Federal Court of Australia

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

ORDERS

THE COURT ORDERS THAT:

1.    The parties on or before 21 September 2023 file and serve proposed minutes of orders to give effect to these reasons.

2.    There be a further case management hearing on a date to be fixed to deal with confidentiality issues.

3.    Liberty to apply.

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

REASONS FOR JUDGMENT

BEACH J:

1    Mercedes-Benz dealers have brought the present proceeding asserting that the agency model as implemented in Australia by Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) has involved the appropriation of their goodwill and customer relationships for no or inadequate compensation. It is said that this agency model has provided a worse financial return to the dealers than existed under the prior dealership model.

2    Now from 2018 onwards the dealers consistently opposed the introduction by MBAuP of the agency model. It is said that they did so having endured years of misrepresentations by MBAuP, threats to their ongoing business relationship, and the refusal to genuinely negotiate the terms of the agency agreements. Such conduct was said to involve the spin and dissimulation of officers of MBAuP including Mr Horst von Sanden, Mr Florian Seidler and Mr Jason Nomikos in their dealings with the dealers.

3    It is said that the implementation of the agency model and the issuing of non-renewal notices bringing to an end their relationships under the prior dealer agreements were not the product of a genuinely conducted process, and were not conducted in good faith.

4    Further, it is said that there has been an appropriation of the dealers’ goodwill in the events which have occurred without compensation. Moreover, it is said that MBAuP knew or was recklessly indifferent to the fact that most if not all of the dealers would be worse off under the agency model. It is said that this model was imposed on the dealers in contumelious disregard of their interests.

5    Further, in implementing the agency model the applicants say that MBAuP was little more than the cat’s paw of its ultimate holding company, Mercedes-Benz AG (MBAG). It is said that MBAuP acted in accordance with the directions of MBAG, through the latter’s formal decision-making structure with key decision-makers including Mr Matthias Lührs, Ms Britta Seeger, Mr Peter Schymon, Mr Harald Wilhelm and Mr Ola Källenius.

6    It is said that various reporting lines converged at the MBAG Board of Management level, which was the real decision-making body so far as the agency model in Australia was concerned. I will discuss these matters in detail later, including the role and conduct of Region Overseas (RO) personnel.

7    It is said that MBAG not only made all the critical strategic and timing decisions for the rollout of agency in Australia, but set the guardrails for the operational decisions. It is said that MBAG collaborated closely with the MBAuP project team in relation to operational issues, but that the Finance and Controlling staff including Messrs Wilhelm, Schymon, Jörg Wolf, and Tobias Freienstein had the final say in relation to the setting of dealer commissions.

8    More generally it is said that no decision of any significance about the agency model in Australia was made by MBAuP.

9    Now these proceedings were commenced on 18 October 2021 by 38 of the then 49 dealers operating Mercedes-Benz (MB) dealerships in Australia. I will refer to Mercedes-Benz and MB inter-changeably throughout these reasons.

10    On 12 November 2021 I ordered:

Subject to further order, the trial of the claims of the individual applicants identified by operation of orders 2 and 3 (other than the quantification of any monetary compensation) and any other issues that the Court directs, be fixed for hearing on 2 August 2022 at 10.15am on an estimate of 4 weeks.

11    So, orders were made setting down the matter for an expedited hearing commencing on 2 August 2022 with further orders concerning the selection of four of the applicants to serve as exemplars for the purpose of that hearing, such that each of their individual claims would be dealt with. Two exemplars were nominated by the applicants, being the fourth and twenty-first applicants, and two exemplars were nominated by MBAuP, being the twenty-eighth and thirty-sixth applicants. Between them, the four exemplars represented all of the 38 applicants in relation to their dealership agreements with MBAuP.

12    The trial occurred over August to October 2022 with further written material filed up to December 2022. In addition to more than 100 folders of witness statements, annexures and other exhibits, other evidence had to be filtered and synthesised from an electronic database. The case was forensically complex although legally straight-forward for a case of this type. Notwithstanding, I have had to say a little on the concepts involved in statutory unconscionable conduct as a counterpoint to what can be described as value-laden philosophising in some of the authorities. This is a characterisation not a criticism.

13    Let me now say something further about the case and the claims made.

14    The applicants challenge the non-renewal of their dealer agreements and the imposition on them of the agency model, which they say has involved the appropriation of their goodwill.

15    The applicants say that the dealer agreements were “evergreen”. By “evergreen”, the applicants mean that the non-renewal power was constrained such that MBAuP could exercise the power of non-renewal only if a dealer failed to meet their targets or make mutually agreed improvements.

16    On the applicants’ case, the parties made a permanent bargain. So, because a dealer made investments in their dealership, the dealer was entitled to continue to operate under the dealer model permanently, provided the dealer met their targets, made mutually agreed improvements and did not breach the agreement. They allege that by force of clause 1.2 of the dealer agreements, MBAuP gave away the right to operate any business model in Australia other than the dealer model. They say that in essence clause 1.2 was a renunciation of agency.

17    The applicants say that the non-renewal power, which could be exercised by MBAuP without cause, did not extend to permitting MBAuP to use that power to continue the existing relationship between MBAuP and each of the dealers on the basis of an agency relationship.

18    They say that the non-renewal notices (NRNs) given to them by MBAuP at the end of 2020 were invalidly issued. Now they advance such a case despite the express words of clause 8 of each dealer agreement and the fact that, correspondingly, a dealer could terminate the agreement without cause on 60 days’ notice. And they advance their case despite the fact that each dealer agreement did not grant a dealer an entitlement to any particular margin or any particular level of supply, if at all, of Mercedes-Benz vehicles and MBAuP could change the dealer’s prime marketing area (PMA) on three months’ notice.

19    Further, the applicants say that MBAuP has appropriated the dealers’ property being their goodwill. It is said that the agency model implemented in Australia involves the appropriation of the dealers’ goodwill and customer relationships for no or inadequate compensation. It is said that the purpose of issuing the NRNs was to terminate the dealer agreements and force the applicants to enter into the agency agreements to achieve the purpose and effect of transferring the goodwill in each applicant’s dealership to MBAuP.

20    Generally, the applicants contend that MBAuP’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.

21    Let me at this point say something more about the NRNs. The applicants allege that MBAuP had various improper purposes in issuing the NRNs and failed to consider certain matters in issuing the NRNs.

22    First, it was said that the purpose of the NRNs was to terminate the dealer agreements and introduce the agency model so as to transfer the goodwill in each applicant’s dealership to MBAuP. It was said that MBAuP misused a contractual mechanism intended for another purpose.

23    Second, it was said that the issuing of the NRNs was to give effect to directives issued by MBAG to MBAuP and to give effect to a global strategy or policy of MBAG to implement the agency model. So, it was said that MBAuP introduced a direct sales model at the behest of MBAG without exercising its own judgment.

24    The applicants allege that the proper purpose of the non-renewal power was to allow MBAuP to bring the relationship to an end where a dealer did not meet their performance targets or did not carry out mutually agreed improvements. Moreover, the applicants contend that the purpose of the power of non-renewal was to end the relationship between MBAuP and a dealer, not to continue the relationship on different terms unilaterally imposed by MBAuP.

25    The applicants allege that by engaging in the relevant conduct for an impugned purpose, each NRN was issued with the following characterisations.

26    First, the NRNs were issued in contravention of the good faith duty under clause 6 of the Franchising Code as set out in Schedule 1 to the Competition and Consumer (Industry Codes–Franchising) Regulation 2014 (Cth) and involved a contravention of s 51ACB of the Competition and Consumer Act 2010 (Cth) (CCA).

27    Second, the NRNs were issued in contravention of certain alleged implied duties owed by MBAuP 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.

28    Third, 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, being the 2002 dealer agreement term provision, the 2015 dealer agreement term provision and the Wollongong dealer agreement term provision.

29    Fourth, 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. But by the end of the trial it appeared that the spent notices claim was no longer pressed by the applicants. But even if it had been persisted in, in my view it was meritless.

30    Now the applicants say that if one or more of these grounds are established, then each of the NRNs should be set aside or is void and of no effect. And the applicants say that if the NRNs are set aside or are void, then each of the applicants is entitled to have their dealer agreements automatically continued on and from 1 January 2022.

31    But I should say now that I have rejected the applicants’ case on this aspect.

32    The very purpose of the non-renewal power is to bring the existing contractual bargain to an end. And the content of MBAuP’s obligation pursuant to any duty of good faith and to act with fidelity to the bargain between the parties is necessarily informed by the nature of the power which is to bring that bargain to an end.

33    So, the proper inquiry is directed to MBAuP’s non-renewal of each dealer agreement and whether the non-renewal was faithful to that contractual bargain. It was. MBAuP exercised the non-renewal power for the purpose for which it was created, being to bring each dealer agreement to an end.

34    Moreover, the applicants’ position fails to recognise that it will be difficult to discern a want of good faith in the exercise of a power which can serve only the interests of the party upon whom the power is conferred.

35    Further, once it is appreciated that the commercial bargain struck by the dealer agreements was not a permanent bargain, the proper analysis of the NRNs claim is to evaluate whether the exercise of the non-renewal power was faithful to that bargain. On the NRNs claim, the inquiry is not whether the introduction of the agency model, at large, was in good faith or faithful to the bargain struck under the dealer agreements. However, and in any event, even if that were the proper inquiry, the evidence demonstrates that MBAuP introduced the agency model in good faith.

36    Let me turn to some other matters concerning the applicants’ case.

37    First, the applicants have brought a claim asserting that they were subject to economic duress. They say that they did not have the opportunity to give their consent freely to enter into any of the agency agreements, by reason of MBAuP’s pressure or threat to treat the dealers’ relationships with MBAuP and the MB brand as ceasing on 31 December 2021 if the applicants did not sign and return to MBAuP each of those agreements. They allege that the pressure exerted and the threats made upon each of the applicants to sign the agency agreements was illegitimate, thereby amounting to economic duress. They seek orders setting aside and/or rescinding the agreements. But for the reasons that I have set out later, such a claim is not made out.

38    Second, the applicants allege that other conduct of MBAuP was a contravention of its obligation of good faith under clause 6 of the Franchising Code. The applicants say that MBAuP 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. But again, such claims have not been made out.

39    Third, the applicants allege that MBAuP engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law (ACL), as set out in Schedule 2 to the CCA, in three principal respects.

40    The first principal respect was said to be by purporting to bring to an end the dealer model by not renewing each of the applicants’ dealer agreements.

41    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.

42    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 dealer model, and the implementation of the agency model under the agency agreements, service and parts agreements, and agency related agreements.

43    Generally, the applicants allege that MBAuP has 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 dealer model, implementing terms in the agency agreements to allow MBAuP to rationalise its network and implementing a global directive, strategy or policy of MBAG.

44    But I agree with MBAuP that the applicants in essence seek to rewrite the contractual bargain struck by the dealer agreements into one which better suits their commercial interests. They seek to convert the commercial judgment they made when they entered into those agreements into a guarantee of permanent tenure (subject to certain qualifications that it is convenient for them to concede) and a fetter on the exercise by MBAuP of its legitimate business judgment as to how best to adapt to a changing marketplace concerning the Mercedes-Benz brand in Australia. In essence, the commercial judgment made by each dealer was that MBAuP would not issue a notice of non-renewal if the dealer performed well, because it was assumed that it would be in MBAuP’s commercial interest and the dealer’s interest for that agreement to continue. No doubt that was a sensible commercial assumption to make. But it was not the contractual bargain that was struck. The NRNs could be given without cause.

45    Moreover, the applicants do not allege that the agency agreements have not provided them with a reasonable opportunity to make a return on their investments during the term of those agreements, that being a statutory requirement under clause 46B of the Franchising Code which provides that:

A franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement.

46    Instead, the applicants’ case proceeds on the basis of a “better off/worse off” analysis of Mr Terence Potter, the applicants’ financial expert witness. I will return to this later in my reasons. But in any event, it does not follow that MBAuP has acted unconscionably or failed to act in good faith because a dealer is financially worse off under the agency model as compared to the dealer model.

47    Moreover, the applicants have neither run a case nor sought to establish that the remuneration under the agency model ought to have been set at a particular level or to generate a particular return on sales (RoS).

48    In summary, I would reject the applicants’ unconscionable conduct case although I must say that it had greater merit than the applicants’ other claims and has involved a harder judgment call on my part.

49    Now the principal remedy sought by the applicants is the setting aside of the NRNs and damages for the losses suffered by the applicants as a result of the implementation of the agency model in 2022, with alternative or other relief.

50    The applicants’ relief is framed by reference to provisions of the CCA and the ACL as well as under the common law and in equity.

51    First, they seek declarations that MBAuP has contravened s 51ACB of the CCA by breaching clause 6 of the Franchising Code and engaging in conduct that was unconscionable in contravention of s 21 of the ACL. Section 51ACB, which is in Division 2 of Part IVB, provides that a corporation must not contravene an applicable industry code. Relevantly, the Franchising Code is an industry code prescribed by the regulations.

52    Second, they seek declarations pursuant to ss 80 and 87 of the CCA, ss 232 and 237 of the ACL and at law and in equity declaring the NRNs issued to the applicants to be void, declaring the agency agreements and the service and parts agreements entered into with the applicants to be void ab initio, and declaring that the dealership agreements of the applicants continue to have their full force and effect after 31 December 2021. They also seek orders that MBAuP specifically perform and carry into effect the dealer agreements of the applicants or other orders or relief as will restore the applicants to the full enjoyment of their rights under their respective dealer agreements as if they had continued to have full force and effect after 31 December 2021.

53    Third, alternatively, the applicants seek orders pursuant to ss 80 and 87 of the CCA and ss 232 and 237 of the ACL and at law and in equity declaring relevant terms of the agency agreements and/or the service and parts agreements of the applicants to be void ab initio either in whole or to the extent that those terms are not fair and reasonable, or varying such terms as and from the commencement of the agency agreements and/or the service and parts agreements.

54    Fourth, the applicants seek damages and/or orders for compensation pursuant to ss 82(1)(a) and 87(1) of the CCA, ss 236 and 237 of the ACL and at law or in equity.

55    In essence, the applicants seek orders that will put them in the position that they were in prior to MBAuP’s imposition, as they would describe it, of the agency model on them. In other words, the applicants seek orders which will restore the status quo ante.

56    Now MBAuP did not defer the implementation of the agency model. Instead, with knowledge of these proceedings and the nature of the relief sought by the dealers, MBAuP proceeded to implement the agency model to conform to a deadline for implementation on 1 January 2022.

57    Now the applicants have prayed in aid the philosophy manifested in Metz Holdings Pty Ltd v Simmac Pty Ltd (No 2) (2011) 216 IR 116 at [872] to [874]. The applicants say that I should take a similar approach in the present case. They say that to make an order for damages and not to grant relief setting aside the agency agreements would be to allow MBAuP to enjoy the fruits of its wrongful conduct and to condemn dealers to the servitude of a business arrangement to which they did not consent and had no alternative but to subject themselves to. They say that I should restore the status quo prior to the implementation of the agency model. And by restoring the applicants to their rights under the dealership model, including to their rights of automatic renewal, they say that MBAuP would be deprived of the benefits of its wrongdoing.

58    Now this is all very interesting, but it is only of hypothetical interest concerning the exemplar applicants’ claims. That is because I have found against the exemplar applicants.

59    Now although this trial was in relation to the exemplar applicants, the applicants say that various issues are likely to be determined that are of general application to similarly situated dealers, and potentially all dealers. The applicants’ statement of declarations and remedies, which was provided in accordance with my direction at the case management hearing on 3 June 2022, comprehensively sets out the issues arising on the claims of the applicants generally.

60    Further, the manner of disposition of the issues between the parties and the consequences for other dealers similarly situated to the exemplar applicants was the subject of an exchange with counsel at the commencement of trial. Perhaps potential extrapolation of some of my findings concerning the exemplar applicants to the broader field may be appropriate. I will hear further from the parties on these questions to the extent necessary.

61    Let me now turn to my detailed reasons for finding against the exemplar applicants.

62    It is convenient to divide my discussion into the following sections:

(a)    The main themes litigated and key conclusions ([63] to [266]).

(b)    The applicants generally and the exemplar applicants’ lay witnesses ([267] to [353]).

(c)    The NDC, DAC and Mr Jennett ([354] to [380]).

(d)    MBAuP and MBAG ([381] to [469]).

(e)    MBAuP’s lay witnesses ([470] to [531]).

(f)    The parties’ Jones v Dunkel points ([532] to [576]).

(g)    The dealership model ([577] to [652]).

(h)    The dealer agreements ([653] to [747]).

(i)    The dealership businesses and investments ([748] to [834]).

(j)    The agency model ([835] to [848]).

(k)    The agency agreements and agency overview ([849] to [904]).

(l)    Other agency related agreements ([905] to [970]).

(m)    Some relevant facts – the evolution and implementation of agency ([971] to [2207]).

(n)    The economic expert evidence ([2208] to [2330]).

(o)    The financial expert evidence ([2331] to [2375]).

(p)    Business Case 2.1 update – a critique ([2376] to [2562]).

(q)    The Deloitte modelling ([2563] to [2584]).

(r)    Analysis of expert evidence – dealers worse off ([2585] to [2660]).

(s)    Exemplar applicants – impact of agency model ([2661] to [2732]).

(t)    Valuation evidence ([2733] to [2770]).

(u)    Non-renewal notices and contractual claims ([2771] to [3043]).

(v)    Statutory duty of good faith ([3044] to [3223]).

(w)    Unfair and unreasonable terms ([3224] to [3361]).

(x)    Economic duress ([3362] to [3453]).

(y)    Statutory unconscionable conduct ([3454] to [3750]).

(z)    Conclusion ([3751] to [3752]).

The main themes litigated and key conclusions

63    It is appropriate at this point to identify and address various sets of themes that permeated the parties’ dispute before I descend into the detail of the evidence. Perhaps this is an unusual course to take, but much of the later detail in my reasons concerning financial information and the global strategy of MBAG is likely to be redacted as a result of confidentiality claims and so it is advantageous at the outset to synthesise some of the highlights of these themes and how I have resolved them for ease of comprehension for those who may only have access to the redacted version of my reasons.

64    One set of themes raised by the applicants concerns the proper construction of the dealer agreements, including the object of the agreements and nature of the commercial bargain reflected in them, the duration of those agreements and the purpose of the power of non-renewal. Let me begin with this subject matter.

The scope and purpose of the contractual power of non-renewal

65    The determination of the NRNs claim principally turns on the proper construction of clause 8 of the dealer agreements, including the ascertainment of the proper purpose of that clause.

66    The applicants allege that the object of the dealer agreements was to encourage and facilitate the investment in, establishment, operation of and/or maintenance by the dealer of an MB dealership at the premises identified in the dealer agreement, and the taking of financial risks by the dealer in relation thereto.

67    The applicants plead that the commercial bargain that MBAuP struck with each dealer was that each dealer would invest time, money, effort and entrepreneurial skill, and take financial risks, to build their MB dealerships, from which they would enjoy ongoing profits and which they could sell to reap the benefits of the goodwill they had generated.

68    The applicants submit that determining a proper purpose is a matter to be assessed in conformity with the object of the contract, which they also refer to as the nature of the bargain. That object or bargain contemplates a particular form of relationship between MBAuP and the dealer, on the faith of which the dealer has invested in its dealership to make future profits and enhance the goodwill of its dealership.

69    On that case, it is alleged that because a dealer made investments in their dealership, the dealer was entitled to continue to operate that dealership under the dealer model permanently, provided the dealer met their targets and made mutually agreed improvements. Indeed, the applicants say that is the case regardless of the quantum and timing of the investments made by a dealer.

70    On the basis of that asserted permanence of the commercial bargain, the applicants assert that MBAuP could never exercise the power of non-renewal as a precursor to a change of business model, regardless of how much notice it gave to dealers and no matter what the financial terms of that new business model were.

71    Now the applicants characterise the power by reference to what it does not empower MBAuP to do. So, it is said that the power of non-renewal granted to MBAuP is not at large and that the power of non-renewal is limited by the bargain reached between MBAuP and the dealer, and cannot be used in a manner which is antithetical to that bargain or to destroy it.

72    The applicants contend that the non-renewal power in clause 8 did not extend to permitting MBAuP to use that power to continue the existing relationship between MBAuP and each of the dealers on the basis of an agency relationship, which was contrary to clause 1.2 of the dealer agreements.

73    The applicants’ case as to the purpose of the non-renewal power is that its purpose was to allow MBAuP to bring its relationship (cf the dealer agreement) with a given dealer to an end, in two circumstances.

74    The first circumstance was where that dealer had failed to meet its targets or make mutually agreed improvements.

75    The second circumstance was said to be some other purpose “consistent with the object of the dealer agreement” and relevant “business circumstances”. Now the facts described as the business circumstances that inform the exercise of the non-renewal power appear to be that the dealers operated as retailers and MBAuP as a wholesaler, each applicant had invested time, money, effort, entrepreneurial skill and took financial risks to acquire, establish, build and/or maintain the businesses comprising their MB dealerships, each applicant established relationships with customers such that they created a valuable asset of and/or goodwill in the business at their MB dealership, MBAuP encouraged the dealers to make those investments and take those risks, and MBAuP represented that the dealers could build a successful long-term relationship with MBAuP and/or the Mercedes-Benz brand provided that they achieved their targets and made any mutually agreed improvements. So, the business circumstances describe aspects of the dealer model under which MBAuP and the applicants had previously operated.

