Shoye Venture Ltd v Wilson

[2013] NZHC 658

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-007912 [2013] NZHC 658

BETWEEN  SHOYE VENTURE LIMITED Plaintiff

ANDDONALD GORDON WILSON Defendant

ANDMANUKAU GOLF CLUB INCORPORATED

Third Party

CIV-2010-404-004422

BETWEEN  MANUKAU GOLF CLUB INCORPORATED

Plaintiff

ANDSHOYE VENTURE LIMITED Defendant

Hearing:         11-14 June and 6 July 2012

Counsel:         M R T Colthart for Plaintiff in Proceeding CIV-2009-404-007912 and for the Defendant in Proceeding CIV-2010-404-004422

A E Hansen for Defendant in Proceeding CIV-2009-404-007912 and for the Plaintiff in Proceeding CIV-2010-404-004422

I T F Hikaka and K L J Simcock for the Third Party in Proceeding
CIV-2009-404-007912

Judgment:      28 March 2013

JUDGMENT OF DUFFY J

This judgment was delivered by Justice Duffy on 28 March 2013 at 11.00 am, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

SHOYE VENTURE LTD v WILSON and ANOR HC AK CIV-2009-404-007912 [28 March 2013]

[1]      Gambling is strictly controlled in New Zealand.  Gambling that does not fit within the strict confines of permitted gambling is illegal and the contracts relating to it are also illegal.   One of the permitted forms of gambling is by the provision of gaming machines.  Such operations must conform with the requirements of the Gambling Act 2003 (the Act).   Those requirements include maintaining a clear demarcation and independence between the holder of a licence to operate gaming machines and the operator of the venue at which such gaming takes place.  A related control requires the manager of the venue where the gaming machines are in use to be a natural person.  The Act places performance obligations on the holder of the licence to operate gaming machines, the venue operator and the venue manager.  For these persons to be able to work with each other, they need to contract with each other for the performance of their respective roles.   This is why the plaintiff (Manukau) and the defendant (Shoye) came to contract with each other.

[2]      At all material times, Manukau was an incorporated society that operated as a golf club.  It qualified as a corporate society under the Gambling Act.  Like many sports clubs, Manukau sought to increase its financial resources through operating gaming machines.  Shoye is a registered company.  It was the lessee and operator of licensed premises at 276 Great South Road, Takanini, known as the Trophy Bar.  Its sole director is Maurice Joyce.

[3]      In late 2007, Manukau sought and obtained an operator’s licence and venue licence permitting class 4 gambling by way of gaming machines at the Trophy Bar. To obtain these licences, Manukau had to enter into a contract known as a venue agreement  with  Shoye,  the  terms  of  which  met  the Act’s  requirements  and  so satisfied the Secretary of Internal Affairs (Internal Affairs).   On the face of it, the contract that Manukau entered into with Shoye on 9 October 2007 met the relevant requirements of the Act and was approved by Internal Affairs.

[4]      But   Manukau   and   Shoye   ran   the   gaming   machine   operation   in   a fundamentally different way from that contemplated by the venue agreement and by the Act.  The operation contravened the Act’s requirements and led to financial loss for both parties.

[5]      The departure from the legitimate contractual arrangements resulted from changes that were agreed by Manukau’s then general manager, Ross Keown.  The changes fundamentally altered those arrangements, turning them into a different gaming machine operation from that approved by Internal Affairs, which made it illegal under the Act.  Despite the fact that Manukau never demanded performance of the 9 October 2007 venue agreement at the relevant time, Manukau now sues Shoye in contract for its failure to perform in accordance with the terms of that agreement. Shoye’s response is mixed.  Its position at the time of closing addresses had changed from the position outlined in the pleadings.  Whereas its statement of defence and counterclaim contained allegations suggesting the 9 October 2007 venue agreement had been replaced by alternative agreements that reflected what the parties actually worked to, it later abandoned this position in its closing submissions.  Nonetheless, Shoye maintained in its closing submissions that the actions of Manukau’s general manager, Mr Keown, were the cause of Manukau’s loss and that at all times, he “acted within the scope of his authority”.  In its statement of defence, Shoye pleaded that the contractual breaches that Manukau alleges were caused by Mr Keown and another person, Tanya Mara, both of whom were acting as agents of Manukau.

[6]      Manukau has responded to Shoye’s claims by pleading that the substitute arrangements that Shoye alleged in its statement of defence and counterclaim were an illegal contract under the Act.   In this regard, Manukau has conceded that the actual arrangements the parties worked to were illegal under the Act.  Its main case is that it never agreed to those arrangements and this was done by Mr Keown acting outside his authority.

[7]      I have been left with the overall impression that in different ways, each party has attempted to distance itself from how the gaming operation was actually carried out.   Manukau concedes it was illegal but that it never authorised the shift to the illegal manner of running the operation.  Shoye started out by alleging the existence of alternative arrangements but then, perhaps realising it faced the obstacle of how to complain about breaches of arrangements that the Court was likely to find illegal, has moved to a different position, albeit one that is not apparent on its pleadings. Against  this  background,  it  has  to  be  acknowledged  that  the  Court  is  facing  a situation where the evidence clearly points to both parties having participated in a

different   gaming   machine   operation   from   the   one   that   was   approved   by

Internal Affairs, and so an operation that involves illegal gambling. [8]        Thus, the proceeding raises complex legal questions:

(a)      Was the conduct of Manukau’s employee and agent in deliberately departing from the legal contract and entering into illegal contractual arrangements something within his implied and/or apparent authority?

(b)Should  the  Court  view  the  parties’ legally  compliant  contract  as having been implicitly abandoned and replaced by the illegal contractual arrangements if the facts satisfy it that this is what has occurred?

(c)      Should the Court allow the parties to recover the damages each seeks from the other if their claims are inextricably bound up with their illegal contractual arrangements to the point where the Court by awarding damages would appear to condone their conduct in this regard?

(d)      Is it open to the Court to pay regard to the question above if the

parties have not expressly raised it as a defence to the other’s claim?

It is helpful to have an understanding of the Act’s requirements before considering the parties’ contractual arrangements and the impact of their conduct on the enforceability of those arrangements in the light of these questions.

The Gambling Act

[9]      The Act imposes strict controls on gambling.   Unless it is any gambling within the permitted types of gambling in s 9, it is a prohibited and illegal activity. The purpose of the Act, which is set out in s 3, reveals Parliament’s intent to ensure that permitted gambling occurs in a regulated environment that is in part designed to reduce the recognised harmful effects of this activity.

