In more good news for original equipment manufacturers (OEMs) and franchisors more generally, the Supreme Court of Victoria has dismissed a claim brought against General Motors Holden Australia NSC Pty Ltd (GM Holden) by a number of its dealers (and franchisees) arising out of General Motors Company’s (GMC) decision in 2020 to shut down the Holden brand. The judgment in the much-publicised class action is another example of dealers (unsuccessfully) alleging breaches of contract and bad faith in an attempt to obtain a better ‘deal’ than they were entitled to under their Dealer Agreements, following the recent decisions involving Mercedes-Benz and Honda.

Background

In February 2020, General Motors Company (GMC), GM Holden’s ultimate parent entity, announced that it was shutting down the Holden brand and exiting the Australian market, and would do so by 2021. Between March and August 2020, GM Holden ran a ‘liquidation allowance’ program, allocating all remaining stock of new Holden cars to its network of dealers and ran a clearance campaign to liquidate the stock. By August 2020, GM Holden had ceased supplying any new vehicles to the dealers.

In response, Beecham Motors Pty Ltd, who operated a dealership in Caboolture, Queensland, commenced a group proceeding in the Supreme Court of Victoria on behalf of a group of Holden dealers (Dealers) who entered into dealer agreements with GM Holden commencing on 1 January 2018 for terms ending on 31 December 2022 (Dealer Agreements).

The Dealer’s claims

The Dealers claimed that:

1. properly constructed, their Dealer Agreements imposed an obligation on GM Holden to supply new passenger vehicles to them for the entire term of those agreements (Supply Obligation);
2. further or alternatively, the Dealer Agreements contained an implied term to the effect that GM would ensure the availability for supply of new Holden-branded motor vehicles (or a substitute) for the entire term of the agreements (Implied Supply Term), being a term that was either implied in order to give business efficacy to the Dealer Agreements or by reason of the custom and usage in the Australian new motor vehicle retailing industry;
3. GM Holden breached each of the terms by Holden ceasing to supply any new vehicles to the Dealers from August 2020 and in providing an ‘inadequate’ supply of new vehicles from early March 2020;
4. GM Holden breached the obligation of good faith set out in the Franchising Code of Conduct (Code) and an implied term requiring GM Holden to act in good faith by failing to ensure the availability for supply of new Holden branded motor vehicles for the term and refusing to accept or consider purchase orders for new vehicles.

In effect, the Dealers’ case was that their Dealer Agreements were commercially nonsensical if GM Holden had no obligation to supply any Holden-branded vehicles during the term of the agreements and further that the Dealers, who had invested heavily in their Holden dealerships, had expected ‘business as usual’ until the end of the dealership term.

GM Holden’s response

In rejecting the Dealers’ claims, GM Holden argued that the contractual bargain reached between the parties did not expressly or impliedly require it to ensure that vehicles were available for supply throughout the term of the Agreements, especially since GM Holden did not build cars in Australia and (instead) was a distributor of products that had a complex supply chain. GM Holden argued it was in no position to ensure the supply of vehicles, especially in circumstances where there was only one source of supply of Holden-branded vehicles and that the Dealers’ view of business common sense just happened to coincide with their own commercial interests.

No breach of express terms

The key initial question for the Court was whether the Dealer Agreements contained an express obligation requiring GM Holden to supply new passenger vehicles to them for the entire term of those agreements. After a thorough analysis of all of the express terms of the Agreements, Nichols J held that a subclause in Holden’s Wholesale Standards (which Holden was required to comply with under the Dealer Agreements) which stated that “Holden will endeavour to supply dealers with a sufficient quantity of vehicles that will allow achievement of sales evaluation guide (‘SEG’) or meet reasonably anticipated demand” contained that obligation (Express Supply Term).

However, Nichols J found that GM Holden had not breached the Express Supply Term, having regard to a number of factors including:

1. GM Holden’s actions in putting in place arrangements for the supply of vehicles to it so that it could in turn supply Dealers, constituted an “endeavour” for the purposes of the Express Supply Term;
2. while GM Holden’s supply arrangements were “vulnerable” (in that GMC as the ultimate brand owner could decide to cease manufacture of cars for supply to Australia) the promise to “endeavour to supply” could not be assessed by only considering what occurred from late 2019, once GM Holden learned that GMC might terminate its retail business in Australia;
3. the Dealers did not establish that the lack of an attempt by GM Holden’s to persuade GMC to change course amounted to a failure to “endeavour to supply” as the Dealers did not adduce credible evidence to support their position that, if GM Holden had done so, it would have “made a difference” to the final result (as they did not show that GM Holden had any real power in a negotiation or any compelling commercial case to make to change GMC’s mind).

