Understanding the Agency Model in the Automotive Industry

The automotive industry is undergoing significant changes, driven by the rise of electric vehicles and increased competition from foreign manufacturers entering the Canadian market. These shifts are prompting original equipment manufacturers to explore new sales models, with a notable transition towards the agency model.

What is the agency model?

Traditionally, dealership agreements have been franchise-like, where dealers purchase vehicles from original equipment manufacturers (“OEMs”), carry inventory and associated financing risks, and resell to customers, earning profits from sales margins and incentive payments. Under this model, dealers maintain substantial control over customer relationships and pricing, even though OEMs establish pricing parameters. These agreements are typically governed by provincial franchise statutes, such as Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, which broadly defines a “franchise” as a right to engage in business where the franchisee is required to make a payment or continuing payments, whether direct or indirect, to the franchisor (or to the franchisor’s associate) and either (a) the franchisor grants the right to sell goods or services substantially associated with its trademark and exercises significant control or provides significant assistance over the franchisee’s method of operation, or (b) the franchisor grants representational or distribution rights for goods or services supplied by the franchisor, and the franchisor provides location assistance. If the dealership model meets the definition of a “franchise” under the applicable provincial franchise laws, then the dealer sales and service agreement would be governed by that law.

The agency model represents a departure from the traditional dealership structure. In this model, OEMs retain ownership of vehicles until they are sold directly to end customers. Dealers primarily function as sales agents, earning fixed commissions rather than margin-based profits. OEMs directly set uniform retail prices to ensure a consistent customer experience. The sales contract is between the brand and the buyer, with the manufacturer owning the inventory and having more control over the transaction, leading to more consistent and fixed pricing. Dealerships continue to play an important role in the agency model; however, they are primarily used as delivery and service points. This includes arranging test drives, delivering vehicles, and providing support for customers after the sale, though with reduced on-lot inventory and space for displaying vehicles.

Why are some OEMs switching to the agency model?

The transition to the agency model is largely driven by societal trends, including consumers’ increasing preference for online shopping and reliance on digital research prior to purchase. Several independent trend watchers, and even Statistics Canada, have noted that the COVID-19 pandemic accelerated this shift by nearly a decade. The agency model offers advantages such as uniform pricing, reduced dealer inventory risk, and the ability for OEMs to establish direct relationships with customers. It also enables OEMs to adapt to online purchasing trends, improve operational efficiency, and respond more quickly and directly to regulatory and market changes in a rapidly evolving industry.

In the U.S., Tesla has been a leader in the adoption of the agency model, selling vehicles online or through company-owned show rooms typically found inside shopping malls. While Tesla has faced several legal disputes due to various state laws prohibiting direct manufacturer auto sales, it has largely succeeded in gaining unrestricted or restricted store limits. Similar franchise laws do not exist in Canada, allowing Canadian OEMs to more freely explore the use of this model.

However, there are regulatory steps that an OEM must take before selling vehicles. Across Canada, motor vehicle sales are generally governed by provincial statutory regimes administered by delegated regulatory authorities. These regulators have recognized that the automotive marketplace is evolving, with vehicles increasingly being sold through non-traditional models such as online platforms. Despite these developments, existing legislation will generally continue to be applied to the sale of motor vehicles under an agency model, and dealer and salesperson requirements must be considered in structuring distribution arrangements. These regulatory regimes typically require dealers to be registered before carrying on business, and individuals involved in vehicle sales to be licensed or registered. Registered dealers are also subject to ongoing obligations, which may include maintaining trust accounts, providing prescribed disclosures to customers, ensuring salesperson compliance, and complying with applicable codes of conduct and consumer protection legislation.

In Canada, electric vehicle brands like Tesla and Lucid Motors, have embraced the agency model. These brands operate luxury showrooms in premium shopping locations, typically offering a small selection of vehicles for customers to view. Hybrid versions of the agency model are also emerging, such as Genesis Motors Canada, which uses a combination of showrooms and dealerships. Rather than selling directly to the customer, the dealership (which is referred to as the “distributorship”) will earn a commission on each sale that they help to facilitate. This commission is typically fixed providing a more predictable revenue stream versus the potential for negotiation that occurs within standard dealerships.

What does all of this mean for traditional car dealerships?

The transition to the agency model has caused anxiety among car dealerships, as it significantly alters their role and risks diminishing their autonomy over their own business. Dealers are concerned about losing control over pricing and customer relationships. They may question the necessity of investing heavily into showrooms and inventory when vehicles are primarily sold online or through OEM showrooms, potentially decreasing the value of their investments. Dealer associations are advocating for transparent negotiations during this transition and for sufficient time for dealerships to prepare and sort out potential contractual issues in their current dealership agreements.

Despite these concerns, there are new opportunities for dealerships. OEMs can continue to rely on dealer networks in a different capacity, with a shift away from volume-based sales and toward services, such as maintenance, innovative fintechs and financing support, long-term customer support, commercial and fleet expertise, and used vehicle sales. These areas may support customer loyalty and more stable revenue streams, though dealerships may need to adopt new strategies to attract and retain customers as their role in the initial sale evolves.

What does this mean for OEMs?

For OEMs, the agency model provides greater control over pricing, branding, and the sales process, while increasing responsibility and accountability throughout the customer journey. Although OEMs may gain better insight into customer preferences, concerns remain about customer satisfaction, as manufacturers lack the personal interaction traditionally provided by dealers. OEMs must consider how to maintain meaningful engagement, particularly where customers value trusted relationships and guidance on financing, and may be discouraged if dealerships no longer serve as a one-stop shop for purchasing and maintaining a car.

