relevant consideration to be weighed in the circumstances of every case: at [54]. In the course of rejecting that proposition, their Honours said at [56]:

… the matters in s 22(1)(a)–(l) are non-exhaustive. As such, they embody “the values and norms recognised by the statute” by reference to which “each matter must be judged” to the extent that it “appl[ies] in the circumstances” [Stubbings at [57]].

(Emphasis added.)

126    The language that the s 22 factors “embody” values and norms “recognised by the statute” is inconsistent with the appellants’ proposition that the court’s task is to search for and apply accepted and acceptable community standards.

127    After referring to five key aspects of the provisions, their Honours stated at [60]:

That the presence or absence of each matter in s 22(1) is not a mandatory relevant consideration to be weighed by a court in every case, irrespective of the circumstances, does not mean that the required evaluation involves nothing more than, as the College put it, an “instinctive reaction that the legislation sought to avoid”. The normative standard set by s 21(1) is tethered to the statutory language of “unconscionability”. While that term is not defined in the legislation and, in its statutory conception, is “more broad-ranging than the equitable principles”, it expresses “a normative standard of conscience which is permeated with accepted and acceptable community standards” [Stubbings at [57]], and conduct is not to be denounced by a court as unconscionable unless it is “outside societal norms of acceptable commercial behaviour [so] as to warrant condemnation as conduct that is offensive to conscience” [Kobelt at [92]. See also Stubbings at [58]]. The items listed in s 22(1)(a)–(l) are matters that the legislation requires to be considered, in the overall evaluation of the totality of the circumstances to be undertaken for the purpose of s 21(1), if and to the extent those matters are applicable. This is why both “close attention to the statute and the values derived from it, as well as from the unwritten law” [Kobelt at [153]] and “close consideration of the facts” [Kobelt at [217]] are necessary.

(Some footnotes omitted; emphasis added.)

128    In the above passage, their Honours referred to Stubbings at [57] and [58]. In those paragraphs, Gordon J stated:

57    Section 12CB of the ASIC Act, like equity, requires a focus on all the circumstances. The court must take into account each of the considerations identified in s 12CC if and to the extent that they apply in the circumstances. The considerations listed in s 12CC are non-exhaustive, but they provide “express guidance as to the norms and values that are relevant to inform the meaning of unconscionability and its practical application”. They assist in “setting a framework for the values that lie behind the notion of conscience identified in s 12CB”. “The assessment of whether conduct is unconscionable within the meaning of s 12CB involves the evaluation of facts by reference to the values and norms recognised by the statute, and thus, as it has been said, a normative standard of conscience which is permeated with accepted and acceptable community standards. It is by reference to those generally accepted standards and community values that each matter must be judged”.

58    Put in different terms, the s 12CC considerations assist in evaluating whether the conduct in question is “outside societal norms of acceptable commercial behaviour [so] as to warrant condemnation as conduct that is offensive to conscience”. A court should take the serious step of denouncing conduct as unconscionable only when it is satisfied that the conduct is “offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society”.

(Footnotes omitted; emphasis added.)

129    We do not read either of the above passages as suggesting that the test of unconscionability in s 21 involves application of a standard of conscience defined by community standards in the abstract (i.e. untethered from the statute). Rather, we read those passages as standing for the proposition that the statutory provisions (both ss 21 and 22) “recognise” certain values and norms. It is in this sense that the statutory test is “permeated” with accepted and acceptable community standards.

130    The same analysis applies, in our opinion, to the judgment of Gordon J in Productivity Partners. In that case, her Honour stated:

100    The s 22 factors are non-exhaustive. They provide “express guidance as to the norms and values that are relevant” to, and inform the meaning of, “unconscionable” in s 21(1) and its practical operation. These norms and values include “certainty in commercial transactions, honesty, the absence of trickery or sharp practice, fairness when dealing with customers, the faithful performance of bargains and promises freely made” and the protection of the vulnerable.

101    As was explained in Stubbings [at [57]], the s 22 factors “assist in ‘setting a framework for the values that lie behind the notion of conscience identified in [s 21]’”. The s 22 factors “assist in evaluating whether the conduct in question is ‘outside societal norms of acceptable commercial behaviour [so] as to warrant condemnation as conduct that is offensive to conscience’” [Stubbings at [58]].

102    The ACL does not require a plaintiff in every case to “plead and adduce evidence of facts directed to” the factors in s 22(1). Nor is there warrant for construing the factors in s 22 as “statutory criteria” that set the metes and bounds within which the normative standard prescribed by s 21(1) is to be applied. Neither the text or context of ss 21 and 22 of the ACL, nor the authorities that have considered those provisions, provide any support for that approach.

103    To treat the matters in s 22 as a mandatory set of factors to be applied mechanistically when analysing whether s 21 has been contravened would be contrary to the text of the ACL. It would impermissibly limit the court’s capacity to consider the totality of the circumstances that might render a particular person’s conduct, system of conduct or pattern of behaviour unconscionable.

104    Unconscionability has been described as “a normative standard of conscience which is permeated with accepted and acceptable community standards” [Stubbings at [57]]. But, as we know, values, norms and community expectations can develop and change over time: “[c]ustomary morality develops ‘silently and unconsciously from one age to another’, shaping law and legal values”. Indeed, standards from earlier times can be, in some respects, rougher and, in other respects, more fastidious. Different standards of commercial morality apply in other lands.

(Emphasis added; some footnotes omitted.)

131    We do not read the above passage (or the passage in Gordon J’s judgment at [150]-[151]) as suggesting that the test of unconscionability is untethered from the statutory language. To the contrary, those passages reinforce the point that the statutory provisions recognise and give effect to certain accepted and acceptable community standards, and that the court’s role is to apply a standard prescribed by the statute.

132    In Productivity Partners, Edelman J considered the relevant principles concerning unconscionable conduct under s 21 of the Australian Consumer Law commencing at [229]. His Honour’s discussion included:

231    The legislative proscription by reference to “conscience” contains layers of uncertainty. Conscience, from the Latin conscientia, denoting a holding of knowledge, has shades of meaning generally related to a subjective recognition of the moral and ethical qualities of action. Locke described conscience as “nothing else but our own opinion … of our own actions”. But Parliament must be taken to have contemplated an assessment of whether conduct is unconscionable by reference to objective standards rather than to a judge’s personal or subjective opinions. Nor is there any indication that the objective standard of assessment should involve a judge’s best guess, or a survey of the empirical evidence, as to the standards of a community, even if such monolithic standards can be taken to exist in a plural society. “Compassion will not, on the one hand, nor inconvenience on the other, be to decide; but the law”.

…

233    The difficulty with the application of the values of Australian common law and statute is that they apply at such a high level of generality, and can point in so many different directions, that the concept of unconscionability has been said to be no more useful than the category of “small brown bird” to an ornithologist. …

234    Section 22 of the Australian Consumer Law does not codify the values of Australian statute and common law, nor does it resolve such difficulties in application. Rather, it articulates a list of wide-ranging matters to consider when applying these values, including: …

235    In applying the relevant values of Australian common law and statute, all matters and circumstances enunciated in s 22 that are potentially relevant must be considered. So too must any other circumstance that potentially bears upon standards of trade and commerce be considered. Otherwise, the assessment of conscience will have proceeded by reference only to a subset of the relevant values. …

(Footnotes omitted; emphasis added.)

133    The above passage does not provide any support for the appellants’ submission that the task of the court is to search for and apply accepted and acceptable community standards.

134    As already noted, Steward J (at [282]) agreed with Gordon J’s expression of principle concerning the relevant meaning of “unconscionable conduct”. Steward J noted that Gordon J in Stubbings adopted the following passage from the reasons of Nettle and Gordon JJ in Kobelt (at [234]):

The assessment of whether conduct is unconscionable within the meaning of s 12CB [of the Australian Securities and Investments Commission Act 2001 (Cth)] involves the evaluation of facts by reference to the values and norms recognised by the statute, and thus, as it has been said, a normative standard of conscience which is permeated with accepted and acceptable community standards. It is by reference to those generally accepted standards and community values that each matter must be judged.

(Emphasis added.)

135    As this passage makes clear, the impugned conduct is to be assessed against the values and norms “recognised by the statute” rather than accepted and acceptable community standards at large.

136    In the context of discussing the role, if any, of the notion of “moral obloquy”, Steward J stated:

290    It is unclear what is meant by a “normative standard”; by “societal norms” of commercial behaviour; or by “generally accepted” “values and norms”. These somewhat anaemic concepts appear to mask, or skate over, necessary analysis in accordance with a known methodology. To borrow the words of Professor Birks, it looks like an attempt to “clothe” equitable principle “in more grown-up words”.

291    In that respect, the required “normative standard” cannot be that of Australia’s judiciary; it is not what each judge subjectively, and perhaps collectively, believes to be an acceptable standard of commercial behaviour. If it meant that, commercial life really would be subject to judicial caprice or, worse, mere fashion. It should not, with very great respect, be a “free-form choice”.

292    Nor should recourse to generally accepted “values and norms” be seen as a reference to some form of empirical enquiry into what most Australians might think is a normative standard of behaviour. If it was, how would a judge discern it? Would it be a matter for expert evidence of some kind? Would it be a matter of judicial notice? What if many standards exist: a possibility which is real enough in a multicultural society which may no longer exhibit “monolithic moral solidarity”. And what if the standards themselves are offensive or become so? It was undoubtedly the case that some Australian “values and norms” held before the Second World War would now be considered entirely repulsive. That includes standards about racial bigotry.

(Footnotes omitted; emphasis added.)

137    These statements, in particular the first sentence of [292], are inconsistent with the appellants’ submission that the court’s task is to search for and apply accepted and acceptable community standards.

138    As noted above, Gleeson J agreed (at [310]) with the reasons of Gageler CJ and Jagot J in relation to grounds one and two of the College’s appeal. Gleeson J also agreed (at [314]) with Gordon J’s analysis of the meaning of “unconscionable conduct” in s 21. Gleeson J wrote separately to explain the two ways in which s 22 informs the analysis required for a conclusion that conduct is unconscionable within the meaning of s 21. In the course of that explanation, Gleeson J stated:

315    First, s 22 provides “express guidance as to the norms and values that are relevant to inform the meaning of unconscionability and its practical application”. Unconscionability within the meaning of s 21(1) is itself a standard. However, the content of the statutory standard of unconscionability is not obvious because Parliament has appropriated, without definition, the terminology of “unconscionability”. Under the general law, “unconscionability” is a value-laden concept by which a person’s conduct is judged against “standards of personal conduct compendiously described as the conscience of equity”. Since s 21(1) is “shorn of the constraints of the unwritten law”, it may apply in a case that involves a departure from “societal norms of acceptable commercial behaviour” that would not ground a claim for relief under the general law.

316    The terms “norm” and “value” are overlapping. Generally, a norm is a standard of conduct, such as a standard set by an industry code. A value, which could encompass a norm, is a quality that is desirable. In these reasons, I will refer simply to standards.

317    Secondly, s 22 provides relevant guidance by “setting a framework for the values that lie behind the notion of conscience” in s 21(1). Section 22 facilitates the identification of “the circumstances”, within the meaning of s 21(1), in which allegedly unconscionable conduct must be assessed by listing, non-exhaustively, “matters” to which the court “may have regard” in deciding whether the conduct has contravened s 21(1).

(Footnotes omitted; emphasis added.)

139    The above passage and the passage at [319]-[321] reinforce that the statutory provisions recognise and give effect to certain norms and values. The passages do not provide support for the appellants’ submissions.

140    We are reinforced in our view that there is no error in the primary judge’s statement of principles by the fact that the primary judge relied (at J[3504]-[3505]) on the judgment of Gageler J in Kobelt (at [87]) and the judgment of Nettle and Gordon JJ in Kobelt (at [153]). The judgments of Gageler CJ and Jagot J and of Gordon J in Productivity Partners do not indicate any departure from those passages in Kobelt. To the contrary, Kobelt at [87] is cited in the footnotes to the judgments of Gageler CJ and Jagot J and of Gordon J.

