Car wars

The Mercedes litigation may have settled, but there was no love lost between the two sides – or their lawyers. Brendan Malkin reports on the row and asks: have DaimlerChrysler and Richards Butler come away with egg on their faces?

Before the dust has even settled on the $1bn (£701.2m) claim brought by Mercedes Benz dealers against DaimlerChtyslerUK (DCUK), serious question marks hang over DCUK's tactics.
When the parties agreed on an out-of-court settlement earlier this month, both sides emerged claiming victory, but the result is being widely viewed as a climbdown by DCUK over its restructuring plans.
DCUK insists that the settlement is not a defeat, but the rhetoric of Allen & Overy (A&O), the dealerships' law firm, suggests that DCUK's strategy was fundamentally flawed.
“I find it surprising that a corporation enjoying all the prestige and calibre of the Mercedes-Benz marque and previously enjoying such goodwill with its dealers should have embarked upon a strategy that met with such resistance from them,” says A&O senior associate Stephen Jagusch.
The dispute began last December when Mercedes, the luxury car arm of DCUK, served 12-month termination notices on all of its car dealerships. Mercedes' plan was to take direct control and ownership of its retail outlets in Europe's largest cities. In the UK, this would see around half of the existing Mercedes dealers excluded from selling new Mercedes cars and would enable Mercedes to control around 70 per cent of the market.
Although DCUK's restructuring will still go ahead, the dealers – previously required to renegotiate a role in DCUK's new network or sell out to it – will be offered compensation and extended notice periods up to June 2003 to thrash out a deal.
When legal proceedings were first issued, Allan Pulham, director of the National Franchise Dealers' Association, told The Birmingham Post: “Manufacturers don't get challenged by dealers and they do what they're told by manufacturers. There's a suggestion that it will be resolved before it gets to court because DaimlerChrysler couldn't take it. We shall win in court if DaimlerChrysler lets it get that far. They're losing the plot.”
So, perhaps DCUK and its team of legal advisers, led by general counsel Chrissi Evans and a team from Richards Butler, believed they could steamroller the dealerships into compliance. Certainly, in December, when the dealers received the termination notice, they were out in the cold without funding and devoid of the unity required to take on DCUK in the courts. But it did not take long for 85 of the 137 dealerships to band together to form an action group, bringing the Retail Motor Industry Federation on board to handle the media campaign, which garnered considerable international support.
The action group raised between £750,000 and £1.5m to fight the campaign, enabling it to instruct a seriously heavyweight team of legal advisers spearheaded by A&O. The team was led by head of litigation Andrew Clark, who instructed two of the commercial bar's biggest hitters, Lord Grabiner QC, head of One Essex Court, and one of the set's top juniors, Laurence Rabinowitz.
Richards Butler partner Katherine Holmes, however, disagrees that the dealers were ever faced with the task of David taking on Goliath. “The dealers are all successful businessmen who've been running franchises for some time,” she says. “You can't suggest that they're poorly-resourced people at the mercy of DCUK.”
So what about DCUK's tactics? Were they really fundamentally flawed? The criticisms centre on DCUK's issuing of the 12-month termination notice. DCUK's contract with the dealers stipulated that a 12-month termination notice was permitted only if “necessary” for restructuring, whereas a 24-month termination notice was permitted for any reason.
In April, a full two months after A&O had issued proceedings against DCUK arguing that the original notice was invalid, DCUK decided to issue a second notice that extended the termination notice from 12 to 24 months.
Jagusch is astounded at the way DCUK went about this, and says that the company should have given the dealers the 24-month notice period in the first place.
Clark is equally dismissive of DCUK's approach. “Our view is that, if we were advising DCUK, the moment there was any suggestion of problems to the first one, which was conditional on there being a necessary reorganisation, we'd have said, 'For goodness' sake, issue a backup one now on two years notice, as you don't have to give any reason at all for such a notice',” he says. “There's no provision in the contract and there's no principle of law that permits you to seek retrospectively to validate a notice which when issued was invalid. It's either valid and binding when it's issued or it's not. If you mess it up, then you have to issue another.”
DCUK's general counsel Evans hits back at A&O's claims. She says that the second notice was issued only once “we had a legal challenge on our hands”. Her in-house lawyers discussed at length the fact that, while the 12-month notice was valid, once the matter reached litigation stage “you have to do everything to cover for every potential event”.
“A precautionary notice is often issued when a company terminates a contract for breach of contract, and in the event of the breach being disputed, and to be on safe grounds, they issue a second one,” she says.
DCUK's counsel, Nicholas Green QC of Brick Court Chambers, argues that there is “no magic” in issuing a second notice. It is merely a matter of technical protection to issue a 24-month notice period if you fear that any litigation could go against you.
“Any sensible company would have done that,” Green says. “How much does it cost to send out a letter saying, 'If we're wrong, then here's the 24-months notice'?”
