From showroom to courtroom? Mercedes case reinforces judicial approach to statutory unconscionability

On 9 July 2025, the Full Court of the Federal Court of Australia dismissed an appeal brought by a group of Mercedes dealers challenging the company’s change from a dealership model to an agency model.[1] This is the latest pronouncement of an appellate court as to the scope and limits of what constitutes unconscionable conduct for the purposes of the prohibition of such conduct under s 21 of the Australian Consumer Law (and cognate statutory provisions[2]). Importantly, it involved commercial entities on both sides of the transaction, rather than a commercial entity dealing with end consumers.

The dealers had challenged aspects of Mercedes’ conduct on a number of bases including contract, the statutory unconscionability prohibition, the statutory duty of good faith in the Franchising Code, and economic duress. At first instance, the Court dismissed the dealers’ claims. They appealed to the Full Court, where their challenge was limited to arguments based on unconscionable conduct in contravention of s 21 of the Australian Consumer Law and breach of the obligation of good faith in cl 6 of the Franchising Code.

Key takeaways

The Full Court decision affirms that it is not necessarily unconscionable, nor a breach of good faith, for a commercial party to act in a way that advances its own self-interest in changing the terms on which it is prepared to contract to the detriment of another commercial party. Exercising contractual rights – particularly in circumstances where those rights are wholly for the benefit of the party exercising them – is not, in itself, unconscionable. Nor is it necessarily unconscionable or a breach of good faith obligations to engage in robust, arm’s length commercial negotiations with a view to a party seeking the best deal it can obtain – as long as it acts honestly, and not capriciously or arbitrarily.

The judgment is also important in lending further clarity to how courts should approach the task of determining whether particular impugned conduct is in fact unconscionable. It affirms that courts are required to apply the test as embodied in the statutory prohibition, rather than embarking upon a wide-ranging and abstract inquiry into accepted and acceptable community standards.

The facts

The dealers had entered into dealer agreements with Mercedes that gave effect to a “dealership model”. This was a model whereby the dealers would purchase new vehicles from Mercedes and would sell them on to customers. At the end of 2020, Mercedes gave “non-renewal notices” (NRNs) to all the new vehicle dealers in Australia, informing them that their dealer agreements would end on 31 December 2021.

During 2021, Mercedes Australia offered to enter into new proposed agreements that would give effect to an “agency model”. This would involve dealers instead being the agents of Mercedes Australia in relation to new vehicle sales. This model left the dealers worse off, but the agreements were presented on a “take it or leave it” basis and the dealers had to agree to it in order to be able to continue selling Mercedes vehicles. All dealers entered into the agency agreements, but did so under protest.

First instance decision

It was held at first instance that the proper construction of the non-renewal power was that it “was to enable [Mercedes] to bring the term of a dealer agreement to an end… [and] the only substantive constraint on its exercise was that it be exercised in good faith”.[3] The exercise of the power was held to fall within these limits. The Court said: “It is difficult to discern a want of good faith in the exercise of a power which can serve only the interest of the party upon whom the power is conferred”.[4]

The Court rejected the claim that Mercedes engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law by not renewing the dealer agreements, imposing the agency model on the applicants as the basis for their continuing to operate their dealerships, and failing to compensate them for the value of their dealership including the loss of the value of their goodwill as a result of the termination of the dealer model.[5] The Court placed considerable weight on the voluntary nature of the contractual arrangements out of which the impugned conduct arose and canvassed twelve discrete aspects of Mercedes’ conduct before concluding that “none of [the] conduct… makes out the applicants’ statutory unconscionable case”.[6]

The economic duress claim failed because, although the dealers faced commercial pressure to sign the new agency agreements, the Court held that this pressure was not illegitimate and did not amount to duress under Australian law.[7] The allegation of breach of statutory and contractual duties of good faith was also dismissed, with the Court finding that Mercedes acted within the bounds of honest commercial conduct and did not undermine the substance of the contractual bargain. The Court said that the dealers failed “to identify any particular use of power and opportunities in respect of which there has been an alleged failure to act in good faith, or indeed any act which might be said to be capricious, dishonest, arbitrary or motivated by a purpose which is antithetical to the evident object of any provision of a franchise agreement”.[8]

As noted above, the dealers appealed to the Full Court of the Federal Court, principally challenging the first instance judgment in relation to statutory unconscionability and good faith.

The Court’s reasoning: Statutory standards, not community norms

Section 21(1) of the Australian Consumer Law provides as follows:

A person must not, in trade or commerce, in connection with:
a. the supply or possible supply of goods or services to a person; or
b. the acquisition or possible acquisition of goods or services from a person,
engage in conduct that is, in all the circumstances, unconscionable.

Section 22 of the Australian Consumer Law sets out a number of factors to which the Court may have regard in determining whether a person has contravened s 21. (Those factors are substantially identical to those set out in respect of the prohibition on unconscionable conduct in the ASIC Act,[9] and the Full Court’s decision will assist in the interpretation of those analogous provisions also.)