141    Insofar as the appellants relied on the judgment of Allsop CJ in Paccioco, and the adoption of parts of that judgment by members of the High Court in Productivity Partners, we do not see any substantive relevant difference between those statements of principle and the primary judge’s judgment. As set out above, the primary judge specifically relied on Allsop CJ’s judgment in Paccioco in formulating J[3510], as the primary judge explained at J[3511]. To the extent that J[3511] queried whether “the values and norms that inform the living Equity” play much of an additional useful role in the context of statutory unconscionability to the extent that they are not already enshrined in ss 21 and 22, the primary judge’s qualification was carefully calibrated and this is not a matter that was the subject of detailed analysis in Productivity Partners.

142    In summary, no error is shown in the primary judge’s statement of the applicable principles. We do not consider there to be any difference as a matter of substance between the primary judge’s statement of the applicable principles and those set out by the High Court in Productivity Partners. In the passages criticised by the appellants, the primary judge was not seeking to convey that accepted and acceptable community standards are irrelevant to ss 21 and 22 of the Australian Consumer Law. Rather, his Honour was making the point that in applying s 21, the Court is to be guided by norms and values recognised by the statute (i.e. those identified at J[3510]), not carry out its own inquiry as to the content of accepted and acceptable community standards in the abstract. His Honour was correct to do so.

143    It follows that the second part of Ground 2 does not need to be dealt with.

144    For these reasons, Ground 2 is not made out.

Ground 1 (unconscionable conduct – application)

145    Ground 1 concerns the primary judge’s application of the principles of unconscionable conduct to the facts of the case. This ground largely relies on findings made by the primary judge. The appellants contend that, on the basis of those findings, his Honour should have concluded that Mercedes Australia engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law.

146    Ground 1 (omitting particulars) is as follows:

In respect of the conduct of the respondent ([Mercedes Australia]) in giving notices of non-renewal (NRN) on about 27 December 2020 to all then existing Mercedes Benz dealers in Australia (Dealers) and entering into agency agreements commencing on 1 January 2022 (Agency Agreements) with all then existing Dealers:

(a)    the primary judge erred in finding that [Mercedes Australia] did not contravene s.21 of the Australian Consumer Law (ACL), being Schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA) (J[3750]), as follows:

(1)    the primary judge erred in finding that the true source of vulnerability of the Dealers was the contractual matrix and risks inherent therein, and concluding that this was an answer to the unconscionable conduct claim below (J[3634]-[3636]), rather than the Dealers’ vulnerability being a consequence of both the Dealers’ existing investments in their dealership businesses and the giving of the NRNs by [Mercedes Australia] to the Dealers collectively and at the same time (J[385], [755]-[762], [847], [3030], [3032], [3598]-[3611], cf. J[3541], [3548]);

(2)    the primary judge erred in analysing [Mercedes Australia’s] conduct in respect of the NRNs and the Agency Agreements as separate and distinct items of conduct (J[3636], [3637]), on the basis that there was a causal break in the facts between the timing of the giving of the NRNs and the offer to enter into the Agency Agreements (J[193], [2918], [2993], [3614]-[3615], [3700]-[3701]), despite the issuing of the NRNs and entry into Agency Agreements being part of the same course of conduct (J[428]-[431], [1509], [1867], [3030]-[3032]);

(3)    the primary judge erred in failing to differentiate between the financial and commercial interests of [Mercedes Australia] on the one hand, and [Mercedes Australia’s] legitimate interests on the other hand (J[3207], [3327], [3578] cf. J[3524]-[3528]), and in failing to find that the financial terms of the Agency Agreements were a disproportionate response to, and were not reasonably necessary for the protection of, [Mercedes Australia’s] legitimate interests otherwise justifying the introduction of the agency model: (cf.J[3700]);

(4)    the primary judge erred in limiting the conceptions underpinning ACL s.22(1)(e) and (i), of the ‘risk and worth of the bargain’ (J[3510(c)]), to the contractual terms of the Dealer agreements (J[3597]), and in failing to consider that the ‘risk and worth of the bargain’, for the purpose of ACL s.21, was broader than the ‘formal’ contract and was also to be found in the relationship between the Dealers and [Mercedes Australia] (J[2275]-[2277], [2279]-[2280], [2282], [2936]-[2941], [3071]-[3073]).

(5)    the primary judge erred in considering that the relevant financial comparison involved considering how the dealership model was going to work or might work in the future if it had been left in place (J[3627]), and further erred in considering, as a relevant factor, the absence of evidence as to whether dealers are able to make a reasonable rate of return (J[3628], [3616]), in circumstances where the relevant financial comparison is between the agency model as implemented by [Mercedes Australia], and the financial returns to the Dealers based on an assumption that [Mercedes Australia] had not engaged, and will not engage, in unconscionable conduct under ACL s.21, or act in breach of its obligations under the Franchising Code of Conduct, set out in Schedule 1 to the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) (Franchising Code).

(b)    the primary judge ought to have found that [Mercedes Australia] engaged in unconscionable conduct in contravention of ACL s.21, on the basis of findings of fact made below, including, inter alia, the findings summarised in the following particulars and in the particulars to Grounds 1(a)(3), (5) and 3(b).

The primary judge’s reasoning in relation to unconscionable conduct

147    His Honour summarised his conclusions in relation to the applicants’ unconscionable conduct case at J[39]-[48]. At J[48], his Honour said that he would reject the applicants’ unconscionable conduct case “although I must say it had greater merit than the applicants’ other claims and has involved a harder judgment call on my part”.

148    The primary judge’s detailed consideration of the applicants’ claims based on statutory unconscionable conduct is at J[3454]-[3750]. After outlining the applicants’ contentions and discussing the applicable legal principles, his Honour turned to the application of those principles (commencing at J[3531]). In the initial part of this section, his Honour swiftly rejected the applicants’ claim that the giving of the NRNs was unconscionable:

3531    Before proceeding further it is to be recalled that I have already found the following.

3532    First, as a matter of the exercise of contractual power, the NRNs were validly given.

3533    Second, in the giving of the NRNs, there was no breach of any good faith duty, statutory or otherwise.

3534    Stopping there for the moment. There is no substance to the applicants’ case concerning unconscionable conduct that could be said to impugn the giving of the NRNs. And even accepting that there was spin or half-truths by [Mercedes Australia] in communications with dealers prior to the giving of the NRNs, that goes nowhere. The NRNs could always have been given at the time that they were. And any attempts to forestall their giving by taking legal proceedings prior to that time would have been an exercise in futility.

3535    Further, the giving of the NRNs by [Mercedes Australia] was an exercise by [Mercedes Australia] of its contractual power. There was no other relevant exploitation of any other power. [Mercedes Australia] did what it was contractually entitled to do.

3536    So, as at the end of 2020, all dealer agreements were to come to an end by 31 December 2021.

3537    And it is in that setting that one then comes to consider the agency model and the “imposition” on the dealers of the agency and associated agreements. …

149    The primary judge then set out a number of points relating to whether Mercedes Australia’s conduct in introducing the agency model was unconscionable at J[3538]-[3553]. It should be noted that the appellants rely on many of the points made in this section of the judgment. However, the appellants challenge some other points. His Honour stated (with bold emphasis to indicate the parts that are challenged by the appellants by Ground 1):

3538    First, I have found against the applicants on economic duress. There was no such duress.

3539    Second, I have found against the applicants concerning any breach of clause 6 of the Franchising Code in terms of failing to act in good faith concerning the implementation of the agency model. Moreover, I have not found that any of the terms of the agency and associated agreements involved unfair or unreasonable terms.

3540    Third, the negotiations in 2021 between [Mercedes Australia] and the dealers all took place in the context where the NRNs had been validly given in December 2020 and the dealer agreements were to terminate on 31 December 2021 come what may.

3541    Now of course the applicants were in a weak position at that time, particularly given the investments that they had made. But that all arose from the form of the dealer agreements and the giving of the NRNs. There was no unconscientious exploitation by [Mercedes Australia] of its strong position at that time. And every step that it took was in pursuit of its legitimate commercial interest. And as I have indicated, the steps that it took were all in conformance with the contractual matrix and the Franchising Code.

3542    Let me also for convenience re-iterate some other matters.

3543    First, on one view [Mercedes Australia] cherry-picked the best bits of the dealers’ businesses on which the agency model was imposed and left the dealers with less desirable features. So, if they wanted to, dealers had to also enter into services and parts agreements, but as vendors/retailers rather than agents. So risk was left with them. No doubt this was seen by [Mercedes Australia] to be advantageous to it by leaving the allocation of risk elsewhere.

3544    Second, the agency agreements imposed were standard form contracts.

3545    Third, the dealers ultimately had a lack of real choice concerning the terms of the agency agreements in the sense that they were presented on a take it or leave it basis. I also accept that they were given little time to negotiate the final form of the agency agreements and the associated agreements.

3546    Fourth, and related to the third point, there is no doubt that [Mercedes Australia] played hard-ball in its negotiations with the dealers. There was no meaningful negotiation that the new model to be imposed would be an agency model. There was, however, some negotiation over the detail of some aspects. But on the financial aspects, [Mercedes Australia] only made concessions on rats and mice issues. And on the main commission aspects, in my view [Mercedes Australia] and [Mercedes Germany] ratcheted this down as low as they thought that they could get away with.

3547    Fifth, on one view the dealers had little meaningful choice concerning the agency model. But as I have already said, in a sense that lack of choice was brought about by the issuing of the NRNs, which I have found to be contractually valid. In other words, the lack of choice was a causal function of the terms of the dealer agreements that the dealers had signed up to, including the power to issue the NRNs without cause. I must assume that the dealers entered into the dealer agreements after taking such commercial and legal advice as they thought fit well knowing of the risks, but taking the calculated risk that if they performed then they were unlikely to be given a NRN. In other words they perceived that if they performed then it was to the mutual benefit of both [Mercedes Australia] and the dealer(s) to continue the relationship. That was no doubt a sensible commercial risk to take. But nevertheless a risk as they must have appreciated. The seeds of their ultimate lack of choice were sown a long time ago.

3548    Sixth, I accept that the dealers were ultimately placed in a position of situational disadvantage and possibly constitutional disadvantage in terms of the agency model. But in a sense this was in part self-induced by the dealers’ entry into the dealer agreements and a willingness, it must be inferred, to accept the risks and the risk allocation enshrined in those agreements including the risks inherent in the contractual power of [Mercedes Australia] to issue the NRNs without cause. They made the relevant capital investments knowing of or when they ought to have known of such risks. And on a broader front, the dealers were well-heeled individuals and corporations that hardly had any socio-economic vulnerability.

3549    Seventh, the dealers say that [Mercedes Australia] took unconscientious advantage of them in imposing the agency arrangements. But let it be assumed that the NRNs were validly given and the dealer agreements rightly came to an end. Although [Mercedes Australia] clearly obtained an advantage under the terms of the agency model, it is difficult to see how this was unconscientious. Of course there can be an unconscientious advantage taken even if [Mercedes Australia] acted honestly and in good faith. But where is the unconscientious element once the dealer agreements terminated? The dealers had a choice, and I have rejected the economic duress argument.

3550    Eighth, the applicants have also run a case that the giving of the NRNs themselves constituted unconscionable conduct. But as I have said that assertion is not sustainable on any view of the matter.

3551    Ninth, I accept that in some respect [Mercedes Australia] encouraged the dealers to make long term investments in some of the facilities. But where this occurred this was usually reflected in a longer term being negotiated under the dealer agreement. Further, with such terms and the various renewals, there is no evidence that dealers have not earned a reasonable rate of return on their assets and also in many instances also recouped their capital investment over time. And where they have not, they still have the assets. Now perhaps there would have been a drop in value if they had to be repurposed, which perception may have led some of the dealers to think that they had no choice but to enter into the agency agreements. But again, this all stems from the giving of the NRNs that I have found to be valid.

