Franchising: Megasave’s representations about income guarantee to cost ‘mega bucks’

Megasave Couriers Australia Pty Ltd (Megasave) is an Australian courier franchise, with over 50 franchises operating Australia-wide.

The Federal Court has declared that Megasave breached the Australian Consumer Law (ACL), after having made false or misleading representations, to franchisees, in relation to income guarantees. Megasave’s sole director, Gary Bourne, conceded that he was knowingly involved with the conduct. This decision will now cost Megasave and its director over $2 million collectively.

We set out below some steps that franchisors and franchisees can undertaken to minimise their risk.

Income Guarantee

The Court held that Mr Bourne misled prospective Megasave franchisees by making representations to them that they would receive:

  • guaranteed minimum weekly payments: typically $2,000 per week; and
  • a guaranteed annual income: around $91,000 per annum

(collectively, the income guarantees) if they purchased a Megasave franchise.

These representations were made in promotional statements and marketing material, which could be found on Megasave’s website, in online advertisements, as well as in documents and correspondence provided to prospective franchisees.

These representations were made notwithstanding that, at the time, Megasave was not paying its existing franchisees the guaranteed weekly payments and did not have sufficient revenue to pay such income guarantees.

Megasave franchises were purchased by franchisees on the belief that, in doing so, they would be provided with secure future income. In many cases, the affected franchisees had used their life savings, or taken out loans, to purchase a Megasave franchise.

During the proceedings, Megasave conceded there was no reasonable basis for making the representations to the prospective franchisees, regarding the income guarantees.

The Court last week ordered Megasave to pay $1.9 million in penalties for making the false or misleading representations to affected franchisees. Additionally, Mr Bourne was ordered to pay a penalty of $120,000, which is in addition to him being disqualified from managing a company for a period of five years, as previously ordered by the Court, with consent.

Further, Megasave and Mr Bourne are to pay $500 to the affected franchisees.

Outcomes for Franchisors and Franchisees

Franchisors

This case serves as a reminder to franchisors, that they are responsible for the representations they make to franchisees during any pre-contractual negotiations, as well as during the course of the franchise.

Franchisors should ensure that any material or statements they give to franchisees (including prospective franchisees) are correct and that they are able to support the statements being made. These include oral statements made by directors and other staff within the franchise, and particularly at the recruitment stage.

Some actions which franchisors can take to prevent such conduct occurring are:

  1. Ensuring that all staff working in recruitment for the franchise, are adequately trained and understand the legal consequences of making false or misleading statements;
  2. Asking all prospective franchisees to sign a statement which sets out the representations they have relied on, upon entering into the franchise. This practice will then provide franchisors with an opportunity to correct any incorrect information, at the pre-contractual stage; and
  3. Ensuring that the franchise has the financial capacity to pay an income guarantee if a franchisor wishes to promote one.

Franchisees

Franchisees should undertake proper reviews of documents before signing a Franchise Agreement, and seek proper legal and financial advice before purchasing a franchise.

If a franchise offers an income guarantee, franchisees should ask the franchisor what performance criteria must be achieved to receive the income guarantee (that is, what do you have to do in order to receive such payment).

Finally, if a representation seems too good to be true, then it probably is! For Megasave franchisees, the income guarantee was in some cases, many times greater than the amount paid for the franchise. Franchisees should seek financial advice before entering into a Franchise Agreement.

Summary

Although the ACCC can hear franchise disputes and take action against franchisors, this does not always mean the franchisee will receive financial compensation.

If you are concerned about statements that have been made, either as a franchisor or franchisee, please contact us. The Franchising Code of Conduct sets out various dispute resolution procedures in addition to what is otherwise set out in a Franchise Agreement.

The content of this article is general information only and does not constitute legal advice. If you have any questions about franchising, please feel free to contact Peter Charatsis, Partner by email or on (08) 8221 6162.