Tatts Group Ltd v State of Victoria [2014] VSCA 311 Tabcorp Holdings Ltd v State of Victoria [2014] VSCA 312 (4 December 2014)

What You Need To Know

• When dealing commercially with the government, the best safeguard against changes in policy is a sufficiently widely drawn contract.
• To be enforceable, an obligation to act in good faith must have some content — and it cannot secure an outcome which contradicts other, more certain, statements concerning the parties’ obligations.

 
The contrasting results of Tabcorp Holdings and Tatts Group’s compensation claims against the State of Victoria — arising out of the abolition of their gaming machine duopoly — serve as another reminder to commercial parties dealing with governments that a contract is the most effective means of protecting their commercial interests.

 
The Victorian Court of Appeal has confirmed the trial judge’s findings that:

• neither Tabcorp nor Tatts are entitled to compensation pursuant to the GamblingRegulation Act 2003 (Vic);
• Tabcorp is not otherwise entitled to compensation (it had sought $687M plus interest); but
• pursuant to an agreement between it and the State made in 1995, Tatts is entitled to compensation of AUD 451M plus interest.

 
Neither Tabcorp nor the State have yet indicated whether they will seek special leave to appeal to the High Court.

 
The Unsuccessful Statutory Slaims

 
The regulatory model for the introduction of gaming machines into Victoria saw the State grant Tabcorp and Tatts a duopoly in the ownership and operation of gaming machines located in venues such as clubs and pubs. In 2008, the State government determined to change that model so that the right to own and operate individual gaming machines would be vested in the venues themselves.

 
Tabcorp and Tatts had paid substantial fees for the licences which gave effect to the duopoly. The relevant legislation provided that those payments would be refunded if those licenses were awarded to any other (unrelated) entity upon their expiry in 2012. In particular, these refund provisions helped to maximise the proceeds to the State of Tabcorp’s public float: they allowed Tabcorp not to amortise the value of its licence, thus boosting the profit projected in the prospectus and the opening share price.

 
In what the Court of Appeal described as an “emasculation” of the refund provisions, the State amended the relevant legislation to, among other things:

• create a new species of licence (the “Gaming Machine Entitlements” granted to the venues from 2012), which could not be granted to Tabcorp or Tatts; and
• stipulate that no more of Tabcorp and Tatts’ species of licence could be granted.

 
However, the refund provisions were not repealed; both Tabcorp and Tatts argued (among other things) that therefore the legislation should be interpreted so as to give them meaning.

 
The Court of Appeal held that, whatever might be said about the commercial morality of what the State had done, the conclusion that the refund provisions had been rendered a dead letter by the amendments was, on the application of well-settled principles of statutory interpretation, “unavoidable”. This was so even if the amendments could be said to have resulted in “the expropriation of rights or other manifest unfairness”.

 
Tabcorp’s Unsuccessful Contractual Claim

 
The prospectus for Tabcorp’s public float included a copy of a letter from the then Treasurer to Tabcorp which purported to “confirm the principles on which the [State] is privatising [Tabcorp]”. Among those seven principles was a statement to the effect of the refund provisions described above.

 
However, the letter also made clear that the principles did not bind the State. The letter also acknowledged that the Victorian Parliament could at any time change legislation “affecting the operations of Tabcorp … or the terms on which those operations are conducted”. The Court of Appeal upheld the trial judge’s decision that, on a plain reading of the text, those provisos did not apply to the statement towards the end of the letter that the State “will continue to deal with … Tabcorp … reasonably and in good faith”. Put simply, that statement was not one of the principles.

 
However, the Court of Appeal agreed with the trial judge’s rejection of Tabcorp’s attempt to rely upon that statement as a contractual promise sufficient to entitle it to compensation. Whether or not it amounted to a contractual promise (something which neither the trial judge nor the Court of Appeal decided), any such obligation of good faith and reasonable dealing could not “impose upon the State, in effect, an obligation to procure the outcome dealt with in one of the specified principles when the letter expressly makes it clear that the State undertakes no such obligation”.

 
The content of an obligation of good faith is notoriously uncertain. The Court of Appeal’s decision makes clear that it cannot produce results which contradict other, more certain, statements concerning the parties’ obligations.

 
Tatts’ Successful Contractual Claim

 
Following Tabcorp’s privatisation, the State asked Tatts to pay a fee for its licence, in order to create a ‘level playing field’ between it and Tabcorp. Tatts and the State negotiated a written agreement which provided for the payment of that fee in instalments.

 
Clause 7.1 of that agreement provided that “If the Gaming Operator’s Licence expires without a new gaming operator’s licence having issued to [Tatts, it] shall be entitled to …, an amount of money as compensation”. While the agreement expressly defined the “Gaming Operator’s Licence” as that which had been granted to Tatts under the relevant legislation (in the form it took before the amendments referred to above), the trial judge and the Court of Appeal agreed that the undefined phrase “a new gaming operator’s licence” was sufficiently ambiguous to allow reference to the context in which clause 7.1 had been agreed to.

 
In those circumstances, the trial judge and the Court of Appeal had little difficulty in ascribing a “generic” meaning to “a new gaming operator’s licence” so that it encompassed “any statutory authority [which operated] to confer on the holder substantially the same rights as were conferred … by the Gaming Operator’s Licence”. Ultimately, the substitution of species of licence effected by the legislative amendments referred to above was no bar to Tatts’ claim for compensation pursuant to clause 7.1.

For further information, please contact:

Ashley Wharton, Partner, Ashurst
[email protected]

Michael Tandora, Ashurst
[email protected]

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