76    But there is no articulation as to the justification for the constraint effected by the words “consistent with the object of the dealer agreement” and the “relevant business circumstances”. I agree with MBAuP that the applicants have not explained why it would be unlawful for MBAuP to issue a non-renewal notice for some other good faith purpose, simpliciter.

77    But the applicants do accept that MBAG could decide in good faith to exit the Australian market and that the power of non-renewal could be exercised for this purpose. But in my view this also implies an acceptance that the power could be exercised by reference to broader network-wide considerations, rather than just individual circumstances concerning particular dealerships.

78    So in summary, the applicants allege that the proper purpose of the non-renewal power was to allow MBAuP to bring the relationship (cf the dealer agreement) to an end where a dealer did not meet their performance targets or did not carry out mutually agreed improvements, but not otherwise except in the circumstances that I have just indicated.

79    But in my view the purpose of clause 8 was to enable MBAuP to bring the term of a dealer agreement to an end. It was the only means by which MBAuP could bring a dealer agreement to an end, absent agreement of the parties or breach by the dealer. And it symmetrically matched a dealer’s right to terminate the dealer agreement without cause on 60 days’ notice. The only substantive constraint on its exercise was that it be exercised in good faith, which was, inter alia, an obligation imposed by clause 6 of the Franchising Code. Further, the applicants’ concept of a broader bargain superimposed on the contractual framework must be rejected.

80    Three other features of this case should be noted before proceeding further.

81    First, the applicants do not allege that they were or are in a fiduciary relationship with MBAuP, let alone that there has been any breach of any fiduciary duty. This is unsurprising as any attempt to erect such a relationship would have been at odds with the relevant express contractual provisions. But some of their arguments went close to seeking to implicitly raise such a relationship, particularly when they sought to superimpose over the applicable contractual framework the suggestion of a long-term relationship between MBAuP and the dealers and to suggest somehow that the bargain struck between MBAuP and the dealers under the dealer agreements was somehow broader than the bargain enshrined in the contractual framework and provisions. Of course, some dealers in fact had contractual relations with MBAuP over an extended period. But that is a different question.

82    Second, I have also rejected the applicants’ theme concerning relational contracts, except as used in the narrow sense by Finn J to which I will return later.

83    Third, the applicants have not run any broad estoppel case concerning representations that:

(a)    dealer agreements would be renewed, alternatively expressed that NRNs would not be given;

(b)    dealer agreements would be continued to be renewed, that is NRNs not given, until at least the capital investments of dealers was recouped;

(c)    MBAuP would not over time reduce the foot-print of the dealers.

84    Now the applicants did run in the context of the Wollongong dealer agreement scenario and analogues, a narrow estoppel by convention case. But this was hopeless.

85    Let me turn then to another set of themes.

The concept of goodwill – confusion and conflation

86    Another set of themes concerns the nature of goodwill. How does the legal concept of goodwill differ from the accounting concept? What is the particular nature of goodwill under franchise agreements such as the dealer agreements? Has the change from the dealer model to the agency model effected an acquisition or appropriation of goodwill by MBAuP from the dealers generally and the exemplar applicants specifically?

87    The applicants’ case is that the change from the dealer agreements to the agency agreements involved a transfer of goodwill from the dealers to MBAuP. Goodwill was defined to mean a valuable asset of and/or goodwill in the business at the dealership as a result of attracting customers, establishing customer relationships and generating customer revenue. The applicants say that MBAuP has transferred that value to itself.

88    Contrastingly, MBAuP takes a narrow view of goodwill, which it says was tethered to the dealer agreements, and was lost when the dealer agreements ended. Consequently, MBAuP says that the applicants had no goodwill that survived termination, and so there was nothing taken or transferred.

89    In summary, I have taken MBAuP’s position which has the advantage of according with High Court authority. I will put to one side for the moment more informal concepts that I will discuss later. Let me turn to some of the authorities.

90    As was made plain in Commissioner of State Revenue (WA) v Placer Dome Inc (2018) 265 CLR 585, goodwill at law is not equivalent to a going concern valuation or an accountant’s concept of goodwill. So it was said by the plurality (at [97] to [99]):

Goodwill for legal purposes is different from, and is not to be confused with, the “going value” or the going concern value of a business. These terms are not separate methods of valuing the same intangible. The distinction between them is clear and, in the context of this appeal, important. As seen earlier, goodwill represents a pre-existing relationship arising from a continuous course of business – to which the “attractive force which brings in custom” is central. Without an established business, there is no goodwill because there is no custom. A collection of assets has no custom.

Going concern value, on the other hand, is the ability of a business to generate income without interruption even where there has been a change in ownership. It has been recognised as a property right by the Supreme Court of the United States. In general terms, in a number of US decisions, it has been described as what differentiates an established business from one just starting; and, importantly, is present even when there is no goodwill.

For present purposes, the difference is best understood in the terms identified and discussed in Murry. Goodwill is property in the nature of the right or privilege to conduct the business by “means which have attracted custom to the business”. The courts will protect that property – those means of attracting custom to the business – irrespective of the profitability or value of the business, so far as it is legally possible to do so. Going concern value is not of that nature: it is not the right or privilege to conduct the business by means which have attracted custom to the business and, thus, going concern value does not comprise the means of attracting custom to the business which the courts will or can protect.

(emphasis and footnotes removed)

91    In terms of the legally relevant context with which I am considering, a dealer holds goodwill constituting property only if the dealer holds the right or privilege that satisfies the definition of goodwill at law. As explained in Federal Commissioner of Taxation v Murry (1998) 193 CLR 605 at [23] by the majority:

From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes “the attractive force which brings in custom”. Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business.

92    Further, it was said at [45]:

Once goodwill as property is recognised as the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means which in the past have attracted custom to the business, it follows that a person acquires goodwill when he or she acquires that right or privilege. The sources of the goodwill of a business may change and the part that various sources play in maintaining the goodwill may vary during the life of the business. But, as long as the business remains the “same business”, the goodwill acquired or created by a taxpayer is the same asset as that which is disposed of when the goodwill of the business is sold or otherwise or transferred.

93    Now in a franchise context, the fact that the legal definition of goodwill is aligned with the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it is of significance.

94    As MBAuP correctly points out, the franchise business cannot be conducted in substantially the same manner and by substantially the same means absent the rights granted to the franchisee by the franchisor. In other words, in the context before me, the continued existence of goodwill as asserted by each of the dealers before me turned upon the continued existence of a dealer agreement, which was the source of the legal right or privilege to conduct the business in substantially the same manner and by substantially the same means that had attracted custom to the particular dealer(s).

95    Now a central pillar of the applicants’ case is their allegation that MBAuP has acquired or appropriated their property, being their goodwill.

96    On the NRNs claim, they allege that one purpose of MBAuP in issuing those notices was to appropriate the dealers’ goodwill. The unconscionable conduct case alleges that the agency model resulted in the transferral of the goodwill in their dealership businesses to MBAuP without compensation. It proceeds on the footing that dealers’ goodwill is property and that the appropriation of one person’s property is objectively dishonest.

97    The applicants’ case exhibits a misunderstanding of the meaning of goodwill at law. They routinely equate the accounting definition of goodwill with the legal definition of goodwill. The applicants refer to dealers having paid an amount of money described as goodwill as evidence that they have goodwill that meets the legal description of property. But as was stated in Placer Dome at [53], goodwill to accountants clearly means something different than goodwill to lawyers. Goodwill for accounting purposes is essentially subjective, reflecting the excess that a purchaser is willing to pay for a business or the discount a seller is willing to accept for the same. However, as a matter of law, the existence or otherwise of goodwill is objectively ascertained.

98    In Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217 at 235, Lord Lindley stated:

Goodwill regarded as property has no meaning except in connection with some trade, business, or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others which do not occur to me. In this wide sense, goodwill is inseparable from the business to which it adds value, and, in my opinion, exists where the business is carried on. Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own.

99    The plurality in Box v Commissioner of Taxation (1952) 86 CLR 387 at 397 recognised that different businesses derive their value from different considerations such as location or reputation.

100    Moreover, as Placer Dome discussed, goodwill may have different sources depending on the facts of the case. As was said at [63]:

…the notion of custom encompassed connections between a business identity and customers, however those connections were made. This expansion of the view of goodwill from being sourced in a place of business to recognising that there were other sources – such as the personality of those that ran the business or the way it was conducted – did not diverge from the idea that custom was central to goodwill. Custom was and remains central. What had occurred was that the law now recognised that custom could be generated by and from different sources.

101    Let me return to Murry. The issue was whether under the Income Tax Assessment Act 1936 (Cth), by reason of an exempting provision, the capital gain from the disposal of a business or an interest in a business was deemed to be reduced by half because the disposal included the goodwill of the business. Goodwill was not defined in the legislation. The factual context was the disposal of a licence to operate a taxi.

102    The majority held that the taxpayer did not dispose of a business within the meaning of the exempting provision, nor did they dispose of an interest in a business which included the goodwill of the business. The majority considered the nature of goodwill, goodwill as property, the sources of goodwill, and then the value of goodwill.

103    First, they stated that the existence of goodwill (at [12]) depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of the business.

104    Second, they endorsed Lord Linley’s description of goodwill in Inland Revenue Commissioners v Muller at 235 as:

…whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers, and agreed absence from competition, or any of these things, and there may be others…

105    Third, they stated that the attraction of custom still remained central to the legal concept of goodwill. Moreover, they stated that the legal concept of goodwill has three different aspects, namely, property, sources and value, and that what unites those aspects is the conduct of a business. But for each aspect identified in Murry, the attraction of custom remained the focus of and central to the legal conception of goodwill.

106    Now in seeking to identify the sources of goodwill, the starting point was custom. So it was said in Murry at [24] that the goodwill of a business is the product of combining and using the tangible, intangible and human assets of a business for such purposes and in such ways that custom is drawn to it. They went on to say that:

Much goodwill, for example, derives from the use of trade marks or a particular site or from selling at competitive prices. But it makes no sense to describe goodwill in such cases as composed of trade marks, land or price, as the case may be. Furthermore, many of the matters that assisted in creating the present goodwill of a business may no longer exist. It is therefore more accurate to refer to goodwill as having sources than it is to refer to it as being composed of elements. In Muller, Lord Lindley referred to goodwill as adding value to a business “by reason of” situation, name and reputation, and other matters and not because goodwill was composed of such elements.

107    Goodwill has sources which are typically those that motivate service or provide competitive prices that attract customers.

108    But patronage in the sense of customers through the door is no longer the sole means of generating or adding value or earnings to a business by attracting custom.

109    Further, the sources of goodwill for a business are not static. The sources of goodwill of a business may change. Indeed, the part that various sources play in maintaining goodwill may vary during the life of a business.

110    Moreover, in some businesses, price and service may have little effect on attracting custom. The goodwill may instead derive from custom being attracted because of location, statutory monopolies including patents and trademarks and expenditure such as advertising. It was said in Murry (at [27]):

Goodwill may also be the product of expenditures rather than the use of assets. Thus, money spent on advertising and promotions, although charged against annual earnings rather than capitalised, may generate brand, product or business name recognition that helps to generate revenue...

111    Further, Murry reinforced the idea that goodwill for legal purposes is property and that (at [29]):

[t]o the extent that the proprietor of a business has the right or privilege to conduct the business in the manner and by the means which have attracted custom to the business, the courts will protect the sources of the goodwill of the business, so far as it is legally possible to do so…

112    The Court observed that goodwill has no existence independently of the conduct of a business and goodwill cannot be severed from the business which created it.

113    The Court noted that whilst goodwill (at [4]):

…may derive from identifiable assets of a business … it is an indivisible item of property, and it is an asset that is legally distinct from the sources - including other assets of the business - that have created the goodwill. Because that is so, goodwill does not inhere in the identifiable assets of a business, and the sale of an asset which is a source of goodwill, separate from the business itself, does not involve any disposition of the goodwill of the business.

114    So, the sale of an asset of a business does not involve any sale of goodwill unless the asset sale is accompanied by or carries with it the right to conduct the business.

115    The Court stated that when viewed from the perspective of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. The Court stated (at [23]):

From the viewpoint of the proprietors of a business and subsequent purchasers, goodwill is an asset of the business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is the right or privilege to make use of all that constitutes “the attractive force which brings in custom.” Goodwill is correctly identified as property, therefore, because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is a right or privilege that is inseparable from the conduct of the business.

(footnotes omitted)

116    The Court later stated (at [45]):

Once goodwill as property is recognised as the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means which in the past have attracted custom to the business, it follows that a person acquires goodwill when he or she acquires that right or privilege. The sources of the goodwill of a business may change and the part that various sources play in maintaining the goodwill may vary during the life of the business. But, as long as the business remains the “same business”, the goodwill acquired or created by a taxpayer is the same asset as that which is disposed of when the goodwill of the business is sold or otherwise transferred.

117    As custom is central to the nature and sources of goodwill, the value of the goodwill of a business varies with the earning capacity of the business and the value of the other identifiable assets and liabilities.

118    Let me say something about the nature of goodwill under a franchise agreement.

119    As I have indicated, goodwill constitutes property because it is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. It is an asset of a business because it is the valuable right or privilege to use the other assets of the business as a business to produce income. It is only when a person holds that right or privilege that they hold goodwill constituting property.

120    In Murry, it was concluded that the taxi licence was merely an item of property the value of which was not dependent on the present existence of a business, and therefore the majority held that the taxi licence contained no element of goodwill.

121    Now the fact that the legal definition of goodwill is tethered to the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it takes on particular significance in a franchise context, because the franchise business cannot be conducted in substantially the same manner and by substantially the same means absent the rights granted to the franchisee by the franchisor.

122    In the present context there was no Mercedes-Benz dealership business without the rights granted to a dealer under a dealer agreement. So, the question is not, as the applicants would have it, who owns the customer?

123    Without access to supply of Mercedes-Benz vehicles and rights to use the Mercedes-Benz brand, a dealer could not generate any future profits from the sale of Mercedes-Benz vehicles, whether that be through customer relationships or otherwise. Absent that supply and those rights, there would exist no Mercedes-Benz dealership from which they could derive future profits, nor would there be such a dealership that an applicant could transfer to a third party.

124    Without that supply and those rights, a former Mercedes-Benz dealer might deploy its physical assets, personnel and customer relationships to generate profits by operating a business as, say, a used car dealer or a servicing business, or, subject to obtaining a grant of rights from another brand, as a new car dealer for that other brand. But that would be a different business, with a different goodwill. In that circumstance the goodwill would be the right or privilege to conduct that other business.

125    Further, the absence of any right at law for a franchisee to be compensated for goodwill on non-renewal of a franchise agreement has long been recognised.

126    As Ward CJ in Eq said in Favotto Family Restaurants Pty Ltd v Chief Commissioner of State Revenue (2020) 111 ATR 283 at [104]:

Second, as to the nature of the rights under a franchise agreement, reference was made to the decision of the Full Court of the Federal Court (Lockhart, Wilcox and Gummow JJ) in Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 (Ranoa), a matter involving a franchise governed by the Petroleum Retail Marketing Franchise Act 1980 (Cth). In Ranoa, it was held that, on the expiry or termination of a franchise agreement, the franchisee has no right to continue operating the business and no right (in the absence of specific provision in the agreement to the contrary) to any goodwill that may have accrued to the business whilst it was operated by the franchisee. Their Honours noted (at 256) that, under the general law, “the benefit of goodwill built up by reason of a tenant carrying on a business from the leased premises enures to the benefit of the landlord at the expiration of the term” (citing Lord Coleridge CJ in Llewellyn v Rutherford (1875) LR 10 CP 456 at 467 ) and that, “in the absence of any special covenant and any other applicable statute, upon the tenancy coming to an end, the benefit of any goodwill of that character would be lost to the tenant and would enure to the benefit of the lessor” (see at 257).

127    Similarly, Habersberger J stated in Foxeden Pty Ltd v IOOF Building Society Ltd [2003] VSC 356 that a franchise merely confers a licence to participate in the franchisor’s business system for a specified term. He said at [269]:

However, Mr Hayes recognised that, generally, a franchise merely confers a licence to participate in the franchisor’s business system for a specified term. During the term of the franchise, the franchisee owns the goodwill of the franchise in the relevant sense and is able to sell the goodwill (by assigning the franchise agreement). In the absence of a contractual provision providing for compensation for goodwill on expiry or termination of the franchise, the franchisee will forfeit the goodwill…

128    Habersberger J subsequently observed at [295], that:

Whether or not the relationship between the Taylors and IOOF is correctly described as a franchise is not strictly relevant. What is important is what was actually agreed between the parties, whatever label is given to the relationship…

129    The absence of any right to compensation for goodwill on non-renewal of a franchise agreement is an issue that has long attracted the attention of those seeking to change franchising laws in Australia.

130    The Trade Practices Act Review Committee, which released its report in 1976, considered the issue of compensation to franchisees for the loss of goodwill upon the termination or non-renewal of their franchise agreement by the franchisor. It recommended that franchisees be given the right to just and equitable compensation.

131    In 2013, the issue was also considered in the review of the Franchising Code; see Wein A, Review of the Franchising Code of Conduct: Report to the Hon Gary Gray AO MP, Minister for Small Business, and the Hon Bernie Ripoll MP, Parliamentary Secretary for Small Business, 30 April 2013. The report of that inquiry concluded (at p107):

Nonetheless, there should not be a general overarching right to compensation for franchisees at the end of a fixed term franchise agreement. Making such a recommendation would substantially and fundamentally change long established legal principles of property and contract law. There would also be a risk of greater cost and uncertainty in the industry and possible unintended consequences from any such change to contractual rights.

While appreciating the contribution made by franchisees to the development of their franchise site or territory, a franchisee should expect that the franchise period should be no longer than the negotiated terms of the contract. Any equitable right to compensation for a franchisee whose franchise is not renewed must lie with the courts and any statutory right that may exist under the ACL.

Arguably, adequate remedies already exist if a franchisor fails to renew a franchise agreement in a situation where the franchisee has complied with all the conditions for renewal. Unlawful refusal will amount to a breach of the agreement by repudiation or possibly unconscionable conduct. However, if the agreement does not provide for renewal, the franchisee knows before entering into the agreement that the franchisee’s rights under the agreement will terminate on the expiry of the term. In that situation the franchisee should not be entitled to compensation.

132    Following the Wein review, amendments were made to the Franchising Code in relation to the enforceability of restraint of trade provisions where a franchise agreement is not renewed and nominal or no compensation for goodwill is given to a franchisee. But no right to compensation for goodwill, and no right to renewal, has been included in the Franchising Code. Rather, a franchisor is required to disclose “the prospective franchisee’s rights relating to any goodwill generated by the franchisee (including, if the franchisee does not have a right to any goodwill, a statement to that effect)” (Franchising Code, Annexure 1 (Disclosure Document for franchisee or prospective franchisee), [18.1(fa)]).

133    Now both Ward CJ in Eq in Favotto and Habersberger J in Foxeden referred to Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251. Let me elaborate on Ranoa.

134    The appellant in Ranoa had operated a BP service station franchise at Engadine in New South Wales for 9 years. On 30 March 1988, the second respondent (BP Australia Limited) wrote to the appellant advising that “BP intends to take back control of BP Engadine at the end of your current lease” and “BP is unable to offer renewal at that time”. The proceeding concerned the construction of s 23 of the Petroleum Retail Marketing Franchise Act 1980 (Cth). Section 23 provided that:

(1)    Where, but for this section, the operation of a provision of this Act would result in the acquisition of property from a person by another person otherwise than on just terms, there is payable to the person by that other person such reasonable amount of compensation as is agreed upon between those persons or, failing agreement, as is determined by a court.

(2)    In sub-section (1), ‘acquisition of property’ and ‘just terms’ have the same respective meanings as in paragraph 51(xxxi) of the Constitution”

135    The question as framed on the appeal assumed that the respondents acquired property, namely some species of goodwill from the appellant, and that such property was acquired otherwise than on just terms. The primary judge had answered in the negative a question which had been ordered to be decided separately from and before all other questions in the proceedings. The question was:

Upon the true construction of s.23 of the [Petroleum Retail Marketing Franchise Act 1980] in its setting in the Act, is the franchisee, upon the expiration of the period of nine years, provided for in ss.13 and 17B entitled to such reasonable amount of compensation as is determined by a Court upon the basis that the franchisor acquired property from the franchisee otherwise than on just terms by reason of the operation of this Act?.

136    The question before the Full Court was reformulated as:

Upon the basis of the following assumptions, namely, that for the purpose only of the determination of this separate question, on 18 September 1989:

(a)    the respondents acquired property namely some species of goodwill from the Appellant and,

(b)    such property was acquired otherwise than on just terms,

did the operation of some provision of the [Petroleum Retail Marketing Franchise Act 1980] result in the acquisition of this property so as to require the Respondents to pay to the Appellant compensation pursuant to s 23 of the said Act?

137    So, the issue that was posed was whether the operation of s 23 of that Act resulted in the acquisition of goodwill such as to require the respondents to pay compensation to the appellant. In passing, Lockhart, Wilcox and Gummow JJ opined on the position of a franchise under the common law and held that the legislation under consideration in that case did not alter the position at general law. So it was said (at 257):

Upon the expiry of the term of a franchise agreement in circumstances such as those in the present case, where the franchisor is not bound to renew the agreement and does not voluntarily do so, does the legislation bring about a result as regards the goodwill which differs from that under the general law?...