3552    Tenth, I accept that [Mercedes Australia] did not consider the individual circumstances of dealers. Moreover, it had little regard for the top 30% of dealers who were likely to suffer under the agency model.

3553    In summary then, the applicants’ case on unconscionable conduct must fail, and certainly so far as the exemplar applicants’ claims are concerned.

(Emphasis added.)

150    Next, the primary judge addressed the main themes of the applicants’ case under a series of sub-headings at J[3556]-[3740]. This part of the judgment is structured under the following sub-headings:

(a)    Has Mercedes Australia misappropriated the dealers’ goodwill?

(b)    Are the dealers financially worse off?

(c)    Are there other detriments to the dealers under the agency model?

(d)    Has the imposition of the agency model undermined the dealers’ original bargain?

(e)    Have the dealers made substantial investments under the dealership model?

(f)    The deployment of capital

(g)    The question of proportionality

(h)    The question of compensation

(i)    The question of vulnerability

(j)    What are the relative differences in bargaining strengths?

(k)    Did Mercedes Australia exploit its superior bargaining position using unfair tactics?

(l)    Legitimate interest

(m)    Was Mercedes Australia dishonest? Did it misrepresent its intentions in its implementation of the agency model?

(n)    Other representations

(o)    Safety net letter

(p)    Closures

(q)    Customer information.

151    The appellants rely on many of the primary judge’s findings or conclusions in the above sections. For example, the appellants rely on: the primary judge’s finding that the applicants are financially worse off under the agency model (J[3562], [3577]); the primary judge’s findings relating to the applicants’ investments (eg, J[3602]); and the primary judge’s findings that the dealers were in a vulnerable position and had a weaker bargaining position than Mercedes Australia, and that Mercedes Australia was more easily able to exploit the dealers’ vulnerability because of the dealers’ pre-existing investments, partial sunk costs and the fact that the dealers were not “greenfields” (J[3629]-[3632]).

152    The sections that are of most relevance to Ground 1 are as follows (with bold emphasis to indicate the parts that are challenged by the appellants by Ground 1):

Has the imposition of the agency model undermined the dealers’ original bargain?

3597    The applicants say that the risk and worth of the bargain are the conceptions underpinning ss 22(1)(e) and (i) and that the dealers’ bargain was undermined. But as I have indicated elsewhere, I have rejected this contention. The relevant bargain was what was embodied in the dealer agreements. Nothing more.

…

The question of compensation

3623    Let me make some other points in terms of compensation that the applicants say ought to have been payable by [Mercedes Australia] as a result of “converting” the dealers to the agency model.

3624    First, undoubtedly no compensation has been offered by [Mercedes Australia], but then it was not contractually bound to provide compensation under the dealer agreements or the Franchising Code in the manner contended for by the applicants.

3625    Second, there has been no transfer or acquisition of the dealers’ goodwill as I have previously discussed.

3626    Third, the applicants say that there has been some transfer of profits or customer revenue away from the dealers or some diminution in the future revenue stream of the dealers that was expected from the customers or some notional transfer of what has been described in the evidence as “customer equity”.

3627    I am prepared to accept that under the agency model, the dealers’ capacity to make the same profits that they were making under the dealer model has been lessened. But to what extent I cannot say on the present evidence. But an important point needs also to be made here. The relevant comparison ultimately is between the two possible futures. One future is of course under the agency model and the revenues achievable by the dealers thereunder. The other hypothesised future is the dealership model going forward and the revenues achievable under that future counter-factual. It is not a comparison between the agency model going forward and the dealership model as it historically worked and as it delivered past returns. The applicants continually sought to make the wrong distinction by focusing their comparison on how dealership had worked, rather than how it was going to work or might work in the future if it had been left in place. If dealership was left in place, [Mercedes Australia] had considerable flexibility in volumes, pricing, margins and commissions going forward. Moreover, intra-brand discounting may have reared its head again. Ultimately, I had little cogent evidence to make the forward-looking comparisons, whether under agency or the counterfactual of future dealership. And any such evidence would have only been based upon problematic assumptions in any event.

3628    But as I say, I have generally concluded in favour of the applicants that they are worse off under the agency model than under the dealership model and that no compensation has been offered or provided to deal with this detriment. But by how much I cannot say. Moreover, I cannot conclude on the current evidence that they are not able to make a reasonable rate of return.

The question of vulnerability

3629    I accept that the dealers were in a vulnerable position.

3630    Clearly they had a weaker bargaining position than [Mercedes Australia]. Moreover, this position was exacerbated by the investments they had made, involving in some respects sunk costs. Further, [Mercedes Australia] had encouraged the dealers to make such investments, which were in part for [Mercedes Australia’s] benefit as much as the dealers. Moreover, the expectation which had been engendered over time was that the dealers would have a longer-term relationship with [Mercedes Australia].

3631    Further, in some respects [Mercedes Australia] has sought to exploit that vulnerability. And of course, the voluntariness with which the dealers have acted does not negate their vulnerability or [Mercedes Australia’s] exploitation of it.

3632    And [Mercedes Australia] has more easily been able to exploit the dealers’ vulnerability because of the fact of the dealers’ pre-existing investments, partial sunk costs and the fact that the dealers’ businesses were not “greenfields”. Indeed, [Mercedes Australia] did not want “greenfields” agents, but dealers with pre-existing businesses being converted into agents.

3633    Of course, and as I have found, [Mercedes Australia] did not engage in economic duress and did not act with a lack of good faith. But to so find does not entail that [Mercedes Australia] has not engaged in statutory unconscionable conduct.

3634    Now let it be accepted then that the dealers were vulnerable and that in some respects [Mercedes Australia] exploited this vulnerability. That is not enough to establish unconscionability when one considers the relevant contractual matrix and the risks inherent therein, which is the foundational source for the dealers’ vulnerability.

3635    The fact is that the dealer agreements were subject to non-renewal on adequate notice by either [Mercedes Australia] or the dealer without cause. And the fact is that the NRNs served by [Mercedes Australia] were valid and brought the dealer agreements to an end. This is all the foundation for and explains the dealers’ vulnerability. But the risks inherent in this contractual structure were what the dealers signed on to. Moreover, the dealers were themselves sophisticated commercial players. They can be taken to have appreciated such risks or had available to them advice which would have informed them of such risks if they had chosen to take such advice.

3636    When one identifies the true source of vulnerability one can see that its exploitation falls short of establishing unconscionability. Now I do not say that the exercise of contractual rights cannot amount to unconscionable conduct. Of course it can. But here, the contractual power to not renew was exercised for a proper purpose, in good faith and without economic duress. There was no unconscientious exercise of such a right. And once it was validly exercised, there was no other conduct thereafter of [Mercedes Australia] that could be said to be unconscionable. The dealers were free to accept or reject the agency model. Now of course they would have been under strong commercial pressure to enter into the agency agreements. But that pressure flowed from the giving of the NRNs, which did not involve any unconscionable conduct on the part of [Mercedes Australia].

3637    Now the dealers have complained about the conduct of [Mercedes Australia] in 2021 after the NRNs were given concerning the negotiation and terms of the agency agreements. But these complaints were exaggerated, and in any event go nowhere. Once the NRNs were given, which in my view involved no unconscionability, the fact that [Mercedes Australia] may have played hard-ball does not amount to unconscionability. And ultimately each dealer had to make their own decision as to whether they accepted or rejected the agency agreement proffered. Of course they were under pressure, of course [Mercedes Australia] knew this and exploited it by playing hard-ball, but in my view this has no legal consequences concerning statutory unconscionability.

…

Legitimate interest

3696    The legitimate interest of [Mercedes Australia] includes the legitimate interest of its ultimate holding company, [Mercedes Germany].

3697    I do not see any difficulty in a subsidiary company pursuing its interest by acting in a manner consistent with its holding company’s global strategy. To do so may well be beneficial to the subsidiary and its over-all business model. And at the least, to do so may be perfectly consistent with its interest even though it does not achieve any additional benefit.

3698    Further, the legitimate interest of [Mercedes Australia] may also involve the consideration of an Australia wide and uniform model being imposed rather than one which is implemented in a piece-meal or hybrid fashion in terms of individual dealers, locations or time frames.

3699    Now the dealers say that [Mercedes Australia] does not have a legitimate interest in “effectively taking our profitability or having an economic outcome that makes us worse off” to use the words of senior counsel for the applicants. But this is describing one financial consequence of what is otherwise perfectly legitimate for [Mercedes Australia] to do, namely, to issue the NRNs and then to offer the opportunity of the agency model to the dealers on the terms that it did so offer.

3700    [Mercedes Australia] had a legitimate commercial interest to change the model, and to do so in a homogenous way across the dealer network. Moreover, I do not consider that it did so in a way which was disproportionate to furthering or protecting that interest, although undoubtedly it could have been done in different ways and tailored to different dealers in ways which may have found more favour with the dealers. But what was in fact done by [Mercedes Australia] in my view was not outside the boundaries of the reasonable choices open to it consonant with its legitimate commercial interest.

3701    Now of course the applicants say that if this is correct, then [Mercedes Australia] had to provide compensation in different amounts to different dealers to reflect individual detriment and outcomes. But in my view, there is no warrant for so concluding particularly where the premise here is that the NRNs have been validly given. It is not unconscionable not to offer compensation. There was no right. There was no appropriation. And there was no duress to sign the agency agreements.

(Emphasis added.)

The appellants’ submissions

153    We will focus first on the appellants’ oral submissions and then refer briefly to their written submissions.

154    At the commencement of his oral submissions, senior counsel for the appellants submitted that the primary judge made two central analytical errors in his assessment of Mercedes Australia’s conduct:

(a)    First, his Honour considered that the NRNs were not unconscionable in themselves and that they broke what his Honour referred to as the “causal chain” (J[193], [2918]). This appeared to provide a basis for the primary judge to put aside the findings that the dealers were worse off under the new agreements and that Mercedes Australia exploited the dealers’ vulnerability to obtain that result. A proper application of legal principle and the correct factual analysis required a finding that the NRNs were a connected circumstance, and what happened before and after the NRNs were issued formed part of the court’s assessment of whether Mercedes Australia’s conduct overall was unconscionable.

(b)    Secondly, the primary judge failed to distinguish between which of Mercedes Australia’s interests were legitimate and which were not. Mercedes Australia’s conduct involved an opportunistic imposition of a remuneration structure which appropriated profit to it at the expense of dealers, for reasons unrelated to the protection of its legitimate interests.

155    Later in his oral submissions, senior counsel for the appellants submitted that another analytical error of the primary judge concerned the question of vulnerability.

156    In support of the appellants’ causal break contention (raised by Ground 1(a)(2)), senior counsel for the appellants submitted that to say that the giving of the NRNs and the move to agency were not linked was, causally and factually, “simply wrong”. Senior counsel pointed out that the NRNs stated that it was not Mercedes Australia’s intention for the relationship to cease. Senior counsel submitted that it was “part of a coordinated process to set up the position that they got into”. Senior counsel submitted that the expression “causal break” has within it profound ambiguities. He continued:

There’s a causal break, in one sense, every day of this process, but if it’s an integrated process to achieve an aim, to speak in terms of a causal break is to introduce a field of discourse not apposite to an appropriate inquiry into unconscionable conduct.

157    Further, senior counsel for the appellants submitted:

… his Honour found … that there had not been, as it were, unconscionability in sending the NRN. That meant that was irrelevant to everything that came after. We just say that’s simply wrong as a matter of principle.