3         Purpose

The purpose of this Act is to—

(a)      control the growth of gambling; and

(b)      prevent   and   minimise   the   harm  caused   by  gambling, including problem gambling; and

(c)      authorise some gambling and prohibit the rest; and

(d)      facilitate responsible gambling; and

(e)      ensure the integrity and fairness of games; and

(f)       limit opportunities for crime or dishonesty associated with gambling; and

(g)      ensure that money from gambling benefits the community;

and

(h)      facilitate  community  involvement  in  decisions  about  the provision of gambling.

All of these provisions show that there are strong policy reasons for discouraging and preventing arrangements to thwart this purpose.

[10]     Section 9 prohibits and makes illegal any gambling that is not authorised by or under the Act and that does not comply with the Act and any relevant licence, game rules, and minimum standards.  Gambling contracts are regulated by s 14. Under s 14(1), contracts for, or related to, illegal gambling are also illegal and subject to the Illegal Contracts Act 1970, whereas, under s 14(2), gambling contracts authorised under the Act are enforceable.   Thus, gambling and the contractual arrangements on which it rests must conform to the Act’s requirements in order to be legal and enforceable.

[11]     The contracts in this case relate to gambling by off-site gaming machines. The Act categorises this form of gambling as class 4 gambling.  The requirements of class 4 gambling are set out in ss 30 to 33 of the Act. Section 30 provides:

In this Act, class 4 gambling is—

(a)       gambling that is not gambling of another class and that satisfies the following criteria:

(i)       the  net  proceeds  from  the  gambling  are  applied  to  or distributed for authorised purposes:

(ii)      no  commission  is  paid  to,  or  received  by,  a  person  for conducting the gambling:

(iii)     the gambling satisfies relevant game rules; and

(b)      gambling that utilises or involves a gaming machine; or

(c)       gambling categorised by the Secretary as class 4 gambling.

Under s 31:

Class 4 gambling may be conducted only by a corporate society that holds—

(a)       a class 4 operator’s licence for the gambling; and

(b)      a  class  4  venue  licence  for  the  place  where  the  gambling  is conducted.

[12]     Under s 4, “authorised purpose” for class 4 gambling means gambling for any

of these purposes:

(i)       a charitable purpose:

(ii)      a non-commercial purpose that is beneficial to the whole or a section of the community:

(iii)     promoting,  controlling,  and  conducting  race  meetings  under  the

Racing Act 2003, including the payment of stakes ...

The  definition  of  “corporate  society”  includes  a  society  incorporated  under  the

Incorporated Societies Act 1908.

[13]     The licensing of class 4 gambling is provided for in Part 2, Subpart 4 of the Act.  This Part of the Act contains a series of provisions imposing conditions relating to the application for, and grant of, licences for class 4 gambling.   When read together, they impose an interlocking set of requirements for the lawful undertaking of  class  4  gambling.     The  Department  of  Internal  Affairs  is  responsible  for overseeing compliance with these provisions, and the Secretary for Internal Affairs is the person authorised to approve and to impose conditions on the relevant licences.

[14]     Sections 50 to 51 provide for applications for a class 4 operator’s licence and ss 52 to 54 provide for the grant and conditions of use of such a licence.  Read together, these provisions impose the requirements for a class 4 operations licence.

[15]    Section 50(g) requires an application for a class 4 operator’s licence to be accompanied by an application for a class 4 venue licence.  An application for this licence is made under s 65.  The grant and use of this licence is provided for in ss 67 to 78.

[16]     Under s 4, a “class 4 venue” is a place used to conduct class 4 gambling.

[17]     Section 65(2)(j) requires an applicant for a venue licence to provide evidence

that the class 4 venue is “not to be used mainly for operating gaming machines”.

[18]   Section 65(3) requires an application for a class 4 venue licence to be accompanied by a class 4 venue agreement, unless the operation is of a certain kind, which is not the case here:

65       Application for class 4 venue licence

…

(3)       The  application  must  also  be  accompanied  by  a  class  4  venue agreement unless the Secretary is satisfied that the applicant is a club that intends to operate gambling equipment at a non commercial class 4 venue that—

(a)      it owns or leases; and

(b)      is mainly for the use of club members.

[19]     Section 4 defines a “class 4 venue agreement” as:

an agreement or agreements between the holder of, or applicant for, a class 4 operator’s licence or a class 4 venue licence and the venue operator that sets out their respective rights and responsibilities ...

[20]     “Venue operator” means the occupier of a class 4 venue to which s 65(3) applies who owns the primary business.  “Venue manager” means one natural person responsible for supervising the gambling and the venue personnel at the class 4 venue  and  for  banking  the  proceeds  of  class  4  gambling.    “Venue  personnel”

includes a person who works at a class 4 venue and whose work involves dealing with the gambling activity.

[21]     Section 67 mandates that the Secretary must refuse to issue a venue licence except when satisfied that certain specified requirements have been met:

67       Grounds for granting class 4 venue licence

(1)      The Secretary must refuse to grant a class 4 venue licence unless the

Secretary is satisfied that

(a)      the applicant holds a class 4 operator's licence; and

(b)       the possibility of persons under 18 years old gaining access to class 4 gambling at the class 4 venue is minimal; and

(c)      the venue manager is an individual and any investigations carried out by the Secretary do not cause the Secretary not to be satisfied about his or her suitability, in terms of section

68, to supervise—

(i)       the conduct of class 4 gambling at the venue; and

(ii)      venue personnel; and

(d)       any investigations carried out by the Secretary do not cause the Secretary not to be satisfied about the suitability of any other key person, in terms of section 68; and

(e)       if the application relates to a class 4 venue that is licensed to another corporate society, the other corporate society has surrendered its class 4 venue licence for the venue; and

(f)       the territorial authority has provided a consent (if required under section 98); and

(g)       on issue of the licence, the applicant will own any gambling equipment (except for electronic monitoring systems) that it proposes to operate; and

(h)      on issue of the licence, the applicant will not operate any gambling equipment that is financed by the manufacturer, distributor, or vendor of the equipment; and

(i)       all gambling equipment to be operated at the venue meets relevant minimum standards; and

(j)       the class 4 venue agreement (if required)—

(i)       enables the class 4 gambling conducted at the class 4 venue  to  comply  with  this  Act  and  the  proposed class 4 venue licence; and

(ii)      includes the information specified in section 69; and

(k)      the class 4 venue is not used mainly for operating gaming machines; and

(l)       for  a  class  4  venue  that  is  not  established  before  the commencement of this section, the class 4 venue is not to be part of a place at which another class 4 venue or a casino is located; and

(m)      for an application to which section 65(3) applies, no person will be both a key person in relation to the relevant class 4 operator's licence and a key person in relation to the class 4 venue licence; and

(n)       if the New Zealand Racing Board is the applicant, the class 4 venue is either—

(i)       owned or leased by the New Zealand Racing Board and used mainly for racing betting or sports betting; or

(ii)      a racecourse; and

(o)      if the applicant is a racing club, the class 4 venue is a racecourse; and

(p)       the  risk  of  problem  gambling  at  the  class  4  venue  is minimised; and

(q)       the proposed venue is suitable in all other respects to be a class 4 venue; and

(r)       there  are  no  other  factors that  are  likely to  detract from achieving the purpose of this Act; and

(s)       any  other  requirement  set  out  in  regulations  or  licence conditions is, or will be, met.