138    As to the specific question in that case, their Honours held that the:

…acquisition of goodwill upon the end of the term … was not the result of the operation of any provision of the Act so much as a consequence of what the Parliament did not provide, namely an entrenched tenure for a period greater than 9 years.

139    Their Honours noted that under the general law the benefit of goodwill built up by reason of a tenant carrying on a business from the leased premises enures to the benefit of the landlord at the expiration of the term and that in the absence of any special covenant and any other applicable statute, upon the tenancy coming to an end, the benefit of any goodwill of the relevant character would enure to the benefit of the lessor. Their Honours stated (at 257 and 258) that:

Where a franchisor elects to grant a new lease the franchisee has the benefit of continued exploitation of the goodwill of the site... But where a franchisor elects not to grant a new lease, the franchisee is turned from the site without compensation for any goodwill which it may have developed during its period of occupancy. A franchisee, such as the appellant, may regard this result as harsh, the harshness being exacerbated if it should be the case - we do not know whether it is so - that franchisors are more likely to decide themselves to operate sites to which substantial goodwill attaches…

140    So, the views expressed in Ranoa are consistent with the principle, recognised in Murry and Placer Dome, that goodwill is the legal right or privilege to conduct a business in substantially the same manner and by substantially the same means which in the past have attracted custom to the business. The continued existence of that goodwill turns on the continued existence of that right or privilege.

141    Now I accept though that Ranoa concerned the “taking back” by the franchisor from a franchisee tenant of a leased service station, by a notice of non-renewal of the lease. It was against that factual background, and a general law principle that goodwill built up by a tenant from leased premises enures to the benefit of the landlord at expiration, that the Court found there was no residual goodwill in the tenant franchisee’s business. The present case does not share that common factual and legal substratum.

142    But again, to use the present case as an example, a dealer whose term has expired cannot transfer to a purchaser the essential ingredient required to conduct a Mercedes-Benz franchise, being the rights granted under the dealer agreement, including access to supply of MB vehicles and use of MB intellectual property.

143    As Chesterman J observed in McDonald’s Australia Holdings Ltd v Commissioner of State Revenue (2004) 57 ATR 395 in discussing whether there had been a transfer of the goodwill of a McDonald’s franchise (at [61]):

It follows that the applicants cannot have become the transferee of the licensee’s goodwill, or have otherwise acquired the goodwill, unless it acquired those assets which the licensees held prior to 31 January 1994 and which allowed them to carry on the business, which is said to have given rise to the goodwill. In practical terms that means the licences, or rights, to use the McDonald’s System’s trademarks, trade names and service names. Without these licenses the licensees would not have conducted their businesses which were McDonald’s restaurants. They may have needed other things as well, but the licenses were the essential ingredient. Customers are attracted to a McDonald’s restaurant because of the reputation of the McDonald’s name and the fact that enforced compliance with the detail of the McDonald’s System means that on the occasion of every visit and in every McDonald’s restaurant the quality and choice of food and the quality of service and standard of fit-out will be the same. There is a uniformity of product, service and milieu in every McDonald’s restaurant. This uniformity, which the public confidently expects to experience at a McDonald’s restaurant, comes from the adherence by each restaurant proprietor to the McDonald’s System including the use of the trademarks, trade names and service names. It is the right to use these items of intangible property which generates goodwill…

144    Similar issues arose in relation to the sale of two McDonald’s restaurant businesses in Favotto concerning assessments for duty issued by the Chief Commissioner of State Revenue (NSW) in respect of transactions entered into by Favotto relating to those restaurants. The principal issue was whether there was dutiable property and, specifically, whether the transactions effected a transfer or agreement for the sale or transfer of the goodwill of the existing McDonald’s restaurant businesses to Favotto or merely the non-dutiable grant of new franchise rights to enable Favotto to continue the operation of the existing restaurant businesses.

145    Ward CJ in Eq considered that what was revealed on a consideration of the respective transaction documents was that Favotto acquired a limited licence to use the respective premises and the “McDonald’s System” for the purpose of running a McDonald’s restaurant (for a limited time and on strict conditions) at each of the premises. Her Honour considered it significant that on the termination of the licence arrangement, there was no goodwill that enured to the benefit of Favotto. Favotto had the temporary enjoyment of the goodwill of the businesses but there was no transfer as such to Favotto of the goodwill in the sense that it would be free to deal with or dispose of this at the end of the licence arrangements. As her Honour stated, “in effect, Favotto’s right to make use of that goodwill simply comes to an end” (at [170]). On the expiry or termination of a franchise agreement, a “franchisee has no right to continue operating the business and no right (in the absence of specific provision in the agreement to the contrary) to any goodwill that may have accrued to the business whilst it was operated by the franchisee” (at [104], citing Ranoa). Moreover, in the absence of a contractual stipulation to the contrary, no compensation for any so-called loss of goodwill is payable.

146    Let me say something about two other cases that the parties before me lingered on being Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; 69 NSWLR 558 and Bond Brewing (NSW) Pty Ltd v Refell Party Ice Supplies Pty Ltd (unreported, Supreme Court of NSW, Equity Division, 17 August 1987).

147    Let me deal first with Burger King and the scenario that it was dealing with.

148    Burger King Corp as franchisor and Hungry Jack’s as franchisee entered into four agreements, one of which was a development agreement. Those agreements, together with the individual franchises for each store, governed their contractual relationship, including Hungry Jack’s development rights in Australia.

149    The development agreement conferred upon Hungry Jack’s the non-exclusive right to develop and to be franchised to operate Burger King restaurants in Australia. Under clause 2.1, Hungry Jack’s was required either by itself or through a third-party franchisee to develop and open a minimum of four new Burger King restaurants per year in Western Australia, South Australia and Queensland. The agreement also provided for non-exclusive development rights in the other Australian states and territories. Further, there was a provision allowing termination for breach and a requirement that 30 days’ notice be given in respect of any breach that was capable of cure. Clause 4.1 required Hungry Jack’s to obtain individual franchises for each restaurant developed under the agreement. That required compliance with various procedures, including entering into a further agreement, which provided for conditional approval in respect of nominated sites and to have certain approvals at the time of application for a franchise agreement for a newly developed restaurant.

150    Now from 1993, Burger King Corp took a more active role in Australia with a view to reducing Hungry Jack’s role in the market. In 1995, Burger King Corp took three steps that restricted Hungry Jack’s ability to develop. First, it advised that it would no longer approve any further recruitment of third party franchisees. Second, it withdrew financial approval. Third, it withdrew operational approval. The effect of these actions was to impede Hungry Jack’s development of new outlets. The impact of this was significant as Hungry Jack’s was required under the development agreement to develop a minimum of four stores in Western Australia, South Australia and Queensland each year.

151    During 1994, the parties also entered into discussions with Shell about the feasibility of establishing Hungry Jack’s outlets in Shell service stations. A test site agreement was initially proposed to assess the viability of a long-term venture. The initial discussions were conducted on the basis that if the test sites were successful, the parties would enter into a long-term tripartite venture. During the course of these discussions, Burger King Corp then commenced dealing with Shell separately. Months after Burger King Corp had decided to proceed with Shell without Hungry Jack’s, Burger King Corp informed Hungry Jack’s of the position.

152    Now over the relevant period Hungry Jack’s was operating 148 Hungry Jack’s restaurants and operating another two restaurants controlled by Shell on service station sites. 18 Hungry Jack’s restaurants were operated by third party franchisees and Hungry Jack’s provided training and other services to those restaurants. From November 1990 to November 1996 Hungry Jack’s had paid royalties to Burger King Corp exceeding $20 million.

153    By two separate notices given in November 1996, Burger King Corp purported to terminate the development agreement for breach. The first notice particularised Hungry Jack’s failure to develop new restaurants as required by clause 2.1 as the breach giving rise to the right to terminate. The second alleged various breaches relating to a sunglass promotion campaign, advertising without approval and improper trademark use. A third notice was given in September 1997, after the commencement of proceedings, against the possibility that the earlier notices were held to be invalid.

154    Hungry Jack’s challenged the notices of termination and was substantially successful before the primary judge. Burger King Corp then pursued an appeal, but unsuccessfully.

155    Now it was common ground that there were implied terms of the development agreement that Burger King Corp would do all that was reasonably necessary to enable Hungry Jack’s to enjoy the benefits of that agreement, that Burger King Corp would act reasonably in exercising its powers under the agreement, and that Burger King Corp would act in good faith in the exercise of its contractual powers.

156    Now as to the steps taken by Burger King Corp to reduce Hungry Jack’s role in the Australian market, the Court of Appeal observed that Burger King Corp’s conduct and its intentions in respect of the Australian market were to be reviewed against the fact that under the development agreement, Hungry Jack’s had the prospect of expanding over a 20 year period and that the franchise agreements for each restaurant provided for a term of either 15 or 20 years with an option to renew for the same period. A detailed review of the facts is contained in a schedule to the judgment which has been omitted from the authorised report.

157    On the issue concerning the third party freeze by which Burger King Corp would not approve any further recruitment of third-party franchisees, the Court held that Burger King Corp did not seek to support the freeze on any contractual basis and that the freeze was imposed at a time when Burger King Corp had made a policy decision to, in some way, take back the Australian market. The Court was satisfied that it was clear that Burger King Corp was actively seeking ways to at least reduce Hungry Jack’s dominant role if it could not remove it from the market altogether. One of the means available to Hungry Jack’s to both satisfy the development schedule and to develop generally was through third party franchisee arrangements. But it was precluded from doing so from mid-May 1995 at a time when there was active interest by prospective franchisee applicants. The Court held that the continued imposition of the freeze was in breach of the implied terms of reasonableness and good faith.

158    On the issue concerning Burger King Corp’s financial disapproval of Hungry Jack’s which was the second step of a process whereby Hungry Jack’s ability to expand was affected, the Court stated (at [276]) that there was considerable force in the trial judge’s observation that the “odd thing about BKC’s approach, which, in my opinion, is only explicable because of the attitude BKC was taking to HJPL, is that the financial disapproval preceded the receipt of the various information [requested of Hungry Jack’s], rather than followed an analysis of it and the exercise of the discretion based on that analysis”.

159    The Court held that Burger King Corp’s conduct in this regard breached an implied term of good faith, stating (at [310]):

…the evidence clearly establishes that BKC’s conduct is properly characterised as being directed not to furthering its legitimate rights under the Development Agreement but to preventing HJPL from performing its obligations under the Development Agreement.

160    The Court reached the same view regarding the other issue concerning the withdrawal of operational approval. It accepted that Burger King Corp breached its obligations of good faith and reasonableness by its conduct in imposing the third party freeze, and in financially and operationally preventing Hungry Jack’s from further expansion.

161    Now the conduct of Burger King Corp was not in good faith because it was directed not to furthering its own legitimate interests but, rather, to preventing Hungry Jack’s from performing its obligations under the development agreement. Its conduct was directed to setting up a basis for terminating the development agreement and denying Hungry Jack’s the benefit of the contractual bargain. The long-term nature of the parties’ bargain in Burger King was clear on the contractual documents. Hungry Jack’s had the prospect of expanding over a 20-year period and the franchise agreements for each restaurant provided for a term of either 15 or 20 years, with an option to renew for the same period. As the Court said (at [185]), Burger King Corp’s conduct was wrongful because it sought to “thwart HJPL’s rights under the contract”.

162    In particular, the Court held (at [187]) that:

the discretion conferred in clause 4.1 was one which was required to be exercised reasonably, so that it could not be used for a purpose foreign to that for which it was granted, such as to thwart the respondent’s right to develop and ultimately to procure a situation where the Agreement could be terminated.

163    Burger King Corp did not withhold operational and financial approval under clause 4.1 of the development agreement out of any concern regarding the merits of applications for approval submitted by Hungry Jack’s under that clause, that being the purpose of the development procedure under that clause. It withheld approval because it wanted to thwart Hungry Jack’s right to develop and ultimately to procure a situation where the agreement could be terminated.

164    Let me now deal with Bond Brewing and the scenario that it was dealing with. Bond Brewing is an estoppel case.

165    In Bond Brewing, a notice to quit was served by the plaintiff, a brewery and the owner of the New Brighton Hotel at Manly, NSW, on the defendant, the tenant hotelkeeper, who was holding over as a monthly tenant after expiry of a one-year lease. In 1982, the tenant had, with the consent of the brewery, taken an assignment of an interest in the leasehold and had paid in consideration for the assignment an amount partly attributable to “goodwill”.

166    From 1976, the brewery had required incoming tenants to sign a so-called goodwill letter addressed to the brewery, a condition of which was that the brewery would not be obligated to compensate the tenant for loss of goodwill if the brewery decided not to renew the current or any subsequent lease or otherwise retake possession of the premises. During the period 1970 to 1985, which was both before and after the goodwill letter was required of the tenant, the brewery had a practice where on each occasion when it sought to gain possession of a hotel the subject of a brewery lease, it paid the particular tenant substantial compensation for giving up possession even though the tenant was holding over under a weekly or monthly tenancy. The evidence also showed that the person who had authority to state to the tenant in that case what the brewery’s policy was in relation to the goodwill letter had told the tenant before its signature was affixed that the letter was a mere formality.

167    The brewery decided not to renew the lease and did not offer to pay any compensation for loss of goodwill to the tenant. The tenant argued that when it took an assignment of the lease, it acted on a representation made by the landlord or relied upon an assumption, which the landlord did not correct, that the landlord would not terminate without paying to the tenant a reasonable sum for the goodwill. The landlord argued that the tenant was precluded from relying upon its understanding of the landlord’s practice because of the terms of the goodwill letter.

168    Waddell CJ in Eq upheld the tenant’s estoppel in pais argument.

169    Bond Brewing is not authority for the proposition for which the applicants have cited the case before me. In summary, neither Bond Brewing nor Burger King assist the applicants.

170    Now more generally the applicants say that the notion that goodwill as a matter of legal analysis ends when the underlying franchise agreement terminates is inconsistent with the analysis in Murry. But I disagree. Goodwill in terms of the legal concept did not transcend the non-renewal of the dealer agreements. Moreover, there was no acquisition or appropriation by MBAuP of the dealers’ goodwill at the time of the service of the NRNs or at any time thereafter.

171    Further, the applicants say that the question on which legal goodwill depends is what attracts custom. This could be the business itself independently of any trademark licence or it could be the business in combination with the trademark.

172    It was said in Murry (at [67] and [68]):

A taxi licence is a valuable item of property because it has economic potential. It allows its holder to conduct a profitable business and it may be sold or leased for reward to a third party. But neither inherently nor when used to authorise the conduct of a taxi business does it constitute or contain goodwill. A licence is a pre-requisite to the conduct of many professions, trades, businesses and callings. But it is not a source of the goodwill of a business simply because it is a pre-requisite of a business or calling. Nor is the situation different when only a limited number of licences are issued for a particular industry.

For legal purposes, goodwill is the attractive force that brings in custom and adds to the value of the business. It may be site, personality, service, price or habit that obtains custom. But with the possible exception of a licence to conduct a business exclusive of all competition, a licence that authorises the conduct of a business is not a source of goodwill. A taxi licence therefore is simply an item of property whose value is not dependent on the present existence of a business. It is not and does not contain any element of goodwill.

173    The applicants say that it is not in dispute that when the business ceases to exist because the underlying licence ends, at that point the goodwill evaporates as legal property. But the applicants say that it follows that if the business at the dealerships continues, even where the underlying basis of the relationship between MBAuP and the dealer changes, the goodwill in the dealership continues because customers are still attracted to the dealership by the assets deployed by the dealer and the trademarks of Mercedes-Benz. This is because, though not identical, the business is being conducted by substantially the same means and in the same manner both before and after the change of contract.

174    Moreover, they say that even though the attraction of customers is the result of the combined or joint contributions of the business and the MB trademarks, the goodwill is not joint goodwill. Rather, each party benefits depending upon its own business. It is said that this is also recognised in the dealer agreements.

175    But these arguments are problematic. Perhaps commercially they make sense. But in terms of the legal concept of goodwill and any suggested misappropriation by MBAuP of the dealers’ goodwill they are contrary to authority and incoherent.

176    Further, the applicants say that the gravamen of their case in relation to statutory unconscionable conduct is that the dealers have operated and continue to operate the same businesses, attracting customers and generating customer revenue, as a result of their investments. But as a result of the agency model, they are not entitled to the same share of the revenue generated as previously and the value of their businesses is now reduced. They say that it is a permissible characterisation of that loss as a diminution in goodwill. But they also say that success on their unconscionable conduct case does not depend upon an acceptance of this legal characterisation. Now this is one point upon which I agree with the applicants. A broader perspective may be taken to these questions in the context of addressing whether there has been unconscionable conduct.

177    Let me turn to some of the other themes.

The exercise of power to give the NRNs

178    I have already said something about the scope and purpose of the contractual power of non-renewal. Let me make some points concerning the exercise of power to give the NRNs.

179    First it is not pleaded or run by the applicants that MBAuP itself did not exercise that power. Rather it is said that this was done under the direction of MBAG.

180    Second, it is not said that the exercise of power was some sham exercise.

181    Third, the case being put was that the exercise of power by MBAuP was done under the direction of or at least under the influence of MBAG. Now I accept that the exercise was done under the influence of MBAG but not by its direction.

182    I accept that such influence of MBAG involved approval of the necessary business cases and approval of the elements of the agency model and the terms of the agency agreements. But even accepting such influence of MBAG, I do not accept the applicants’ case that MBAuP exercised no independent judgment whatsoever in issuing the NRNs.

183    Fourth, I accept that MBAuP 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.

184    Fifth, I accept that the exercise of the power was done solely for the benefit of both MBAuP and MBAG and their strategic interests.

185    Sixth, as between MBAuP and MBAG, informing MBAuP’s purpose was the desire to act in the interests of MBAG and to act consistently with MBAG’s global objectives. But what is also obvious is that MBAuP perceived that what was in MBAG’s strategic interest was also in MBAuP’s strategic interest. In other words, they were not mutually exclusive interests but rather wholly or predominantly complementary. And that is no surprise when one is considering the position of a subsidiary and its relationship with its ultimate parent company.

186    Now pausing here, in my view none of these purposes of MBAuP are improper, foreign or collateral to the power to give an NRN. And none of such purposes show an absence of good faith.

187    Seventh, there is no broader bargain between a dealer and MBAuP 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.

188    Eighth, the purpose of MBAuP in issuing the NRNs involved pursuing an Australia-wide strategy and, in essence, treating all dealers uniformly. But given the nature of the power being exercised, this was not improper or impermissible.

189    Now true it is that the power is being exercised literally within the framework of an individual dealer agreement as between MBAuP and an individual dealer. So it might be said that it is foreign or collateral to the purpose for which the power to issue an NRN has been granted to:

(a)    consider an Australia-wide strategy;

(b)    principally follow MBAG’s strategy;

(c)    treat all dealers uniformly;

(d)    not consider the individual circumstances of individual dealers; or

(e)    use the occasion to change the relationship to a new model, a circumstance that I will discuss in a moment.

190    But given the nature of the power, it is for the sole benefit of MBAuP. And if that be so, none of points (a) to (e) that I have just listed demonstrate any impermissible purpose let alone a lack of good faith on the part of MBAuP.

191    Let me analyse further four points raised by the applicants.

192    First, they say that the power to issue the NRNs can only be used for the purpose of terminating a relationship between MBAuP and the dealer rather than changing or creating a new relationship with the dealer, that is, one of agency.

193    Now I must say that I have difficulty with this argument. The power was exercised to terminate the pre-existing relationship under the dealer agreements, even if MBAuP 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 MBAuP 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, MBAuP 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.

194    Further, there is a conceptual problem with the applicants’ position. The power of non-renewal like a power of termination is a power to end the pre-existing relationship. But it does not say anything about or deny that the parties might have it in mind to enter into a new and different relationship under a new agreement. And it does not foreclose or deny that possibility. As one would expect, the contractual provision is silent on that question. It cannot contemplate let alone deny what the parties may agree to do in the future.

195    Second, it is said by the applicants that the power has been improperly used to appropriate the dealers’ goodwill. But that argument is flawed for reasons that I have discussed elsewhere.

196    Third, and relatedly, it is said that the power has been improperly used so that MBAuP could achieve a direct relationship with the end-customers. Now that is the effect of the agency model. But the power to give the NRNs was being used to achieve the direct end of terminating the dealer agreements. The fact that there are other consequential ends does not impugn the exercise of the contractual power, even if those ends are favourable to MBAuP and unfavourable to the dealers.

197    Fourth, the applicants say that the non-renewal power can only be used for circumstances such as a dealer failing to meet targets or a dealer failing to make mutually agreed improvements or the like. Other examples were also given. But in my view the relevant power has no such limitations. The only relevant limitation is a good faith exercise requirement, either arising under clause 6 of the Franchising Code or under the express or implied terms of the contractual provisions.

198    But it is convenient to say up front that it is difficult to discern a want of good faith in the exercise of a power which can serve only the interests of the party upon whom the power is conferred; see Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 at [23] per Buchanan JA. The ostensible purpose of the exercise of such a power will almost invariably be its true purpose.

199    If a contractual right or power, which is intended to advance only the interests of the party on whom it is conferred, is fettered by the obligation of good faith, resort to the duty may become an obstacle to the promotion of that party’s legitimate interests. Such a power may be contrasted with one that is concerned with co-operation to produce a result beneficial to all the parties to the agreement.