158    A centrepiece of the appellants’ oral submissions was a detailed analysis of the evolution of Business Cases prepared by Mercedes Australia. Senior counsel handed up an aide memoire titled “Appellants’ Judgment Redaction Extracts” that reproduced a number of paragraphs from the primary judge’s judgment that contained information relating to the Business Cases. In particular, the aide memoire reproduced J[2378], which includes a table setting out key information relating to the successive Business Cases. Senior counsel for the appellants made submissions about the development of each Business Case and referred to the table at J[2378] to make the submission that Mercedes Australia made changes to the financial model to “transfer” profit from dealers to itself. Particular emphasis was given to the changes in the “DCVA”, standing for discounted cash value add. This was a measure of change of the profit or loss to Mercedes Australia from the implementation of the business change, as Mercedes Australia perceived it. The figure for DCVA increased significantly through the evolution of successive Business Cases. (We note for completeness that there was a difference between the parties as to whether one of the figures in the table (the DCVA figure in the fourth column) was accurate, with the appellants contending that it should be a different figure, and Mercedes Australia contended that the figure in the table was accurate. It is unnecessary to resolve this issue.) The appellants submitted, in summary, that the transfer of profits from the dealers to Mercedes Australia was not within Mercedes Australia’s legitimate interests, and the primary judge erred by failing to consider whether it was within Mercedes Australia’s legitimate interests.

159    During the course of the appellants’ submissions about the Business Cases and documents referred to as “dealer walks” and the anticipated dealer commission in those documents, the following exchange took place:

BROMWICH J: … if the numbers were half this or double this, would the point of principle change?

[SENIOR COUNSEL FOR THE APPELLANTS]: When you say the half, I’m not sure which is the half.

BROMWICH J: The figure – the level of disadvantage brought about by the changes, if the amount of disadvantage had been double what you’ve got here or half of what you’ve got here in these figures, would it have made any difference to the point of principle?

[SENIOR COUNSEL FOR THE APPELLANTS]: To the point of principle, we think not, your Honour, but there might be – if it was, say, three or four times, if it was, in effect, it remained at the [REDACTED] per cent at the outset which is – and there was evidence that my clients aimed to achieve a [REDACTED] per cent return, it may have been a different exercise then because then, in effect, there would not have been a worse off by reason of their conduct in pursuing the agency model and acting in the way in which his Honour found.

160    Senior counsel for the appellants submitted that the primary judge erred in his consideration of the question of vulnerability, referencing Ground 1(a)(1) and 1(a)(4). After referring to J[3634] (set out at [152] above), senior counsel submitted that the primary judge failed to properly consider as part of this analysis his earlier finding that the dealers’ idiosyncratic investments exposed them to a risk of being held hostage to the threat of early termination; it was that vulnerability which was exploited. Senior counsel submitted that it was not just a vulnerability of being the subject of early termination; it was the vulnerability of being subject to early termination when one has substantial sunk investments which have been encouraged.

161    Senior counsel for the appellants dealt together with Ground 1(a)(3) and 1(a)(5). Senior counsel started this submission by relying on the following paragraph of the primary judge’s judgment:

3525    So, the imposition of a remuneration structure which appropriated profit to one party at the expense of the other for reasons unrelated to the protection of the first-mentioned party’s legitimate interests may be an example of a condition not reasonably necessary to protect the party’s legitimate interests.

162    Senior counsel submitted that that statement is correct. He then submitted that where the primary judge erred was in failing to accept that Mercedes Australia’s conduct in driving the dealer margin down “as low as they thought they could get away with” (J[3546]) was conduct which was not reasonably necessary to protect its legitimate interests. Senior counsel referred to J[520] (set out earlier in these reasons), in which the primary judge found that “[t]he major advantage of shifting to agency from [Mercedes Australia’s] and [Mercedes Germany’s] perspective was all about profit maximisation including price setting, avoiding discounting and reducing costs, which principally involved reducing the take of the dealers”. Senior counsel submitted that that is what this whole thing was about, and one needed to address whether that involved Mercedes Australia pursuing its legitimate interests in all the circumstances of the case. In the course of these submissions, senior counsel accepted that Mercedes Australia could move to an agency model (T108). However, he submitted that the model that was imposed on the dealers was unconscionable. Senior counsel submitted that there was a failure by the primary judge to consider whether the conduct of Mercedes Australia in relation to the financial aspects of the agency agreement was conduct consistent with pursuing or protecting its legitimate interests.

163    Senior counsel for the appellants also submitted that the mere fact that something may be in Mercedes Australia’s interests or even its commercial interests is not an answer to the inquiry as to whether it is in its legitimate interests.

164    The appellants’ written submissions in relation to Ground 1 are structured under the following three main propositions:

(a)    The primary judge erred in finding that the contractual source of the vulnerability precluded a finding of unconscionable conduct (Grounds 1(a)(1), 1(a)(4)).

(b)    The primary judge erred in separating the NRNs from agency (Ground 1(a)(2)).

(c)    The primary judge erred in finding that Mercedes Australia’s taking of the benefits of the relationship furthered its legitimate interests (Ground 1(a)(3), 1(a)(5)).

165    The written submissions in relation to these propositions were largely covered in oral submissions, which have been summarised above.

166    We note also the following written submissions, which have not been covered above. In paragraphs 38 to 39 of the appellants’ written submissions, the appellants make the following submission in support of Ground 1(a)(4):

38    The primary judge’s findings also failed to grapple with the pre-existing relationship between [Mercedes Australia] and the Dealers, which was essential to understanding the basis on which the Dealers made their investment. … Mr von Sanden referred to the relationship as being based on “mutual trust”, in which the Dealers would know that there was a low risk of non-renewal, provided they performed in accordance with expectation. The primary judge encapsulated the understanding at J[3602]: … [set out above]

39    This relationship was evident in [Mercedes Australia’s] communications with the Dealers over many years (with the following emphasis added). In May 2002, for example, [Mercedes Australia] encouraged Baker Motors to invest in an ‘Autohaus’ showroom in Albury, stating that, after the formal term of the contract had expired, ‘it is in the Dealer’s hands to ensure their long-term association by achieving targets and mutually agreed improvements’. In July 2018, in a discussion about the then proposed agency model, Mr von Sanden told the Dealer Advisory Committee that [Mercedes Australia’s] intention was for ‘a long term and loyal relationship with the dealer network’. In December 2020, in the NRNs, [Mercedes Australia] stated ‘notwithstanding the issuing of this notice, it is not [Mercedes Australia’s] intention for the relationship between the parties to cease’: see J[1909]. On 14 September 2021, in its final communication to the Dealers requiring the agency agreements to be signed, was the threat that if they were not returned [within] two days ‘your relationship with our brand will cease’: J[2177]. These communications support the primary judge’s finding that [Mercedes Australia] sought to attract investments by the Dealers, ‘by presenting such investments as secure and long-term’: J[3598], [3733].

(Footnotes omitted.)

167    Further, although appearing under a different heading, the appellants’ submissions at paras 51-53 of their written submissions are relevant to Ground 1(a)(4). In essence, the appellants submitted that, for the purpose of an unconscionable conduct analysis, the “bargain” is not limited to the terms of the contract (contra J[3597]).

168    In paragraph 46 of the appellants’ written submissions, the appellants make the following submission in support of Ground 1(a)(5):

It is not to the point (contra J[3551] and [3614]) that Dealers may have earned a reasonable rate of return on those investments in the past, nor does it matter to the [Dealers’] argument that there was no evidence of the rate of return proposed under Agency. In setting the commission as low as it could get away with without Dealers walking, [Mercedes Australia] must have provided a sufficient return to stop Dealers walking. The success of [Mercedes Australia’s] plan depended on the Dealers accepting it. What is relevant for the unconscionable conduct analysis is what [Mercedes Australia] took, and how [Mercedes Australia] took it, as a result of holding the Dealers’ investments hostage, while still having the offer accepted.

169    The following paragraph of the appellants’ reply written submissions assists in clarifying the way in which the appellants put their case on appeal. At paragraph 9 of those submissions, the appellants submit:

… it is not in issue that an agency model per se was a response to legitimate concerns about competitive changes in the car market, such that the issues raised in [Mercedes Australia’s submissions] [2.4], [2.5] and [2.9] are moot. Rather, the issue is [Mercedes Australia’s] profit stripping, not the agency model itself …. It is the financial terms of agency that are at the core of the appeal – a point not answered by consultations on operational issues.

Consideration

170    As noted above, ss 21 and 22 are set out in the judgment of the primary judge at J[3494].

171    In Productivity Partners, Gageler CJ and Jagot J outlined key elements of ss 21 and 22 at [51]. Their Honours highlighted that s 21 refers to “conduct that is, in all the circumstances, unconscionable”. Their Honours returned to that point at [57]:

… it is the totality of the circumstances relevant to the conduct being considered (as required by s 21(1)) which dictates if any matter in s 22(1)(a)–(l) is applicable.

172    Their Honours emphasised the necessity to consider the totality of the circumstances at [60], which has been set out above. For ease of reference, we set out part of [60] again:

The items listed in s 22(1)(a)–(l) are matters that the legislation requires to be considered, in the overall evaluation of the totality of the circumstances to be undertaken for the purpose of s 21(1), if and to the extent those matters are applicable. This is why both “close attention to the statute and the values derived from it, as well as from the unwritten law” and “close consideration of the facts” are necessary.

(Footnotes omitted.)

173    Gordon J outlined the key elements of ss 21 and 22 at [98]-[99] of Productivity Partners. We have set out [100]-[104] of her Honour’s judgment earlier in these reasons. Of relevance for present purposes are her Honour’s statements about the nature of the evaluative task required by ss 21 and 22 at [105]:

The legal norm of conduct created by s 21 should not be confused with the factual evaluation of its satisfaction. The factual context — the totality of the circumstances — is vital to understand “what, in any case, is required to be done or not done to satisfy the normative standard”. The court makes an evaluative judgment as to whether conduct is, in all the circumstances, unconscionable. This evaluative judgment is not confined to or arrived at by the “mere balancing” of the factors identified in s 22(1). Nor should it be approached mechanistically by way “of deductive reasoning predicated upon the presence or absence of fixed elements or fixed rules”. Such an approach is the antithesis of the mode of analysis engaged in by Courts of Equity, which has been recognised as the appropriate mode of analysis where a court is performing the task of determining whether a statutory prohibition against unconscionable conduct has been contravened. Assessing statutory unconscionability “calls for a precise examination of the particular facts”. It requires a comprehensive view that “looks to every connected circumstance that ought to influence [the court’s] determination upon the real justice of the case”.

(Footnotes omitted; emphasis added.)

174    Before considering the specific elements of Ground 1, we make this general observation: it is not suggested by the appellants that the primary judge failed to take into account some relevant factual matter or theme relied on by the applicants. The primary judge conducted a comprehensive analysis of the facts and made detailed factual findings. The thoroughness of his Honour’s judgment is underlined by the fact that the appeal was largely conducted by reference to the factual findings in his Honour’s judgment, without much recourse to the evidence at trial. Further, the primary judge conducted an extensive analysis of the main themes of the applicants’ unconscionable conduct case. Those themes were addressed in the section of the primary judge’s reasons at J[3556]-[3740]. We have set out, at [150] above, the sub-headings under which the primary judge structured that section of his reasons. The sub-headings demonstrate the range of matters that his Honour considered. It is not suggested that he failed to consider any of the matters referred to in s 22(1) that are relevant in the present case.

175    We now address the points raised by Ground 1. We will do so in the order in which the contentions were presented orally, as outlined above.

Ground 1(a)(2) – causal break

176    The first main contention concerns his Honour’s statement or finding that there was a “causal break”. This is raised by Ground 1(a)(2). The appellants contend, in summary, that the primary judge erred in analysing Mercedes Australia’s conduct in respect of the NRNs and the agency agreements as separate and distinct items of conduct on the basis that there was a “causal break” in the facts between the giving of the NRNs and the offer to enter the agency agreements.

