7 March, 2016
Tabcorp Holdings v Victoria [2016] HCA 4; Victoria v Tatts Group [2016] HCA 5
What you need to know
- Sovereign risk is a relevant consideration in commercial dealings with government; legislation has the potential to undermine contractual rights despite the parties' intentions at the time of contracting.
- Contracts with government require careful drafting to minimise sovereign risk; but the risk may not be eliminated completely and courts may construe those provisions narrowly.
Agreements between the public and private sectors are often designed to promote long term investment. But what happens to a contracting party's rights if the industry and regulatory framework changes? The High Court has adopted a narrow approach to the statutory and contractual entitlements of Tabcorp and Tatts, the original gaming machine operators in Victoria, who have each been left without compensation despite the impact upon them by reform of the gaming industry.
In Victoria v Tatts Group [2016] HCA 5, the High Court unanimously allowed an appeal from the Victorian Court of Appeal, holding that Tatts Group Limited was not entitled to a payment of $540 million plus interest from the State of Victoria under an agreement between those parties, as a refund of the fee Tatts paid to the State for its gaming operator's licence under the regulatory regime for gaming machines which had been introduced in Victoria in 1992 and which was abolished with effect from 2012.
In Tabcorp Holdings v Victoria [2016] HCA 4, which was heard concurrently, the High Court unanimously dismissed an appeal from the Victorian Court of Appeal, holding that Tabcorp Holdings Limited was not entitled to a termination payment from the State under the Gambling Regulation Act 2003 (Vic).
The High Court's decisions in these two cases serve as a reminder that sovereign risk should always be a consideration in commercial dealings with government. When industry players rely on government approval for their entitlement to participate, or to operate in a particular way, they can be vulnerable to changes in the regulatory framework. Changes may result from sound public policy, but can prejudice legitimate commercial interests. A carefully drafted contract is essential to effectively protecting those commercial interests, but may not be effective to completely eliminate sovereign risk. In these cases, the State's abolition of a particular licencing regime for the gambling industry, under which Tatts and Tabcorp were given a duopoly over gaming machines in Victoria, also proved effective to extinguish their entitlement to a refund of their licence fees.
The changing regulatory landscape
Gaming was legalised in Victoria in 1991 and a duopoly established in 1992 by the grant of licences to each of Tabcorp and Tatts for the ownership and operation of gaming machines, for a term of 20 years. Tabcorp was privatised and floated in 1994, and granted conjoined licences (for wagering and gaming) for an 18 year term, maintaining the duopoly. A terminal payment provision was included in the Gaming and Betting Act 1994 (Vic) in favour of Tabcorp. Tatts and the State entered into an agreement in 1995. Clause 7.1 provided for a terminal payment to be made to Tatts "[i]f the Gaming Operator's Licence expires without a new gaming operator's licence having issued to [Tatts]".
In 2008, the Premier announced a change in the structure of Victoria's gaming industry so that the right to own and operate each individual gaming machine would be contained in a "Gaming Machine Entitlement" vested in the venue in which it was located. In what the Victorian Court of Appeal described as an "emasculation" of the refund provisions, the State amended legislation to create this new species of gaming licence and precluded the grant of Tabcorp and Tatts' species of licence. As a consequence, Tabcorp's and Tatts' licences were not to be renewed, and in 2010 the State created 27,500 GMEs with an effective date of 16 August 2012, being the day after Tabcorp and Tatts' licences were to expire.
The unsuccessful statutory claims by Tatts and Tabcorp
Tabcorp claimed an entitlement to payment under the terminal payment provision of the Gambling Regulation Act 2003 (Vic), arguing that the allocation of GMEs was the "grant of new licences" within the meaning of section 4.3.12(1) because the GMEs were "substantially similar" to the gaming and wagering licence held by Tabcorp. That claim was dismissed at first instance and by the Victorian Court of Appeal.
The High Court upheld those decisions, finding that the phrase "grant of new licences" under that section meant the grant of a new wagering licence and new gaming licence under the Act and, as no such licences had been issued, Tabcorp was not entitled to a terminal payment. The same outcome was reached in response to Tatts' claim under a similar, but distinct, provision of the legislation.
Tabcorp's unsuccessful contractual claim
At trial and before the Court of Appeal, Tabcorp also pursued a claim under an agreement which was said to be contained in a letter issued to Tabcorp by the then Treasurer which was included, with the State's knowledge, in the prospectus for its public float when it was privatised in 1995. That claim was unsuccessful and Tabcorp did not pursue the claim in the High Court.
Tatts' now unsuccessful contractual claim
Clause 7.1 of the 1995 agreement between Tatts and the State provided that "If the Gaming Operator's Licence [granted to Tatts] expires without a new gaming operator's licence having issued to [Tatts], it shall be entitled to an amount of money as compensation."
The trial judge and the Victorian Court of Appeal had found in Tatts' favour in relation to the construction of this clause, holding that the phrase "new gaming operator's licence" in clause 7.1 had a generic meaning which would have been understood by a reasonable businessperson as the issue of any licence or authority substantially similar to Tatts' existing gaming operator's licence. The High Court disagreed and adopted a narrower construction – namely that the phrase "new gaming operator's licence" in clause 7.1 referred to a gaming operator's licence granted under the relevant legislation as it might be amended, re-enacted or replaced from time to time, and that as a "new gaming operator's licence" as such was never issued, Tatts was not entitled to payment under clause 7.1.
The High Court explicitly had regard to the "text, context and purpose" of the agreement in construing the meaning of the phrase "new gaming operator's licence" in clause 7.1. Clause 1.3 provided that words and phrases in the agreement had the same definition as in the relevant legislation, which then defined a "gaming operator's licence" as one of Tatts' species of licence.
The addition of the word "new" did not alter that meaning. The obligation in clause 7.1 was also predicated on the continuation of the duopoly, and as the duopoly had been abolished the obligation to pay the compensation did not arise.
For further information, please contact:
Andrew Harpur, Partner, Ashurst
andrew.harpur@ashurst.com