200    In Metropolitan Life Insurance Co v RPR Nabisco Inc 716 F Supp 1504 (SDNY, 1989) Judge Walker said (at 1517):

In other words, the implied covenant [of good faith] will only aid and further the explicit terms of the agreement and will never impose an obligation which would be inconsistent with other terms of the contractual relationship ... Viewed another way, the implied covenant of good faith is breached only when one party seeks to prevent the contract’s performance or to withhold its benefits ... As a result, it thus ensures that parties to a contract perform the substantive, bargained-for terms of their agreement.

201    He went on to say (at 1519) that it is impermissible to “permit an implied covenant to shoehorn into an indenture additional terms plaintiffs now wish had been included”. And he went on to note (at 1520) that assertions made by a plaintiff such as “fundamental basis” or a “fruit of an agreement” are usually in the eye of the beholder seen through hindsight.

202    In DPN Solutions Pty Ltd v Tridant Pty Ltd [2014] VSC 511, one clause of the agreement in issue gave the defendant a right to terminate for cause. Another clause gave both parties the right to terminate without cause by giving the other party one month’s notice in writing. The schedule to the agreement described the term of the agreement as ongoing subject to one month’s notice in writing from either party.

203    Hargrave J held that although he would not imply an obligation of good faith, had he done so he would have held that there was no want of good faith for the same reasons that he rejected the unconscionability assertion. The termination without cause was done by the defendant in its own legitimate commercial interests.

204    A similar sentiment was expressed by Akenhead J in TSG Building Services PLC v South Anglia Housing Ltd [2013] EWHC 1151 (TCC) at [51] where he said:

I do not consider that there was as such an implied term of good faith in the contract. The parties had gone as far as they wanted in expressing terms in Clause 1.1 about how they were to work together in a spirit of “trust, fairness and mutual co-operation” and to act reasonably. Even if there was some implied term of good faith, it would not and could not circumscribe or restrict what the parties had expressly agreed in Clause 13.3, which was in effect that either of them for no good or bad reason could terminate at any time before the term of four years was completed. That is the risk that each voluntarily undertook when it entered into the Contract, even though, doubtless, initially each may have thought, hoped and assumed that the Contract would run its full term. Obviously, if South Anglia (and there is no suggestion of this) misrepresented prior to the Contract that it intended to proceed to the full term in circumstances when it was always planning to terminate early, that could give rise to a separate cause of action for one type of misrepresentation or another. Again, if (and there is similarly no suggestion of this) there was some material fraud or dishonesty on the part of South Anglia in and about the termination that might well give rise to some cause of action. Thus, if there were extreme and unusual facts (none being adumbrated so far), the law may well provide TSG with some other remedy.

205    Further, in Reda v Flag Ltd (Bermuda) [2002] IRLR 747; UKPC 38, the Privy Council dealt with a termination without cause provision.

206    Lord Millett stated (at [42] and [43]):

Under the terms of the appellants’ contracts, therefore, Flag had an express contractual right, which it exercised, to bring the appellants’ contracts of employment to an end at any time during the contract period without cause. Their Lordships agree with Flag that that is an end of the matter. As the Court of Appeal observed, ‘the very nature of such a power is that its exercise does not have to be justified.’

The principal ground on which this was disputed by the appellants at trial was that the decision of Flag’s directors to bring their contracts to an end was vitiated by their ‘collateral purpose’ in seeking to avoid having to grant the appellants stock options. But in the present context there is no such thing as a ‘collateral’ or improper purpose; a power to dismiss without cause is a power to dismiss for any cause or none. The directors of Flag were, of course, obliged to exercise their powers as directors in good faith and for the benefit of the company. As the Court of Appeal pointed out, however, this was a duty owed to the company and not to its employees. There is no reason to doubt that, in resolving to exercise Flag’s contractual right to terminate the appellants’ contracts without cause and before a stock option plan had been established, the directors were loyally seeking to further the interests of Flag as they saw them, and Flag’s shareholders implicitly approved the action that they took on its behalf. They could properly form the view, as they undoubtedly did, that it would not be appropriate to grant the appellants stock options or, to put the matter another way, that it would be commercially inappropriate to grant such options to employees whose contracts of employment had only a few more weeks to run.

207    He also said (at [45]):

Their Lordships accept that the appellants’ contracts of employment contained an implied term that Flag would not without reasonable and proper cause destroy the relationship of trust and confidence which should exist between employer and employee. The existence of such a term is now well established on the authorities: see Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] IRLR 66 at pp. 70–72; Malik v Bank of Credit and Commerce International SA [1997] IRLR 462; Johnson v Unisys [2001] IRLR 279. But in common with other implied terms, it must yield to the express provisions of the contract. As Lord Millett observed in Johnson v Unisys it cannot sensibly be used to extend the relationship beyond its agreed duration; and, their Lordships would add, it cannot sensibly be used to circumscribe an express power of dismissal without cause. This would run counter to the general principle that an express and unrestricted power cannot in the ordinary way be circumscribed by an implied qualification: see Nelson v British Broadcasting Corporation [1977] IRLR 148 (where it was sought to imply a restriction of location into a contract which contained an unqualified mobility clause). Roskill LJ said at p.151: ‘... it is a basic principle of contract law that if a contract makes express provision ... in almost unrestricted language, it is impossible in the same breath to imply into that contract a restriction of the kind that the industrial tribunal sought to do.’

208    Of course contracts of employment differ from franchise agreements, but these general observations are not inapposite to the present context.

209    Further, Bhasin v Hrynew [2014] 3 SCR 494 dealt with a non-renewal clause.

210    Mr Bhasin had been an enrolment director for Can-Am since 1989. Can-Am marketed education savings plans to investors through retail dealers, known as enrolment directors, like Mr Bhasin. It paid those directors compensation and bonuses for selling such plans. Now the directors were in effect small business owners and the success of their businesses depended on them building a sales force. The term of the contract was three years. Clauses 8.3 and 8.4 allowed termination on short notice for misconduct or other cause. Clause 3.3 provided that the contract would automatically renew at the end of the three-year term unless one of the parties gave six months’ written notice to the contrary. The parties’ relationship soured. Can-Am decided not to renew the dealership agreement with Mr Bhasin and gave the requisite notice under clause 3.3.

211    Cromwell J considered that such a context did not fit within any of the existing situations or relationships in which duties of good faith had been found to exist. And he stated that “[c]lassifying the decision not to renew the contract as a contractual discretion would constitute a significant expansion of the decided cases under that type of situation” (at [72]).

212    But relevantly to my context, his Honour said about non-renewal powers (at [90] and [91]):

It is not necessary in this case to define in general terms the limits of the implications of the organizing principle of good faith. This is because it is unclear to me how any broader duty would assist Mr Bhasin here. After all, the contract was subject to non-renewal. It is a considerable stretch, as I see it, to turn even a broadly conceived duty of good faith exercise of the non-renewal provision into what is, in effect, a contract of indefinite duration. This in my view is the principal difficulty in the trial judge’s reasoning because, in the result, her decision turned a three year contract that was subject to an express provision relating to non-renewal into a contract of roughly nine years’ duration. As the Court of Appeal pointed out, in my view correctly, “[t]he parties did not intend or presume a perpetual contract, as they contracted that either party could unilaterally cause it to expire on any third anniversary”: para 32. Even if there were a breach of a broader duty of good faith by forcing the merger, Can-Am’s contractual liability would still have to be measured by reference to the least onerous means of performance, which in this case would have meant simply not renewing the contract. Since no damages flow from this breach, it is unnecessary to decide whether reliance on a discretionary power to achieve a purpose extraneous to the contract and which undermined one of its key objectives might call for further development under the organising principle of good faith contractual performance.

I note as well that, even in jurisdictions that embrace a broader role for the duty of good faith, plaintiffs have met with only mixed success in alleging bad faith failure to renew a contract. Some cases have treated non-renewal as equivalent to termination and thus subject to a duty of good faith: Shell Oil Co. v. Marinello, 294 A.2d 253 (N.J. Super. Ct. 1972); aff’d 307 A.2d 598 (N.J. 1973); Atlantic Richfield Co. v Razumic, 390 A.2d 736 (Pa. 1978), at pp. 741–742. Other courts have seen non-renewal as fundamentally different, especially where the express terms of the contract contemplate the expiry of contractual obligations and leave no room for any sort of duty to renew: J.H. Westerbeke Corp. v. Onan Corp., 580 F.Supp. 1173 (D.Mass. 1984), at p. 1184; Pitney-Bowes, Inc v. Mestre, 517 F.Supp. 52 (S.D. Fla. 1981), cert. denied, 464 U.S. 893 (1983).

213    Now as to the content of any good faith duty as it applies to a termination without cause provision or a power of non-renewal, such a power has two features that distinguish it from contractual provisions that are concerned with co-operation to produce a result beneficial to all the parties to the agreement.

214    First, the very purpose of such a power is to bring the existing contractual relationship and implicit bargain to an end.

215    Second, such a power can serve only the interests of the party upon whom it is conferred. The ostensible purpose of the exercise of such a power will almost invariably be its true purpose.

216    So, the exercising party’s obligation pursuant to the good faith duty to act honestly and with fidelity to the bargain between the parties is informed by these distinguishing features and must recognise that the nature of the power is to bring that bargain to an end. That approach also gives effect to the principle that the standard of fair dealing or reasonableness that is to be expected in any given case must recognise the nature of the contract or relationship, the different interests of the parties and the lack of necessity for parties to subordinate their own interests to those of the counterparty.

217    In summary, the good faith duty applied to such a power of non-renewal without cause does not convert an agreement into a contract of indefinite duration. But it does require that the exercising party act honestly in matters that are directly and intimately connected to its performance of the contract and its exercise of the non-renewal power.

218    Let me address some other matters that were the subject of evidence and submissions before me and some of which I have already touched on.

The wishes of the parent?

219    Generally speaking, a subsidiary is entitled to take direction from and act in the interests of its immediate or ultimate holding company.

220    There is nothing in the contractual power to issue a notice of non-renewal to suggest that in acting bona fide MBAuP could not substantially take into account the interests and wishes of MBAG. Of course, this may be a matter relevant to statutory unconscionability which I will discuss later.

221    But I do agree that it would be acting outside the contractual power if MBAuP was merely to be an automaton acting solely on the direction of MBAG without any independent consideration of the matter.

222    Now did MBAuP merely act as an automaton? I think not. True it is that it was very substantially influenced by the position, conduct and strategies of MBAG. Moreover, MBAG approved all business cases. But it is going too far to say that MBAuP had no relevant input. Moreover, Mr von Sanden was firmly in favour of the initiative from an early time, and I accept his evidence in this regard. Perhaps he anticipated the zeitgeist within Stuttgart and offered up Australia and the dealers as guinea pigs. But nevertheless, there was significant Australian involvement.

223    Moreover, it was the act of MBAuP and not MBAG that gave the NRNs. And if it is necessary to identify and attribute a state of mind to MBAuP in relation to that act, then the relevant state of mind was that of Mr von Sanden, and possibly also Mr Nomikos.

224    Now there were no board decisions of MBAuP which have been minuted recording the relevant decision of MBAuP to give the NRNs. But it seems nevertheless to be an act of the CEO that he considered he had board approval for which constitutes the relevant act with authority to give the NRNs.

225    Further, let it be supposed that what I have said in the preceding paragraph is correct. And let it be supposed that Mr von Sanden acted for multiple purposes in giving the NRNs, namely, what he considered was in the interests of MBAuP and what he considered was in the interests of MBAG. In my view that does not show the giving of the NRNs to be outside the contractual power or given in bad faith.

226    Let me deal with another topic which is relevant to MBAG and its global experiment.

The model

227    From time to time during the case, senior counsel for MBAuP sought to strongly emphasise the distinction between model D, as discussed and sought to be implemented by MBAG globally wherever it could, and the agency model as used and implemented in Australia by MBAuP under the direction and authorisation of MBAG.

228    But once the evidence was in, it became clear to me that such a distinction had an air of unreality to it. Model D was the genus. And the agency model as implemented in Australia was clearly one of the country-specific species embraced by the genus.

229    Now senior counsel for MBAuP persisted with the distinction no doubt because he perceived that somehow that supported his case concept that MBAuP came up with and independently initiated the agency model for Australia. But the contemporaneous documents of both MBAuP and MBAG present a more complex picture. But in any event, the agency model in Australia was one emanation of model D which MBAG was clearly pushing. And the MBAuP personnel in Australia were promoting for Australia what they thought that MBAG wanted. In other words, MBAuP was anticipating its parent’s desires.

Job lot

230    When MBAuP exercised its power and issued the NRNs it did not consider each dealer’s individual circumstances. In essence it gave the NRNs at the same time and without regard to individual investments and positions. Moreover, the agency offer, the agency agreements and associated documents were all in standard form.

231    Moreover, MBAuP’s and MBAG’s financial analysis which under-pinned the various versions of the business cases was modelled on the average dealer. But on any view the dealers in the top 30% were likely to do worse under the agency model than if the dealer model had been left in place.

232    So and generally speaking, MBAuP adopted a “one size fits all approach”. It did not discriminate. And its whole approach was to move from one model (the dealer model) to another model (the agency model) seamlessly and without regard to individual positions of and individual effects on particular dealers.

233    Now there are two questions that arise.

234    First, could the power to give an NRN without cause to a particular dealer under an individual dealer agreement be validly exercised in good faith without regard to that dealer’s individual circumstances? In my view and given the nature of the power, which was for the sole benefit of MBAuP, it could be so validly exercised.

235    Second, of what relevance are these circumstances to the question of statutory unconscionability? Now this is a trickier question.

236    If it be assumed that the giving of the NRNs was valid contractually and there was no unconscionable conduct in their issue, so that the dealer agreements came to an end, where does any of this go so far as agency is concerned? Sure, the “job lot” approach may be relevant to the unconscionable conduct question so far as the subsequent implementation of the agency model. But of course the dealers were not compelled to sign up to the agency agreements.

237    Is it being said that the very giving of the NRNs, which were otherwise contractually valid, amounted to unconscionable conduct upon issue because the individual circumstances of the dealers were not taken into account? If so, there are clear difficulties for the applicants including the potential rewriting of the contractual bargain. And surely it was not unconscionable for MBAuP to give the NRNs to pursue an Australia-wide strategy or indeed a strategy consistent with the global strategy promoted by its parent, MBAG? I will return to this later.

The benefits

238    It is difficult to see how it can be said that MBAuP is engaging in conduct that has prevented any exemplar applicant from enjoying the benefit of its dealer agreement. After all, each dealer agreement was subject to non-renewal by either party without cause. That was a benefit that either party had. Indeed, the applicants’ asserted fetters on MBAuP’s power of non-renewal would seek to impermissibly deny MBAuP the fruits of the relevant provision.

239    Further, there is no suggestion here that MBAuP has breached any implied term to cooperate. Any required cooperation concerned obligations and benefits in the context of the dealer agreement as it was ongoing and being performed. Any such implied term had nothing to say concerning non-renewal without cause. Indeed it is conceptually incoherent to talk of the notion of co-operation in relation to a non-renewal power that can be exercised by a party without cause. The whole point of non-renewal is to bring the contractual relationship to an end, which is the antithesis of co-operating in or on anything.

240    Further, the applicants’ assertion of fetters on the power, save and except for it being exercised in good faith and for the purpose for which it was conferred, would if accepted confer a benefit on the applicants which was not bargained for and be at odds or at least in tension with the express provisions of the dealer agreements.

Unconscionable conduct

241    Let me make reference to my views on some matters of relevance concerning the statutory unconscionable conduct case in addition to what I have already said.

242    First, on one view MBAuP 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 MBAuP to be advantageous to it by leaving the allocation of risk elsewhere.

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

244    Third, the dealers ultimately had a lack of choice concerning the terms of the agency agreements. Ultimately 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.

245    Fourth, and related to the third point, there is no doubt that MBAuP 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, MBAuP only made concessions on rats and mice issues. And on the main commission aspects, in my view MBAuP and MBAG ratcheted this down as low as they thought that they could get away with.

246    Fifth, there is no doubt that the introduction of the agency model has significantly diminished the upside that dealers had under the dealership model in terms of potentially earning profits in the good times. But then of course one must consider that some of the commercial and financial risks that the dealers had under the dealership model have now been shifted to MBAuP under the agency model.

247    Sixth, although the dealers had little meaningful choice concerning the agency model, in a sense that lack of choice was brought about by the issuing of the NRNs, which I have found to be 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 and well knowing of the risks, but taking the calculated risk that if they performed then they were unlikely to be given an NRN. In other words they perceived that if they performed then it was to the mutual benefit of both MBAuP 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 in the form of the dealer agreements and the form of the non-renewal provisions. Now in the form of these provisions there was some symmetry as between the parties. But in terms of contractual risk allocation, the dealers always had more to lose if MBAuP decided not to renew than if a particular dealer decided not to renew; a dealer was always more likely to be vulnerable to the sunk costs problem.

248    Seventh, 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 MBAuP 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.

249    Eighth, the dealers say that MBAuP 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 MBAuP 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 MBAuP 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.

250    Ninth, the applicants have also run a case that the giving of the NRNs themselves constituted unconscionable conduct. But that assertion is not sustainable as I explain later.

251    Tenth, I accept that in some respect MBAuP 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.

252    Eleventh, I accept that MBAuP 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. It noted that effect but had no sympathy for it.

253    Twelfth, there were various themes that from time to time MBAuP put to dealers that were either exaggerated or turned out to be incorrect.

254    It was put that the substantial reason justifying the agency model was because of the problem of disruptors, aggregators and future on-line transactions. But this was all exaggerated in terms of the relevant time horizon that I was dealing with, which on one view, at the time the NRNs were given, was only out to 2026. These so-called concerns were also used in an effort to spook the dealers.

255    Further, a theme was run at one stage to the effect that the “dealers wanted agency”. This was also incorrect.

256    Further, the theme was run from time to time that “no dealers would be worse off” under the agency model. This was clearly not correct in relation to the top 30% of dealers at least.

257    Further, MBAuP persistently ran the line that a concern was the intra-brand discounting between dealers and that the agency model was designed to avoid this. But the reality was that most of the intra-brand discounting was brought about by MBAuP’s and MBAG’s conduct in causing over-supply to increase market share and also the incentives to discount that MBAuP itself created flowing from its commission structure with the dealers.

258    Further, MBAuP at one stage represented that it would not implement the agency model without the dealers’ consent. But I do accept that it eventually resiled from that position and made this clear to the dealers in a timely fashion.

259    But none of this conduct together with the other conduct and circumstances makes out the applicants’ statutory unconscionable conduct case as I will explain later.

260    Finally, at one stage I became concerned during the trial as to whether the dealers had been misled about the level of protection offered under the safety net. I also became concerned about the relevant costing margin and whether, if the dealers had known about it, they could have negotiated for a higher margin and forgone the benefits of the safety net.

261    But after being educated further on this topic by Mr Robert Craig KC for MBAuP, I realised that the dealers had not been misled and that the costing allowance from MBAuP’s perspective for the risk coming to fruition was not a potential benefit or margin that the dealers could bargain for in lieu of the protection. My initial concern had been founded on an ontological rather than a semantic category mistake.

Process complaints

262    Finally, the applicants have made general and broad sweeping assertions about process matters. But much of their complaints have been exaggerated.

263    It has been said that MBAuP hid witnesses and documents. But there is no substance to the suggestion of hiding witnesses. MBAuP was entitled to select its witnesses. I have dealt with Jones v Dunkel points elsewhere. As for hiding documents, this assertion is also exaggerated. But I do accept that there were delays in producing relevant material. And I do accept that the late production of minutes of meetings concerning MBAuP was unsatisfactory.

264    Further, and related to the previous point, I do accept that there was to some extent non-compliance by MBAuP and MBAG with my discovery orders and deadlines from time to time. And no doubt this hampered the preparation and presentation of the applicants’ case. But some of this is explicable by the fact that I brought the trial on quickly. Further, some of the material had to be located and reviewed in Stuttgart. Further, what occurred was also a function of the broad-sweeping case being run by the applicants. Now I can empathise with Mr Timothy Castle SC for the applicants who presented an impressive forensic case. But at the end of the trial there were no outstanding deficiencies. And the applicants had all the discovery that they required to fairly put their comprehensive case.

265    Further, one matter that did underwhelm me was the extensive confidentiality claims that were made by MBAG and MBAuP. These claims hampered the smooth running of the trial to some extent. But at the end of the day the applicants did not suffer any lingering disadvantage.

266    Let me now descend into the detail and begin with the applicants and their lay witnesses.

The applicants generally and the exemplar applicants’ lay witnesses

267    As at the commencement of the proceedings, the applicants comprised 38 of the 49 Mercedes-Benz dealers in Australia and between them operated 41 of the 53 Mercedes-Benz dealerships in Australia.

268    Prior to the introduction of the agency model on 1 January 2022, MB vehicles were offered for retail sale in Australia through the dealer network at specifically identifiable locations, including custom-built Mercedes-Benz branded “Autohaus” showrooms. As at the commencement of the proceedings, 30 of the 41 Mercedes-Benz dealerships operated by the applicants were operated from Autohaus showrooms. MBAuP also had prescriptive requirements applicable to all aspects of the premises and the conduct of the dealerships, as set out in MBAuP’s retailer standards.