177    In our opinion, the appellants’ submissions should be rejected.

178    First, the particular context in which the “causal break” statements were made should be noted. The statement was first made at J[193], which has been set out at [62] above. His Honour made the statements at J[193] in response to a submission by the applicants that the power to issue the NRNs could only be used for the purpose of terminating a relationship between Mercedes Australia and the dealer rather than changing or creating a new relationship with the dealer. That submission was set out at J[192]. It was in the context of that submission – which formed part of the appellants’ contractual case – that the primary judge made the statement that there was a causal break in the facts. That same finding is repeated, in the same context, at J[2918].

179    Secondly, insofar as the primary judge concluded that the giving of the NRNs was not itself unconscionable (at J[3534]), we see no error in that conclusion. We did not understand the appellants to challenge that conclusion. In any event, in circumstances where the dealer agreements gave Mercedes Australia the power to give a non-renewal notice without cause, it is difficult to see how the giving of the NRNs was unconscionable.

180    Thirdly, we do not accept the appellants’ submission that the primary judge analysed Mercedes Australia’s conduct in respect of the NRNs and the agency agreements as separate and distinct items of conduct or adopted a “disjunctive” approach (to use an expression that appears in the appellants’ written submissions). The primary judge had regard to all relevant facts and circumstances. These included: (a) facts and matters that related to the period before the giving of the NRNs; (b) the giving of the NRNs; and (c) facts and matters that related to the period after the NRNs were given. For example, the primary judge referred to the applicants’ investments and sunk costs, a matter that related to the period before the giving of the NRNs, at J[3630] and [3632]. The primary judge had regard to the giving of the NRNs at J[3636]. And the primary judge had regard to the fact that most dealers would be worse off under the agency model than they had been under the dealership model at J[3628]. In our view, consistently with the principles stated in Productivity Partners, the primary judge had regard to “the totality of the circumstances”, including both the giving of the NRNs and the offer of the agency agreements. He did not adopt a “disjunctive” approach.

181    Insofar as the appellants point to J[3636]-[3637] as evidencing the adoption of a disjunctive approach, we do not accept that those paragraphs demonstrate error. The paragraphs have been set out above. In J[3636], the primary judge made clear that he was not saying that the exercise of contractual rights cannot amount to unconscionable conduct. However, in this case, he concluded that there was no unconscientious exercise of the right to give a non-renewal notice. His Honour then said that “once it was validly exercised, there was no other conduct thereafter of [Mercedes Australia] that could be said to be unconscionable”. We do not see error in that approach. His Honour analysed the giving of the NRNs and concluded that that was not unconscionable. He also considered the subsequent conduct of Mercedes Australia and concluded that that too was not unconscionable. While his Honour did not described these events as a “course of conduct”, he was evidently well aware from the factual chronology he set out in the judgment that there was a connection between the giving of the NRNs and the offer of the agency agreements. This was apparent, for example, from the text of the NRNs, which the primary judge quoted at J[1909]. Despite the reference to “causal break” (in another context), we do not accept that the primary judge failed to consider the giving of the NRNs and the subsequent conduct of Mercedes Australia together for the purpose of evaluating whether Mercedes Australia engaged in unconscionable conduct. The same analysis applies to J[3637]. Read fairly, the point his Honour was making in these paragraphs was that one relevant circumstance was the fact that the NRNs were not given unconscientiously or for an improper purpose. Far from indicating a “disjunctive” approach, this aspect of his Honour’s reasons suggests that he took the totality of the circumstances (both before and after the giving of the NRNs) into account in his analysis of unconscionability.

182    We therefore reject the contention in Ground 1(a)(2).

Ground 1(a)(3) – legitimate interests

183    The appellants’ next contention concerns the primary judge’s treatment of the issue of legitimate interests. This is raised by Ground 1(a)(3). In summary, the appellants contend that the primary judge erred by failing to differentiate between the financial and commercial interests of Mercedes Australia, on the one hand, and Mercedes Australia’s legitimate interests, on the other hand. In particular, the appellants submit that his Honour failed to consider whether the financial terms of the agency agreements were reasonably necessary for the protection of Mercedes Australia’s legitimate interests (see s 22(1)(b) of the Australian Consumer Law).

184    The difficulty with this contention is that the primary judge specifically considered the topic of legitimate interests: he considered it at J[3696]-[3701] (set out above). It is apparent from this section of his Honour’s reasons that he considered – but rejected – the applicants’ submissions about a transfer of future profitability from the dealers to Mercedes Australia. At J[3699], the primary judge addressed the dealers’ contention that Mercedes Australia did not have a legitimate interest in “effectively taking our profitability or having an economic outcome that makes us worse off”. The primary judge said that that “is describing one financial consequence of what is otherwise perfectly legitimate for [Mercedes Australia] to do, namely, to issue the NRNs and then to offer the opportunity of the agency model to the dealers on the terms that it did so offer”. This statement implicitly, if not explicitly, involves a rejection of the proposition that the financial terms offered by Mercedes Australia to the dealers went beyond what was reasonably necessary to protect Mercedes Australia’s legitimate interests.

185    At J[3700], his Honour stated that Mercedes Australia had a “legitimate commercial interest” to change the model and to do so in a homogenous way across the dealer network – this responded to the applicants’ complaint that all dealers were treated in the same way. His Honour then said that, moreover, he did “not consider that [Mercedes Australia] did so in a way which was disproportionate to furthering or protecting that interest”. His Honour acknowledged that “undoubtedly it could have been done in different ways and tailored to different dealers in ways which may have found favour with the dealers”. However, in his Honour’s view, “what was in fact done” by Mercedes Australia was not outside the boundaries of the reasonable choices open to it consonant with “its legitimate commercial interest”. In our view, these passages demonstrate that his Honour considered – but rejected – the applicants’ contention that the financial terms of the agency agreements went beyond what was reasonably necessary to protect Mercedes Australia’s legitimate interests.

186    This section of his Honour’s reasons (dealing with legitimate interests) needs to be read in the context of the judgment as a whole. At J[3525], in the section dealing with applicable principles, his Honour accepted that “the imposition of a remuneration structure which appropriated profit to one party at the expense of the other for reasons unrelated to the protection of the first-mentioned party’s legitimate interests may be an example of a condition not reasonably necessary to protect the party’s legitimate interests”. The primary judge dealt in detail with the evolution of the Business Cases earlier in his judgment and was fully aware of the increases in the DCVA, representing the anticipated improvement in Mercedes Australia’s profitability at the expense of the dealers. His Honour found that Mercedes Australia ratcheted down the commission “as low as they thought that they could get away with” (J[245]). His Honour found that the major advantage of shifting to agency from Mercedes Australia’s perspective “was all about profit maximisation including price setting, avoiding discounting and reducing costs, which principally involved reducing the take of the dealers” (J[520]). His Honour found that most dealers will be worse off under the agency model than they were under the dealership model (J[2647]). His Honour’s rejection of the applicants’ submissions relating to Mercedes Australia’s legitimate interests needs to be read in that context. His Honour was fully aware of (indeed, largely accepted) the applicants’ factual propositions about the intended increase in Mercedes Australia’s profitability at the expense of the dealers. Nevertheless, he considered that the financial terms of the agency agreements did not go beyond what was reasonably necessary to protect Mercedes Australia’s legitimate interests.

187    There was no failure to consider which interests were legitimate and which were not. His Honour simply rejected the applicants’ case that the financial terms of the agency agreements went beyond, or were disproportionate to, Mercedes Australia’s legitimate interests.

188    We also observe that the appellants did not put forward any particular commission rate as being the limit of Mercedes Australia’s legitimate interests. The implicit submission seemed to be that the agency model should have been designed to give the dealers the same return as they had derived under the dealership model. While Mercedes Australia could have designed the new model in that way, it is not clear why, in the circumstances of this case, it went beyond Mercedes Australia’s legitimate interests to offer a lower return.

189    We note that, in the particulars to Ground 1(a)(3) in the notice of appeal, reference is made to the provisions of the Franchising Code. Under s 22(1)(g) of the Australian Consumer Law, the court may have regard to “the requirements of any applicable industry code”. There is no issue that the Franchising Code is such a code. While the question whether Mercedes Australia contravened cl 6 of the Franchising Code forms part of the unconscionable conduct analysis, it will be convenient to consider that question in the course of dealing with Ground 3, which relates specifically to cl 6 of the Franchising Code. For the reasons set out in that section of our reasons, we are not satisfied that his Honour erred in his consideration of whether Mercedes Australia contravened cl 6 of the Franchising Code.

190    For these reasons, we reject Ground 1(a)(3).

Ground 1(a)(1) – vulnerability

191    The next contention advanced by the appellants relates to the question of vulnerability. This is raised by Ground 1(a)(1). In summary, the appellants contend that the primary judge erred in finding that the true source of vulnerability of the Dealers was the contractual matrix and the risks inherent therein, rather than the dealers’ vulnerability being a consequence of both the dealers’ existing investments in their dealership businesses and the giving of the NRNs. The appellants challenge, in particular, J[3634]-[3636], which have been set out at [152] above.

192    While the primary judge did state, at J[3636], that the “true source” of the dealers’ vulnerability was the risks inherent in the contractual structure, it is not fair or complete to say that he disregarded the dealers’ investments and sunk costs. The primary judge specifically referred to these in the section of the judgment dealing with the question of vulnerability, at J[3630]-[3632]. His Honour stated that, clearly, the dealers had a weaker bargaining position than Mercedes Australia. His Honour stated that this position was exacerbated by “the investments they had made, involving in some respects sunk costs”. He noted that Mercedes Australia had encouraged the dealers to make those investments, which were in part for Mercedes Australia’s benefit as much as the dealers. In the next paragraph (J[3631]) the primary judge said that, further, in some respects, Mercedes Australia “has sought to exploit that vulnerability”. Thus, the primary judge treated the investments and sunk costs to be a source of vulnerability for the dealers. The primary judge then stated that the voluntariness with which the dealers had acted “does not negate their vulnerability” or Mercedes Australia’s exploitation if it. This reinforces that the primary judge treated the investments and sunk costs as a source of vulnerability.

193    Moreover, in the next paragraph (J[3632]), the primary judge said:

And [Mercedes Australia] has more easily been able to exploit the dealers’ vulnerability because of the fact of the dealers’ pre-existing investments, partial sunk costs and the fact that the dealers’ businesses were not “greenfields”. Indeed, [Mercedes Australia] did not want “greenfields” agents, but dealers with pre-existing businesses being converted into agents.

194    When regard is had to these parts of the reasons, it is clear that the primary judge did have regard to the dealers’ investments and sunk costs as a source of vulnerability. We therefore reject Ground 1(a)(1).

Ground 1(a)(4) – the bargain

195    This aspect of Ground 1 is predicated on the proposition, which the primary judge accepted at J[3510(c)], that the risk and worth of the bargain are the conceptions underpinning s 22(1)(e) and (i) of the Australian Consumer Law. The appellants contend that, having accepted that proposition, the primary judge erred by taking too narrow a view of the “bargain”, limiting it to the contractual terms of the dealer agreements. The appellants contend that the “bargain” was also to be found in the relationship between dealers and Mercedes Australia.

196    The appellants take issue, in particular, with J[3597]. That paragraph appears under the heading “Has the imposition of the agency model undermined the dealers’ original bargain?”. The primary judge rejected the applicants’ contention that the bargain had been undermined, stating: “The relevant bargain was what was embodied in the dealer agreements. Nothing more.” This reflected a finding or conclusion expressed earlier in the judgment, at J[187], where his Honour stated (in the context of dealing with the exercise of power to give the NRNs) that “there is no broader bargain between a dealer and [Mercedes Australia] outside the contractual framework of the dealer agreement such that it could be said that the exercise of power to give an NRN was inconsistent with the bargain struck”. See also J[79], [2912].