The dealers submitted on appeal that the primary judge erred in rejecting “accepted and acceptable social and community standards” as an appropriate approach for determining whether Mercedes had contravened s 21. They said that the primary judge ought to have found that the consequence of Mercedes’ conduct was so far outside societal norms of acceptable commercial behaviour as to warrant condemnation for the purpose of s 21.[10]

Consideration of this argument saw the Full Court analyse a number of High Court judgments dealing with statutory unconscionability – principally the High Court’s 2024 decision in Productivity Partners Pty Ltd (trading as Captain Cook College) v Australian Competition and Consumer Commission [2024] HCA 27; 419 ALR 30 (Productivity Partners), which was handed down after the first instance decision in Mercedes.[11]

The Full Court considered that the High Court judgments in Productivity Partners do not establish “that the task of the court is to search for and apply accepted and acceptable community standards. Rather, we read those judgments as standing for the proposition that ss 21 and 22 recognise or embody certain accepted and acceptable community standards. Importantly, it is the statutory notion of unconscionability against which conduct is to be evaluated”.[12] Their Honours further held that the test in s 21 does not involve the application of a standard of conscience defined by community standards in the abstract; rather ss 21 and 22 themselves “recognise” certain values and norms and the statutory test is “permeated” with accepted and acceptable community standards.[13]

In short, in determining whether s 21 has been contravened, the Court is required to assess impugned conduct against the values and norms recognised by the statute, rather than accepted and acceptable community standards at large.[14] Indeed, the contrary would place the Court in the difficult position of having to undertake an inquiry into what the content of those community standards are in the abstract. As Steward J wondered in Productivity Partners, would this be a matter for expert evidence? Or a matter of judicial notice? And how could the task be undertaken where a multiplicity of standards may exist in the community “which may no longer exhibit ‘monolithic moral solidarity’? And what about changes in community standards over time?[15]

Having considered the correct test to apply, the Full Court then considered the dealers’ appeal grounds in relation to the application of the test to the factual circumstances of the case. Those grounds were rejected. In short:

• Unconscionability is not about abstract community standards: The Court confirmed that the test for statutory unconscionability is grounded in the values and norms recognised by the statute itself, not “the application of a standard of conscience defined by community standards in the abstract (i.e. untethered from the statute)”.[16] The Court must apply the standards set out in the Australian Consumer Law and industry codes incorporated by reference in s 22 of the Australian Consumer Law, not embark on a wide-ranging inquiry into societal expectations.
• Commercial self-interest is not unconscionable: The primary judge had found that Mercedes was entitled to act in its own commercial interests, even if this left dealers worse off. The Full Court did not accept that the primary judge erred by failing to differentiate between commercial interests and legitimate interests — the Full Court found that the primary judge did in fact specifically consider the topic of legitimate interests and at least implicitly rejected the notion that the financial terms Mercedes offered the dealers “went beyond what was reasonably necessary to protect Mercedes Australia’s legitimate interest”.[17] Exercising contractual rights, including issuing non-renewal notices and negotiating hard over new terms, does not amount to unconscionable conduct if done honestly, without caprice, dishonesty, or arbitrariness.
• No breach of good faith in robust negotiation: The Court held that robust, arm’s length negotiations — even where one party plays “hard-ball” and makes minimal concessions — do not breach the duty of good faith, provided the party acts honestly and for a proper purpose. The fact that Mercedes set commissions “as low as they thought they could get away with” was not, in itself, a breach of good faith.
• Dealers’ vulnerability was self-induced and contractually accepted: The primary judge had stated that the “true source” of the dealers’ vulnerability was the way risk was allocated in the contractual structure (i.e., the dealers had accepted the risk of non-renewal when entering into their agreements).[18] While the dealers said, on appeal, that the primary judge erred in not finding that the dealers’ significant investments in their dealerships was also a source of their vulnerability,[19] the Full Court rejected this argument saying that the primary judge had specifically referred to the dealers’ “investments and sunk costs” in addressing the question of their vulnerability.[20] Their investments, while substantial and a source of vulnerability, did not make Mercedes’ conduct unconscionable.

Good faith under the Franchising Code

Clause 6 of the Franchising Code contains a statutory obligation of good faith and a contravention of it is a contravention of s 51ACB of the Competition and Consumer Act 2010 (Cth).

The primary judge concluded that the dealers failed to establish that Mercedes did not exercise its power to issue NRNs in good faith, particularly as the relevant contractual power was for Mercedes’ sole benefit. His Honour also found that none of the identified terms of the agency agreements were unfair.

On appeal, the Full Court found no error in the primary judge’s conclusions that the dealers did not establish that the terms of the agency (and associated) agreements were unfair and/or unreasonable, and that they did not establish that Mercedes’ conduct in negotiating the financial terms of those agreements breached the duty of good faith. In particular, the Full Court held:[21]

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

The Full Court went on to deal with a number of further grounds of appeal in relation to certain factual findings made by the primary judge. Again, these grounds were not successful.

This case underscores the importance of clear contractual drafting and the limits of judicial intervention in commercial negotiations.