(2)       If the Secretary decides to refuse to grant a class 4 venue licence, the Secretary must notify the applicant, or, if there is a venue agreement, the parties to the agreement, and the venue manager of—

(a)      the reason for the decision; and

(b)      the right to appeal the decision; and

(c)      the process to be followed for an appeal under section 77.

[22]     Section  67(1)(m)  stipulates  that  with  applications  for  a  venue  licence  to which s 65(3) applies, no person will be both a key person in relation to the class 4 operator’s licence and the class 4 venue licence.

[23]     Under s 4:

key person means,—

(a)       in relation to a class 4 operator’s licence, a person who—

(i)       is a trustee or other officer of a corporate society that is an applicant for, or holder of, a class 4 operator’s licence:

(ii)      is  the  chief  executive  (or  performs  that  function)  of  a corporate society that is an applicant for, or holder of, a class

4 operator’s licence:

(iii)      exercises  significant  influence  in  the  management  of  a corporate society that is an applicant for, or holder of, a class

4 operator’s licence; and

(b)      in relation to a class 4 venue licence,—

(i)        a venue manger: (ii)      venue personnel: (iii)      a venue operator:

(iv)      a  person  who  is  a  director,  chief  executive,  or  senior manager of a venue operator:

(iva)     any other person whom the Secretary reasonably believes to have a significant interest in the management, ownership, or operation of a venue operator, except for the following persons holding office, elected, or appointed under the Sale of Liquor Act 1989:

(A)      a member of a licensing trust elected in accordance with sections 191 to 194 of that Act or appointed under section 195 of that Act; or

(B)      a trustee of a community trust holding office under section 219Q of that Act or elected in accordance with section 219R of that Act or appointed under section 219U of that Act.

(v)       a person contracted to service gambling equipment at a class

4 venue …

[24]     Section 68 imposes the suitability requirements for those in the role of a

“key person”.

[25]     The Act specifically provides for the form and content of a class 4 venue agreement (s 69) and the content and conditions of a class 4 venue licence (s 70):

69       Form and content of class 4 venue agreement

(1)       The  form  and  content  of  a  class  4  venue  agreement  must  be approved by the Secretary and must include—

(a)       a  schedule  signed  by  the  venue  manager  and  the  venue operator setting out—

(i)       the full name, date of birth, and contact details of the venue manager; and

(ii)      the gambling-related duties and responsibilities of the venue manager; and

(b)       an itemised list of costs associated with the operation of class 4 gambling at the venue; and

(c)      the expiry date of the venue agreement.

(2)       A class 4 venue agreement must be signed by the holder of, or applicant for, the class 4 venue licence and the venue operator.

(3)       The expiry date of a class 4 venue agreement may be overridden by anything to the contrary in this Act, game rules, minimum standards, or licence conditions but, in any case, must not be later than 3 years after the date of the venue agreement.

(4)       Approval of a class 4 venue agreement lapses if the corporate society ceases to hold a class 4 operator's licence or a class 4 venue licence for that venue.

70       Content and conditions of class 4 venue licence

(1)       A class 4 venue licence granted after the commencement of this section must include the following information and conditions:

(a)      the name of the corporate society that holds the licence; and

(b)       the commencement date and expiry date (which must be not later than 18 months after the commencement date) of the licence; and

(c)      the authorised purpose of the corporate society; and

(d)      the name of the venue operator; and

(e)      the name of the venue manager; and

(f)       a description of the class 4 venue and its location; and

(g)       conditions about the class 4 gambling that may be conducted at the venue, including the number of gaming machines that may be operated; and

(h)       details of the gambling equipment that may be operated at the venue; and

(i)       conditions to prevent class 4 gambling being conducted at the venue unless the primary activity of the venue is offered and available at that time; and

(j)       any other conditions added by the Secretary.

(2)       The conditions that the Secretary may add to a class 4 venue licence include—

(a)       procedures to ensure that both the venue operator and the venue manager can supervise effectively—

(i)       the class 4 gambling at the venue; and

(ii)      the venue personnel:

(b)       conditions to minimise the possibility of persons under 18 years old gaining access to class 4 gambling at the class 4 venue:

(c)      procedures for banking money from the gambling:

(d)      conditions regarding the application or distribution of net proceeds from the class 4 gambling to or for authorised purposes:

(e)       if   the   corporate   society   accepts   applications   for   the distribution of net proceeds from gambling, conditions about the process for making, and the provision of information about how to make, an application:

(f)       conditions regarding the display of the class 4 venue licence at the venue:

(g)      procedures to encourage responsible gambling at the venue: (h)     conditions specifying areas within a class 4 venue as the

only areas permitted for conducting class 4 gambling:

(i)       any  other  conditions  consistent  with  this  Act  that  the Secretary considers will promote or ensure compliance with this Act.

(3)      The Secretary may—

(a)      amend or revoke a condition of a class 4 venue licence; or

(b)      add new conditions to a class 4 venue licence.

(4)       If the Secretary decides to amend or revoke a condition or add a new condition to a class 4 venue licence, the Secretary must notify the corporate society or the parties to the venue agreement, and the venue manager, of—

(a)      the right to appeal the decision; and

(b)      the process to be followed for an appeal under section 77.

(5)       Despite subsection (1)(b), a class 4 venue licence expires on the date that a class 4 operator's licence held by the corporate society that holds  the  class  4  venue  licence  is  surrendered,  expires,  or  is cancelled.

(6)       For  the  purposes  of  subsection  (1)(i),  if  the  class  4  venue  is  a racecourse, the primary activity of the venue must be treated as including the provision of sports, recreation, entertainment, and convention facilities.

[26]     In short, a class 4 venue licence holder and the venue operator must be different people and they cannot be under common control or management.  Thus, under s 52(1)(j), a ground for refusing an operator’s licence is that a key person of the holder of the operator’s licence is a key person in relation to a class 4 venue licence (unless the club intends to operate the gambling equipment on its own premises).  Under s 67(1)(m), a ground for refusing a venue licence is that a person is a key person for both an operator’s licence and a venue licence.  Key persons for venue licences must satisfy suitability standards under s 68.

