On 2 March 2016, the High Court of Australia handed down its judgments in the related cases Tabcorp Holdings Limited v State of Victoria [2016] HCA 4 and State of Victoria v Tatts Group Limited [2016] HCA 5. In a quintessential case regarding the interpretation of contractual terms and statutory provisions, the High Court, in a resounding victory for the State of Victoria, dismissed Tabcorp’s appeal in the former case and allowed the State of Victoria’s appeal in the latter case.

KEY LESSON

These judgments serve as a timely reminder to carefully review the risk allocation of parties when entering into contracts that are subject to regulatory change. Parties should consider the inclusion of a “change of law” clause that accurately reflects the parties’ agreed positions on regulatory change that materially impact on the agreement. This is especially the case in the gambling industry, where changes in political perception and public opinion can drastically influence changes in law.

BACKGROUND

Upon the legalisation of gaming machines in 1991, the State of Victoria issued Tabcorp (formerly “TAB”) and Tatts a gaming operator’s licence for a term of 20 years – granting a duopoly. Upon TAB’s privatisation in 1994 to form Tabcorp, Tabcorp was granted a revised licence comprised of a wagering licence and gaming licence. Payment of ~$597.2 million – being the value fo the net float proceeds – was due consideration for those licences.

To protect the proceeds of the privatisation and avoid amortising the capital value of the wagering licence and gaming licence granted to Tabcorp, the legislation provided for a “terminal payment provision” which provided that on the grant of new licences, the holder of the former licences would be entitled to be compensated “an amount equal to the licence value of the former licences or the premium payment paid by the new licensee, whichever is the lesser”.

Tatts did not pay for its original gaming operator’s licence and their agreement with the State did not include a terminal payment provision. Accordingly, to ensure more equality between the duopoly, the State entered into negotiations with Tatts and finalised an agreement similar to the terms of Tabcorp’s agreement (“1995 Agreement”) – including a similar “terminal payment provision” in clause 7 (Compensation). This clause 7 provided for a terminal payment as compensation to be paid to Tatts if their gaming operator’s licence expires and a “new gaming operator’s licence” is not issued to Tatts. However, no amount was payable to Tatts where a new gaming operator’s licence was not issued at all, or was issued to Tatts or a related entity. These provisions were crystallised in the Gaming Acts (Amendment) Act 1996 (Vic)(“1996 Act”)

In 2003, the various laws regulating the gambling industry were consolidated into the Gambling Regulation Act 2003 (“2003 Act“). The licences granted to Tabcorp and Tatts, and the conditions attaching to those licences – such as the terminal payment provisions – were incorporated into the 2003 Act.

In 2008 and 2009, the State reformed the gaming industry – stating that neither Tabcorp nor Tatts’ licences would be renewed beyond the original term expiring in 2012. The right to conduct gaming operations would then be granted to holders of “gaming machine entitlements” (“GMEs“). In 2010, over 27,500 GMEs were created, effective as of 16 August 2012 – the expiry date of Tabcorps’ and Tatts’ licences. Following those amendments:

  • Tabcorp subsidiaries obtained new wagering and betting licences, as well as a keno licence for approximately ~$1.45 billion. On 24 August 2012, Tabcorp commenced proceedings in the Supreme Court seeking payment of $686.83 million, pursuant to the terminal payment provision.
  • Tatts did not apply for any GMEs and on that same date, Tatts commened proceedings seeking a payment of $490 million pursuant to the terminal payment provisions in the 1995 Agreement and 2003 Act.

LEGAL ISSUES – INTERPRETATION OF TERMS

For Tatts: the principal question to be answered was whether the phrase “new gaming operator’s licence” in clause 7 of the 1995 Agreement meant a gaming operator’s licence granted under Part 3 of the legislation, or any statutory action that conferred substantially the same rights of Tatt’s gaming operators licence?

The court held that the “new gaming operator’s licence” in clause 7 of the 1995 Agreement referred to a gaming operator’s licence granted under Part 3 of the legislation and did not extend to any licence or authority of substantially the same kind as Tatts’ existing gaming operator’s licence. This narrower interpretation of the provisions overturns the primary judge and Victorian Court of Appeal’s preceding judgments. The court outlined the commercial nexus between Tatt’s original gaming operator’s licence and any subsequent new gaming operator’s licence – that is, the valuation of any terminal payment being based on the lesser of: (i) any new premium payment paid by the new licensee; or (ii) the original value of the gaming operator’s licence – as an indication of the parties’ intentions to reflect the market value of the advantage secured by the industry duopoly.

Additionally, the court noted that reasonable business people reviewing the terms of the 1995 Agreement would understand that, amongst other things:

  • the entitlement to receive compensation was dependent upon another tender for that gaming operator’s licence on the basis of the same duopoly;
  • the payment to Tatts needed to be revenue neutral for the State – by way of having an entity ready to pay the market value of that share of the duopoly; and
  • the 1995 Agreement gave no assurance that the duopoly would be continued.

Accordingly, as a “new gaming operator’s licence” (within the context of the relevant legislative provisions) was never issued to anyone, Tatts was not entitled to the terminal payment compensation.

For Tabcorp: the principal question to be answered was whether the allocation of the GMEs resulted in a “grant of new licences” within the meaning of the 2003 Act – thereby entitled Tabcorp to payment under the terminal payment provisions?

The court held that the “grant of new licences” in the terminal payment pr ovision of the 2003 Act meant the grant of a wagering licence and gaming licence issued under Part 3, Chapter 4 of the 2003 Act and did not extend to the allocation of the GMEs. The court determined that, in its commercial and legislative context, the trigger for the terminal payment provision was the issuance of new licences to authorise the continuation of the duopoly.The new licensee would essentially be paying for Tabcorp’s share in the ongoing duopoly and the State’s obligation to make payment to Tabcorp was to be funded by a new licensee.  Whether the duopoly would continue was a matter to be determined by the State and that commercial risk always sat with Tabcorp.

To read the cases, click here for the Tabcorp case and here for the Tatts case.