From the legal side of things, the Federal Court of Australia's decision in AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd illustrates the legal complexities faced by an OEM in transitioning to an agency model, upholding a manufacturer's right to end dealer agreements by way of non-renewal notices. The court rejected dealer claims of bad faith, economic duress, unconscionable conduct, and loss of goodwill, emphasizing that non-renewal clauses are intended to terminate contracts and that acting in legitimate commercial interests does not breach an OEM’s duty of good faith. It clarified that goodwill ceases when the legal right to operate the business ends and that commercial pressure alone does not constitute duress or unconscionable conduct. This precedent suggests that in Canada, clear non-renewal rights, exercised by OEMs honestly and for legitimate purposes, are likely to be upheld by the courts, even if broadly applied or aligned with a parent company's strategy.

It is also interesting to note that several OEMs that have incorporated or had planned to incorporate the agency model, specifically in Europe, are scaling back on these efforts. While Volkswagen previously committed to the agency model for its electric vehicles in several European countries, it announced in January of 2025 that it would be returning to a wholesale dealership model for the ‘foreseeable future’, citing slower than anticipated adoption of electric vehicles as a contributing factor. Similarly, after BMW announced that it would switch its MINI sales to the agency model in several European countries, it announced that this model would be expanded to its core brand beginning in 2026. However, this plan was temporarily halted, claiming that an altered schedule would allow for “optimum implementation of the processes while maintaining the highest possible quality.” A new date for the agency model has not yet been announced.

What are the important considerations moving forward?

As the agency model evolves, the primary risk is the potential to strain OEM-dealer relationships. Dealers may view the shift as undermining their autonomy and prior investments (including inventory and showroom), particularly where new vehicle sales revenue and inventory control are reduced. Maintaining transparent communication and minimizing disruption will be critical to preserving these relationships and ensuring a consistent customer experience.

Careful consideration of franchise laws is also necessary, as the contractual and economic positions of dealerships could change significantly, likely requiring extensive negotiations, disclosure, and amendments of existing dealer sales and service agreements. Given that most franchise laws impose draconian penalties against OEMs that breach their provisions, an OEM that neglects to account for these considerations, does so at its own peril.

Additionally, several other risks must be considered:

Loss of personal touch and loyalty: Purchasing a car is a big decision and has historically been a relationship-based transaction. Even in today’s online world, most consumers still prefer to purchase vehicles in person (after conducting extensive online research). If dealerships have a smaller role in the sales process, the experience may feel less personal, which could impact customer satisfaction. This weaker dealer-customer relationship could reduce post-sale loyalty and make customers less likely to return to the dealer for continued maintenance.
Reduced accessibility to services: A decrease in the number of full-service dealerships may result in customers having to travel further distances for test drives, vehicle services, and other in-person support.
Limited pricing flexibility: Fixed pricing removes the ability to negotiate the price of a vehicle which will result in customers not being able to access discounts or promotions that were previously being offered at the dealership level.
Loss of investment for dealers: Dealers, who are traditionally expected to make large investments in their dealerships, may lose control over their inventory and see diminished returns on showroom upgrades, as vehicles are now being sold through the OEM.

The Mercedes-Benz legal proceeding in Australia highlights the importance of having clear contractual terms, particularly regarding non-renewal rights, and demonstrates the need for manufacturers to act transparently and in pursuit of legitimate commercial interests when transitioning to an agency model. The case provides practical guidance for OEMs, including:

avoiding providing any written or verbal assurances that dealer sales and service agreements will be extended or renewed or that new agreements will be offered;
issuing non-renewal notices separately from agency agreement offers;
ensuring that any transition is supported by a sound commercial rationale; and
engaging in early, frequent, and honest communication with dealers without misrepresenting or exaggerating the likely impacts of the new model.

Where do we go from here?

The agency model represents a significant change in the automotive industry, but its suitability may vary across markets. The reality is that the move towards fulfilling and executing agreements electronically is a consumer preference here to stay. While some markets may adopt it quickly, others may retain the traditional model or explore hybrid approaches. The franchise model and the agency model could co-exist with clear distinctions, such as the agency model only being utilized for electric vehicles.

Collaborations between dealerships and OEMs is essential for the agency model’s success. The Canadian Automobile Dealers Association (“CADA”) has emphasized the need for open and fair communication between manufacturers and dealerships when exploring the shift to the agency model. CADA has also warned against OEMs making any changes that disregard the established rights and interests of dealers. Ultimately, since the vehicle still comes from the dealer, significant power remains in the dealer’s hands under the agency model.

For both OEMs and dealerships, staying informed and being flexible will be essential to successfully embracing the agency model. Both parties must assess the operational and contractual features of a proposed agency model to understand its implications on existing franchise obligations between the parties. If you have any questions about the agency model and how it could affect your business, Sotos LLP can help.

Please contact John Yiokaris at 416.977.3998 or jyiokaris@sotos.ca to discuss your automotive industry related inquiries.

John Yiokaris is a partner at Sotos LLP and serves as co-managing partner of the firm. He is the head of the firm’s automotive practice and has extensive experience acting as lead counsel for major automotive manufacturers and dealers. John is also head of the firm’s trademark practices and advises on intellectual property matters, including the registration and licensing of trademarks.

John was awarded the Lexology 2019 Client Choice Award, is ranked by Chambers Canada, and has been consistently listed in Best Lawyers in Canada. He is also recognised in the Best Lawyers Global Business Edition, listed in the Canadian Legal LEXPERT Directory, and recognised in Lexology Index: Canada. John was inducted into the Franchise Times “Hall of Fame” in 2022.