No other terms implied into the Dealer Agreements

The Court found that the proposed Implied Supply Term could not be implied into the Dealer Agreements, either to give business efficacy to those agreements or by reason of the custom and usage in the Australian new motor vehicle retailing industry. As such, the issue as to whether GM Holden breached that term did not arise.

In relation to the Dealers’ argument that the Implied Supply Term must be implied into the Dealer Agreements in order to give business efficacy to them, Nichols J found that the term lacked clarity and certainty and was inconsistent with the express terms of the agreement. In addition, Nichols J found that the implication of a ‘business efficacy’ term is not a broad warrant for re‑writing the commercial bargain that the parties have made in order to re‑balance the risks, where the contract is otherwise coherent in a practical and commercial sense. The bargain that was expressly struck between GM Holden and the Dealers provided an opportunity to the Dealers to sell Holden-branded cars under the Holden franchise model which was intended to benefit both parties. It did not confer a general right on the Dealers to sell Holden-branded cars from dealership premises because the parties agreed that GM Holden would control, through particular mechanisms, which vehicles and how many vehicles the dealer could sell.

In relation to the Dealers’ argument that the term must be implied into the Dealer Agreements by reason of the custom and usage in the Australian new motor vehicle retailing industry, GM Holden tendered a suite of dealership agreements produced on subpoena from participants in the Australian new motor vehicle retailing industry including Honda, Mazda, Mercedes Benz, Mitsubishi, Nissan, Peugeot, Skoda, Subaru, Suzuki, Volkswagen, and Volvo. Nichols J concluded that the evidence adduced by the Dealers “did not come close to establishing widespread and notorious industry practice.”

No breach of duty of good faith

Finally, the Dealers also alleged that GM Holden breached its statutory good faith obligation imposed by s 6(1) of the Code. Nichols J held that:

1. given that the conduct alleged to have been a breach of the good faith obligation was the same conduct as that relied upon for the other contractual breaches, the claim could not rise higher than those contractual claims; and
2. based on the earlier findings, GM Holden did not fail to act with fidelity to the bargain, or otherwise fail to act in good faith.

What do OEM’s and franchisors need to know?

As noted above, this case is another example of dealers seeking the Court’s intervention to attempt to obtain a better ‘deal’ than they were entitled to under their Dealer Agreements:

• In the recent Mercedes-Benz decision^[1], the dealers unsuccessfully argued that their agreements were permanent or ‘evergreen’ such that Mercedes-Benz could only exercise its power of non-renewal if a dealer failed to meet their targets or make mutually agreed improvements. The dealers also failed to convince the Court that they were entitled to goodwill at the conclusion of the dealer agreement and that Mercedes-Benz had acted unconscionably or in bad faith.
• In Brighton Automotive Holdings v Honda Australia,^[2] the Court held that any goodwill enjoyed by Brighton Automotive concerning the sale of new Honda vehicles was lost when the Dealer Agreement came to an end and that, given there was no evidence that Honda would have granted Brighton Automotive a new dealer or agent agreement had the current agreement not been repudiated, it was not entitled to damages for loss of the opportunity to be appointed as a dealer or agent by Honda beyond the end of the initial term. Brighton Automotive also unsuccessfully argued that Honda engaged in unconscionable conduct by not disclosing to the dealers its plans to terminate dealers as part of the transition to the agency model.

It is clear from all of these recent cases that, in the absence of any bad faith, dishonesty, unconscionable conduct or particular conduct undermining the bargain (as opposed to a failure to perform the bargain itself), Courts will generally hold the parties to franchise agreements to the bargain that they originally negotiated and agreed. Courts will be reluctant to allow franchisees to ‘rewrite’ the original bargain to obtain a better deal for themselves. It is therefore imperative that all franchise agreements are clear as to the nature of the rights being provided to franchisees and the parties’ obligations are clear.

_{[1] AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022.}

_{[2] Brighton Automotive Holdings Pty Ltd v Honda Australia Pty Ltd (No 2) [2024] VSC 262.}