[27]     Section  54  stipulates  that  significant  changes  in  relation  to  a  class  4 operator’s licence must be notified.  This includes the circumstance where a key person ceases to be a key person, or is incapable of performing the duties of a key person:

54Significant changes in relation to class 4 operator's licence must be notified

(1)       A corporate society holding a class 4 operator's licence must notify the Secretary, and provide details, if any of the following things occur:

(a)      the  corporate  society  or  a  key  person  is  convicted  of  a relevant offence:

(b)      the   corporate   society   or   a   key   person   is   placed   in receivership, goes into liquidation, or is adjudged bankrupt:

(c)      the corporate society or a key person breaches a rule of racing made under the Racing Act 2003:

(d)      a key person ceases to be a key person or is incapable of performing the duties of his or her position:

(e)      a change is proposed to the corporate society's governing document that may affect the corporate society's ability to comply with this Act or the licence.

(2)       Notification must be made before, or as soon as practicable after, the changes occur.

(3)       The powers and obligations in section 51 apply to a notification as if the notification were an application for a class 4 operator's licence.

(4)      The Secretary may require the corporate society to apply for an amendment under section 57, or may invoke the suspension or cancellation provisions under sections 58 and 59, as a result of the notification.

[28]     A similar requirement is stipulated in s 71 regarding significant changes to a class 4 venue licence.  Notification must be made if the venue manager ceases to be the venue manager, or the venue operator changes:

71Significant changes in relation to class 4 venue licence must be notified

(1)      A corporate society holding a class 4 venue licence must notify the

Secretary, and provide details, if any of the following things occur:

(a)       a  key  person  in  relation  to  the  class  4  venue  licence  is convicted of a relevant offence:

(b)       a key person in relation to the class 4 venue licence is placed in   receivership,   goes   into   liquidation,   or   is   adjudged bankrupt:

(c)       a key person in relation to a class 4 venue licence breaches a rule of racing made  under  section 29  of  the  Racing Act

2003:

(d)      the venue manager ceases to be the venue manager or is incapable of performing the duties of his or her position:

(e)      the venue operator changes:

(f)       the nature of the class 4 venue changes:

(g)       the corporate society has not conducted class 4 gambling at the venue for a period of more than 4 weeks (in which case the class 4 venue licence must be surrendered unless the Secretary agrees that the venue may remain inactive for a further specified period).

(2)       Notification must be made before, or as soon as practicable after, an event listed in subsection (1) occurs.

(3)       The powers and obligations in section 66 apply to a notification as if the notification were an application for a class 4 venue licence.

(4)      The Secretary may require the corporate society to apply for an amendment under section 73, or may invoke the suspension or cancellation provisions under sections 74 and 75, as a result of the notification.

[29]     Section 104 requires gaming machine profits to be banked within specified times into a dedicated account of the corporate society holding the class 4 operator’s licence.  The person responsible for banking is the venue manager.  Under s 106, the corporate society must apply the net proceeds from gambling for an authorised purpose.  Under s 116, the Secretary may by Gazette notice set limits on, or exclude, costs incurred by a corporate society conducting class 4 gambling.  For the gaming machine operation at the Trophy Bar, the limit imposed was a maximum of 16 per cent of the gaming machine profit excluding Goods and Services Tax (GST) for any 12 month period.

Background

[30]     Manukau  used  to  operate  gaming  machines  at  its  club  premises,  which brought it within the exception of s 65(3), so it did not require a venue agreement. However, Mr Keown conceived a plan that would increase Manukau’s revenue from gambling through having off-site gaming machines available for use by members of the public, as well as club members. This change in the location and operation of the gaming machines brought into play the Act’s requirements for a venue agreement, venue operator and venue manager.

[31]     In  the  meantime,  in  2007,  the  Trillian  Trust  had  18  gaming  machines operating in Shoye’s business, the Trophy Bar.  Mr Joyce was interested in selling the business operation of the Trophy Bar.  He began discussions with Manukau, in particular with its manager, Mr Keown.  The discussions led to the decision for Manukau to operate its gaming machines at the Trophy Bar.   This necessitated a series  of  legal  arrangements  that  satisfied  the  Act’s  requirements  for  class  4 gambling.   The parties obtained legal advice and eventually the requisite legal documentation was prepared and executed.

The necessary authorisations for off-site gaming

[32]     The preparation of the legal documentation for the proposed off-site gaming operation was complicated.  The first set of documents was prepared by Manukau’s solicitor, Andrew Nicoll of Martelli McKegg. These documents were:

(a)       A class 4 venue agreement dated 10 September 2007;

(b)A management agreement dated 10 September 2007 between Shoye and Tania Mara; and

(c)       A deed of guarantee dated 10 September 2007 between Shoye and

Donald Gordon Wilson.

[33]     Up  until  the  time  she  became  engaged  in  working  at  the  Trophy  Bar, Ms Mara was an employee of Manukau.  Mr Wilson was a member of Manukau; he guaranteed  Ms  Mara’s  performance  of  the  management  agreement.    To  a  large extent, the off-site gaming machines were operated in accordance with the provisions of these documents.   However, none of them were filed with Internal Affairs for approval; so none of them were part of the foundation for the grant of the necessary licences under the Act.  I will refer to them in greater detail when I come to deal with the de facto arrangements under which the off-site gaming machine operation was actually carried out.

[34]     A  second  venue  agreement  dated  9  October  2007  was  prepared.    This document presents itself as having been prepared by “James Doughty Commercial Lawyers”.  Mr Nicoll’s evidence was that whilst he had prepared the necessary documentation required  by Internal Affairs, he had forwarded the documents to James Doughty,  who  would  then  be  responsible  for  filing  the  documents  with Internal Affairs.  There is no clear explanation for why a second venue agreement was prepared, nor was there evidence to explain why James Doughty became involved in the way that it did.   However, what is clear is that it was the second venue agreement dated 9 October 2007 that was approved by Internal Affairs as part of the process for Manukau and Shoye to obtain the relevant licences for off-site

gaming machines at the Trophy Bar.  Thus, the 9 October 2007 venue agreement is part of the legal controls for the gaming machine operation.  I now propose to focus on the legal controls.

Venue licence

[35]     Following   its   approval   of   the   9   October   2007   venue   agreement, Internal Affairs issued the necessary licences.   On 27 November 2007, a class 4 venue licence was issued pursuant to s 67 of the Act.   The licence shows that the approved “authorised purposes” were:

Provision,  maintenance  and  development  of  club  buildings,  furniture, fittings, grounds and equipment, excludes bar areas; includes mortgage repayments.    Assistance  to  sporting  adjuncts  within  the  club  through provision of uniforms, equipment, premises and actual and reasonable expenses to travel to and compete in tournaments with kindred groups.

