In another landmark decision for the automotive industry, the Full Federal Court of Australia:

(a) Dismissed an appeal by certain Mercedes-Benz dealers relating to the brand's change from its longstanding ‘franchised dealership model’ to the ‘sales agency model’ for new vehicles; and

(b) found no inconsistency with key High Court decisions on statutory unconscionability, and rejected the approach of separately determining ‘accepted and acceptable social and community standards’ to assess whether contravening conduct occurred.

In early July, the Full Court of Appeal of the Federal Court, comprising Judges Moshinsky, Bromwich and Anderson, dismissed an appeal by certain Mercedes-Benz Australia dealers against Justice Beach's decisions concerning the brand's shift to a new retail distribution model in 2021.

In 2023, His Honour found that Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) had not (among other claims) engaged in unconscionable conduct against its authorised dealers as part of their $650 million claim against MBAuP.

Although the case relied heavily on the specific facts and background of the parties' businesses, as well as general automotive industry practices and developments over the years, the case examined the topic of unconscionability under the Australian Consumer Law (ACL).

The participating dealers contended that MBAuP's conduct in changing its retail distribution model was unconscionable because it departed from acceptable social and community standards.

In rejecting this argument at first instance, Justice Beach said that he "would reject the approach of some judges who seem to have infused the statutory text with notions of so-called accepted and acceptable social and community standards, whatever that means and howsoever identified, and then said that the relevant search was for what those norms and values require". His Honour then colourfully added: "There is no thirteenth subject matter in section 22(1) which licenses a judge to indulge in what is little more than intellectual fairy floss".

Justice Beach cited two earlier High Court cases, being Australian Securities and Investments Commission v Kobelt (Kobelt) and Stubbings v Jams 2 Pty Ltd (Stubbings). Kobelt, which was handed down before Stubbings, concerned statutory unconscionability under the Australian Securities and Investments Commission Act 2001 (Cth), a provision similar to that under the ACL.

Justice Beach's colourful euphemism was not without further context, as His Honour then quoted Justice Gageler in Kobelt, who was the only one of five judges to consider the issue of statutory unconscionability. Justice Gageler's reasoning used the concept of an "ultimate question" under the relevant sections, which ultimately assesses the conduct as being beyond "societal norms of accepted commercial behaviour" or not, rather than requiring separate determination of "social and community standards" to find a contravention.

The primary judgment was handed down before the High Court's decision in Productivity Partners Pty Ltd (trading as Captain Cook College) v Australian Competition and Consumer Commission (Productivity Partners), concerning when a determination of statutory unconscionability may arise and, in particular, how the matters set out in section 22 are to be considered in that process.

In their appeal, among other grounds, the appellant dealers argued that the primary judge erred in his statement of the applicable principles relating to statutory unconscionability within the meaning of section 21 of the ACL, on the basis that those statements did not accord with the decision in Productivity Partners. The appellants contended that what was required was the identification and assessment of the impugned conduct against "accepted and acceptable social and community standards". Had this been done, the appellants contended that MBAuP's conduct would have been unconscionable and in breach of section 21.

The Full Court held that there was no error in Justice Beach's statement of the applicable principles and no difference in substance between His Honour's statement and those of the High Court in Productivity Partners. Sections 21 and 22 of the ACL already "recognised or embody certain accepted and acceptable community standards" which informs the meaning of unconscionability. It is the Court's task to assess the conduct "against the values and norms 'recognised by the statute' rather than accepted and acceptable community standards at large" (emphasis added). In Productivity Partners, Justice Steward also cautioned against the potential danger of determining and applying general community "values and norms" that could be offensive or otherwise questionable (including by virtue of the passing of time).

In the context of section 22 and the 12 matters which a Court may take into consideration when determining whether a contravention has occurred, Justice Beach also observed that certain values and conceptions underpin, or are implicit within, them. Among these include fairness and equality, asymmetry of power, lack of understanding or ignorance (of a party), risk and worth of the bargain, asymmetry (or quality of information), as well as good faith and fair dealing.

Relevantly for the franchising and automotive industries, section 22(1)(g) allows for consideration of "the requirements of any applicable industry code", especially the statutory obligation of good faith on parties in respect of matters, dealings or disputes relating to the Franchising Code, more specifically, section 18 of the Competition and Consumer (Industry Codes - Franchising) Regulations 2024 (Cth).

The Full Court also dismissed the appellants' challenge to Justice Beach's finding that MBAuP did not breach its statutory good faith obligation.

The appeal decision serves to clarify the matters to be identified and assessed in statutory unconscionability claims, and, in particular, that it is not the "accepted and acceptable community standards at large" that are assessed, but rather those recognised by statute, including obligations of good faith (where applicable).

In the business-to-business (B2B) context, the result may be that:

1. Even where certain conduct falls below accepted community standards at large, it may nevertheless not be statutory unconscionable unless it offends the narrower set of standards recognised by the ACL;

2. for example, conduct offensive to the community, but not in bad faith between parties, might not contravene the ACL or attract relief.

As at the date of this publication, it is understood that certain (not all) dealer appellants have sought special leave to appeal the Full Court's decision in the High Court of Australia.

There is also a question of whether the Federal Parliament may intervene, and how. In this regard, prior to the May 2025 Federal Election, the Federal Government announced a proposal to extend the Unfair Contract Terms and Unfair Trading Practices provisions to the franchising sector, including automotive dealerships—see announcement dated 18 March 2025 by The Hon Julie Collins MP (then Minister for Small Business), "Albanese Labor Government taking further action to support the franchising sector".

Depending on the High Court's decision on the appeal application, this eventful chapter in the local automotive industry, dating back before the COVID-19 pandemic, may yet continue, and its effects may not be fully known for some time. Time will tell whether the pathway taken by MBAuP, in altering its retail distribution model, will be followed by participants in the same or other industries.

For advice on how this decision or recent developments in statutory unconscionability and good faith obligations may affect your business, please contact our Corporate & Commercial team.