269    The businesses operated by the applicants at their respective Mercedes-Benz dealerships included various activities, as integrated businesses, being the sale of new MB vehicles, the sale of pre-owned vehicles, including but not limited to pre-owned MB vehicles, the servicing of MB vehicles, the sale of MB parts, the sale of after-market accessories, and arranging finance and insurance for purchasers of new vehicles or pre-owned vehicles.

270    The dealer agreements of each of the applicants are represented by the four exemplars. The exemplars also represent a range of different operating characteristics of the applicants generally.

271    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.

272    Second, 34 of the 38 dealerships are multi-brand. All four exemplars are multi-brand. Two operate on stand-alone sites, being Toorak and Macarthur. Two operate on combined sites, being Albury and Wollongong. Also, in the case of Toorak, the same parent company owns other MB dealerships at Brighton and Mornington. Mr Tony Jennett’s MB dealership at Geelong is a single-brand MB dealership.

273    Third, 35 of the 38 dealerships also sell MB vans and commercial vehicles. Each of Albury, Macarthur and Wollongong sell vans, but Toorak does not.

274    Fourth, 21 of the 38 dealers also sell Mercedes-Benz EQ electric vehicles. Albury, Toorak and Wollongong sell EQ vehicles, but Macarthur does not.

275    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.

276    Now since the commencement of these proceedings, three of the applicants have sold their Mercedes-Benz dealerships. MB Bunbury, the twenty-fifth applicant, sold its business in October 2021. West Orange Motors, the thirty-fifth applicant, sold its business in November 2021. MB Hobart, the twenty-seventh applicant, sold its business in February 2022.

277    At the time of the commencement of the proceedings, each of these three applicants had been the subject of the same conduct as all other applicants, that led to each of them entering into an agency agreement prior to the sale of their Mercedes-Benz dealership. Accordingly, the remedies sought by these three applicants are limited to damages or compensation only.

Albury Dealership

278    The fourth applicant is Baker Motors Pty Ltd, which operates an MB dealership at Young Street, Albury, NSW as part of a multi-franchise dealership known as “Baker Motors”.

279    Baker Motors has been a MB dealership continuously since 1990, the earliest of all the exemplars. Prior to 31 December 2021, Baker Motors and MBAuP were parties to a 2012 dealership agreement entered into in February 2013 in relation to the Albury dealership.

280    Mr Martin Baker, joint dealer principal of Baker Motors, has had over 40 years of experience in the automotive industry, having taken over the running of Baker Motors with his four brothers from his late parents in 1998, and has clear expertise in the operation and management of rural car franchises. Mr Baker affirmed three affidavits in the proceedings. He was cross-examined. He gave straight-forward and essentially honest answers, although he was at times a little evasive. Mr Baker engaged the Australian Automotive Dealers Association to assist him in preparing his evidence.

281    In relation to the Albury dealership, he described in detail the circumstances in which he negotiated with Mr Lührs, then MBAuP’s managing director of Mercedes-Benz Cars, the investment by Baker Motors in the first rural Autohaus in 2001, as well as describing the way in which rural dealerships build and sustain customer relationships over many years.

282    As I have said, Baker Motors is a multi-franchise dealership. But Mercedes-Benz is the flagship brand of the dealership. In addition to Mercedes-Benz vehicles it also trades in Mitsubishi, Subaru, Peugeot, Hyundai and Honda vehicles. It comprises three separate sites in Albury-Wodonga, with six separate showrooms and two service centres. The Young Street premises comprises the Mercedes-Benz, Mitsubishi, Subaru, Peugeot and Honda franchises, as well as a service and parts centre. Baker Motors derives profits from the operation of its service and parts centre.

283    Baker Motors has always sought to ensure it has a wide range of volume brands and luxury brands. An important part of the Baker Motors business structure is to seek to benefit from a customer initially buying a volume brand such as Honda or Hyundai, and remaining a loyal customer of Baker Motors through their life to ultimately buying a luxury brand such as Mercedes-Benz.

284    The commercial choice Baker Motors favoured was to sign the agency agreement and provide a full-service luxury brand offering in Albury-Wodonga, offering customers with access to the full range of Mercedes-Benz passenger vehicles, vans, EQ vehicles and digital services technology.

285    Since 1990 Baker Motors has held a franchise agreement with Mercedes-Benz. In mid-2003, Baker Motors completed building an Autohaus showroom at the Young Street premises. The overriding impetus for the investment in the Autohaus development was to help signify Baker Motor’s commitment to the border communities of Albury and Wodonga.

286    At the time of making the investment in the Autohaus showroom, Mr Baker wanted a more secure arrangement with a contract of five years. However, he was told by Mr Lührs on 16 July 2002:

We are offering a three year term with our new dealer agreement to all dealers who have invested in our mutual future with new or upgraded premises, and this would be forthcoming once your dealership is completed. However, we are again unable to make individual contractual arrangements outside these parameters.

287    Mr Baker recognised that there was no complete or comprehensive security in the operation of a franchise business, and that the dealer agreement offered at the time of investing in the Autohaus showroom did not provide security for long term investment. Notwithstanding, Mr Baker made a commercial decision to invest in the Autohaus showroom on the understanding that he would be granted a dealer agreement of a three year term.

288    Since investing in the Autohaus showroom, Baker Motors has derived a profit from the sale of MB vehicles for almost twenty years. Mr Baker did not provide any evidence that the cost of the construction of the Autohaus showroom had not been recovered or that the business had not derived a reasonable return on its capital investment.

289    Mr Baker’s evidence that he would have been more cautious about investing in the Autohaus showroom had he known that, in twenty years’ time, MBAuP would change its business model, is problematic.

290    Now prior to entering the agency agreement, Baker Motors sold MB vehicles pursuant to a dealer agreement dated 5 February 2013. With respect to the dealer agreement, he understood that there was no contractual entitlement to a particular profit level under the agreement. He understood that there was no contractual requirement for MBAuP to provide any particular level of margin, and MBAuP could change the margin from time to time. He understood that MBAuP could determine the quantity and types of vehicles that it allocated to Baker Motors for supply and he understood that the term of the agreement was one year, renewing on the expiry of each calendar year unless there was a notice of non-renewal issued.

291    The reason Baker Motors entered the dealer agreement on those terms 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. It was the same motivation that led Baker Motors to enter the agency agreement.

292    Let me deal with a different topic. Now whilst Mr Baker, Mr David Baker, or both, would attend dealer principal meetings convened by the Mercedes-Benz National Dealer Council (NDC) on behalf of Baker Motors, they had little interest in the design of the agency model; I will explain the NDC later.

293    Mr Baker kept informed of the process of the development of the agency model through the NDC, and the NDC communicated with MBAuP on his behalf. Mr Baker was content to leave it to Mr Scott and Mr Jennett to negotiate with MBAuP.

294    Baker Motors did not subscribe to eProfitFocus and prepared its financials on a consolidated basis rather than a brand-by-brand basis. Mr Baker was aware that Deloitte modelling was being carried out on dealer financials in 2019, and never requested for Baker Motors to be included in that modelling because he was content for the NDC and the Dealer Advisory Council (DAC), which I will return to later, to represent the interests of Baker Motors in the evaluation of the agency model.

295    Mr Baker stated that his concerns with the agency model were the level of remuneration and the term of the agreement. But he accepted that the four year term was a product of negotiation between MBAuP and the NDC, and never raised a complaint with the NDC when he learned of the four year term. Further, he accepted that under the dealership model the remuneration payable was at the discretion of MBAuP.

296    Mr Baker made a decision to hold off on executing the agency agreement on 24 August 2021 because he wanted to see whether the negotiations developed a better deal prior to signing. Mr Baker elected not to participate in those negotiations.

297    Further, I accept his evidence that there is likely to be an adverse financial impact on the Albury dealership once sales made by the dealership pre-agency are no longer able to be completed under the dealership model.

298    Now Mr Baker purported to give evidence about the financial impact of the transition to an agency model, despite evidently having no financial expertise. Mr Baker ultimately conceded that his written evidence with respect to the profitability of Honda vehicles under the agency model was incorrect. He also conceded the premise of his purported financial modelling regarding the anticipated profitability of Baker Motors was erroneous, as it merely compared gross profit per unit and not net profit.

299    Now MBAuP criticised Mr Baker as a very evasive and unreliable witness. But these criticisms are exaggerated. First, MBAuP approbates and reprobates in relation to its assertion that Mr Baker refused to make appropriate concessions, whilst at the same time admitting that Mr Baker openly acknowledged or accepted in cross-examination certain matters of assistance to MBAuP’s case. Second, the submission that Mr Baker was reluctant to accept plainly obvious propositions does not withstand scrutiny.

Macarthur Dealership

300    The twenty-eighth applicant is Peter Warren Automotive Pty Ltd, which operates a Mercedes-Benz dealership known as “Macarthur Automotive” at Blaxland Street, Campbelltown, NSW. It is the second longest serving MB dealership of the exemplars, having been in operation since 2002, although in 2018 it opened a new Autohaus building at a cost of approximately $10m. Prior to 31 December 2021, Peter Warren Automotive and MBAuP were parties to a 2002 dealership agreement in relation to the Macarthur dealership.

301    Mr Simon Radojevic, dealer principal of the Macarthur dealership, has had over 20 years of experience in the automotive industry, having started his career as a salesperson and also spent time working for MBAuP. Mr Radojevic affirmed three affidavits in the proceedings.

302    He provided clear evidence of the impact of the shift from the dealership model to the agency model, including the fundamental change in the relationship between the Macarthur dealership and its customers, as well as the problems with trade-ins and demonstrators for the Macarthur dealership. Given Mr Radojevic’s extensive experience with the Mercedes-Benz brand and his experience across all aspects of the dealership’s business, his opinions regarding the agency model and its effects on the Macarthur dealership were of assistance. He was a helpful and reliable witness who was prepared to make concessions.

303    Now although Mr Radojevic is the dealer principal of Macarthur Automotive, he is not a director of Peter Warren Automotive. He is also not a director of Peter Warren Automotive Holdings Ltd (PWH), the ultimate holding company of Peter Warren Automotive and other related entities which sell 28 brands through 82 franchise operations. PWH is a publicly listed company. It listed on the ASX in April 2021.

304    Mr Radojevic explained that he was at the coalface of running the dealership, but he was not involved in any decisions about whether any entity in the Peter Warren group should buy or sell a dealership. He did not know what real property was owned by the Peter Warren group and did not manage any of its land holdings or the leases that apply to those land holdings. Further, he did not manage any of the finances for any entity within the Peter Warren group.

305    The agency agreement was signed by Mr Paul Warren and Mr Bernard Friend who were the directors of Peter Warren Automotive at the time. They were the relevant individuals who would normally give evidence of the state of mind of that company on entering the agency agreement. Mr Warren was also a director of PWH. Mr Friend was the company secretary and CFO.

306    In circumstances where neither Mr Warren nor Mr Friend were called to give evidence, MBAuP says that the relevant evidence of state of mind is the prospectus issued for the IPO of PWH on 13 April 2021. It says that it can be inferred that Mr Friend as the company secretary and CFO was involved in drafting the prospectus.

307    At least in April 2021 the directors were concerned about the impact of disruptors in the automotive industry and on entities in the Peter Warren group.

308    In the prospectus, the directors acknowledged that PWH’s competitive position could deteriorate as a result of a failure to respond successfully to changes in the industry. They also explained the threat of disruptors to their new car business including increased use of ride sharing platforms, increased competition via the internet, the emergence of new technologies that provide services which may affect the demand for new vehicles, and the shift towards purchasing cars online and the growth in online retailers such as carsales.com.

309    Mr Radojevic agreed with these changes and threats. He said that the industry was evolving and that new entrants to the market were changing the way that customers buy cars. He accepted that it was sensible business practice to develop an omni-channel strategy if customers have a preference to buy online. He accepted that the industry continues to evolve and that it makes sense to develop strategies that will be suitable for the industry as it evolves.

310    The prospectus explained the following matters.

311    First, PWH had a commitment to growth in terms of its property portfolio, current operations and acquisition opportunities. Its property portfolio covers strategic sites to support increased valuation over time.

312    Second, Macarthur Automotive is situated in a growth corridor.

313    Third, PWH’s strategy is to create “auto malls” with multiple OEMs. This allows the Peter Warren group flexibility to adjust the brand offering and floorspace.

314    Fourth, where a dealership agreement is not renewed, PWH would typically change the franchise or sublease or use the site for a different purpose. So, when faced with the choice of signing the agency agreement or ending the relationship with MBAuP, the directors had various options available to them including to change the franchise or sublease or use the site for a different purpose. The directors could swap out one franchise for another and sell another brand from the premises.

315    Let me deal with another matter. The applicants say that the Autohaus at Macarthur Automotive cost $10 million. However, that amount is inflated. It cost $19 million to construct a Jaguar Land Rover showroom and service department, a multilevel carpark, a section of the Ford service department and the MB dealership; around 40% was attributable to the MB showroom.

316    Further, the directors did not consider investments in land or improvements on that land to be a sunk cost.

317    Let me say something more on the question of agency. Now although Mr Radojevic was not aware of any instance where MBAuP had approached any representative of the Peter Warren group to discuss the impact of the agency model on Macarthur Automotive or to negotiate the terms of the agency agreement, the following may be noted.

318    First, Macarthur Automotive had received the Deloitte modelling tool in 2019. Mr Radojevic said that he had not seen it before. But he was not the dealer principal at the time.

319    Second, MBAuP employees had many discussions with each of Mr Warren and Mr Hughes, who was the dealer principal of MB North Shore and attended several Deloitte working groups, who represented the Peter Warren group interests.

320    Third, many of their specific questions and requests in relation to the agency model were taken into account by MBAuP. After receiving the indicative draft agency agreement and agency overview on 3 May 2021, Mr Radojevic drafted an email to Mr Hughes setting out his list of questions about the agency model. Those questions were numbered by reference to the agency overview document provided by MBAuP. Many of his specific questions formed part of Mr Jennett’s emails setting out the consolidated list of dealer concerns to the agency documentation and the agenda for the NDC meeting on 18 June 2021. Many of Mr Radojevic’s requests were considered by MBAuP and MBAuP made some changes to the agency overview and the operation of the model.

Toorak Dealership

321    The twenty-first applicant is NGP Toorak Pty Ltd, which operates a Mercedes-Benz dealership in Toorak, Victoria. Prior to 31 December 2021, NGP Toorak and MBAuP were parties to a 2015 dealership agreement in relation to the Toorak dealership.

322    Two witnesses were called in respect of the Toorak dealership. Evidence was given by Mr Daniel Ryan, Chief Executive Officer of NGP Toorak and the larger corporate group operating MB dealerships at Mornington and Brighton. Evidence was also given by Mr Vasilios Tourogianis, the financial controller of NGP Toorak.

323    Mr Ryan has worked in the automotive industry for over 20 years, has extensive experience in buying and selling car dealerships, and has prior experience with dealership restructuring. He was also a member of the DAC. Mr Ryan affirmed three affidavits in the proceedings.

324    In October 2015, MB Toorak was purchased by NGP Toorak from MBAuP. NGP Toorak forms part of the NGP group, which is ultimately owned by interests associated with Mr Nick Politis. The NGP group also comprises NGP Melbourne Pty Ltd, which operates the MB Brighton and MB Mornington dealerships.

325    At the time of acquiring MB Toorak, the NGP group had already acquired MB Brighton and MB Mornington.

326    Mr Ryan oversees 28 car dealerships owned and operated by the NGP group, with a broad portfolio of automobile brands. Mr Ryan has extensive experience with the operations of MB dealerships. In addition to being a director of the companies that operate the three MB dealerships within the NGP group, being MB Brighton, MB Mornington and MB Toorak, Mr Ryan is also a director of both WFM Motors Pty Ltd, the largest shareholder of Eagers Automotive Ltd, and Eagers Automotive Ltd, which operates MB dealerships at six locations.

327    Mr Ryan read the information memorandum concerning MB Toorak. It contained information that MBAuP held a leading market share in the luxury vehicle segment, and was pursuing a growth strategy in the Australian market. And it contained the historical and forecast financial position of MB Toorak.

328    Mr Ryan understood at the time of purchasing MB Toorak that MBAuP was pursuing a growth strategy in order to ensure that MB remained the number one luxury brand in Australia. He also understood that being number one in the luxury car market segment by volume helped promote brand value for Mercedes-Benz.

329    NGP Toorak made its offer to purchase MB Toorak on the assumption of a profit before tax of approximately $2 million per year, with an expected return on sales of 1.5%. The purchase price NGP Toorak paid for MB Toorak included both net assets and goodwill value. Mr Ryan gave evidence that the amount paid for goodwill comprised six times earnings based on an anticipated return on sales of approximately 1.5%.

330    On completion of the sale of MB Toorak, MBAuP was required to provide NGP Toorak with a signed dealer agreement in the form annexed to the business sale agreement. Mr Ryan accepted in cross-examination that under the dealer agreement there was no defined entitlement to any particular margin. Further, NGP Toorak was obliged to install a prospect and sales record system. Further, should MBAuP not offer NGP Toorak a new agreement, NGP Toorak would be contractually obliged to return the list of customers and prospects it had been maintaining to MBAuP. Further, upon a notice of non-renewal being issued by MBAuP, there was no mechanism in the contract for the payment of compensation. Further, the term of the agreement was for one calendar year and would automatically renew unless there was a notice of non-renewal issued.

331    Mr Ryan also understood at the time of entering the business sale agreement that MBAuP did not negotiate with dealers as to the margin that it advanced with respect to the sale of vehicles, that it was a unilateral direction that MBAuP was able to make to determine the level of margin afforded and that it was an inherent risk in operating under the dealer model that the margin could change.

332    Following entry into the business sale agreement, NGP Toorak negotiated a revised dealer agreement that provided for a three-year term, with the option to renew for two further three-year terms, subject to a notice of non-renewal being issued in advance of the expiry of each of those terms.

333    Mr Ryan gave evidence that he was aware that if MBAuP was to issue NGP Toorak with a notice of non-renewal, no compensation was payable. Mr Ryan stated, “that’s the risk we take”.

334    Mr Ryan gave evidence of his continuous concerns about the effect of the agency model, in circumstances where, as I have explained, the NGP group paid $12m in goodwill to MBAuP to acquire the Toorak dealership in 2015 on the basis of a 6x multiple of estimated future profits, as set out in an information memorandum issued by MBAuP, even though the dealership was losing money at the time of sale. MBAuP’s witnesses accept that Mr Ryan consistently raised the issue of compensation with MBAuP as a member of the DAC.

335    Mr Ryan was challenged in cross-examination about the adverse effect of the agency model on the Toorak dealership, as contained in the MB Toorak updated financial modelling. But the challenge was based on a false premise that ignored the fact that the relevant part of the Excel spreadsheet contained calculation formulas. This matter was clarified in relation to the operation of Excel spreadsheets by Mr Nomikos. The reworking of the applicants’ Toorak model in the MB Toorak modelling aide-memoire tendered at trial, to reflect the factual premises put to Mr Ryan in cross-examination, demonstrates that Mr Ryan’s evidence was correct about the losses that Toorak would incur under agency, even assuming the higher number for sales stated by Ms Wright is adopted.

336    Further, as Ms Wright acknowledged, the Excel spreadsheet upon which Mr Ryan was cross-examined was a model prepared by Mr Tourogianis, and exhibited to his affidavit. Let me turn to Mr Tourogianis.

337    Mr Tourogianis affirmed two affidavits in the proceedings. He was a chartered accountant and chief financial controller working in MB dealerships, with 14 years of experience in the automotive industry, having come across to the NGP group when it acquired the MB Brighton and Mornington dealerships.

338    A key part of Mr Tourogianis’ role involved the creation of financial models for use in the MB dealership businesses, including in relation to forecasting the impact of the “Commitment to Excellence” (CTE) payments under the dealership model, to facilitate the dealerships’ acquisition and retention of customers by offering the best possible deals to those customers. This understanding of the financial aspects of the business enabled him to create models to forecast the negative impacts upon MB Toorak of the agency model, including the MB Toorak updated financial modelling, on which he was not cross-examined. Mr Tourogianis’ evidence in relation to the separation of sales revenue from CTE payments also disproved Ms Wright’s calculations and the assumptions given to Ms Wright to the effect that demonstrators were loss-making for the dealers under the dealership model.

339    Let me say something about the credit attack concerning both witnesses.

340    MBAuP said that Mr Ryan was not a credible witness. It is said that he refused to make appropriate concessions, refused to accept obvious propositions that he considered adverse to his case, and gave entirely self-serving evidence. For instance, Mr Ryan was reluctant to concede there was a need to provide an online offering for car sales; he was reluctant to concede that disruptors posed a threat to the business; and he sought to distance himself from the size of the NGP Group by asserting it was not relevant.

341    MBAuP also said that Mr Tourogianis was not a credible witness. It is said that he had a tendency to make speeches rather than assist with honest answers. Further, it is said that he was called for the sole purpose of attempting to manufacture an expected loss for MB Toorak out of the transition to the agency model, but his modelling was flawed. It is said that I should not accept Mr Tourogianis’ evidence given its self-serving and unreliable nature.

342    But I agree with the applicants that MBAuP’s attempt to cast Mr Ryan and Mr Tourogianis as witnesses lacking credibility ought be rejected.

343    First, rather than acting as an indictment of Mr Ryan’s credibility in the way MBAuP suggest, Mr Ryan’s long-held view that the change in business model would adversely affect the goodwill value of the dealership businesses serves to reinforce his evidence. In other words, Mr Ryan’s evidence in that regard was not a recent invention. MBAuP’s own evidence illustrates that Mr Ryan consistently and openly raised the issues of goodwill and compensation.