Still, why not issue the second notice – which was subject to no conditions and did not have to be justified – at the same time as the first?
The dealerships' case centres on the contention that DCUK's proposed restructuring was simply not 'necessary'. According to Jagusch, under English law, 'necessary' means that “there is nothing else that could be done”, and the dealers argued that, given their impressive sales record, this was really not the case.
A press statement from Nick Adams of the Mercedes-Benz UK Dealers' Campaign set out their argument: “The UK market is very strong. The Mercedes-Benz brand and the 156 dealers are both highly competitive with one another in the UK. Last year we sold 65,000 cars, despite 15,000 imports coming into the UK.”
This misses the point, argued the other side. Evans says that for DCUK to meet the future markets and the future requirements of the customer, then “change needed to be made”.
“To be effective in terms of ensuring you have competitive advantage and don't have disgruntled distributors, then it's best to do it as quickly as possible,” she says. “Under the dealership arrangement, you have workshops on property retail sites or retailing on industrial sites. That makes it inflexible because they can't open late hours and are subject to planning restrictions.
“Also, Mercedes has expanded enormously over the last five years, and for dealers to carry the full range of demonstrators is difficult. Lots of other issues that combined have moved the structure away from single dealers based around one town to looking at a larger market area.”
But does that make it 'necessary'? Well, that depends on which interpretation of 'necessary' you rely on, English or European Community (EC) law.
The wording of the contract stated that DCUK was entitled to terminate the contract if it was 'necessary' to restructure. A&O argued that 'necessary' means there is nothing else that could be done with the dealership network. DCUK, meanwhile, argued that the clause had its roots in the European regulation, the Block Exemption Selective Distribution for Motor Vehicles, which contains explanatory material and supplies a broader interpretation of what is 'necessary'.
“You don't look beyond the contract to construe it,” argues Jagusch. “Sometimes a court will look at the factual matrix if that's necessary, but the starting point is that you must construe the contract as a single document. We don't think [the reference to the Block Exemption regulation] is relevant to the interpretive exercise of the contract by an English court. This is an English law contract on principles of construction in English law.”
A&O criticising DCUK's reference to European law? How strange, says Green, who points out that at a preliminary hearing six to eight weeks before the settlement took place, the dealers' lawyers accepted that it was necessary to refer to the Block Exemption regulation. “They were going to try to put a different gloss on the meaning of the word 'necessary' in the light of the [European] regulation,” he says.
So why was it necessary to refer to EC legislation? Green says: “We argued that to understand what the contract means you have to understand what the Block Exemption means because the wording was identical. We therefore said that the proper construction of the regulation is part of the factual matrix of the contract. When you look at the factual matrix it gives a very broad definition of the word 'necessary'.”
The broader definition relates to the recitals to the Block Exemption regulation, which suggests the need to “enhance flexibility and efficiency for the supplier”. In other words, the Block Exemption regulation's definition of 'necessary' relates to the future of DCUK, not the past success of its sales team. DCUK is certain that if it had got to court it would have won, based on its definition.
DCUK maintains that, far from the dealers having clinched a victory, the whole litigation issue was merely a disturbance in its ongoing restructuring plans.
“The settlement included a complete arrangement for the transition from the old network to the new network,” says Evans. “The dealers will leave on an agreed exit date. The notices have not been withdrawn but replaced by an agreed termination date.”
In any event, she points out, the termination notice contained the opportunity for an extension in order to “suit the requirements of where a dealer was”.
At least with both parties claiming victory, both must in some way be satisfied with the settlement?
“The result has enabled the dealers to move forward with DCUK in a spirit of compromise and cooperation,” says Jagusch. “They've managed to replace ill-will with goodwill.”
Holmes, meanwhile, is pleased with how quickly her team prepared for trial. “We had a lot of work to do in a very short time-frame and we managed that very well,” she says. “Ultimately, litigation didn't solve the commercial problem. The settlement enabled us to have a full transfer of the old network to the new network on an agreed time-frame.”
It seems that although DCUK and the dealers managed to reach an agreement, the two legal teams are determined to stick to their guns.

The lawyers
For the Mercedes-Benz dealerships
The Allen & Overy team was led by head of litigation Andrew Clark with senior associate Stephen Jagusch; the counsel was Lord Grabiner QC and Laurence Rabinowitz, both of One Essex Court.

For DaimlerChryslerUK
The general counsel was Chrissi Evans; the Richards Butler team was led by partner Katherine Holmes, with head of the commercial dispute resolution group Charles Hewetson, corporate finance partner Mark Douglas and senior associate Sarah Hartley; the counsel was Nicholas Green QC and Helen Davies, both of Brick Court Chambers.