The permitted number of gaming machines was limited to no more than 18.

[36]     Regarding the venue details, the licence identified the venue operator as Shoye, and the venue manager as Mr Joyce.  The description of the venue was given as “hotel”, being the Trophy Bar; and the address was specified in the licence.  The licence was to commence on 1 January 2007 and expire on 31 December 2007. These licences are annual and a licence with the same conditions was subsequently issued for the period 1 January 2008 to 31 December 2008.  Part way through 2008, there was a successful application to amend the licence, but this has no relevance to the issues in question in the proceeding.

[37]     The  venue  licence  had  four  conditions.    Condition  1  precluded  class  4 gambling at the Trophy Bar without the Trophy Bar’s primary activity at the venue being on offer and available.  Condition 2 required the licence to be displayed at all times in a clear view of the public and in close proximity to the gaming machines at the relevant venue.   Condition 3 related to change of details.   This condition essentially repeated the requirements in s 71 of the Act regarding Internal Affairs being informed of a change of details.  Condition 4 related to late banking and advised that if the gaming proceeds were not banked in accordance with regulation 4 of the Gambling (Class 4) Banking Regulations 2006, class 4 gambling was to cease

immediately until the outstanding proceeds were banked and all reasonable endeavours made to recover any outstanding proceeds.

Operator’s licence

[38]     The  annual  class  4  operator’s  licence  issued  to  Manukau  replicated  the

authorised purposes set out in the venue licence.

[39]     Condition  1  prescribed  a  formula  for  minimum  return  to  the  authorised purpose.  Condition 2 required payments made for the specified purposes to be made to and from a dedicated account.  Condition 3 required additional requirements for net proceeds committees that did not mainly distribute net proceeds to their community.   This required that there may be a proceeds committee established pursuant to regulation 8 of the Gambling (Class 4 Net Proceeds) Regulations 2004 for the purpose of maintaining a detailed record of every decision on the application or distribution of net proceeds to, or for, the authorised purpose, including details of the amount of each application or distribution and the purpose of the application or distribution. Condition 4 provided that the funds were to be distributed regularly and that the operator was to ensure that there was no accumulation of funds in the dedicated account unless the Secretary had approved such accumulation.

[40]    The operator’s licence and the venue licence were issued following the Secretary receiving applications for such licences, accompanied by the requisite information, which included a copy of the venue agreement between Manukau and Shoye.

Venue agreement

[41]     A venue agreement is an essential requirement for obtaining a class 4 venue licence for off-site gaming machines.  This is stipulated in s 65 and s 67 of the Act. No class 4 venue licence will issue unless Internal Affairs is satisfied with, amongst other things, certain aspects of the venue agreement.  Here, the operative venue agreement was the agreement dated 9 October 2007 between Manukau, as the owner of the class 4 gaming machines, and Shoye, as the venue operator.  In clause 1, the

nominated venue operator was Shoye, and the venue manager was Mr Joyce.  The agreement was executed by Mr Keown and a board member on behalf of Manukau; and by Mr Joyce on behalf of Shoye.

[42]     Clause 3 set out the obligations of the venue operator, and clause 4 set out the gaming-related  duties   of  the  venue  operator.     These  conditions  and  duties

encapsulate the same that are imposed by the Act.

d

[43] perfor	Un m th (a)	er clause 4.1 of the agreement, Shoye, as venue operator, was required to e following: Provide  a  cash  float  for  the  operation  of  the  gaming  machines
(clause 4.1(d));
(b)	Inform Manukau immediately of any irregularities in the operation of or collection of proceeds from the gaming machines and, in addition,
to immediately explain to and to reimburse Manukau, if necessary, any discrepancies in the gaming machines’ takings (clause 4.1(i));
(c)	Bank the gaming profit weekly (minimum) within five working days from    the     end    of    the    period    shown    on     the    “WGMPR” (clause 4.1(j)(iv));
(d)	Carry  out  meter  readings,  operate  a  gaming  machine  float,  bank
gaming machine funds and carry out all procedures as stipulated in the regulations, game rules and licensed conditions (clause 4.1(k)(ix));
and
(e)	Maintain  the  minimum  hours  of  operation  specified  in  the  first
schedule (clause 4.1(n)).
[44]	Oth	er material terms of the agreement included clause 3.3, which provided

 

that Shoye:

Shall perform the services so as to fully comply with the Gambling Act, with due diligence and care, and otherwise in compliance with the agreement.

[45]     And clause 3.5, which provided that Shoye:

Shall comply with all statutes, regulations and laws applicable to this agreement.  In particular [Shoye] acknowledges its responsibilities under the Gambling  Act  and  will  comply  fully  with  the  requirements  of  the Gambling Act, game rules, licence conditions relating to the operation of gaming   machines   and   any  directives  issued   by  the  [Department   of Internal Affairs].  [Shoye] shall also ensure compliance with the terms of this agreement by its employees, agents or sub-contractors and all other parties with whom it deals under this agreement.

[46]     Clause 6 of the agreement dealt with the remittance of takings and payment of fees.  Under clause 6.1, Shoye acknowledged and agreed that all takings from the gaming machines belonged to Manukau and must be paid forthwith to Manukau. Shoye acknowledged that it was a “base trustee” [sic] of such moneys belonging to Manukau and owed fiduciary duties to Manukau with respect to such takings.  I consider this to be in error and what was meant here was that Shoye was a bare trustee of such funds.  Shoye was required to present a tax invoice to Manukau whenever fees  were due pursuant  to  the third  schedule of the agreement.   The invoice was to specify the amount of GST payable, if any.  The invoice was to be payable by Manukau within seven days of the invoice being presented.  Any fees payable pursuant to the third schedule were to comply with the limits and exclusions as gazetted pursuant to s 116 of the Gambling Act.   The reference to the third schedule in clause 6.2 was a mistake, as the relevant schedule was in fact the fourth schedule.  Here, the limit on fees payable to Shoye as the venue operator was set at a maximum of 16 per cent of the gaming machine profit excluding GST for any 12 month period.

[47]    Clause 8.6 provided that if Manukau had its gaming licence revoked or cancelled, or chose to relinquish it in its absolute discretion, or was unable to renew it for whatever reason, it could by notice in writing to the venue operator terminate the venue agreement immediately.