344    Second, MBAuP mischaracterises Mr Ryan’s views and any attempt to provide careful responses to questions as a reluctance to concede certain matters. By way of illustration, MBAuP asserts that Mr Ryan was reluctant to concede there was a need to provide online sales. But relevantly, in the exchange referred to by MBAuP, it is apparent that Mr Ryan sought to contextualise the question at a particular point in time and properly explain his views based on his experience in the industry.

345    Third, in relation to Mr Tourogianis and the submission that his modelling is flawed, MBAuP failed to directly put to Mr Tourogianis some of the propositions that it put to me. Moreover, Mr Ryan was not the person responsible for producing either model.

346    In summary, I do not consider that Mr Tourogianis’ evidence was unreliable. Moreover, I consider Mr Tourogianis to have been a straight-forward and careful witness who did not engage in speculation.

Wollongong Dealership

347    The thirty-sixth applicant is Wollongong City Motors Pty Ltd (WCM), which operates a Mercedes-Benz dealership at Bourke Street, North Wollongong, NSW. WCM was purchased through a share sale agreement by the Wakeling automotive group in 2019, at a time when MBAG and MBAuP were still considering the business case parameters for Business Case 1.0. WCM, under its prior owners, operated the Wollongong dealership for a number of years prior to the acquisition, having refurbished its Autohaus in or around 2011.

348    On its acquisition by the Wakeling automotive group in 2019, a new dealer agreement was entered into with MBAuP, which is in the form of a 2015 dealer agreement but with a fixed term provision in clause 8.

349    Mr Scott Wakeling is the dealer principal of the Wollongong dealership and has 30 years of experience in the automotive industry. Mr Wakeling is also the managing director of the Wakeling automotive group and oversees the operations of the group’s 15 other automotive dealerships, which has provided him with industry-wide knowledge and experience, including in the acquisitions of automotive dealerships. Mr Wakeling affirmed three affidavits in the proceedings.

350    Mr Wakeling readily accepted that he acquired the Wollongong dealership cognisant of a proposed change to MBAuP’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.

351    During the cross-examination of Mr Wakeling, it became apparent that MBAuP 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.

352    Mr Wakeling’s evidence in this regard demonstrates 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 MBAuP.

353    I will deal with other aspects of his evidence later.

NDC, DAC and Mr Jennett

354    The National Mercedes-Benz Dealer Association Ltd (MB dealers association) is a membership-based association of Australian Mercedes-Benz dealers, incorporated in 2004. As at January 2022, all the dealers were members of the MB dealers association.

355    The NDC is the elected board of the MB dealers association, comprising dealer representatives from different regions of Australia. The NDC provides a forum for dealers to discuss issues affecting their businesses and the dealer network generally, and represents the interests of dealers in discussions with MBAuP.

356    From November 2017, members of the NDC attended various meetings with MBAuP where the agency model was discussed, and the NDC conveyed the dealers’ opposition to the introduction of the model in Australia.

357    Mr Jennett has been a member since 2011 and the elected chairman since 2016 of the NDC. The other members of the NDC since 2016 have included Mr Geoff Quirk (MB Brighton), Mr Scott Braid (Wagga Motors), Mr Paul Hughes (MB North Shore), Mr Robin Mainali (MB Gold Coast), Ms Susan Butler (MB Sydney), Mr David Upton (MB Adelaide and MB Unley), Mr Mark Guberina (G Brothers), Mr Shane Parkins (MB Brisbane), Mr Cameron O’Hara (MB Sunshine Coast), Mr Meon Nehrybecki (MB Castle Hill and MB Parramatta) and Mr Daniel Waterfield (MB Warwick Farm).

358    Let me at this point say something about the DAC.

359    At a national dealer meeting held on 20 June 2018, when the dealers first voted to reject MBAuP’s then proposed agency model, the dealers endorsed the establishment of an advisory board, comprising representatives from dealers with substantial investments in the Mercedes-Benz brand, to work with the NDC on strategic issues and deal with any further proposal for an agency model from MBAuP. The advisory board subsequently became known as the DAC, and was constituted as a subcommittee of the NDC.

360    The members of the DAC at all relevant times were Mr Ryan, Mr Paul Warren (Macarthur, MB North Shore and MB Warwick Farm), Mr John Good (MB Sydney, MB Brisbane and MB Melbourne), and Mr Greg Scott (MB Castle Hill, MB Parramatta and MB Gold Coast). Mr Scott was chairman of the DAC until September 2021. Between June 2018 and April 2021, the DAC members attended a series of meetings with MBAuP where agency was discussed. Mr Jennett also attended these meetings.

361    Let me turn now to Mr Jennett, who in my view was a cautious and careful witness.

362    Mr Jennett is the dealer principal of the MB Geelong dealership (the Geelong dealership), which he has owned and operated since 2007 through the twelfth applicant, Geelong Motors Pty Ltd. Prior to acquiring the Geelong dealership, Mr Jennett spent more than two decades working in the automotive industry for manufacturers, including as a regional manager at MBAuP.

363    In his roles on the NDC, Mr Jennett gained extensive knowledge of the operation of the dealer network and the issues affecting dealers, in addition to his experience operating the Geelong dealership.

364    Mr Jennett affirmed three affidavits in the proceeding in his capacity as chairman of the NDC, the twelfth applicant not being an exemplar. Mr Jennett gave detailed evidence of the key meetings and communications between MBAuP and the NDC and DAC in relation to agency, which is supported by his extensive contemporaneous meeting notes which are also in evidence.

365    He took very detailed notes of meetings that he attended. Most of the notes were contemporaneous or written up at a time shortly after a particular meeting where he had a good recollection.

366    Where in these reasons, particularly in the detailed chronology, I have referred to his notes, I accept that they accurately summarise the gist of what was said. Now MBAuP at times challenged their accuracy. And some of its witnesses could not recall words attributed to them. But in my view, Mr Jennett’s notes are likely, given their contemporaneous nature, to provide a more accurate summary of what was said than what the witnesses now say they recollect about events some years ago.

367    Mr Jennett gave cogent evidence as to how the related issues of intra-brand discounting and declining profitability in the network in 2016 to 2019 were a direct result of MBAG’s and MBAuP’s growth strategy, and its performance-based remuneration model for dealers linked to sales targets through the CTE system.

368    I should say now that I accept this evidence over the evidence given by the MBAuP witnesses who denied this link, and sought to blame the dealers for a culture of aggressive intra-brand discounting. Such a culture was the inevitable consequence of the financial incentives created by MBAuP and the over-supply produced by MBAuP and MBAG. To suggest otherwise is bordering on the fatuous.

369    Now MBAuP says that I should treat Mr Jennett’s evidence about what was said at meetings with caution unless corroborated.

370    As I have said Mr Jennett was an avid note-taker. However, those notes were not always made during the course of a meeting and were not always accurate. Mr Jennett sought to reconstruct verbatim accounts of meetings from his shorthand notes for the purpose of preparing his affidavit with no independent recollection of the words being said. Further, Mr Jennett said that he would add words that were more explanatory than the bullet points recorded in his notes without an independent recollection of whether those words were spoken. The following examples were given.

371    First, Mr Jennett’s affidavit records that on 8 November 2017, an unknown MBAuP representative stated “Daimler is working on an introduction in Spain”. Mr Jennett’s notes only record the words “working in Spain”. Mr Jennett accepted he had reconstructed the paragraph from his notes and added the additional words.

372    Second, in addition, in relation to the same meeting, Mr Jennett’s affidavit records that “there are different versions of the agency model that may apply in different markets with different structures” whereas his notes record “different models and structures”.

373    Third, in respect of a meeting on 21 November 2017, Mr Jennett’s affidavit evidence did not identify the consideration of disruption and digitisation that occurred at the 21 November 2017 meeting by reference to the contemporaneous notes.

374    Fourth, in respect of the Dealer Briefing on 26-27 November 2019, Mr Jennett’s affidavit records Mr Bruce Miles, a Mercedes-Benz dealer from New Zealand, stating “the agency model is working with Toyota in New Zealand”. Mr Miles was not present at that meeting. Mr Jennett accepted that this demonstrates the transposition of his shorthand notes into longhand is fallible.

375    Fifth, in respect of the dinner briefing with Mr Lührs on 14 November 2018, Mr Jennett’s notes, which were made after he returned to his hotel room, attribute the words “not in a position to force new model, couldn’t afford it. Clear view of the board to implement” to Mr von Sanden. In his affidavit, Mr Jennett reconstructed those notes to state “clear view of the Daimler board to implement agency wherever possible”. But although the notes do not specifically refer to Daimler, Mr Jennett explained that the reference in his notes to “the board” could only ever have been to the Daimler board as Mr von Sanden “only ever referred to one board”. Similarly, Mr Jennett added the words “to pay compensation if we forced them to change”, which do not appear in his shorthand notes. Mr Jennett accepted that he tried to add to the narrative to make it flow.

376    Now MBAuP says, on the basis of these examples, that the reconstruction in Mr Jennett’s affidavit means that his affidavit evidence with respect to what was said at meetings should be treated with caution and his contemporaneous notes should be preferred.

377    Now in my view Mr Jennett was a reliable witness who was assisted rather than impeded by his practice of thorough note-taking throughout the period. Moreover, the submission that Mr Jennett sought to reconstruct verbatim accounts of meetings from his shorthand notes for the purpose of preparing his written evidence with no independent recollection of the words being said is unsupported by the evidence generally speaking.

378    MBAuP refers to the following exchange:

MR CRAIG:    Can I now ask you about your note-taking process. Is it fair to say that in preparing your affidavit, Mr Jennett, you relied upon your notes as being accurate and then reconstructed your evidence by reference to your notes?

MR JENNETT:    Yes.

379    But it was not put to Mr Jennett at this point that he had no independent recollection. And when it was ultimately put to Mr Jennett that he reconstructed evidence without any independent recollection, Mr Jennett gave the following evidence:

MR CRAIG:    Yes. And so when preparing your affidavit, you reconstructed your evidence by reference to your notes and not by any independent or assisted recollection?

MR JENNETT:    Well, quite often reading a note will refresh something in my mind.

Q:    Okay. And so where it refreshed something in your mind, how did you ensure that that was accurate in terms of the way in which it was recorded in your affidavit?

A:    To the best of my knowledge.

Q:    And so is the evidence to his Honour that you have an independent recollection of a number of meetings, going as far back as 2017?

A:    That referring to a note will often refresh something in my memory.

Q:    But not always, Mr Jennett; that’s correct, isn’t it?

A:    Yes, maybe not always.

380    So, only occasionally was an independent recollection not triggered by his notes.

MBAuP and MBAG

381    MBAuP is ultimately owned by MBAG. Until 2007, MBAuP was known as DaimlerChrysler Australia/Pacific Pty Ltd, and until 1 February 2022, MBAG was known as Daimler AG.

382    Mr von Sanden and Mr Lührs both arrived in Australia in late 2000, with Mr Lührs coming from South America to be the managing director of passenger cars in Australia, and Mr von Sanden coming from Stuttgart to be director of sales. Mr von Sanden succeeded Mr Lührs as managing director of passenger cars in 2003, and remained in this role for 17 years. He was also CEO of MBAuP from 2014 until December 2020.

383    Let me at this point deal with some general topics and begin with the growth strategies of both MBAuP and MBAG.

Growth strategies

384    Prior to Mr Lührs taking up his role in Australia, MBAuP had a sales goal of 10,000 vehicles annually by 2000. Thereafter MBAuP set a series of strategic goals, which had various names including “Vision 30” and an ambition to reach sales of 40,000 vehicles annually.

385    MBAuP’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 MBAuP of this sales growth was sustained increases in its annual revenue, recording gross sales revenue on a wholesale basis of $2.469 billion in 2020, the results of which were remitted by way of dividends to MBAG, including for example a $100 million dividend in 2020.

386    Now at this point I should note two points in relation to these sales achievements.

387    First, sales targets for MBAuP were set annually by MBAG with MBAuP, and were tied into factory and production schedules that had a time-frame of up to five years. MBAG derived further financial rewards from the efficiencies that came with economies of scale at the factory level, and also had the ability to switch the way in which it accounted for revenue through its transfer pricing arrangements from time to time.

388    Second, given the “push” nature of the supply of new MB vehicles into Australia, MBAuP set annual dealer targets to sell the vehicles imported, and used its variable commission/CTE program levers to lower the wholesale price of the vehicles, where there was a mismatch between supply and demand. These levers included altering the way in which CTE was paid by reference to volume targets, and also “free kicks”, as a form of incentive bonus to clear particular stocks.

389    Australia provided a testing ground for new strategic initiatives as perceived by MBAG management. The sea borders and the fact that most cars sold in Australia have to be imported, together with Australia’s sizeable market share and market leadership in the luxury brands, were well recognised by MBAG. Accordingly, despite Australia being a 1% market for MBAG, it occupied the attention of senior decision-makers in MBAG, as decisions were being made about MBAG’s intentions in relation to the global strategy for model D/agency.

390    As the applicants correctly contend, Finance and Controlling staff in Stuttgart appear to have viewed the Dealer Walks concerning the Australian dealers, which appeared frequently in the high-level MBAG documents, as a source of experimentation to see how low the RoS could be pushed by lowering agency commissions. Australia and possibly one other country seem to have been the subject of the most cutting so to speak.

391    Now despite no Finance and Controlling staff member being called to give evidence by MBAuP, other than Ms Jung, the evidence reveals the extent of the power exercised in relation to the financial outcomes for dealers by the Finance and Controlling staff. The applicants accurately point to the following examples in the evidence.

392    First, there was the email exchange between Mr Eisenbarth and Mr Jörg Heinermann on 30 November 2020, in which Mr Eisenbarth revealed that “Joerg Wolf was always the driving force for generating further efficiencies – even without need”.

393    Second, in July 2018, Mr Christoph Dangelmaier identified in an email to Mr Wolf and others in Finance and Controlling, that the weighted average cost of capital (WACC) methodology favoured by MBAG indicated a dealer RoS target range of X to X%. Further, Mr Schymon directed in September 2020 that a dealer RoS of X% be used for Business Case 2.1.

394    Third, there was the consideration given by Mr Wilhelm to the Australian position in a meeting with Mr Schymon, Ms Seeger, and Mr Frank Lindenberg in January 2020, as part of the “top level” finance alignment following the approval of Business Case 1.0 by the Marketing and Sales (MS) executive committee (ExCom) (MS ExCom).

395    Fourth, on the one hand, in late 2020 Mr von Sanden sought to highlight the risks of legal action if the RoS was set too low in Business Case 2.1. So the statement, “Potential legal exposure and risks increase the more we reduce dealers’ ability to generate a market industry relevant ROS”. On the other hand, he sought to garner pity from the dealers by claiming that it had been a battle with Stuttgart to get a better model to present to the dealer network. There is no doubt that Mr von Sanden and Mr Nomikos warned the MBAG decision-makers about the risks associated with seeking to push the dealers’ RoS too low.

396    Now MBAG’s intention in my view was to achieve uniformity where possible, at all levels across the global company. This process started in 2016 at the MS ExCom level with the statement of its then global ambition of model D, which was intended to start with a trial in RO through South Africa.

397    By the time the strategy was presented in full to the MBAG Board of Management, coordination was taking place between Region Europe and RO in the development of the strategy, as seen in the presentations made to the MBAG Board of Management. Other indicia include the development of the “Musterbetreib” global template, which was one of the reasons for Business Case 2.1.

398    More generally, I have little doubt that MBAuP’s strategy in Australia reflected, unsurprisingly, the global strategy of MBAG. From at least the early 2000s MBAG’s brand strategy worldwide was a growth or volume strategy to grow annual sales of new vehicles and increase the company’s market share globally. The financial benefits of this strategy for MBAG as a manufacturer were at least two-fold. First, it could reduce per unit production and other costs through economies of scale. Second, it could increase total profitability without increasing the prices paid by end customers and therefore not impede the growth strategy.

399    MBAG’s growth strategy was necessarily long-term, as it involved the need for increasing production capacity and supply.

400    Further, MBAG’s growth strategy required constant increases in sales in Australia for MB 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 MB vehicle buyers through investment in both the sales process and also servicing. And it was important to MBAG’s overall growth strategy for the dealers to make investments in the dealer network, rather than MBAuP.

401    MBAuP’s awareness of the relationship between investment by the dealers, and the attainment of its growth strategies, is clear from the Network Target Picture 2025/2030, which stated:

•    In 2013 MBAuP commenced a substantial Network Expansion Plan to expand as part of its growth strategy - since 2013 6 New Dealers were appointed, and 62 projects were completed to increase both sales and service capacity.

•    Independent partners invested more than $400m in the Network Expansion Plan.

•    MBAuP divested its Own Retail Operations (2014-16), selling 4 locations for a total of $167m (~€100m) in goodwill.

•    MB has the largest Network footprint in the Australian luxury car segment with 64 Points of Sale (53 Business Partners).

…

•    MB Service capacity of approx. 600 work-bays appears appropriate for current Vehicle Parc volume of approx. X (Deloitte Study 2018).

(emphasis in original)

402    Now MBAG’s growth strategy was implemented in Australia by MBAuP through successive targets and strategies to grow its market share that involved ambitious volume targets. The ultimate consequence of this, as seen in the Network Target Picture, in terms of the “vehicle parc” and customer retention was:

403    As the applicants point out, the strength of the projections shown by the dotted lines for the future sales and profit potential in respect of MB vehicles in Australia from the above diagram, when coupled with a retention rate of approximately 50%, can be understood in light of the Deloitte benchmarks for the 2020 year as shown in the 2021 publication:

404    The financial benefit of this market position can be translated into an assurance of future profits from a combination of this customer base, and the retention rate, when regard is had to the 2020 Deloitte benchmarks in terms of customer profitability:

405    These data points illustrate the success of MBAuP’s strategy in encouraging investment by dealers under the dealership model. They also demonstrate the very significant profit potential available from existing customers in Australia, in terms of their unexpired lifetime value, as well as the referrals that emanate from the loyal customer base, and the business presence of the dealerships to attract new customers as well.

MBAG decision making hierarchy

406    Let me at this point say something about the key decision making hierarchy within MBAG.

407    The MBAG Board of Management is the central decision-making authority of MBAG and comprises its executive management, who are responsible for the day-to-day business of the company.

408    The MBAG Supervisory Board is a separate body which has the power to appoint and remove members of the MBAG Board of Management. It is not clear to what extent the MBAG Supervisory Board involved itself in the management of MBAG, although it had, at least, an accountability function for the MBAG Board of Management.

409    Let me say something about the Regional Divisions. MBAG has passenger vehicle manufacturing and/or sales operations in almost 200 countries. The management of these operations occurs within four separate divisions, based on the following geographical regions: Europe, North America, China and RO including Australia.

410    Executive Committees or ExComs were established at each level in the organisational hierarchy, run by the person in charge at that level – Ms Seeger in relation to MS ExCom, and Mr Lührs in relation to MS/O (RO) ExCom. Although Mr Nomikos and Mr von Sanden gave evidence of a business unit called MBAuP Cars ExCom, which I have later defined to be MBAuP ExCom, the evidence is unclear as to the authority of that business unit or body, and its interaction with the MBAuP Board of Management (MBAuP BOM).

411    Specifically as to the internal governance of MBAG in relation to model D/agency, the following diagram, with a translation below, shows how the model D project was controlled and directed:

412    Of particular interest in this structure is the continuing role played by the MBAG Board of Management through frequent presentations to the Board called “Boxenstopps”, which is German for “pit stops”.

413    The evidence reveals various Boxenstopps that followed the decision of the MBAG Board of Management on 25 May 2020, which reveal the ongoing involvement of Ms Seeger and Mr Schymon in late 2020 and early 2021 when actions were being taken to implement the agency model. On 20 November 2020 there was a Boxenstopp Model D, prepared by Mr Schymon, which depicts Australia as being scheduled for roll-out in 2022. On 9 December 2020 there was “Boxenstopp II Model D”, prepared by Ms Seeger, Mr Schymon and Mr Karl Schregle, who was a member of MS ExCom and Head of Region Europe.

414    Let me elaborate further concerning MBAG.

415    Now at the lowest level in the hierarchy is a Market Performance Centre (MPC) such as MBAuP. The MPC reported to one of the Regional Divisions, which in the case of Australia was RO, headed up by Mr Lührs from August 2017, and before that Dr Conrad. Within RO, Mr Lührs reported to the Mercedes-Benz Cars – MS section headed by Ms Seeger from January 2017, which in turn reported to the MBAG Board of Management of which Ms Seeger was a member.

416    The MPC was subject to an annual budgeting process and KPIs set by RO. In the event a major strategic change was proposed, the MPC was required to prepare a business case to show the financial impact upon the MPC using a standard form discounted cash value add (DCVA) methodology. The business case required approval from MS/O ExCom, which was the principal strategic decision-making body in RO, and, if MS/O ExCom considered it necessary, from MS ExCom. MS ExCom also had the ability to refer the matter for decision to the MBAG Board of Management.