197    In our view, no error is shown in the primary judge’s identification of the bargain between the parties or in his utilisation of that conclusion at this point of his analysis of the applicants’ unconscionable conduct case. The fact that the contractual terms of the dealer agreements gave each party the right to give a non-renewal notice without cause was a fundamental element of the circumstances that needed to be considered to assess whether Mercedes Australia’s conduct was unconscionable. His Honour was well aware of the nature and scope of the relationships between Mercedes Australia and the dealers, having made detailed findings about these matters earlier in the judgment. His Honour took into account the nature and scope of the relationships at the appropriate points in his analysis of whether the conduct was unconscionable. For example, in the context of the question of vulnerability, his Honour took into account the fact that “the expectation which had been engendered over time was that the dealers would have a longer-term relationship with [Mercedes Australia]” (J[3630]). Thus, his Honour took into account the relationships between Mercedes Australia and the dealers, even if they did not form part of the “bargain”.

198    For these reasons, we reject Ground 1(a)(4).

Ground 1(a)(5) – counterfactual and reasonable rate of return

199    By this aspect of Ground 1, the appellants challenge two aspects of the primary judge’s reasoning:

(a)    the primary judge’s statement that the relevant comparison is ultimately between two possible futures – one future is the agency model and the revenues achievable by the dealers thereunder; the other hypothesised future is the dealership model going forward and the revenues achievable under that future counterfactual (J[3627]); and

(b)    the primary judge’s consideration, as a relevant factor, of the absence of evidence as to whether dealers are able to make a reasonable rate of return (J[3628], [3616]).

200    It appears that the appellants do not press their challenge to (a) above. The appellants’ written submission on Ground 1(a)(5) (paras 44-46) do not make submissions on this point. Mercedes Australia’s submissions at paragraph 5.28 state that only part of Ground 1(a)(5) is pressed, namely the part referred to in (b) above. In their reply submissions in relation to Ground 1(a)(5) (at paragraph 57), the appellants did not disagree with that statement. In any event, we see no error in the primary judge’s statement summarised in (a) above. It is logically correct that the relevant comparison is ultimately between those two possible futures.

201    We note for completeness that his Honour’s finding that most dealers will be worse off under the agency model (J[2647]) involved a different comparison, namely a comparison between the future under the agency model with how the dealership model had operated in the past. That finding is challenged in the notice of contention.

202    We now turn to the appellants’ challenge to [199(b)] above. At J[3628], the primary judge referred to his earlier finding that most dealers will be worse off under the agency model than under the dealership model and that no compensation has been offered or provided to deal with that detriment. His Honour stated that he could not say how much worse off dealers would be. He then stated: “Moreover, I cannot conclude on the current evidence that they [i.e. the dealers] are not able to make a reasonable rate of return”. His Honour made a similar statement at J[3614]. At J[3616], his Honour stated that the applicants had not satisfied him that they would not have a reasonable opportunity to make a return on their assets under the agency model.

203    The appellants do not challenge the primary judge’s conclusion that the evidence did not establish that the dealers could not make a reasonable rate of return; they challenge the primary judge’s consideration of this as a relevant factor. The appellants’ point seems to be that whether or not the dealers were able to make a reasonable rate of return under the agency model was neither here nor there in assessing unconscionability. However, as the judgments in Productivity Partners make clear, it is necessary to have regard to the totality of the circumstances in evaluating whether conduct is unconscionable. Whether the dealers are able to make a reasonable rate of return is a relevant circumstance, particularly in light of the dealers’ reliance on the proposition that there had been an appropriation of profits from the dealers to Mercedes Australia. No error is shown in the primary judge’s consideration of the absence of evidence about this as a relevant factor.

204    We therefore reject Ground 1(a)(5).

Conclusion on Ground 1

205    In light of our rejection of each aspect of Ground 1(a), it is unnecessary to consider Ground 1(b). In any event, we are not satisfied that, on the basis of the primary judge’s findings that are relied on by the appellants, his Honour erred in concluding that the applicants’ unconscionable conduct case was not made out.

206    Accordingly, Ground 1 is rejected.

Ground 3 (duty of good faith under the Franchising Code)

207    Ground 3 (omitting particulars) is as follows:

In respect of [Mercedes Australia’s] conduct in requiring all then existing Dealers to enter into the Agency Agreements (J[431]), without any meaningful concessions on the financial aspects (J[3546]), the primary judge:

(a)    erred in finding that [Mercedes Australia] had not acted in contravention of clause 6 of the Franchising Code (J[3223]), and in particular erred in:

(1)    finding that the terms of the Agency Agreements, safety net letter, and the service and parts agreement were fair and reasonable within the meaning of cl.6(3A) of the Code (J[3048], [3328], [3347], [3350], [3353]);

(2)    finding that there was no foundation to the applicants’ assertion of a want of good faith in [Mercedes Australia]’s conduct in negotiating the agency model generally or the Agency Agreements specifically (J[3216]), having regard to the primary judge’s findings referred to in Ground 1(b), particular (10) and the errors stated in Ground 1(a) above.

(b)    ought to have found [Mercedes Australia] liable for contravention of clause 6 of the Code, and s.51ACB of the CCA, as follows:

(1)    the primary judge ought to have found that the financial terms of the Agency Agreements were not fair and reasonable for the purpose of cl. 6(3A) of the Code;

(2)    otherwise on the basis of the findings of fact made in favour of the case brought by the applicants below and in rejection of the case advanced by [Mercedes Australia], as summarised in the particulars in Ground 1(b) above; and

(3)    having regard to the primary judge’s acceptance that the duty of the good faith in cl.6(2) of the Code extended to proposed agreements and the negotiation of those agreements (J[3066]), and the primary judge’s acceptance of the content of the duty (J[3068]-[3083]), and the interrelationship of cll.6(2) and (3A) of the Code (J[3224]-[3237]).

208    Ground 3(a)(2) refers to (and relies on) the primary judge’s findings referred to in Ground 1(b), particular (10). That particular states:

[Mercedes Australia] dealt with all Dealers collectively and at the same time, without discrimination, as part of an approach to move seamlessly from one model to another model (J[232], [3030]-[3032], [3743]-[3744]). [Mercedes Australia] gave the NRNs at the same time and without regard to individual investments and positions, and provided the agency offer, Agency Agreements and associated documents in a standard form (J[3030]). [Mercedes Australia] played “hard-ball” in its negotiations with the dealers, and the final form of these agreements was presented by [Mercedes Australia] on a “take it or leave it” basis, in circumstances where dealers had little meaningful choice. There was no meaningful negotiation that the new model to be imposed by [Mercedes Australia] was an agency model, and on the financial aspects, [Mercedes Australia] only made concessions on rats and mice issues. On the main commission aspects, [Mercedes Australia] and [Mercedes Germany] ratcheted this down as low as they thought that they could get away with (J[3545]-[3547]) and see also (6) above.

209    Although Ground 3(b)(2) relies on all of the particulars in Ground 1(b), we do not set out the balance of those particulars due to their length. In those particulars, the appellants rely on many of the findings of the primary judge. We have sought to refer to the main findings relied on by the appellants in the “Key factual findings” section of our reasons.

Applicable provisions

210    A contravention of cl 6 of the Franchising Code is a contravention of s 51ACB of the Competition and Consumer Act and gives rise to remedies under that Act.

211    Clause 6 of the Franchising Code contains a statutory obligation of good faith. From 1 July 2021, it included a new clause 6(3A). Clause 6 was in the following terms during 2020 and 2021 (save that cl 6(3A) was in force only from 1 July 2021):

Obligation to act in good faith

(1)    Each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law from time to time, in respect of any matter arising under or in relation to:

(a)    the agreement; and

(b)    this code.

This is the obligation to act in good faith

(2)    The obligation to act in good faith also applies to a person who proposes to become a party to a franchise agreement in respect of:

(a)    any dealing or dispute relating to the proposed agreement; and

(b)    the negotiation of the proposed agreement; and

(c)    this code.

Matters to which the court may have regard

(3)    Without limiting the matters to which a court may have regard for the purpose of determining whether a party to a franchise agreement has contravened subclause (1), the court may have regard to:

(a)    whether the party acted honestly and not arbitrarily; and

(b)    whether the party cooperated to achieve the purposes of the agreement.

New vehicle dealership agreements

(3A)    Without limiting the matters to which the court may have regard for the purpose of determining whether a party to a new vehicle dealership agreement has contravened subclause (1), and without limiting subclause (3), the court must have regard to whether the terms of the agreement are fair and reasonable.

Franchise agreement cannot limit or exclude the obligation

(4)    A franchise agreement must not contain a clause that limits or excludes the obligation to act in good faith.

(5)    A franchise agreement may not limit or exclude the obligation to act in good faith by applying, adopting or incorporating, with or without modification, the words of another document, as in force at a particular time or as in force from time to time, in the agreement.

Other actions may be taken consistently with the obligation

(6)    To avoid doubt, the obligation to act in good faith does not prevent a party to a franchise agreement, or a person who proposes to become such a party, from acting in his, her or its legitimate commercial interests.

(7)    If a franchise agreement does not:

(a)    give the franchisee an option to renew the agreement; or

(b)    allow the franchisee to extend the agreement;

this does not mean that the franchisor has not acted in good faith in negotiating or giving effect to the agreement.

(Emphasis added.)

212    Relevant definitions, and other relevant clauses of the Franchising Code, are set out in the primary judge’s judgment at J[3049]-[3061]. An extract from the explanatory statement in relation to the introduction of the statutory duty of good faith is set out at J[3072].

213    There is no issue that each agency agreement was a “franchise agreement” and a “new vehicle dealership agreement” for the purposes of cl 6 of the Franchising Code.

The primary judge’s reasoning in relation to the good faith duty

214    The primary judge discussed the principles relating to the obligation of good faith at J[3062]-[3097], including by reference to Australian Competition and Consumer Commission v Geowash Pty Ltd (No 3) [2019] FCA 72; 368 ALR 441 (Geowash) at [746] per Colvin J (approved on appeal in Ali v Australian Competition and Consumer Commission [2021] FCAFC 109; 394 ALR 227 (Ali) at [194]). We note that, in the present matter, senior counsel for the appellants submitted that the principles set out in those cases need to be moulded so as to apply to conduct comprising negotiation.

215    The primary judge outlined the key themes of this aspect of the applicants’ case at J[3119]-[3131]. It is apparent from those paragraphs that the applicants’ case based on cl 6 of the Franchising Code at first instance was much wider than the appellants’ case on appeal. In particular, at first instance the applicants contended that the giving of the NRNs in itself involved a breach of the obligation of good faith. That contention is not pursued on appeal.

216    The primary judge divided his analysis of whether there was a breach of cl 6 of the Franchising Code into two sections:

(a)    First, at J[3145]-[3223], he dealt with the applicants’ cl 6 case apart from the question whether the terms of the relevant agreements were unfair and unreasonable.

(b)    Secondly, he considered whether the terms of the agency and ancillary agreements were unfair and unreasonable, and whether there was therefore a breach of the good faith duty in cl 6. This was dealt with at J[3224]-[3361].

Applicants’ cl 6 case apart from unfair and unreasonable terms

217    The primary judge addressed a series of matters that were relied on by the applicants in support of their allegation that Mercedes Australia breached the good faith duty in issuing the NRNs at J[3145]-[3217]. In the course of this section, the primary judge discussed the decision to change to the agency model. Having discussed that matter, the primary judge stated at [3207]:

In summary, the evidence demonstrates that [Mercedes Australia’s] pursuit of an agency model was rational and in pursuit of its legitimate interest. And the anterior step that needed to be taken was to issue the NRNs, which also was in [Mercedes Australia’s] legitimate interest.

218    The primary judge also stated at [3216]:

In summary, whether dealing with the giving of the NRNs or [Mercedes Australia’s] conduct in negotiating the agency model generally or the agency agreements and associated agreements specifically, there is no foundation in the applicants’ assertion of a want of good faith.

(Emphasis added.)

We note that the appellants challenge the conclusion of the primary judge that Mercedes Australia’s conduct in negotiating the relevant agreements was not a breach of the good faith duty in cl 6.