[48]     Clause  9  provided  for  the  consequences  of  termination.    In  particular, clause 9.2 provided that termination was without prejudice to the other rights and

remedies of the parties arising out of any default that occurred before the termination and was without prejudice to any claim for moneys payable by either party as at the date of termination, or in respect of obligations to be performed or liabilities incurred before termination.  The clause went on to provide that termination of the agreement would not affect such rights and obligations as are intended to survive termination and, in particular, clauses 9, and clauses 7 and 13.

[49]     Clause 10 of the venue agreement made it clear that the venue operator was independent of Manukau.  Clause 12 prevented the venue operator from assigning its rights and obligations under the venue agreement without the prior written consent of  Manukau,  and  any  such  assignment  was  conditional  upon  the  approval  of Internal Affairs.

[50]    The second schedule of the venue agreement sets out the gambling-related duties of a venue manager. These included:

Manage  the  venue,  gaming  operation  and  venue  personnel  so  that  the Venue Operator’s   obligations   under   this   agreement   as   well   as   the Gambling Act  2003,  applicable  regulations,  licence  conditions  and  any directives of the Department are met;

Manage the venue, gaming operation and venue personnel so that [Manukau’s] responsibilities under the Gambling Act 2003, applicable regulations, its licences, licence conditions and any directives of the department are met;

The schedule then set out detailed specific duties, some of a daily or weekly nature, that the venue manager was to perform.

[51]     The  venue  agreement  and  accompanying  applications  for  an  operator’s licence and a venue licence met with Internal Affairs’ approval.  Thus, this material and the licences that were issued on the strength of it provided the lawful basis for Manukau to operate off-site class 4  gaming machines through the assistance of Shoye as venue operator and Mr Joyce as venue manager.  Had those concerned conducted  themselves  in  accordance  with  the  approved  legal  arrangements,  the class 4 gambling that was conducted would have been lawful.  However, they did not do this; instead, they acted in a materially different way.

The de facto arrangements

[52]     Shoye took such a back seat role in the operation of the gaming machines at the Trophy Bar that it never carried out the role of venue operator as prescribed in the venue agreement.  From the outset, the key person in the form of the venue manager was never Mr Joyce.  He acknowledges that he never acted in this capacity; indeed, he contends that he did not know he was the nominated venue manager, though this is a separate issue to be considered later.  Instead, the role of venue manager was performed by Tanya Mara.

[53]     The heavy reliance on Ms Mara to undertake responsibilities that the venue agreement placed on Shoye as venue operator and Mr Joyce as venue manager was consistent  with  the  terms  of  the  earlier  venue  agreement  that  was  executed  on

10 September 2007 between Manukau as owner of the gaming machines, Shoye as venue operator, and Ms Mara as venue manager.  Schedule A of the 10 September

2007 venue agreement set out the details of the duties of the venue manager to be performed by Ms Mara.   The duties included starting up and closing down the gaming  machines;  clearing  cash  from  note  stackers  and  cash  boxes;  preparing weekly gaming machine proceeds reports; reconciling the float; dealing with service agents and players; handling cash; preparing for and completing the weekly banking of the gaming machine profit; and other gaming-related duties.  At the foot of schedule A, Ms Mara had signed as venue manager, and Mr Joyce had signed on behalf of Shoye as venue operator.  This agreement was never provided to and, therefore, never approved by Internal Affairs.  Thus, it was not part of the legal contractual arrangements for off-site gaming machines at the Trophy Bar.

[54]     On the same day as the September venue agreement was executed, Shoye, as business owner, and Ms Mara, as manager, entered into a management agreement. Yvonne Penny, a board member of Manukau, witnessed the execution of this agreement.

[55]     The management agreement was prepared by Mr Nicoll, Manukau’s solicitor. The introduction describes Ms Mara as being appointed by Shoye to manage Shoye’s business known as the Trophy Bar in Takanini.  In clause 1, “business” is defined to

mean the licensed premises known as the Trophy Bar and to include the “on-premise and off-premise aspects of the Business in addition to the subleasing of space within the Business Premises to duly licensed operators of gaming machines”.   Clause 1 defined “management services” to include the services set out in clause 3.1.  That clause provided as follows:

3.1The     Manager     undertakes     that     it     will     perform     the Management Services  and  will  carry  out  all  activities  reasonably necessary to manage the day to day operation of the Business.  This will include amongst other things:

3.1.1    Employing sufficient employees to operate the Business;

3.1.2    Managing and securing the Business Premises;

3.1.3Attending to the day to day operation of the Business including attending to all related matters such as maintaining stock, cleaning and maintaining the Business Premises, maintaining liquor licence, maintaining all other licences reasonably necessary to maintain the Business, complying with any requirements of the Department of Internal Affairs and promoting and advertising the Business.

[56]     Under  clause  3.2,  the  manager  undertook  in  providing  the  management services to ensure:

3.2.1	That it complies with all relevant laws and regulations in relation to the Business; and
3.2.2	That it meets all reasonably foreseeable safety requirements in relation to the Business including but not limited to the safety of the employees and patrons of the Business.
[57]	Claus	e  3.3  recognised  the  manager’s  independence  when  it  came  to

performance of its duties, but required the manager to discuss with the business owner from time to time management of the business and the activities that the manager had undertaken in the course of doing so.

[58]     Clause 3.4 required the manager to keep full and up to date financial records and documentation relating to the operation of the business, and all such records and documentation necessary to establish that the manager was performing the required duties under the agreement legally and to the required standard.

[59]    Clauses 3.5 to 3.6 are not relevant; they contain provisions regarding the manager’s obligation to perform the agreement diligently and to indemnify the business owner for any losses arising from the manager’s failure to so perform.

[60]     Clauses 3.7 to 3.8 contain the manager’s warranty regarding the net profit of the business for the 12 months preceding termination of the agreement, this being a sum of not less than $85,178.  Any fall in such net profit required the manager to compensate the business owner in accordance with clause 7.1.

[61]     Clause 2.1 provided that the business owner appointed the manager as the:

exclusive manager of the Business and the Manager will provide the Management Services in relation to the Business on the terms and conditions of this Agreement.

Also under clause 2.1, the business owner assigned all its rights and interest to “all

income earned by the Business during the Term to the Manager”.

[62]     Under clause 2.3, in consideration of the business owner assigning all its rights in the income derived by the business during the term of the management agreement,  the  manager  was  obliged  to  pay the  business  owner  the  amount  of

$2,307.70 plus GST per week, with the potential for adjustments according to the

Consumer Price Index.

[63]     Clause  4  set  out  the  business  owner’s  obligations  and  duties.    Under clause 4.1,  these  were  to  provide  support  to  the  manager  on  an  ad  hoc  and consultative capacity only.  Further, the parties agreed that:

The support of the Business Owner will not include any element of financial support nor will the manager be able to compel physical attendance of the Business Owner or any of its officers or employees at the Business Premises.