417    Each of the ExComs included a representative of the Finance and Controlling branch, which had a direct reporting line to the CFO, Mr Wilhelm. That person at the RO level was Mr Wolf, and at the MS level was Mr Schymon. It is clear from the documents that the Finance and Controlling officers including members of their team such as Mr Freienstein (Head of Controlling) and Mr Oliver Sihler had considerable influence over the financial aspects of the Business Case, such as the commissions which were set. At the MBAuP level, the CFO, Mr Volker Malzahn, was the key Financing and Controlling representative. Mr Malzahn did not give evidence, but in my view his absence has been satisfactorily explained.

418    Further, Mr Seidler gave an explanation of the process by which a decision was made within the MBAG global company, particularly as it concerned model D. This involved three steps, namely, a target picture, a business case and then implementation.

419    Now from the minutes of meetings of key decision-making bodies, such as the various ExComs, the MBAG Board of Management and the MBAG Supervisory Board, the following summary of the decision-making process can be discerned for the agency model.

420    On 4 May 2016, MS ExCom confirmed model D as the long-term ambition for new car sales globally.

421    On 5 March 2018, MS/O ExCom discussed the target picture for Australia as model D.

422    On 26 November 2018, the MBAG Board of Management considered a model D presentation, which included Australia being identified as a likely future rollout market for model D.

423    On 6 June 2019, MS ExCom agreed with the mid-term solution for Australia, being the introduction of agency for EQ followed by full-scale roll out of model D for all new cars by no later than 2021.

424    On 7 November 2019, MS ExCom approved Business Case 1.0 with a target go live date of January 2021, subject to finance alignment with Mr Wilhelm. In late January 2020, it was approved to push back the target go live date for the agency rollout to 1 January 2022.

425    On 25 May 2020, the MBAG Board of Management approved to proceed with the rollout plan as presented, which included the introduction of agency in Australia.

426    On 15 October 2020, MS ExCom approved Business Case 2.1, subject to a reduction in the proposed online margin.

427    In April 2021, Ms Seeger, Mr Schymon and Mr Lührs approved amendments to Business Case 2.1 in relation to harmonised margins.

The position of MBAuP

428    There were actions on the part of MBAuP to introduce the agency model. Let me highlight some of the significant steps.

429    First, there was the issuing by MBAuP of the NRNs on 29 December 2020.

430    Second, there was the issuing of the letters to dealers on 3 May 2021, attaching the agency overview 1.0 and the indicative draft agency agreement.

431    Third, there was the requirement by MBAuP’s email of 14 September 2021 that dealers enter into the amended agency agreement following the mediation by 16 September 2021 or “your relationship with our brand will cease once your agreement(s) expire on 31 December 2021”.

432    Now these steps do not appear to be the subject of any resolutions of the board of directors of MBAuP or its constituent divisions/committees. Certainly the minutes that I was provided with do not indicate that formalised resolutions were made by MBAuP. It is appropriate to elaborate a little further on this aspect.

433    Since March 2020 and due to the COVID-19 pandemic in Australia, when the MBAuP BOM and one of its sub-committees, Mercedes-Benz Cars Executive Committee, which I will simply refer to as MBAuP ExCom, omitting reference to “Cars”, were meeting virtually, it was not the practice of either the MBAuP BOM or MBAuP ExCom to formally sign the minutes of their meetings to confirm that they were the final approved versions of those documents. Instead, those committees adopted the practice of updating if necessary and approving the final versions of the minutes during the next meetings of the MBAuP BOM or MBAuP ExCom.

434    As for pre March 2020 minutes, whilst it was the usual practice to have minutes signed prior to March 2020, this was not always done. But let me explain what was usually done. Before each meeting, the previous month’s minutes were distributed to members for review. At the commencement of each MBAuP BOM or MBAuP ExCom meeting, the minutes from the previous meeting were either approved, or any changes to the previous minutes were noted and minuted before the minutes were approved by the members.

435    MBAuP BOM and the MBAuP ExCom met separately and were composed of different members. Now I should say that MBAuP ExCom is not formally recognised as a decision-making body under MBAuP’s constitution. And the status of its authority was to some extent opaque. It would seem though that from time to time the MBAuP BOM would approve of or in effect ratify its decisions.

436    The members of the MBAuP BOM and MBAuP ExCom have changed over time.

437    From 2016 up until around October 2017, the members of the MBAuP BOM were the managing directors/CEOs/general managers of Daimler Truck & Bus, MB Cars, MB Vans, human resources and the general counsel and company secretary. From time to time, guests were invited to these meetings on an as needs basis, for example, the CEO of MB Financial Services.

438    From 2016 up until October 2017, the members of the MBAuP ExCom were the CEO and managing director of MB Cars and the directors of each business unit being director of sales, director of marketing, director of customer services, director of network development & customer management, director of human resources and the CFO. From time to time, guests were invited to these meetings on an as needs basis.

439    In or around October 2017, the entire MBAuP business involving cars, larger commercial vehicles such as trucks and buses, and vans was separated into three separate legal entities, namely MBAuP, and two other corporate vehicles.

440    Following that corporate restructure in October 2017 and until January 2019 when there was a further company restructure, MB Cars was the only division in MBAuP. For convenience and efficiency, the members of the MBAuP ExCom and MBAuP BOM met jointly once each month, with the minutes of those meetings being described as “BOM” minutes. This change is reflected at item 9 of the 18 October 2017 MBAuP ExCom minutes which states:

Future set up for ExCom / BOM meetings

The MBC Board of Directors BOD will consist of CEO, CFO and Company secretary. BoD meetings to take place when necessary in conjunction with Board of Management (BOM) meetings.

BOM meetings to consist of CEO, CFO, Directors of After-Sales, Sales, Marketing, Network Development and Human Resources. Meetings are to take place every month.

441    Following this corporate restructure, the members of the then MBAuP BOM and MBAuP ExCom from October 2017 up until December 2018 were the CEO and managing director MB Cars and the directors of each business unit being director of sales, director of marketing, director of customer services, director of network development & customer management, and director of human resources.

442    In January 2019, MBAuP underwent a further corporate restructure and MB Vans was re-integrated into MB Cars.

443    From January 2019 to the time of trial the members of MBAuP BOM comprised the managing directors/CEOs/CFO/general managers of MB Cars, MB Vans, human resources and the general counsel and company secretary.

444    The members of MBAuP ExCom comprised the CEO and managing director MB Cars and the directors of each business unit being director of sales, director of marketing, director of customer services, director of network development & customer management, director of human resources and the CFO.

445    Now I should note that the evidence reveals that meetings were not held in the following months for MBAuP ExCom meetings: January 2016, April 2016, June 2017, November 2017, July 2019, October 2019, February 2020 and January 2021. Further, MBAuP BOM meetings were not held in January 2016, July 2016, December 2016, April 2017, October 2017, November 2017 and December 2017.

446    I should note one other matter. From March 2020, an informal decision was made by MBAuP ExCom to increase the frequency of the meetings to daily meetings to enable the team to “check-in” each day during COVID-19. These meetings were initially held virtually, but as COVID-19 restrictions eased, they were held in person and as a hybrid meeting. These daily MBAuP ExCom meetings were not minuted.

Deloitte and other professional advisers

447    Deloitte Touche Tohmatsu was the main external adviser to MBAuP during the relevant period. Deloitte also had a dual role in the evidence, as the source of industry analysis and data, collected from 1,500 Australian automotive dealers through its eProfitFocus service, and from customer surveys, including a study of over 1,000 consumers, the results of which were reproduced in its 2021 Automotive Industry Overview.

448    Contrastingly, at the MS level, external advice appears to have been taken from Roland Berger, a large German based consulting firm. At the RO level, the main adviser appears to have been Accenture, which produced a detailed “Direct Sales Playbook” for RO. Accenture appears to have also had a wider role through Mr Marcus Breitschwerdt, and with Region Europe. The RO appears to have also used the services of Boston Consulting Group (BCG) at some stage, as they prepared the market assessment tool in May 2017, and also provided at least one template diagram for Mercedes-Benz South Africa’s (MBSA) business model planning, that was also used in Australia.

449    Deloitte commenced providing advisory and consulting services to MBAuP from about 2008. Deloitte had various roles for MBAuP.

450    First, Deloitte acted on the sales of MBAuP’s four company-owned dealerships, namely MB Sydney, MB Brisbane, MB Melbourne, and the Toorak dealership between 2014 and 2017.

451    Second, Deloitte collected monthly operational data from 31 MB dealers as part of its eProfitFocus service, and provided that data to MBAuP until 2019.

452    Third, Deloitte provided training to the dealer network, at the request of MBAuP, and presented at an annual dealer business briefing.

453    Fourth, Deloitte facilitated a workshop for dealers in 2016 at the request of Mr von Sanden.

454    Fifth, Deloitte provided a series of seven workshops for MBAuP and the dealers between October 2018 and November 2019 in relation to agency and model D, and in connection with these workshops undertook a range of financial modelling tasks for the dealers and MBAuP.

455    Sixth, from early 2020, Deloitte provided a senior consultant who worked on secondment as part of Mr Nomikos’ project implementation team at MBAuP.

456    Now Deloitte prepared a financial modelling tool which showed mostly that dealers were worse off under the agency model than under the dealership model. A consequence of that work was that it provoked a strong protest from the dealers, to the extent that MBAuP noted that the DAC had threatened to withdraw from the Deloitte workshops.

457    Now at no point was Deloitte retained by the dealers in relation to the agency model, and none of its accounts were paid by the dealers. The Deloitte workshops and consultation were an attempt to win over the dealers to model D, by leveraging their trust in Mr von Sanden’s assurances, and in Deloitte as respected industry advisers.

458    A notable example of Deloitte’s lack of independence is the following. Mr Clay Latta, a former director of Deloitte Private stated in his email to Mr Nomikos of 31 October 2018:

One question that has been raised in our discussions, is in relation to referring back to Models A, B, C and D. As we discuss each model … are you happy for us to name each model rather than using the Letter references? …The benefit of this is we can disguise the natural progression we will lead the dealers on to reach Model D, and then the subsequent discussions….

459    The applicants say that I am entitled to rely on the Deloitte models as presented to the dealers to demonstrate that, even on the commission assumptions made at the time, dealers would be worse off under agency. I will discuss this in more detail later.

460    Now I should at this stage make one other point. In relation to Deloitte’s general industry role, I have had regard to the industry evidence produced by Deloitte for general industry information, including their industry overviews, their benchmark studies and their Global Automotive Industry Survey, where relevant and appropriate. It is convenient at this point to reproduce some of their analysis.

461    I have reproduced five other graphs produced by Deloitte concerning industry trends over 2019 to 2021.

462    Table 1 shows the effect of JobKeeper on net profit as a percentage of sales (NP%S), an analogous metric to RoS. Table 2 does likewise but shows a longer time horizon.

463    Table 3 shows the continuing effect of micro-chip shortages. Table 4 also shows supply shortages. Of course, discounts either reduce or evaporate in such an environment.

464    Table 5 shows the scope for profit increase which, if it continues under agency, the applicants say will accrue to MBAuP. It is said that this would otherwise have accrued to the dealers if the dealership model had continued.

Table 1

Table 2

Table 3

Table 4

Table 5

465    The Deloitte automotive industry overviews and associated materials also show varying trends.

466    First, NP%S dropped overall over the period from the first half of 2015 (2.6%) to the second half of 2019 (0.7%). But from the first half of 2020 it picked up to 2.9%, and then further increased.

467    This was due to supply shortages and the COVID effects, including job-seeker.

468    But if one took a longer time horizon, then starting with the 2015 peak is a little misleading. For many years before then, and particularly up to 2012, the NP%S had been in the 1 to 2% range, and sometimes even under 1%.

469    The following graph produced by Deloitte usefully demonstrates the trend.

MBAuP’s Lay Witnesses

470    Now MBAuP called five lay witnesses who I will identify in more detail in a moment.

471    The applicants say that the evidence of the MBAuP witnesses should not be accepted, unless it is corroborated by external documentary evidence, or otherwise involves an admission or concession contrary to the case that MBAuP has sought to advance in these proceedings.

472    The applicants seek specific adverse credit findings against Messrs Nomikos, von Sanden and Seidler. Adverse credit findings are not sought against Ms Jung or Mr Peters, although it is said that the reliance to be placed on the evidence of Ms Jung and Mr Peters ought be confined.

473    It is said that each of Messrs Von Sanden, Nomikos and Seidler gave evidence that their affidavits contained a complete account of the development of the agency model, but that evidence was untrue. Now I should say here that one needs to be careful concerning the question of perspective. They were giving evidence from MBAuP’s perspective not MBAG’s perspective. It is understandable why their affidavits did not contain chapter and verse as to the latter. And the defence of MBAuP, as it saw it, did not turn on events in Stuttgart.

474    More generally, the applicants say that a forensic decision was taken by MBAuP to exclude any substantive financial evidence in its initial round of lay evidence, ordered to be filed by 11 April 2022, but not in fact completed until 22 April 2022. That is, the only evidence filed by MBAuP initially was from sales and marketing staff, together with Deloitte. Ms Jung’s evidence was only provided in reply to Mr Potter’s report, and included for the first time in MBAuP’s evidence an explanation of how financial information relevant to the business cases was recorded and compiled by MBAuP.

Horst von Sanden

475    Mr von Sanden was a director of MBAuP from 2003 to 31 December 2020. He succeeded Mr Lührs as managing director of the MB Cars division in 2003 and became CEO of MBAuP in January 2014. As an “L2” in the MB global hierarchy, Mr von Sanden came to Australia from prior sales and marketing roles in Germany, and remained in Australia longer than normal in the global company. Mr von Sanden claims that his retirement date of 31 December 2020 was set by mutual agreement with Ms Seeger and Mr Lührs during 2019.

476    Mr von Sanden was also the Chair of the Federal Chamber of Automotive Industries from August 2018 to August 2020. The FCAI represents 68 manufacturing brands, which between them account for 4,000 dealers and 75,000 employees in the motor vehicle industry in Australia.

477    Mr von Sanden provided evidence by video-link from Spain over various half-day sessions. He was a clever witness who from time to time pushed the corporate line of MBAuP’s case themes. Generally, he gave short and sharp answers.

478    There were some aspects of his evidence that were problematic.

479    First, he says that he came up with the idea of implementing the agency model for Australia. Now that may have been true in one sense. But in another sense, he knew what Stuttgart wanted to do and was seeking to ingratiate himself by serving up Australia as one of the experimental guinea pigs. In essence he seems to have anticipated what MBAG wanted to do.

480    Second, I thought his evidence was murky and unreliable concerning the decision making processes within MBAuP and the hierarchal level at which decisions were made (or indeed not made) by MBAuP and MBAG on questions concerning the giving of the NRNs and the implementation of the agency model in Australia.

481    Mr von Sanden was unable to give any satisfactory explanation for his conduct or the precise way in which the agency model was developed and implemented in Australia prior to his departure on 31 December 2020. This includes his inability to explain why he authorised the issuing of the NRNs on 29 December 2020, two days before his departure, and in the middle of the Christmas/New Year period.

482    Mr von Sanden appreciated his relative lack of power and influence with Stuttgart, in relation to any decision he might wish to make in relation to the Australian market. Thus, in 2018, when he sought some targeted relief for dealers because of a change in demand conditions in the Australian market, the documents show that the real decision-making power lay with the Finance and Controlling staff such as Mr Freienstein.

483    As Mr Seidler acknowledged, an MPC such as MBAuP had to work within annual budgets set by RO, and also with annual sales targets set by Stuttgart. Similarly to the extent Mr von Sanden had originally proposed a RoS for agency at X% in Business Case 0.0, he was ultimately left trying to tell dealers that “it has been a battle with Stuttgart” to achieve a predicted RoS in Business Case 2.1 in October 2020 of X%, which he explained in his affidavit was “higher than what MS was initially willing to agree to”.

484    Third, I thought that his involvement concerning MB Melbourne reflected poorly. Clearly at the time this was sold he had inside knowledge concerning the progress and potential implementation of the agency model.

485    Let me linger on this particular aspect further at this point.

486    The March 2017 information memorandum for the sale of MB Melbourne painted a very rosy picture. It provided various financial data and trend lines including favourable increases out to 2021 concerning sales volumes and net revenue.

487    It said that “MBAuP’s franchise model is well tested and highly successful, building on a collaborative win-win relationship”.

488    Under the heading “Dealer incentives” it was said that “[f]ranchisees operate under an industry-standard margin model, with the opportunity to capitalise on the Commitment to Excellence Program”. Other laudatory and glowing statements were made about the future.

489    It was said that the business has significant opportunity for operational and financial improvement.

490    There was reference to MBAuP’s strategic 2025 goal which had three core components one of which was said to be “[p]reparing our retailers for the future”, that is “Retail of the future” (ROTF). Nothing was said about agency or any introduction in 2021/2022.

491    Frankly, what was not said in the information memorandum given what MBAuP said that it was pursuing in 2017 concerning model D/agency analysis, but not disclosed to potential purchasers, gives rise to adverse comment. And it is difficult to reconcile the contents of this document with what Mr von Sanden said was his state of mind in 2017 concerning agency and the problems that the dealers faced about an agency model. Presumably he was responsible for its contents even though it was authored by Deloitte.

492    Further, nothing was said concerning NP%S declines since 2015.

493    Further, nothing meaningful was said about disruptors, aggregators and online perceived problems, which was at odds with MBAuP’s central themes seeking to justify agency.

494    I also note that the rosy statements in the information memorandum seem to have engendered very sizeable offers from four bidders to pay $72 million, $27.45 million, $20 million and $10 million just for goodwill alone, that is, on top of an amount referable to the net assets figure. If goodwill were valued as a multiple of EBIT then one has implicit multiples of at least six times concerning some of these figures.

495    There is one final comment that I would make. The M&A Gate 1 Approval request dated 19 January 2017 from Mr von Sanden and others at MBAuP to personnel at MBAG sought approval to conduct a bid process for the sale of MB Melbourne.

496    It stated:

Whilst the divestment of MB Melbourne was for the first time considered at the end of last year in line with the global direction, there is an urgency to speed up this divestment to maximize the return for Daimler and minimise any possible future risks.

497    Well might Mr von Sanden have said that with the information he then had concerning the proposed model D and agency that was contemplated for Australia.

498    I will not linger further about what was not disclosed to potential purchasers of MB Melbourne. Nor will I linger on the tensions between what was said to potential purchasers and how MBAuP sought to justify the agency model to the dealers and to me. Suffice it to say that none of this reflects well on Mr von Sanden.

499    Generally, I should say for completeness that I have considered the applicants’ detailed appendix 2 to their closing submissions, but none of it adds much to what I have just said. I will discuss more detailed aspects of Mr von Sanden’s evidence later in these reasons.

500    But I do consider that Mr von Sanden gave honest evidence about his belief in an agency model and the process by which it came to be implemented in Australia. And I do accept that he genuinely held the belief that an agency model was the best fit for the Australian market in terms of the medium to long-term.

Jason Nomikos

501    Mr Nomikos is the director of customer management and network development for MBAuP. Relevantly to the present context, his main role was that of senior manager for MBAuP’s ROTF and e-commerce, RO, which formed part of a broader structure within RO for the implementation of model D by MBAG.

502    Mr Nomikos was an “L3”, being the same level as his counterpart in RO, Mr Thomas Eisenbarth. Mr Nomikos replaced Mr Brad Kelly as the ROTF Project Leader in Australia in July 2018, in circumstances where MS/O ExCom had considered Business Case 0.0 on 25 June 2018, and the dealers had held a vote to reject agency.

503    Mr Nomikos was put forward by MBAuP as its first and principal witness, which reflected the significant portion of his time spent on the ROTF/agency project, as well as his continuous involvement in relation to ROTF/agency from July 2018 to the present time. These activities included setting in place and then coordinating all 19 work-packages relevant to implementation of agency, preparing and presenting the Business Cases 1.0, 2.0, 2.1 and the draft of 3.0 for MBAG decision-makers, coordinating the Deloitte workshops with the dealers in 2018-2019, coordinating the “alignment” strategy in relation to the terms of the dealer agreements, being the signatory of various letters and emails to be sent out to the dealers in February 2020 and in 2021, and attending the mediation in September 2021.

504    The applicants say that Mr Nomikos’ affidavits were designed to mislead me to the view that the agency model to be implemented in Australia was a consequence of decisions made in Australia with minimal involvement of MBAG, and was a consequence of requests made by the dealers.

505    It is said that his evidence as a whole was part of a pattern of falsehoods, designed to support MBAuP’s defence in the proceedings, which sought to differentiate the role of MBAuP from MBAG. Of greatest concern, so the applicants say, was his statement in his first affidavit, from which he did not resile in cross-examination, to explain the decision to implement the agency model in Australia. He said that in late January 2020, the MBAuP ExCom decided to proceed with the implementation of the agency model with a start date of 1 January 2022, that is, with or without the agreement of the dealers.

506    Mr Nomikos was asked a series of questions at the commencement of his cross-examination, in which he repeated this position and gave further evidence in relation to who made the decisions to introduce and implement the agency model in Australia, when those decisions were made, the role of the dealers in relation to the agency model and the role of MBAG personnel in relation to the agency model.

507    Now it seems that Mr Nomikos was not a principal decision-maker in relation to the agency model. He did not claim to be the author or the person giving instructions in relation to the emails or communications to the dealers.

508    More generally, it became apparent from the extensive cross-examination of Mr Nomikos that his affidavit evidence was incomplete as to his role and involvement with MBAG. A more accurate and complete picture of his role emerged from the totality of the documents discovered by MBAuP and MBAG. Mr Nomikos’ role was a technical role coordinating actions at the local level and between MBAuP and MBAG.

