On 2 March 2016, the High Court of Australia handed down its decisions in Tabcorp Holdings Ltd v Victoria [2016] HCA 4 and State of Victoria v Tatts Group Limited [2016] HCA 5. The claims of both Tabcorp and Tatts in seeking compensation of over $1 billion were rejected unanimously.

Johnson Winter & Slattery successfully acted for the State of Victoria in both proceedings from their inception in the Supreme Court of Victoria in August 2012.

The decisions will result in the State recovering over $540 million from Tatts Group Limited.

In some quarters the issues raised by this litigation are perceived to involve sovereign risk. This summary highlights why this is not the case and highlights an important point of principle relating to contracting with the States and the Commonwealth.

Background

Prior to 1991, gambling in Victoria involving gaming machines was unlawful.

In 1991, Tabcorp and Tatts were each granted a licence, entitling them to conduct gaming on gaming machines at approved venues in Victoria and creating a duopoly in the operation of gaming machines. Neither Tabcorp nor Tatts paid any fee to the State for the grant of these licences.

In 1994, Tabcorp was floated and the proceeds were paid to the State. In return, Tabcorp was granted two conjoined licences – a wagering licence and a gaming licence – for a term of 18 years. Tabcorp’s licences were dealt with in legislation which included a terminal payment provision providing that on the "grant of new licences" Tabcorp would be entitled to a terminal payment from the State. The phrase "new licences" was not defined in the legislation.

In 1995, having received proceeds from the float of Tabcorp (and to ensure that Tabcorp and Tatts operated on a level playing field given their duopoly over gaming machines), the State and Tatts entered into a contract (1995 Agreement) under which, in exchange for licence payments equivalent to that received by the State from the float of Tabcorp, a terminal payment would be paid to Tatts if their gaming operator's licence expired without a new licence being issued to Tatts. The terminal payment provision was contained in clause 7 of the 1995 Agreement. The 1995 Agreement also provided that the minister would use his best endeavours to introduce a bill into parliament to provide legislative effect to the terminal payment provision of the agreement. That legislation was introduced and passed in 1996.

In 2008, the Premier of Victoria announced that Tabcorp and Tatts’ licences would not be renewed and no further licences of the type held by Tabcorp or Tatts could be issued. The gaming legislation was also amended to create “gaming machine entitlements" (GMEs) which permitted venue owners the right to own and operate gaming machines. 27,500 GMEs were subsequently created which came into effect the day after Tabcorp and Tatts’ licences expired. The venue operator regime introduced post 2012 involved a large number of participants and was therefore materially different from the duopoly enjoyed by Tabcorp and Tatts.

Tabcorp issued proceedings claiming that it was entitled to payment of $686m (plus interest) under the legislative terminal payment provision.

Tatts also issued proceedings claiming that it was entitled to the terminal payment of $490m (plus interest) under both clause 7 of the 1995 Agreement and the subsequent legislation which was passed to give effect to that agreement.

In June 2014, the Supreme Court of Victoria dismissed Tabcorp’s statutory and other claims entirely. The Court also dismissed Tatts’ statutory claim but allowed its contractual claim. As a result, the State was required to pay compensation and interest to Tatts of approximately $540 million. The Court of Appeal affirmed this result in December 2014.

In March 2015, the High Court affirmed the lower Courts’ approach and dismissed the statutory claims of both Tabcorp and Tatts and went one step further and also dismissed Tatts’ contractual claim.

Sovereign Risk

Governments through their parliaments have the power to pass legislation which can adversely affect pre-existing rights and benefits enjoyed by private citizens and corporations. This has always been the case and no doubt will continue so long as our legal system remains broadly as it is.

Sovereign risk refers to the situation where a later government passes legislation to take away either a right granted or provided for in earlier legislation by a previous government or parliament or which, in extreme cases, abrogates a contractual right arising from an agreement between the State (via an earlier government) and a private citizen or corporation.

Despite some reports that Tabcorp and Tatts were victims of sovereign risk, it is clear from the recent and unanimous High Court judgments that this was not the case.

Firstly, all 9 judges (at trial and both appeal levels of the litigation) applied every day and completely traditional methods of statutory interpretation in rejecting Tabcorp’s and Tatts’ claims under legislation.

Second, the High Court in particular emphasised the commercial context in which the original duopoly licenses had been issued and that it was clear the compensation provisions were predicated on “new licences” being issued after 2012 which continued that duopoly regime. That was a context which the High Court in particular held was readily apparent and therefore the incumbent licence holders took the commercial risk that the duopoly might not be continued beyond 2012.

Third, neither Tabcorp nor Tatts had an unequivocal or unconditional right to compensation which came into being at the time the licences were granted. Their respective right were always conditional on a continuation of the duopoly regime after 2012.

Thus this was never a case of sovereign risk. There was no unconditional right or benefit to which either Tabcorp or Tatts were entitled to and which was later “taken away” by a later government or parliament.

Contractual Implications

The Supreme Court and the Court of Appeal had held that the compensation provisions contained within the 1995 Agreement between the State and Tatts existed in parallel with the legislation providing for compensation to Tatts. The lower courts held those provisions should be interpreted more widely than the legislation and in a manner which entitled Tatts to compensation.

This led to the anomalous situation where there was a dual compensation regime where the contract effectively trumped the legislation.

The High Court rejected this approach.

Firstly, the High Court held that the 1995 Agreement should be interpreted in the light of its context and purpose which was that the compensation provisions were predicated on a renewal of a duopoly gaming licence regime enjoyed by Tabcorp and Tatts. Therefore the High Court concluded the compensation provision of that agreement should be narrowly interpreted consistent with the approach taken by the courts in relation to the statutory compensation provisions affecting both licence holders.

Second, the High Court rejected the approach of the lower courts and concluded, based on the wording of the contract, that once the 1996 legislation was passed to give effect to the compensation provisions, the legislation would entirely govern Tatts’ rights to compensation and the contract provision would fall away. This was particularly the case as the contract did not expressly provide that the contract would exist independently from the later legislation which was contemplated.

Conclusion

Importantly the rejection of Tabcorp’s and Tatts’ claims for compensation is not a case of sovereign risk. It is, and always was, a case about certain rights to compensation which were conditional, and where those conditions were not satisfied.

The approach of the High Court in relation to the Tatts’ 1995 Agreement is significant. It demonstrates the importance of careful attention to detail in drafting agreements with the States and the Commonwealth and what (if anything), is to happen if rights under that contract are later taken away or adversely affected by subsequent legislation.

There have been reported instances in recent times of State governments contracting with licence holders to indemnify and/or compensate corporations which are adversely affects by later legislation. This was not a feature of the 1995 Agreement with Tatts. The enforceability of compensation provisions in agreements with States will be dependent on the strict wording of those contracts in the context of the circumstances in which the agreement was entered into.

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