[64]     Under clause 4.2, the business owner undertook to perform its responsibilities diligently.  Under clause 4.3, the business owner warranted the manager that:

4.3.1The Business Owner has the exclusive right to grant and is capable of granting the management rights granted under this Agreement;

4.3.2The Business Owner will use reasonable endeavours to ensure that it obtains  such  licences  as  may  be  reasonably  necessary  for  the

manager to perform its obligations pursuant to this Agreement, but this  shall  be  at  the  expense  in  all  things  of  the  Manager.   The Manager shall reimburse all reasonable expenses of the business owner reasonably necessary in respect of all licence requirements for the premises within seven days of invoices being furnished to the Manager; and
4.3.3	The Business Owner has the power to enter into this Agreement and perform its obligations under this Agreement.
[65]	Claus	e  5,  which  dealt  with  business  accounts,  provided  as  follows.	In

clause 5.1, the business owner acknowledged that all income derived by the business was the property and responsibility of the manager and that the business owner had no right, title, interest or claim whatsoever in respect of such income.

[66]    Under clause 5.2, the manager agreed that it would be responsible for all expenses incurred by it during the term in operating the business.  The manager undertook that all payments necessary to be paid to creditors would be paid as and when they fell due and that it would not undertake any steps, actions or omissions which  may lead  to  any damage to  the reputation  of the business  owner or the business.

[67]    Under clause 5.3, the manager was solely responsible for maintaining the business premises in good condition at all times and “ensuring compliance with the directors from regulatory bodies which are not the responsibility of the landlord of the Business Premises”.

[68]    Clause 7.1 provided for termination of the agreement when either party materially breached its obligations under the agreement and failed to remedy any breach capable of remediation within a specified timeframe; or either party became insolvent, went into liquidation, receivership or statutory management.

[69]     Clause 7.4 provided for what was to occur on termination of the agreement under clause 7.1.  On such termination, the manager was to purchase the business for

$300,000, plus GST, if any, in lieu of damages.  The sale and purchase was in full and final settlement of all claims between the parties, and neither party had any further claim against the other arising from the agreement.

[70]     Clause 8.4 provided that if any provision in the agreement was found to be invalid or unenforceable, the remaining provisions would not be affected and would continue in full force and effect.

[71]    Like the 10 September 2007 venue agreement, the management agreement formed  no  part  of  the  approved  material  that  led  to  the  issue  of  the  relevant operator’s licence and venue licence.

[72]     There are two further aspects of the de facto arrangements.  Around the time the management agreement and the 10 September 2007 venue agreement were executed,  Manukau  sent  two  letters  to  Ms  Mara.    The  letters  were  signed  by Mr Keown.  Manukau’s solicitor, Mr Nicoll, had a hand in preparing them.  The first was a letter dated 17 September 2007, which was prepared by Mr Nicoll and which went out on Manukau’s letterhead. The letter reads as follows:

September 17, 2007

Dear Tania

Re Trophy Bar

Thank you for agreeing to assist the club with its placement and operation of gaming  machines  at  the  Trophy  Bar  while  the  Bar  is  under  your management.  In return for your co-operation the Club will arrange for your position to be underwritten to the extent necessary to ensure that while you comply with all reasonable requirements in relation to the management and operation of the Bar such operation of the Bar by you is conducted at no personal financial risk to yourself and to such extent as may be necessary to ensure that your own personal income is maintained throughout the period. The Club will also ensure that you are provided with such assistance as you may reasonably require in establishing your management of the Bar and in your subsequent operation of the Bar for the period while the Club maintains its machines on site.  As you know the Club’s initial term is for three years from October 2007 and we look forward to a mutually beneficial, supportive relationship during that time.

This letter must be keep [sic] absolutely confidential between you and the

Club at all times.

Should you need any support or advice from time to time please contact the

Club’s General Manager. We look forward to working with you.

Yours Sincerely

H R (Ross) Keown

General Manager

[73]     Then, on 21 September 2007, a second letter was sent to Ms Mara.  Mr Nicoll drafted part of this letter:

September 21, 2007

Dear Tania

Re Trophy Bar

As we have discussed it is intended that any surplus earnings made by the Trophy Bar business whilst operated under your management agreement with Shoye Venture Limited should be retained in the business’s account pending direction as to its use by the general manager of the Manukau Golf Club.

You will of course be able to utilize the business revenue for the day to day operation costs of the bar business including for wages, stock, cleaning, power, rent, maintenance, water and the like but any excess remaining is to be held in the business account by you as bare trustee on the terms of this letter.

Notwithstanding any provision to the contrary in any other document documents by countersigning this letter in the space below you agree to hold such excess earnings as bare trustee pending such direction.  You also by countersigning  this  letter  in  the  space  below  irrevocably  authorize  the general manager of the Manukau Golf Club to act as your attorney and to do all such things and sign all such documents as may be necessary to withdraw any such excess from the business’s account should the need arise.

Yours Sincerely

H R (Ross) Keown

General Manager

In accordance with the letter’s requirements, Ms Mara countersigned it.

[74]     Mr Keown arranged the overdraft to the bank of Trophy Bar Limited, which is the company that Ms Mara used to operate the Trophy Bar.  Further, Mr Keown wrote to the Bank of New Zealand advising that Manukau would guarantee the overdraft of the Trophy Bar business.  Ms Penny was a second required signatory on the bank accounts for Trophy Bar Limited.  This was required by Mr Keown. This is consistent  with  Mr  Keown  having  an  active  role  in  the  management  of  the Trophy Bar.   These circumstances are also consistent with Mr Keown acting as Manukau’s general manager rather than on his own account when he took these steps.

[75]    In his evidence to this Court, Mr Nicoll expressed his discomfort with the contents of the letters Manukau sent to Ms Mara.  He recognised their detrimental impact in regard to keeping Manukau separate from the management of the gaming machines  at  the  Trophy  Bar.    He  said  he  prepared  them  on  instruction  from Mr Keown.  He said he never raised his concerns about the letters with Manukau’s president  or  chairman  or other  officials.    His  explanation  was  that  he  assumed Mr Keown was acting with the support of Manukau’s committee.  Thus, every time Mr Nicoll interacted with Mr Keown, either with or without the presence of the Manukau Board or club members, Mr Keown’s manner of being suggested that he was acting as general manager of Manukau.

