Shoye Venture Limited v Wilson

[2014] NZHC 408

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-7912 [2014] NZHC 408

BETWEEN  SHOYE VENTURE LIMITED Plaintiff

ANDDONALD GORDON WILSON Defendant

Hearing:                   12 December 2013

Counsel:                  M R T Colthart for Plaintiff

A E Hansen for Defendant

Judgment:                7 March 2014

JUDGMENT OF RODNEY HANSEN J

This judgment was delivered by me on 7 March 2014 at 4.30 p.m., pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ………………………….

Solicitors:           Warren Simpson & Co, Papakura

Heimsath Alexander, Auckland

SHOYE VENTURE LIMITED v WILSON [2014] NZHC 408 [7 March 2014]

Introduction

[1]      The  plaintiff  (Shoye)  sues  to  enforce  a  guarantee  entered  into  by  the defendant (Mr Wilson) of the obligations of Tania Mara under a management agreement between Shoye and Ms Mara.  The management agreement related to a gambling  operation  carried  on  by  Shoye  and  Manukau  Golf  Club  Limited (Manukau) in  premises  leased  by Shoye  known  as  the Trophy Bar.    In  related

proceedings1  Duffy J held the gambling operation to be in breach of the Gambling

Act 2003 and the related contracts to be illegal.

[2]      Mr Wilson applies to strike out the claim on the ground that the guarantee is itself illegal and there is no prospect that a Court would exercise its discretion under s 7  of  the  Illegal  Contracts  Act  1970  (the  Act)  to  relieve  Shoye  from  the consequences of its illegality.   The application is resisted by Shoye who does not accept that the guarantee is illegal or, if it is, that relief would not be available under the Gambling Act.

Further background

[3]      The gambling enterprise was conducted pursuant to two agreements dated

10 September 2007, a venue agreement made between Shoye and Manukau, and the management agreement between Shoye and Ms Mara.  Those agreements were never approved by Secretary for Internal Affairs as required under the Act.  Instead, a later agreement dated 9 October 2007 between Manukau and Shoye was approved as the basis  for  the  gambling  enterprise.    Duffy J  held  that  the  parties  had  implicitly abandoned the later agreement by not performing it in accordance with its terms. As the  September  agreements,  pursuant  to   which  the  gambling  enterprise  was conducted, had not been approved, the operation was illegal and, pursuant to s 14(1) of the Act, the contracts are illegal for the purposes of the Act.

[4]      Shoye issued this proceeding against Mr Wilson to enforce his guarantee of

Ms Mara’s obligation. The guarantee provides:

1.        GUARANTEE

1      Manukau Golf Club Inc v Shoye Venture Ltd [2013] NZHC 658.

1.1      Unconditional Guarantee and Indemnity

In consideration of the Business Owner [Shoye] agreeing to enter into the Management Agreement the Guarantor [Mr Wilson] unconditionally and irrevocably:

1.1.1guarantees by way of continuing obligation to the Business Owner [Shoye], and not merely as a surety, the due performance by the Manager and of all its obligations under the Management Agreement; and

1.1.2indemnifies the Business Owner [Shoye] against any loss or damage which it may suffer as a direct or indirect result of the breach by the Manager of any of its obligations under the Management Agreement.

[5]      The  proceeding was  issued  by way of a summary judgment  application. Mr Wilson joined Manukau as a third party.   Shoye then abandoned the summary judgment application and issued the proceeding against Manukau which was determined  by  Duffy  J.     Mr Wilson  decided  to  abandon  his  defence  to  this proceeding, believing that the agreements in place between the other parties were enforceable.  Following the release of Duffy J’s judgment, he sought leave to defend

the claim out of time.  Duffy J gave him leave to do so.2

Strike-out application

[6]      Ms Hansen submits that Duffy J’s finding that the management contract is illegal binds the Court in this proceeding.  She argues that the guarantee, although not found by Duffy J to be illegal, must itself be an illegal contract which, by s 6 of the Act, is therefore of no effect.  She submits that relief will not be available under s

7 of the Act having regard, in particular, to the purposes and specific provisions of the Gambling Act.