219    The primary judge concluded this section of the judgment (which primarily related to whether the giving of the NRNs involved a breach of the good faith duty) at [3217]:

The applicants have failed to establish that [Mercedes Australia] did not exercise the power of non-renewal in good faith, particularly as the relevant contractual power was for the sole benefit of [Mercedes Australia] as I discussed earlier in my reasons. They have not established any basis on which the NRNs could be set aside.

Unfair and unreasonable terms

220    The primary judge then went on to consider whether the terms of the agency and ancillary agreements were unfair and unreasonable, and whether Mercedes Australia therefore breached the good faith duty, commencing at J[3224].

221    The primary judge first dealt with an issue of construction concerning cl 6(2) and 6(3A). Mercedes Australia contended that cl 6(3A) applies only to parties to a “new vehicle dealership agreement” and does not apply to pre-entry conduct in relation to that agreement which might otherwise be captured by cl 6(2): J[3228]. The primary judge rejected that construction: J[3228]-[3236]. In other words, the primary judge accepted the applicants’ construction that cl 6(3A) applies also to pre-entry conduct. By ground 3 of its notice of contention, Mercedes Australia challenges that conclusion.

222    The primary judge set out the terms of the agency agreements that the applicants contended were not fair and reasonable at J[3238]-[3257]. At [3258], the primary judge stated:

Now I accept that these terms need to be considered collectively, and in the context of their effect on the existing relationship under the dealer agreements and the investments that the dealers had made in their dealerships.

223    The primary judge set out a summary of the applicants’ contentions about the effect of the terms of the agency agreements:

3272    Overall, the applicants say that it is apparent that the effect of these terms was the following.

3273    First, the effect is to effectively take the goodwill of the dealerships without paying for it, or alternatively, to appropriate profits from the dealers to [Mercedes Australia], where the dealers had made investments and taken risks on the basis that they would earn those future profits.

3274    Second, the effect is to take back the benefits that [Mercedes Australia] had traded away at the time of attracting the dealers to invest.

3275    Third, the effect is to effectively flip the original bargain, by keeping the dealership structure in place to generate the profits from customers based on the dealers’ investments, but placing dealers on a set commission.

3276    Fourth, the effect is to deliver significant reduced returns to the dealers.

3277    Fifth, the effect is to impose terms that enable what is colourfully described as the parasitic transfer of customer data.

3278    Sixth, the effect is to limit the term to a period patently inadequate for any dealer to secure a return on the investments made or to be made in its [Mercedes-Benz] dealership, and allow [Mercedes Australia] to more easily reduce the number of dealerships in the future, in accordance with its internally stated but otherwise undisclosed intention.

224    The primary judge set out the relevant terms of, and the applicants’ contentions in respect of, the safety net letter at J[3280]-[3287], the service and parts agreement at J[3288]-[3303], the new EQ trial agreement at J[3304]-[3311], and the new vans agreement and new digital services agreement (DSA) at J[3312].

225    His Honour’s core reasoning on this part of the case is at J[3313]-[3361]. In the first part of that section, his Honour said:

3315    Unlike other statutory regimes, the Franchising Code does not contain a freestanding prohibition of unfair terms in franchise agreements. Rather, the inquiry with respect to whether a term of a franchise agreement is fair and reasonable is directed toward determining whether the good faith duty has been contravened.

3316    The applicants’ claim, namely, that the terms of the agency and related agreements are not fair and reasonable, and for that reason contravene the good faith duty can be readily disposed of.

3317    Now no separate relief is sought in respect of these claims. Instead, the applicants submit that the alleged unfairness and unreasonableness of the terms of the agency agreement and other agreements are an additional factor in support of the claim of economic duress, as well as being relevant circumstances in support of the unconscionable conduct claim and related good faith claim.

3318    Here, the applicants advance general claims that the terms of the given agreements are not fair and/or reasonable. And they fail to identify any particular use of powers and opportunities in respect of which there has been an alleged failure to act in good faith.

3319    Further, the applicants’ claim rises no higher than an assertion that there has been a failure to act in good faith by [Mercedes Australia] because the applicants would have preferred to sign agency and related agreements containing different terms.

3320    The applicants’ analysis proceeds on the false premise that the correct approach is to compare the terms of the dealer agreements with the agency agreement and, if the applicants consider that the latter is less beneficial to them, to assert that it is unfair.

3321    The applicants fail to identify any particular use of power and opportunities in respect of which there has been an alleged failure to act in good faith, or indeed any act which might be said to be capricious, dishonest, arbitrary or motivated by a purpose which is antithetical to the evident object of any provision of a franchise agreement.

226    We note that the statement at J[3317] that no separate relief was sought in respect of these claims does not appear to be correct. Paragraph 4(a) of the further amended originating application sought a declaration that Mercedes Australia had contravened s 51ACB of the Competition and Consumer Act by breaching cl 6 of the Franchising Code. See also orders 2(a) and 2(b) sought in the further amended originating application. But nothing turns on this.

227    The primary judge considered, at J[3324]-[3328], whether the relevant terms were unfair. His Honour concluded that, in his view, “none of the identified terms come close to being unfair terms”: J[3328].

228    His Honour then addressed each of the relevant agreements. He first addressed the agency agreement and reasoned:

3330    I reject the applicants’ claim that the terms set out are not fair and/or reasonable and/or were a contravention by [Mercedes Australia] of the duty of good faith under clause 6 of the Franchising Code.

3331    First, the applicants allege that the terms of the agency agreement oblige the applicants to continue to operate their dealerships in substantially the same manner under the agency agreement as they did under the dealer agreements, without having the opportunity to conduct their business to generate profits commensurate with the costs and risks involved, and/or to generate the profits they were making from the dealership under the dealer agreement. They also assert that [Mercedes Australia] imposed a remuneration structure on the applicants which is detrimental to the applicants, and also can be unilaterally varied on notice. But none of this establishes a lack of fairness or reasonableness.

3332    The operation of the dealership is different under an agency model, with reduced costs and risks.

3333    Further, the dealer agreement provided no entitlement to any particular margin or any particular level of profitability. Under the dealer agreement, [Mercedes Australia] determined the allocation of products to a dealer and the prices at which they would be supplied. Moreover, the fact that under the agency agreement the remuneration can be unilaterally varied on notice does not contain any unfairness.

3334    Second, the applicants say that depriving the applicants of the ability to negotiate a discount on new vehicles is not fair and reasonable as it will result in the loss of sales and the loss of the opportunity to earn commission under the agency model. But no cogent evidence has been led to make good that proposition, just the self-serving assertions of the applicants that it will be so.

3335    In any event, the imposition of a fixed price model cannot be said to be unfair, unreasonable or otherwise a breach of the good faith duty under the Franchising Code given the following points.

3336    [Mercedes Australia] had a legitimate commercial interest in introducing a fixed price model so as to prevent discounting that had become prevalent in the market, keep out disruptors and improve the customer experience at the point of purchasing a vehicle.

3337    It is neither unfair nor unreasonable to prefer those legitimate commercial interests to the view of some retailers that they saw negotiating price as a way to build customer relationships.

3338    Further, under the agency model, the agents retained the ability to build customer relationships by discussing and advising on vehicle parts and accessories, providing good customer service, and through the related parts of their businesses offering finance and insurance and parts and servicing departments.

3339    Third, the applicants allege that under the agency model [Mercedes Australia] interfered and will interfere with the relationship between the agents and their customers. But under the dealer agreement, customer information was provided to [Mercedes Australia] and dealers were required to return customer information to [Mercedes Australia] at the expiry or termination of the dealer agreement. But I accept that the position is tighter under the agency model.

3340    Further, under the agency model, retailers retain their key customer-facing role. There is no prohibition on retailers collecting customer information; to the contrary they are required to do so.

3341    Fourth, the applicants say that the sale value of dealerships is effectively worthless under the agency model. That assertion should be rejected for the reasons set out elsewhere.

3342    Further, the applicants’ assertion that the premature end provision in the agency agreement diminishes the sale value of dealerships and is, accordingly, neither fair nor reasonable, ignores the fact the term is required by clause 46A of the Franchising Code. Further, I do not consider that any unilateral termination rights are unfair or unreasonable.

3343    Fifth, the applicants allege the agency agreement provides a contractual mechanism that would enable [Mercedes Australia] to close dealerships without having to pay any or any meaningful compensation to retailers. But the agency agreement affords retailers greater protection in that regard than the dealer agreements, which in most cases had a 12-month term and no entitlement to compensation on non-renewal.

3344    Sixth, the applicants allege that [Mercedes Australia] has failed to make any provision for the payment to the applicants for the transfer of the future value of the existing customers to the dealerships and/or to compensate them for the loss of goodwill. But the applicants had no such entitlement at law.

3345    Seventh, the applicants’ assertions that the terms of the agency agreement were imposed over the opposition of the dealers, in circumstances of economic duress and without any meaningful negotiation are incorrect.

3346    Eighth, the applicants allege that [Mercedes Australia] requiring them to sign the recitals to the agency agreement constituted an attempt to pre-empt or negate any subsequent complaint about the lack of fairness and reasonableness of the agency agreement and to stifle the freedom of expression by any applicant about [Mercedes Australia]’s conduct. But such a claim is contradicted by these proceedings.

3347    In summary, there is no basis for the applicants to assert that the terms of the agency agreement are not fair and reasonable. But even if they were, that is only one indicia in considering the good faith question. On any view these terms considered separately, cumulatively or with the other circumstances do not show a lack of good faith.

(Emphasis added.)

229    The primary judge’s reasoning in relation to each of the other relevant agreements is at J[3348]-[3361].

The appellants’ submissions

230    In oral submissions in relation to Ground 3, senior counsel for the appellants submitted that the case presented on appeal is concerned with whether Mercedes Australia breached cl 6 in the negotiation of the agency agreement in relation to the financial terms of that agreement. He submitted that the primary judge made two principal errors:

(a)    First, by finding at J[3046] that the financial terms were fair and reasonable within the meaning of cl 6(3A) when that was not the case.

(b)    Second, by rejecting at J[3216] the applicants’ case of want of good faith in Mercedes Australia’s conduct in negotiating the agency agreements, specifically insofar as those negotiations concerned the financial terms.

231    Senior counsel for the appellants submitted that there are four key findings that the appellants wished to highlight at the outset:

(a)    First, at J[2036], the primary judge found that 3 May 2021 was the first time the dealers received anything in writing from Mercedes Australia about the agency model when they received an indicative draft agency agreement, including the remuneration schedule and an agency overview (1.0).

(b)    Second, at J[2063], the primary judge found that, on 11 June 2021, the dealers made it clear that they were concerned about the financial aspects of the agency model remuneration in a consolidated response sent to Mercedes Australia.

(c)    Third, the course of negotiations culminated in a mediation on 9 September 2021, referred to by the primary judge at J[2165]. At J[2173], his Honour found that it would seem Mercedes Australia made no substantial financial concessions as a result of the mediation that departed from what had been decided by Ms Seeger and Mr Schymon in Business Case 2.1 in October 2020. (The reference in that paragraph of the judgment to “October 2021” appears to be a typographical error.)

(d)    Fourth, at J[245], the primary judge found that Mercedes Australia only made concessions on “rats and mice issues” and that, on the main commission aspects, Mercedes Australia and Mercedes Germany “ratcheted this down as low as they thought that they could get away with”.

232    The appellants submit that the few cases that have considered statutory good faith obligations have generally been in the context of good faith in the performance of an existing contract, rather than in the negotiation of a new contract; where, as here, a new contract is intended to continue an existing relationship and investments, it is appropriate to consider the proposed terms collectively, and also in the context of the existing relationship and existing contractual terms (J[3258]); the primary judge applied that analysis to the service and parts agreement at J[3353], but not to the agency agreement at J[3320].

