Honda decision affirms no compensation rights for loss of goodwill

The Supreme Court of Victoria has provided more good news for original equipment manufacturers (OEMs) and franchisors more generally, by largely dismissing a claim brought by Brighton Automotive Holdings Pty Ltd (Brighton Automotive) regarding the early termination of their dealership agreement as a result of Honda Australia Pty Ltd (Honda Australia) deciding to change to an agency model. The case confirms the reasoning in previous decisions that automotive dealers and franchisees are not entitled to compensation for loss of established goodwill if their agreements are not renewed at end of term or after being terminated, as also seen recently in AHG (WA) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] (Mercedes case).

Background

In a judgement handed down on 24 May 2024, Justice Matthews dismissed the claims brought by Brighton Automotive against Honda Australia for misleading and deceptive conduct, bad faith and unconscionable conduct. Her Honour also dismissed the claim brought by Brighton Automotive, which argued that they should be entitled to damages for loss of opportunity derived from revenue and profit earnings as an authorised Honda dealer or agent after 30 June 2023, being the date on which their dealer agreement was due to expire.

Her Honour decided that Honda Australia was only liable to pay damages to Brighton Automotive for any loss of opportunity derived from revenue and profit earnings for the balance of the term remaining under their dealer agreement, which was due to expire on 30 June 2023. Honda Australia did not dispute this liability during the trial, only the quantum of damages that Brighton Automotive ought to be given.

Reaffirmation of the principles of goodwill in Mercedes case

The Judge’s findings in Honda have reaffirmed many of the findings by Justice Beach in the Mercedes case relating to goodwill. In particular, that legal goodwill attaches to the right under the dealership agreement to conduct a business in substantially the same manner and by substantially the same means that have attracted custom to it. Therefore, when the dealer agreement ends, as was the situation in both the Honda and the Mercedes cases, the legal goodwill attached to the dealership disappears.

Justice Mathews noted:

‘I accept Honda Australia’s submission that Beach J’s ruling in Mercedes Benz supports that conclusion that any goodwill enjoyed by Brighton Australia concerning the sale of new Honda vehicles was lost when the Dealer Agreement came to an end.’

The Brighton Automotive dealer agreement did not allow for a payment or compensation for any goodwill at the end of the term of the agreement. Consequently, Justice Matthews noted:

‘I consider it an insurmountable causative hurdle that Honda Australia could not have caused Brighton Automotive to lose the value of something it had no entitlement to in the first place. As Honda Australia submits, to allow Brighton Automotive to claim compensation for the value of its goodwill would be to rewrite the bargain.’

Finally, a key difference between the Honda case and the Mercedes case related to the fact that Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) did not terminate any of its dealer agreements mid-term. Instead, MBAuP issued notices of non-renewal to each dealer in its network, informing dealers that MBAuP would not be renewing or extending their existing dealer agreements at the expiration of the term. With that considered, Justice Mathews observed:

‘If Honda Australia had not repudiated the Dealer Agreement and it had instead terminated at the end of its term, without being renewed, then Brighton Australia would have had no Honda business to sell, let alone any goodwill arising from it.’

What compensation are OEMs liable to pay in the event of an early termination?

Clause 46A of the Franchising Code of Conduct requires an OEM to compensate its dealers for early termination of a dealer agreement in the event the early termination relates to:

• a withdrawal from the Australian market;
• rationalisation of its network in Australia; or
• change in distribution model in Australia,

(Early Termination Event).

When specifying how that compensation must be determined, the OEM must have regard to:

• lost profit from direct and indirect revenue;
• unamortised capital expenditure requested by the franchisor;
• loss of opportunity in selling established goodwill; and
• costs of winding up the franchised business,

(Compensation Criteria).

Under Clause 46A of the Code, compensation is only payable to a dealer, having regard to the Compensation Criteria, in circumstances where that dealer still has time to run on the term of its dealer agreement and the OEM has terminated the agreement early as a consequence of an Early Termination Event.

The Honda case dealt squarely with the issue of loss of opportunity in selling established goodwill in circumstances where a dealer agreement is unlawfully terminated before the end of its term. In essence, a Court may award damages arising from a breach of contract compensating a party for loss of commercial opportunity provided the lost opportunity has some value and is not so low as to be speculative.

Brighton Automotive claimed damages for loss of the opportunity to be appointed as a dealer or agent by Honda beyond the end of the initial term at 1 July 2023. Justice Mathews found that there was no evidence that Honda would have granted Brighton Automotive a new dealer or agent agreement had the current agreement not been repudiated. Accordingly, there was no lost opportunity of value that was not negligible or speculative.

The recent decisions in the Mercedes and Honda cases have made clear that a dealer is not entitled to compensation for loss of goodwill at the end of the term of a dealer agreement unless the agreement expressly provides for such an entitlement.

In light of the authorities concerning damages for unlawful termination of a dealer agreement, it would seem reasonable that OEMs include clauses in their dealer agreements dealing with Early Termination Events, by capping total compensation payable for lost profit and goodwill at an amount that, in aggregate, would not exceed the net profit the dealer would have reasonably been expected to earn directly from the operation of the dealership for the period from the from the date of early termination until the end of the term of the agreement. Also inline with the approach taken in Honda, these clauses should provide an adjustment to the amount of compensation for any reasonable steps the dealer could have taken to mitigate its loss.

Shaper Report and Government Response

The recent Government response to the Independent Review of the Franchising Code of Conduct (Government Response) says that clause 46A and 46B of the Code will apply to all franchise agreements when the Franchising Code of Conduct is next remade (April 2025). Until now, these clauses have only affected new passenger motor vehicle agreements. Consequently, all franchisors now need to consider how they will approach (likely) compulsory new clauses for their franchise agreements to address the compensation payable for Early Termination Events. They will do well to take a steer from the experiences of the motor vehicle OEM’s and how they have charted these new waters.