Shoye’s position

[7]      Mr Colthard, for Shoye, does not accept that the management contract is illegal.   Nor does he accept that an estoppel arises to make Duffy J’s finding of illegality binding in this proceeding.   He says that if the management contract is illegal (either on the basis that the trial Judge is bound by the judgment of Duffy J or

that Shoye’s submissions on illegality are not accepted), Shoye will argue that the

2      Shoye Venture Ltd v Wilson & Manukau Golf Club Inc [2013] NZHC 2339.

Court should grant relief under s 7 of the Act.   That involves the exercise of a discretion  which  it  is  not  appropriate  to  exercise  in  the  context  of  a strike-out application.

Discussion

[8]      The question of whether an issue estoppel arises to bind the Court in this proceeding to Duffy J’s finding of illegality was not argued in depth.   Her comprehensive judgment provides persuasive grounds for argument that the management contract was indeed illegal.  However, as the two proceedings are not between the same parties, one of the conditions usually required before an issue estoppel can arise is not satisfied.3    It may be that, because the issue was decided

against Shoye, it would be an abuse of process for Shoye to raise the issue again.4

But this is not a question that I was asked to consider.

[9]      Assuming, however, that Duffy J’s finding that the management contract is illegal is binding, it will still be necessary for the judge hearing this proceeding to find that the contract of guarantee is also illegal.   I did not hear argument on this issue either.  It may be that s 14 of the Gambling Act applies on the basis that the contract of guarantee is one “relating to” illegal gambling.  Alternatively, it may be argued that the doctrine of tainting applies.  In order to make a finding of illegality

on that basis, a two-stage test was postulated by Tipping J in Hickman v Turner:5

(a)      Whether the collateral contract is sufficiently related to the primary contract so that it can fairly be said that the unenforceability of the primary contract should lead to the unenforceability of the collateral contract.

(b)The party to the collateral contract must have known or should have known of the essential facts giving rise to the illegality.

3      Talyanich v Index Developments Ltd [1992] 3 NZLR 28 (CA) at 38.

4      See the discussion in Matthew Downs (ed) Cross on Evidence (looseleaf ed, Lexis Nexis) at

4.10. See also Hunter v Chief Constable of West Midlands Police [1982] AC 529 (HL).

5      Hickman v Turner [2012] NZSC 72, [2013] 1 NZLR 741 at [156].

[10]     Assuming a finding that the contract of guarantee is illegal, it would remain for the Court to consider whether the primary contract, the management contract, should be validated under s 7 of the Illegal Contracts Act.   For that purpose, the Court is entitled to take into account in exercising its discretion under s 7(3) the conduct of the parties, the object of the enactment in question and the gravity of the penalty for breach.

[11]     It may well be that, as Ms Hansen anticipates will be the case, the illegal nature of the gambling operation will weigh decisively against the grant of relief. But I cannot exclude the possibility that other factors will intrude to tip the scales in the other direction.  Mr Colthart will rely on evidence that Mr Wilson knew of the unlawful nature of the gambling arrangements whereas Shoye will say that its sole director believed, on the basis of professional advice, that the arrangements were lawful.   Mr Colthart also has expectations of introducing evidence of a settlement reached by Manukau and Mr Wilson, the terms of which will assist the case for validation.

[12]     While the terms of Duffy J’s judgment present a discouraging picture for Shoye, I cannot exclude the possibility that the Judge who hears this proceeding may take a view of the facts that will permit the guarantee to be enforced.  As Fisher J said in Claydon v Herron,6  when one comes to the issue of a judicial discretion, unforeseen circumstances can have a bearing upon what at the moment may seem obvious.7

[13]     Mr Wilson has failed to show that Shoye has no reasonably arguable cause of action.

Result

[14]     The application to strike out the statement of claim is dismissed.

[15]     Shoye is entitled to costs on a category 2 band B basis.

6      Claydon v Herron (1994) 7 PRNZ 631 (HC).

7      At 634.