233    The appellants submit that the objective analysis of the relevant negotiations is simple – the primary judge found that there were no meaningful negotiations in relation to the financial terms (J[3546]); that is because Mercedes Australia was constrained by decisions made by Mercedes Germany in Stuttgart, and in particular Business Case 2.1 and the FAPS; the relevant local executive, Mr Seidler as the replacement CEO, was sent to Australia with a “clear mission to implement the agency model” on behalf of Mercedes Germany (J[517]).

234    The appellants submit that Mercedes Australia was engaged in designing and fine-tuning its Business Cases and DCVA analyses with Mercedes Germany, without the involvement of the dealers; even the details first presented in late April 2021 were couched in equivocal language of a “remuneration concept” (J[2018]); even accepting that Mercedes Australia made concessions on operational matters throughout its “consultations” with the dealers from 2018 onwards, and also in 2021, there was no meaningful negotiation about the financial terms (J[3546]); in any event, opportunistic conduct, in holding a party’s investments hostage to extract the benefits of those investments for oneself is not a good faith negotiation; setting a commission “as low as they thought that they could get away with” (J[245]) and refusing to negotiate on those terms, is not acting in good faith. The appellants submit that other indicia of a lack of good faith include: (a) seeking to insist on recitals and terms that were untrue about the negotiations and the deployment of capital assets; and (b) including terms to permit future margin reductions – agreeing only to vary the notice from 6 months to 12 months – with a plan in mind to apply a “margin glide path” and further reduce commissions.

235    The appellants submit that, as the primary judge found at J[242], the effect of the agency and related agreements was that Mercedes Australia “cherry-picked the best bits of the dealers’ businesses” and “left the dealers with less desirable features”; this was neither fair nor reasonable.

Consideration

236    We note at the outset of our consideration of this ground that the appellants’ case on appeal has a different emphasis from the case presented at first instance. The focus of the cl 6 case at first instance was on the giving of the NRNs being a breach of the good faith duty, and the terms of the agency agreements and associated agreements being unfair and unreasonable. While the applicants’ case at first instance included a contention that Mercedes Australia’s conduct in negotiating the relevant agreements involved a breach of the good faith duty (see the amended statement of claim, paragraph 71), that was not the focus. Nevertheless, the primary judge did address this aspect, and rejected it at J[3216] (set out at [218] above).

237    For the reasons that follow, we see no error in the primary judge’s conclusions that: (a) it was not established that the terms of the agency agreements and associated agreements were unfair and/or unreasonable; and (b) it was not established that Mercedes Australia’s conduct in negotiating the financial terms of the agency agreements and associated agreements breached the good faith duty.

238    The applicable principles relating to the good faith duty were stated by Colvin J in Geowash at [746] (affirmed on appeal in Ali at [194]). We accept the appellants’ submission that that statement of the applicable principles needs to be moulded to apply to conduct comprising negotiation. We note also the discussion of what good faith entails in relation to negotiation in Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222; 41 WAR 318 at [62] per Pullen JA (Newnes JA agreeing).

239    In relation to the financial terms of the agency agreements, the matters referred to by the primary judge at J[3332]-[3346] (set out at [228] above) are cogent and persuasive reasons why it is not established that the terms are unfair and/or unreasonable. There is no need to repeat those points. We adopt his Honour’s reasons.

240    Insofar as the appellants submit that the primary judge failed to consider the issue of the fairness and reasonableness of these terms in the context of the existing dealership relationship, we do not accept that submission. As set out above, at J[3258], the primary judge stated that he accepted that the terms need to be considered “in the context of their effect on the existing relationship under the dealer agreements and the investments that the dealers had made in their dealerships”. Further, in the course of his core reasoning on whether the agency agreement terms were fair and reasonable, the primary judge referred to the dealer agreements (eg, at J[3343]). Thus, his Honour had regard to the context.

241    In relation to Mercedes Australia’s conduct in negotiating the agency agreements and associated agreements, we proceed on the basis of the primary judge’s findings. The primary judge made findings that:

(a)    there is no doubt that Mercedes Australia played hard-ball in its negotiations with the dealers (J[245]);

(b)    there was no meaningful negotiation that the new model to be imposed would be an agency model (J[245]);

(c)    there was some negotiation over the detail of some aspects (J[245]);

(d)    on the financial aspects, Mercedes Australia only made concessions on “rats and mice issues” (J[245]); and

(e)    on the main commission aspects, Mercedes Australia and Mercedes Germany “ratcheted this down as low as they thought that they could get away with” (J[245]).

242    The primary judge also found that various themes put by Mercedes Australia to the dealers in relation to the agency model were either exaggerated or turned out to be incorrect: J[253].

243    The primary judge also made detailed findings about the interactions between Mercedes Australia and dealers during 2021 at J[1917]-[2199], some aspects of which have been highlighted in the appellants’ submissions.

244    We are not satisfied that those findings are sufficient to establish that Mercedes Australia breached its good faith duty in the conduct of the negotiations. In particular, the fact that Mercedes Australia made no concessions on the commission payable to the dealers under the proposed agency agreements, and indeed ratcheted this down as low as they thought they could get away with, is not sufficient to establish a breach of the duty of good faith, even in the context of the pre-existing relationship between Mercedes Australia and the dealers. This was a commercial negotiation between business entities. It was not incumbent on Mercedes Australia to maintain the rate of return the dealers had experienced under the dealership model.

245    The fundamental difficulty with the appellants’ case in relation to Ground 3 is that all of the matters relied on by the appellants were taken into account by the primary judge in reaching his conclusion that Mercedes Australia did not breach the good faith duty. Indeed, the appellants’ submissions are built upon findings made by the primary judge. It is not suggested (nor could it be) that the primary judge did not take these findings into account when reaching his conclusion that Mercedes Australia’s conduct did not breach the good faith duty. Indeed, in our respectful opinion, the strength of his Honour’s judgment is that it includes many findings that are favourable to the applicants, but nevertheless concludes that their case based on breach of the good faith duty is not made out.

246    For these reasons, we reject Ground 3.

Ground 4 (findings of fact)

247    Ground 4 is as follows:

As additional bases in support of Grounds 1-3 above, the primary judge erred in making the findings set out in column A of Schedule A, to the extent that they are findings of fact, and ought to have made the findings set out in column B of Schedule A.

248    As noted in the Introduction to these reasons, little attention was given to Ground 4 in the appellants’ written or oral submissions. In the appellants’ written submissions, they submitted in relation to Ground 4:

This appeal can be determined almost entirely on the factual findings of the primary judge. For the avoidance of doubt, the appellants have identified four findings which are challenged (to the extent they are findings of fact), as set out in Schedule A to the Notice of Appeal. The alternative findings for which the appellants contend are set out in Column B of Schedule A, having regard to existing findings made by the primary judge (set out in Column B) or other objective material. Ground 4 is advanced in this way as a matter of convenience, and submissions in relation to the findings challenged have already been addressed elsewhere in these submissions.

(Footnotes omitted.)

249    In a footnote to the above paragraph, the appellants refer back to earlier parts of their submissions on the other grounds of appeal.

250    In oral submissions about Ground 4, the appellants’ senior counsel submitted:

Now, ground 4 of our appeal dealt with factual errors and they were, as we said at the outset, matters which really, in a sense, were matters more likely to be evaluative, in … effect conclusional, about unconscionability and therefore not matters of fact. We put those in as a matter of protection against that possibility.

251    Given the way Ground 4 is put, it can be dealt with relatively briefly, and largely by reference to our earlier reasons.

252    We refer, in turn, to each of the four matters that are set out in Schedule A to the notice of appeal.

253    First, the appellants challenge the finding that there was a causal break in the facts between the NRNs given at the end of 2020 and the offers concerning agency given in mid-2021 (J[193], [2918]). Instead, the appellants contend that his Honour should have found that the giving of NRNs and the making of offers concerning agency were part of a single course of conduct by Mercedes Australia (cf. J[428]-[431], [1509], [1867], [3030]-[3032]). For the reasons given above, the primary judge’s reference to “causal break” needs to be read in context. When so read, we see no error in his Honour’s statement.

254    Second, the appellants challenge the following findings or conclusions:

The purpose of the NRNs was not to establish the basis for making a subsequent threat to the Dealers either to sign whatever form of agency and other agreements were presented to the dealers to implement the agency model, or have the relationship with the Mercedes-Benz brand cease (J[3212]). The contractual power not to renew was exercised for a proper purpose, in good faith and without economic duress (J[3636]). [Mercedes Australia] did not issue the NRNs for the purpose of exerting pressure on the Dealers (J[3684]). To the extent that the applicants felt pressure to enter the Agency Agreements, as they undoubtedly did, that pressure was not illegitimate but a result of ordinary and acceptable commercial dealings (J[3409]).

255    In support of the challenge to these findings or conclusions, the appellants’ written submissions provide a cross-reference to paras 31-32 of their written submissions. Those paragraphs form part of the appellants’ submissions on their unconscionable conduct case (Grounds 1 and 2). In summary, in those paragraphs, the appellants contend that issuing the NRNs provided the opportunity to appropriate the future benefits of the dealers’ investments for Mercedes Australia; Mercedes Australia could not contractually impose agency; however, by using its contractual power to issue NRNs, it exposed the dealers’ vulnerability to their past investments being ‘held hostage’, unless they agreed to new terms proposed by Mercedes Australia; in order to maximise that advantage, and expose the collective weakness of the dealers, Mercedes Australia decided on a plan in May 2019 to align the expiry dates of all dealer agreements so that they could be terminated as a ‘job lot’, without regard for the individual circumstances of any particular dealer. We have referred to these contentions earlier in these reasons. They did not provide a basis to conclude that the primary judge erred in his consideration of the applicants’ unconscionable conduct case. Given the way Ground 4 is put, it is unnecessary to deal further with this aspect of Ground 4.

256    Third, the appellants challenge the finding that Mercedes Australia did not acquire the dealers’ businesses and nor did it seek to do so (J[3016]). The paragraph that is challenged is located in the section of the primary judge’s judgment dealing with the applicants’ contractual case. The paragraph is largely concerned with goodwill but includes a final sentence that Mercedes Australia “did not acquire those businesses [i.e. those of the dealers] and nor did it seek to do so”. The appellants’ written submissions (including at the cross-referenced paragraphs, namely paragraphs 23-26) do not explain why they say that finding is incorrect. We see no error in that finding.

257    Fourth, the appellants challenge the finding that as Mercedes Australia wanted to support dealers through the transition with a safety net, it was not necessary to consider compensation (J[1798]). That paragraph of the primary judge’s judgment forms part of his Honour’s chronological findings, and is located where his Honour is describing events in 2020. To provide context we set out both J[1797] and [1798]:

1797    Another issue that was refined throughout 2020 was the safety net to be offered by [Mercedes Australia] to assist the dealers if there were issues transitioning to the new model. But this was not compensation, as the aim of the new business model was to improve the profitability and value of the dealers’ businesses, not to take anything away that would require compensation.

1798    [Mercedes Australia] offered dealers the safety net to support dealers through transitioning issues, as it was realistic that the market might need time to adjust to the new model and/or improvements in profitability may not be immediately felt. [Mercedes Australia] wanted to support dealers through the transition with a safety net, it was not necessary to consider compensation.

258    It may be that the word “As” should be inserted at the beginning of the second sentence in J[1798]. In any event, read in context, we consider that the primary judge was merely making a statement about Mercedes Australia’s position rather than expressing a view himself as to whether compensation was necessary. The appellants’ submissions (including at the cross-referenced place: fn 75) do not explain why they say the primary judge’s statement in the last sentence of J[1798] was in error. We see no error in that statement.

259    For these reasons, we reject Ground 4.

Conclusion

260    For these reasons, the appeal is to be dismissed. It is therefore unnecessary to consider the notice of contention. There is no apparent reason why costs should not follow the event.

Associate:

Dated:    9 July 2025

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