In a controversial move in 2021, Honda Australia began to switch from the traditional ‘dealership’ model to the new ‘agency’ model for selling new cars. 2022 saw a second car manufacturer, Mercedes-Benz, bring the agency model to Australia, prompting a large group of Mercedes-Benz dealerships to bring proceedings against Mercedes-Benz AG over the change in terms. No doubt, similar moves will be made by other manufacturers in the future.
Dealership model vs. Agency model
Under a traditional ‘dealership’ model, a dealer is granted the right to sell and service motor vehicles from a manufacturer whereby they purchase stock at wholesale price from the manufacturer and set their own retail sale price to customers. Under this model, dealers have more flexibility to negotiate with customers on price and can offer other products to customers, including after-market accessories or other products.
The ‘agency’ model however, flips the relationship between dealers and the manufacturer. Generally speaking, under this model, the manufacturer retains ownership of new vehicles, sets the sale price and enters directly into sales contracts with customers. Although the change does not impact how a dealer operates its pre-owned and service departments, the dealer essentially becomes a sales agent on fixed price commission for new vehicles.
The impact of the “Mercedes-Benz Case” on the future of the dealership model
In August 2023, the Federal Court, in AHG WA (2015) Pty Ltd Trading as Mercedes-Benz Perth & Westpoint Star Mercedes-Benz & Ors -v- Mercedes-Benz Australia/Pacific Pty Ltd, made a landmark decision which may impact the future of the dealership model in Australian dealerships.
Following the expiry of the 38 Mercedes-Benz dealership agreements in Australia at the end of 2021, those dealers commenced proceedings against Mercedes-Benz AP after they received notice that their current dealer agreements would not be renewed. Instead, the dealers were offered new agency agreements, moving them to a fixed price sales model. If any dealer refused to sign up to the new agency agreement, Mercedes-Benz would cease supplying them with new vehicles.
The dealers claimed that they had no choice but to sign the new agency agreements or face having their business taken from them. They also claimed that Mercedes-Benz’s conduct severely diminished the goodwill of each of the dealerships, significantly reducing their value.
Proceedings commenced with the dealers seeking $650 million in compensation from Mercedes-Benz AG, however ultimately the court ruled in Mercedes-Benz’s favour, concluding that none of its actions amounted to unconscionable conduct.
It was made clear in the Merecedes-Benz Case that the rights afforded to a dealer under a dealership or franchise agreement, only exist for the life of the agreement, providing the dealer with no other value or protection of their goodwill once the agreement expires. This finding is aligned to the long-standing position at law that franchisees do not have a right to be compensated for goodwill on the non-renewal of a franchise agreement.
The Appeal
On 31 January 2024, 37 of the 38 dealers involved in the initial Mercedes-Benz case filed an appeal against the August 2023 decision, which is yet to be heard by the Federal Circuit Court. A decision on the appeal is anticipated later this year, which no doubt is being eagerly awaited by other manufacturers keen to make the switch to the agency model.
With more manufacturers moving to the agency model, how will this impact dealers?
Various brands around the world are also shifting towards the agency model. This is evident in BMW’s announcement that it will follow Mercedes-Benz’s footsteps in Europe from 2024 first with its MINI brand and its core brand in 2026. It is only a matter of time before more brands follow and the changes flow to Australia.
As a dealer, the most important thing to be aware of is the terms in your dealer or franchising agreements. Importantly, consider when your agreement is due to expire, the terms relating to renewal of the agreement (if any) and any terms that allow the manufacturer to change or amend your agreement with them. If your agreement is set to expire, there is no guarantee that a manufacturer will renew your agreement, or that it will renew on the same terms that you once had.
You should also consider how a change in the terms of your agreement may impact your business where you run multiple brands out of one location. You may find yourself with a mix of agency and dealership model agreements to manage.
Do you need advice in relation to your franchising or dealer agreement? Our Commercial Team is highly experienced in the automotive industry and can help you.
