Duty of Good Faith and Unconscionable Conduct: AHG WA v Mercedes-Benz

Any franchisee will know, and perhaps experienced, that franchising agreements inherently favour the franchisor. The power to dictate how a franchisee operates naturally translates to substantial bargaining leverage in the franchisor’s favour. The duty of good faith, now contained in section 18 of the Competition and Consumer (Industry Codes – Franchising) Regulations 2024 (Cth) (Franchising Code), is a statutory attempt to mitigate the misuse of bargaining power.

The duty requires parties to act honestly, not arbitrarily, and cooperatively to achieve the purpose of the agreement, objectively ascertained. Critically, however, it does not prohibit a party from acting in its own legitimate commercial interest. This distinction matters. It means that conduct which appears unfair or opportunistic on its face will not automatically constitute a breach. The recent decision of the Full Federal Court in AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2025] FCAFC 86, handed down in the second half of 2025, illustrates precisely why.

The franchisees in AHG WA also sought to rely on unconscionable conduct provisions contained in sections 21 and 22 of the Australian Consumer Law. In addition to the good faith provisions, unconscionable conduct is also often erroneously relied upon in attempting to characterise conduct by a party with a superior bargaining position.

BACKGROUND

Prior to 2020, Mercedes-Benz dealers across Australia operated under a 'dealership model'. Under this model, they would purchase new vehicles from Mercedes-Benz Australia/Pacific Pty Ltd (Mercedes Australia), a subsidiary of Mercedes-Benz AG in Germany, and sell them directly to customers. The dealers were considered franchisees because it was Mercedes Australia, the franchisor, that controlled, among other things, dealer margins, the price at which the vehicles were sold to dealers, and use of their trademark and marketing.

In late 2020, Mercedes Australia issued non-renewal notices (NRNs) to all Australian Mercedes dealers with the intention to replace the existing ‘dealership model’ with an 'agency model', under which Mercedes Australia would set the vehicle sale prices faced by the end-consumer and provide the vehicles directly to customers. The primary judge found that the NRNs were issued without regard to individual dealers' circumstances and solely for the benefit of Mercedes Australia and its German parent.

The shift was commercially significant for dealers. They had, on Mercedes Australia's encouragement, invested approximately $400 million in their dealerships in anticipation of long-term returns under the dealership model. The primary judge found that Mercedes Australia profited from those investments under the new model.

The agency agreements were ultimately executed by the dealers in September 2021, under protest. The terms of these agreements heavily favoured Mercedes Australia:

·       Dealers could no longer negotiate sale prices down with customers.

·       Most dealers would be financially worse off.

·       The agreements were presented on a take-it-or-leave-it basis, with no meaningful negotiation and inadequate time to consider the terms.

·       At each iteration of the proposed model, Mercedes Australia and Germany sought to reduce dealer margins further.

·       It was a clear case of franchisor opportunism.

ISSUE

The central question was whether Mercedes Australia's conduct in the course of issuing the NRNs constituted:

(a)    a breach of the duty of good faith under the Franchising Code; and

(b)    unconscionable conduct under the Australian Consumer Law.

FINDING

The Full Court upheld the primary judge's conclusion: there was no breach.

Despite the factual findings regarding Mercedes Australia’s conduct, which were adverse to Mercedes Australia in almost every respect, the dealers, nevertheless, failed to establish that the duty of good faith or the unconscionable conduct provisions had been contravened.

Making no concessions on dealer commissions, reducing margins as far as commercially possible, failing to negotiate in a meaningful way with the franchisees, and proposing a model that left franchisees materially worse off did not amount to a breach. Mercedes Australia had legitimate commercial interests in pursuing this line. It was, the Full Court held, merely commercial negotiation between two business entities.

Similarly, where the dealership model agreements explicitly permitted Mercedes Australia to issue NRNs without reason, it was difficult to find unconscionability in Mercedes Australia’s decision exercise that right. The dealers freely entered into the agreement and were aware of its terms. As such, the fact the dealers were in a disadvantaged bargaining position was, in a sense, self-induced.  

KEY TAKEAWAYS

The key point to take away from AHG WA is that commercially legitimate use of a superior bargaining position to the perceived disadvantage of a franchisee is not a breach of the duty of good faith. Not only does this apply in respect of the agreement on foot, but it also extends to any subsequent negotiations.  

Franchisees seeking to rely on the duty of good faith should ensure their complaint goes beyond merely questioning a franchisor’s legitimate commercial interests.

The relevant inquiry is whether the franchisor acted dishonestly, arbitrarily, capriciously, or in a manner that undermined the cooperative purpose of the agreement, not simply whether the result was commercially disadvantageous.

To be in breach of this duty, a party to a franchise agreement must act in a way inconsistent with the terms or commercial goal of the agreement. They may do so explicitly, or through exercising a right under a franchise agreement with an ‘ulterior motive’. For example, issuing a breach notice under an agreement, where no clear breach has occurred, for the ulterior purpose of ending the agreement early.

A similar takeaway applies to unconscionable conduct. Not only in the context of franchise agreements, but generally. It is not unconscionable conduct for a party to use their legitimate, but substantially stronger, contractual position against another party that wilfully entered that contract. There must be some element of dishonesty by a party, and more than the mere exercise of a strong commercial bargaining position.

CONTACT GML

If you, as a franchisor or franchisee, are involved in a dispute, contact us. We have specialist knowledge and experienced solicitors to assist and represent you. Please get in touch to organise a consultation.