509    Mr Nomikos also sought in his evidence to reframe communications and events in relation to the dealers, who had on any objective view rejected agency. For example, Mr Scott’s email of 13 September 2018, the November 2019 vote against agency, and Mr Scott’s email of 20 January 2020, all constituted a clear rejection by the dealers of agency, and made clear their desire not to have any further discussions with MBAuP about the subject. Further, in his first affidavit as well as under cross-examination, Mr Nomikos sought to mischaracterise Mr Scott’s email of 20 January 2020 as conveying agreement by the dealers to agency, if three criticisms of the agency model listed in the email were addressed.

510    But despite these matters, I found Mr Nomikos to be a very astute and on the whole honest witness, although some aspects were problematic.

511    True enough his written evidence did not exhibit many communications that he was involved with concerning dealings with MBAG. Indeed and more generally, there was little in his evidence concerning the Stuttgart processes. But in my view that was a function more of the choice of MBAuP’s legal advisors as to what they considered relevant. No doubt Mr Nomikos was guided by their choices as to how they identified the pertinent issues and the subject areas that he needed to address in his written evidence. After all, MBAuP’s case focused on MBAuP, its processes and its officers’ states of mind. Its position was that MBAG’s processes and the states of mind of MBAG’s officers were largely irrelevant to the principal issues.

512    Now perhaps at times his evidence tended to suggest that he was maintaining MBAG’s “corporate line” for the case. But frankly, that was a problem that manifested itself concerning the evidence of all witnesses on both sides.

513    I should say for completeness that I have considered the applicants’ detailed appendix 2 to their closing submissions, but none of the points made challenge the thrust of what I have said. I will discuss other aspects of his evidence later.

Florian Seidler

514    Mr Seidler is the current CEO of MBAuP, having taken up this role on 1 January 2021. Like Mr von Sanden, Mr Seidler was an “L2” and had previously worked in various roles for MBAG in Germany. He was a co-CEO of MBSA from 2012 to 2017, where he implemented the first pilot of model D for MBAG on the instructions of MS ExCom in 2016.

515    From September 2017 to December 2020, Mr Seidler was the Head of MS for RO, based in Stuttgart. He is named on the organisational charts for the ROTF project as a member of MS/O ExCom, and is shown as having attended a number of meetings and presentations at which Australia was discussed. Mr Seidler was given specific tasks from time to time, such as considering, with Mr Heinermann from Region Europe, whether to approve of a harmonised margin in the context of the approval of Business Case 1.0 by Ms Seeger and Mr Schymon in November 2019.

516    Mr Seidler was not a decision-maker in relation to the agency model, and nor could it be said that he held any independent views about agency in Australia. He also suggested that he was responsible for the ROTF strategy as a result of conversation he had with Barloworld in South Africa in or around 2015. But I did not find Mr Seidler’s evidence to be that credible in terms of him seeking to elevate his own significance concerning the genesis of ROTF and the agency model. His involvement with the South African operation and the relevance and influence that had on MBAG concerning MBAG’s strategy was overstated.

517    It is clear from Mr Seidler’s conduct once he took up his role in Australia, that he had a clear mission to implement the agency model in Australia on behalf of MBAG, and to do so on 1 January 2022.

518    Specifically, he did not concern himself with the terms of the existing dealer agreements, he did not give instructions in relation to the drafting of correspondence and emails sent to the dealers in his name, he did not appear to have any familiarity with the terms of the agency agreements, he did not appear to understand the financial details contained in Business Cases or Dealer Walks, and he appears to have left questions of detail in relation to agency to Mr Nomikos.

519    But generally speaking, I thought that Mr Seidler’s evidence on the topics that he had personal knowledge of was on the whole reliable.

520    He 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 MBAuP 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 MBAuP’s and MBAG’s perspective was all about profit maximisation including price setting, avoiding discounting and reducing costs, which principally involved reducing the take of the dealers.

521    Further, he accepted that he knew in mid-2020 that there had been approval from Stuttgart to implement a form of model D from January 2022 for Australia.

522    Further, in terms of the modelling and business case work, he agreed that it would have been more appropriate to use an average of three years (2017, 2018 and 2019) rather than just a single year. Indeed, he did not seem to be aware of the use of a 2019 point estimate. But Mr Seidler did not have any accounting qualification. As a consequence, some of his evidence was not that useful and accordingly some of the cross-examination fell flat.

523    For completeness, I have considered the applicants’ detailed appendix 2 of their closing submissions, but none of it changes the thrust of what I have just said. I will discuss other aspects of his evidence later in these reasons.

Suk-Young Jung

524    Ms Jung is a Senior Manager, Finance and Controlling of MBAuP. Her evidence principally concerned the explanation of the DCVA calculations in the various business cases. She also gave evidence about the difference between the weighted average margin and the harmonised margin in the “Finance Alignment” with Mr Schymon on 21 April 2021.

525    Ms Jung is an “L4” reporting to the Australian CFO, Mr Malzahn, and was responsible for performing the DCVA calculations using information provided to her by Mr Nomikos and the ROTF project team. It is also apparent that Ms Jung worked closely at times with the RO Financing and Controlling staff, and in particular Mr Freienstein and Mr Sihler in providing information and undertaking progressive iterations of the various business cases, both before and after their presentation to Ms Seeger and Mr Schymon.

526    The explanations about the business case modelling provided by Ms Jung were generally clear and of a technical nature, particularly in relation to the DCVA calculations. But I agree with the applicants that this was not the case with her attempt to explain how the harmonised margin was determined. The aide-memoire she prepared was opaque, leading to the applicants’ preparation of a duelling aide-memoire. But I accept that she gave honest evidence.

Lee Peters

527    Mr Peters is a chartered accountant and partner of Deloitte, whose evidence concerned his engagements with MBAuP, including in relation to workshops conducted by Deloitte for MBAuP, evidence relating to the preparation of the Deloitte models and evidence relating to matters of general industry knowledge and expertise about the Australian market.

528    As to the Deloitte models for each of the individual dealers, Mr Peters’ team was responsible for preparing the Deloitte models for use as a modelling tool by the dealers.

529    The models were based on eProfitFocus data, which is a web-based financial analysis and reporting platform owned and operated by Deloitte, that collects data from about 1,500 dealers in Australia, and has records going back for about 25 years. There were 31 dealers who provided data to eProfitFocus in 2018, and Deloitte prepared its model for each of those 31 dealers, and sent that information to Mr Nomikos, Ms Carmela Pellegrino and Mr Justin Orr on 22 March 2019.

530    Mr Nomikos confirmed that he thought the Deloitte model was a good model, and Mr Potter used the Deloitte model as the basis for his modelling.

531    I will deal with aspects of his evidence later.

The parties’ Jones v Dunkel points

532    It is convenient at this point to say something about the parties’ arguments concerning drawing any relevant inference relying upon Jones v Dunkel (1959) 101 CLR 298. Now the principles in respect of when a Jones v Dunkel inference will be drawn are well settled. But I should make one point. A Jones v Dunkel inference can only make evidence that has been given more or less probable. It cannot itself supply a gap in the evidence. Disputed questions of fact must be decided according to the evidence that the parties adduce, not according to some speculation about what other evidence might possibly have been led.

Witnesses not called by MBAuP

533    The applicants seek adverse inferences in respect of ten MBAG employees and two MBAuP employees who did not give evidence. But with few exceptions, the applicants make sweeping assertions that an inference should be drawn, without articulating what the contents of that inference ought to be. But in any event, the failure by MBAuP to call the witnesses identified by the applicants is explained, and there is no basis to draw a Jones v Dunkel inference.

534    The applicants say that decisions taken in relation to the agency model in Australia were made or approved by decision-makers in Stuttgart, including but not limited to Ms Seeger, Mr Schymon and Mr Lührs. At a minimum each of them ought to have been called to advance the positive assertions made by MBAuP in its defence.

535    The applicants say that each of Messrs Källenius, Wilhelm, Heinermann, Breitschwerdt, Wolf, Freienstein and Malzahn ought to have been called to give evidence about their state of mind or intentions in respect of the decisions in which they participated, or the strategies for which they were responsible.

536    In particular, the applicants say that no explanation has been provided by Mr Lührs or anyone else as to the actual state of mind of the MBAG decision-makers in relation to the agency model, or why the MBAG decision-makers thought MBAG could implement model D/agency with or without the mutual consent of the dealers.

537    Further, the specific evidence of Mr Seidler in relation to the role of unnamed internal lawyers in drafting emails and other documents to which he put his name, and the unidentified person who gave those lawyers their instructions, clearly indicates that Ms Renata Brüngger and other members of the Integrity and Legal Affairs division of MBAG, were witnesses who should have been identified and called to explain their states of mind, or alternatively who instructed them. This applies not only to the key agency model documents and correspondence in 2021, but also the emails and correspondence that preceded them in prior years, for example, the letters on 11 and 12 February 2020 moving the “target go live date” from 2021 to 2022. In respect of these documents, the typical answer given by Messrs von Sanden and Nomikos was that they did not recall who drafted them.

538    Having regard to Mr Seidler’s concession in relation to the 2021 documents, the form of earlier documents, the continual involvement of internal and external lawyers throughout the “alignment” process, in relation to the presentation slides for Deloitte workshops, and in references in MBAG documents to the involvement of Baker & McKenzie, the applicants say that there is a black hole of information about what role the internal or external lawyers actually played, and on whose instructions they were acting.

539    In addition to the Stuttgart lawyers, the discovered documents also disclose an early role played by Maddocks in 8 February 2019 in delivering commercial advice to MBAuP in apparent response to a request from Mr Eisenbarth on 10 January 2019.

540    Of course a Jones v Dunkel inference cannot be drawn in respect of a fact which is properly the subject of a claim for legal professional privilege.

541    As for what appear to be decision makers, namely, Ms Seeger, Mr Schymon, Mr Lührs, as well as Ms Brüngger, the applicants say that I should be reserved in drawing any inference favourable to a party in relation to a matter of which the absent witness had close knowledge, and may more comfortably draw inferences from other evidence in the case against that party.

542    Here, in relation to MBAG witnesses, the applicants say that the documents and oral evidence demonstrate that MBAG was central to the development and introduction of the agency model in Australia, as well as being central to the issue of the NRNs and the imposition of the final agency agreements. The applicants say that having regard to the course of conduct apparent from the discovered documents and chronology of events, I am entitled to find that both the individual events involving MBAG, and the totality of that conduct, are inconsistent with MBAG or any of its officers acting in good faith, for a proper purpose, lawfully so far as the economic duress claim is concerned, or in good conscience.

543    Further, as to the suggestion that MBAuP could not be expected to call evidence from officers of MBAG as its parent company, the applicants say that I am entitled to find to the contrary. Not only are the company boundaries between MBAuP and MBAG artificial, but as a matter of substance in relation to the agency model in Australia, Ms Seeger and Mr Lührs had no difficulty making themselves available directly to the Australian dealers during the period during which the agency model was developed and implemented.

544    Now the applicants assert that each of Ms Seeger, Mr Schymon, Mr Lührs, Mr Källenius, Mr Wilhelm, Mr Heinermann, Mr Brietschwerdt, Mr Wolf, Mr Freienstein and Ms Brüngger should have given evidence about their own state of mind or intentions in respect of decisions in which they participated as relevant MBAG decision makers.

545    The applicants invite me to find that individual events involving MBAG and the totality of (unspecified) conduct is inconsistent with MBAG or any of its officers acting in good faith, for a proper purpose or lawfully so far as the economic duress claim is concerned, or in good conscience.

546    But it is MBAuP’s conduct and MBAuP’s state of mind that is in issue in this proceeding, not the conduct or state of mind of MBAG or any of its officers. The ascertainment of MBAuP’s purpose and state of mind is answered not by looking at the state of mind or intention of individuals employed by MBAG but at the actions and state of mind of MBAuP dating back to 2016.

547    In addition, none of the named individuals are employed by MBAuP, and each live outside Australia.

548    The applicants ask me to draw an inference from the fact that MBAuP did not call evidence from internal and external legal teams including the MBAG legal team. Now aside from the fact no Jones v Dunkel inference can be drawn in respect of material properly subject to a claim of legal professional privilege, the state of mind of lawyers who drafted correspondence or provided advice does not advance the applicants’ case.

549    The applicants have also made a point about the failure of MBAuP to call two of its Australian personnel who feature in the evidence about the development and implementation of the agency model.

550    Mr Orr, a senior officer in Mr Nomikos’ project team, undertook various financial analyses of the remuneration models. He made an observation on 28 April 2020 in respect of a reduction in margin requested, “Almost all dealers worse off”. But Mr Orr reports to Mr Nomikos, who gave evidence in the proceedings. And the applicants seek an adverse inference concerning one email in 2020 about a remuneration structure that was not implemented in the agency model. No inference arises that assists the applicants’ case.

551    Mr Malzahn the then CFO had some role in relation to the Business Cases, which Mr Nomikos says Mr Malzahn was responsible for in terms of their presentation, and as a co-“signatory” to the NRNs issued on 29 December 2020, as well as other events generally where his involvement is mentioned.

552    But in my view the specific evidence tendered by MBAuP seeking to explain Mr Malzahn’s personal circumstances was sufficient to displace the Jones v Dunkel inference.

553    But I do accept that no prior notice of Mr Malzahn’s circumstances were raised by MBAuP with the applicants, and the first the applicants became aware of any issue was in the attempted re-examination of Mr Nomikos. This was hardly satisfactory.

Witnesses not called by the applicants

554    MBAuP says that the applicants’ failure to lead evidence from each of Mr Scott, Mr Warren and Mr Friend gives rise to Jones v Dunkel inferences. Let me begin with the latter two.

555    Mr Warren and Mr Friend, who I have previously referred to, were the directors of Peter Warren Automotive who signed the agency agreement. They could have given evidence of the state of mind of the company on entering the agency agreement and the applicants have not explained their absence. Mr Radojevic’s evidence was not sufficient to fill the gap.

556    Mr Warren is also a director of PWH, and Mr Friend is the company secretary and CFO of that entity. Having due regard to the representations of the directors of PWH, it is said that I should find that Peter Warren Automotive had various options available to it when its directors were considering whether to enter into the agency agreement, and that they freely elected to enter into the agency agreement; they did not enter the agreement under duress.

557    In addition, given the evidence of Mr Seidler and Mr Nomikos, it seems apparent that Mr Warren, as the guiding mind of Peter Warren Automotive and also in his representative capacity as a member of the DAC, supported various features of the agency model as implemented being harmonised commission, floating targets, MBAuP owning the demonstrators from “go-live” and selling them directly to consumers, the variable margin structure, and rural dealers using showroom stock for test drives. He also supported the safety net in the form in which it was offered by MBAuP and considered that the safety net removed any need for compensation.

558    I would be prepared to draw a Jones v Dunkel inference, but to do so does not add very much to the case.

Greg Scott

559    Mr Scott was instrumental in the design and negotiation of the agency model as chair of the DAC, including by participating in over 24 meetings concerning the agency model and negotiating components of the agency model directly with Mr Nomikos.

560    It is said that I ought to draw the inference that Mr Scott’s evidence would not have assisted the applicants. In particular, MBAuP says that Mr Scott considered that the dealership model as then in place was not sustainable without change.

561    Now the following seems apparent from the evidence.

562    On 18 April 2018, Mr Scott wrote to Mr von Sanden stating “[w]e do urgently need to introduce something, to ensure we cease this current and prevailing dealer profitability race to the bottom!”.

563    On 30 May 2018, Mr Scott wrote to Mr von Sanden stating “we are uncompromisingly supportive of anything, be it improving the current model, or the introduction of a suitable and acceptable new model, that corrects the unacceptable malady, widespread within new vehicle sales in the Au market-place, with the M-B brand and its dealers”.

564    In addition, in his representative capacity as chairman of the DAC, Mr Scott engaged in the following aspects and conduct. Mr Scott informed MBAuP that the dealers were not against agency per se. During the first Deloitte workshop on 2 October 2018, Mr Scott said words to the effect “we are not against agency per se. We just want to have time to assess it and why do that now? Let’s just focus on the short term problems”.

565    Further, he shared MBAuP’s concern with the risk presented by disruptors, and considered it was necessary to convince dealers about transitioning to an agency model. During a telephone conference on 15 November 2018, Mr Scott said, in relation to Mr Seidler presenting to the entire dealer network on the risk of disruptors “[i]t will be great having Florian because he tells the story well, is credible and we need you to help us convince dealers about the new way forward”.

566    On 3 December 2018, Mr von Sanden and Mr Scott exchanged emails with respect to the risk posed by disruptors. Mr Scott stated, in respect of Motorscout, “this further increases my concerns on this front”. Similarly, on 3 July 2019, Mr Scott emailed Mr von Sanden expressing his concern about disruptors entering the new vehicle market, and recognising that many dealers made very low or no upfront profits on new vehicle sales under the existing dealer model.

567    Further, Mr Scott represented to MBAuP that the dealers would be happy for the agency agreement to have a four-year term. He also represented to MBAuP that it was making good progress and the dealers were happy to transition to an agency model. Following the DAC meeting on 9 March 2021, Mr Scott said to Mr Seidler “good progress, good meeting. Happy to move on now”.

568    MBAuP says that the inference available from this evidence which I should draw is that Mr Scott was happy to transition to an agency model. Moreover, it would seem that Mr Scott supported various features of the agency model, if there was to be one, concerning a floating target, dealers being responsible for trade-ins, MBAuP owning demonstrators, a harmonised commission, the variable margin structure, rural dealers using showroom stock for test drives, and the PDI reimbursement proposed.

569    Now MBAuP says that I should draw a Jones v Dunkel inference with respect to Mr Scott. But the question is what kind of inference I should draw.

570    Now MBAuP asserts that Mr Scott recognised that MBAuP was working in good faith. But any inference cannot supply a gap in the evidence. And even if there were an inference available that Mr Scott considered the dealership model was not sustainable, there is no evidence from which I could infer that Mr Scott recognised that MBAuP was working in good faith. Moreover, there are other problematic features in MBAuP seeking to use Mr Scott’s absence as a crutch.

571    First, Mr Scott’s email of 13 September 2018 stated that the dealers would only participate in the Deloitte workshops as a matter of professional courtesy and he expressed his strong opposition to the agency model.

572    Second, Mr Scott’s presentation on behalf of the dealer representatives to Ms Seeger and Mr Lührs in Berlin in April 2019 expressed a strong view that the agency model should not proceed.

573    Third, on 20 January 2020 Mr Scott sent an email to Mr Lührs and Mr von Sanden in the following terms:

The model as presented is not a genuine agency model…

…

Failings of this model will have a detrimental impact upon the Dealers Business and value thereof… MBA have ignored any requests for compensation…

Overwhelmingly Dealers do not believe that the intent of the Agency model is to improve Dealer Profitability.

(emphasis in original)

574    Mr Scott’s email to Mr von Sanden and Mr Lührs, which led them to conclude that Mr Scott was foreshadowing potential legal proceedings against MBAuP, led to a deferral of the target go live date for agency to 2022.

575    Fourth, MBAuP generally ignores evidence of various instances where Mr Scott was openly critical of both the agency model and MBAuP’s conduct.

576    I do not consider that the absence of Mr Scott takes MBAuP’s position anywhere. Mr Scott’s conduct during the extensive period of negotiations was at times variable. Further, for all I know, when Mr Scott did from time to time convey signals favourable to MBAuP, he may have been playing along as part of a negotiating strategy. Let me now turn to the detail of the dealership model.

The dealership model

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

578    The difference between the dealer model and the agency model can be illustrated by reference to the following diagram:

579    Dealers entered into a written dealer agreement with MBAuP for the sale and servicing of Mercedes-Benz vehicles and associated parts.

580    Dealers acquired new cars from MBAuP at a price determined by MBAuP, which was the local list price (LLP), under a floorplan finance facility between the dealer and, typically, Mercedes-Benz Financial Services Pty Ltd, a subsidiary of MBAuP. 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. MBAuP funded the interest-free period for dealers by paying the interest to MBFS.

581    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.

582    MBAuP did not sell passenger cars directly to customers online and dealers did not have any contractual right to sell passenger cars online.

583    In substance, MBAuP paid dealers what could be described as a dealer margin. And under the dealer model, profits for dealerships on new cars were a function of the dealer margin paid by MBAuP 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.

584    The dealer margin itself was calculated as a percentage of the LLP, with variable and fixed components. The dealer margin contained three components. There was a fixed percentage discount from the LLP recorded on the wholesale invoice from MBAuP to the dealer for the sale of each vehicle, which was the vehicle margin. There was a fixed payment of a percentage of the LLP from MBAuP to the dealer after the sale of a new car, which was the holdback margin. And there was a variable percentage of the LLP that was dependent on the dealer’s performance, which could range from 0% to a set maximum percentage for overachievement against dealer targets, which was the variable margin. I will delve into the detail of these components later.

585    Now dealers did not have a right to earn any particular margin. Moreover, the margins for each year were set unilaterally by MBAuP and communicated to dealers through dealer bulletins and the yearly so-called CTE program. The percentages of each component of the dealer margin changed from time to time and the focus of the dealer margin shifted from time to time from quantitative factors to qualitative factors.

586    Now as I have indicated, under the dealer model, MBAuP provided financial support to dealers. Let me elaborate further. 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. Now MBAuP provided around $X 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 as I have already said. 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.