Effect of the de facto arrangements

[76]     My  interpretation  of  the  management  agreement  between  Shoye  and Ms Mara is that it purported to impose on Ms Mara responsibilities for the off-site gaming machine part of the Trophy Bar’s business that were consistent with the responsibilities of a venue manager. This can be seen from:

(a)       The definition of “business” in clause 1;

(b)      The definition of “management services” in clause 1; and

(c)      The range of management services provided for in clause 3, which is broad  enough  to  include  those  day  to  day  responsibilities  for managing gaming machines that the Act and the conditions of the venue licence impose on venue managers.

[77]     Further,  in  clauses  4.1  and  4.2,  the management  agreement  purported  to relieve Shoye and its officers (being Mr Joyce) of their obligations for the management of the business, which necessarily included the management of the off- site  gaming  machines.     Those  clauses  made  it  clear  that  Shoye’s  role  was consultative only (when it was the venue operator) and precluded Ms Mara from compelling the attendance at the business premises of either Shoye or Mr Joyce (when he was the legal venue manager).  The effect of the management agreement is

confirmed by clause 2, which makes it clear that during the term of the management agreement, the manager had exclusive control of the business, which necessarily included control over the gaming machines.

[78]     Turning to clause 2.3, which provided Shoye with a weekly payment of

$2,307.70 plus GST in return for assigning all its rights and interests in the income to Manukau, I consider that the practical effect of the weekly payment was to provide Shoye with a payment from the business at the Trophy Bar, including the gaming machine  operation,  in  circumstances  where  Shoye  was  the  designated  venue operator.   Ultimately, when Internal Affairs conducted its audit of this gaming machine operation, it concluded that the weekly payment to Shoye amounted to Shoye receiving an overpayment of $101,368.80 as the venue operator when compared to the legal limit, which was a fluctuating amount that turned on a percentage of the gaming machine profit, as opposed to a fixed amount.  All of this shows that the arrangements set out in the management agreement were inconsistent with Shoye’s obligations as venue operator and Mr Joyce’s obligations as venue manager under the legitimate venue agreement of 9 October 2007.  It also resulted in a state of affairs where a gaming machine operation was being conducted in a way that contravened the Act’s purposes.   The purpose behind limiting the financial return of venue operators works together with the purpose of separating the licensed operator from the day to day running of the operation.  The idea behind both is to ensure that persons with the greatest financial interest in the profitability of the machines are removed from day to day control so as to ensure that the gambling occurs in a regulated environment that dampens the likelihood of unrestrained gambling or gambling addictions arising.  Once a venue operator receives a high return from the gaming machines, the incentive on it to ensure the gaming complies with the licensed conditions and to discourage excessive and addictive gambling must decrease.

[79]    That the management agreement purported to impose a venue manager’s responsibilities on Ms Mara is not surprising, as this agreement was executed at the same time as the 10 September 2007 venue agreement, which nominated Ms Mara as venue manager.  However, as noted earlier, this venue agreement never came into effect.   Nonetheless, Shoye and Mr Joyce acted as if Ms Mara were the venue

manager, as did Mr Keown.  Indeed, Ms Mara appeared to other parties as the person responsible for the operation of the Trophy Bar; for example, Anthony Barrow, who was a board member of Manukau at the material times and who gave evidence for Manukau, said that he thought so.  Seen in that light, the management agreement effectively replaced Mr Joyce with Ms Mara as venue manager, thus effecting a change of one of the “key persons” (per s 4(b)(i)) under the Act without proper notification as is required by s 71(1)(d) of the Act.   This also meant that the arrangements under which everyone was acting contravened s 67 of the Act.  This provision requires Internal Affairs to refuse to issue a venue licence, except when satisfied  certain  requirements  are  met,  one  of  which  is  to  be  satisfied  of  the suitability  of  the  venue  manager  to  supervise  class  4  gambling  at  the  venue (s 67(1)(c)).  Ms Mara’s suitability to perform this role had never been considered by Internal Affairs, as it had no notice she had assumed this role.  In addition, the terms of the management agreement effectively devolved the responsibilities of Shoye as venue operator on to Ms Mara, which was contrary to clause 12 of the 9 October

2007 venue agreement.

[80]     The way in which the gaming machine operation was in fact carried out was completely  different  from  that  contemplated  in  the  approved  contractual arrangements and something contrary to what the Act contemplated.   First, it fundamentally changed the way in which the management of the off-site gaming machines was to be carried out.  Secondly, the understanding between Ms Mara and Mr Keown that she would take direction from him when it came to how she discharged her role under the management agreement displaced the required separation between Manukau and the person responsible for operating and managing the gaming machines’ venue.   Thirdly, whilst the language of clause 2.3 of the management agreement sought to distinguish the weekly payment from venue payments, the reality is that the weekly payment was part of the basis on which Shoye was prepared to allow the Trophy Bar to be used as a venue for the gaming machines.  The outcome for Shoye was that in return for providing a venue for licensed gambling by gaming machines, and for assuming the role of venue operator, it received a far higher financial return than that permitted under the Act.

[81]     Further, the letters of 17 September 2007 and 21 September 2007 in which Manukau underwrote Ms Mara’s performance as manager of the Trophy Bar and made her a bare trustee of the surplus earnings of the Trophy Bar for the benefit of Manukau reinforced the fundamental departure from the legally approved arrangements.  Those letters destroyed the separation between licence operator and venue operator that the Act required.  They brought Ms Mara under the direction of Manukau, which is something the Act did not allow and which Internal Affairs would never have approved.

The operation of the gaming machine business

[82]     As stated, the regular operations of the gaming machines at the Trophy Bar were carried out by Ms Mara in accordance with the responsibilities placed on her by the management agreement with Shoye.  Thus, she undertook work that should have been undertaken by either Mr Joyce, as the legal venue manager, or Shoye, as the venue operator.  Mr Joyce knew this to be so.  The concern that he expressed in his evidence  was  that  Ms  Mara  had  failed  to  inform  him  of  the  activities  being undertaken in accordance with clause 3.3 and to provide him with copies of business records on a monthly basis, as was required by clause 3.4.   However, this limited disclosure was required in the context of an agreement that recognised that Ms Mara performed her responsibilities under the agreement independently of Shoye.  At no relevant time did Mr Joyce act in a manner that could remotely be said to constitute him discharging the role of venue manager.  Nor did Shoye in the form of any individual carry out the role it had as venue operator under the venue agreement with Manukau.

[83]    As to Manukau, its employee, Mr Keown, was responsible for managing Manukau’s operation, which included the gaming machines.  As the owner of the gaming machines and the holder of an operator’s licence, it was legally required to maintain a distance from the actual business of managing the gaming machine business of the Trophy Bar.  However, this did not occur.

[84]     The evidence  shows  that  Mr Keown  actively engaged  with  Ms  Mara  in running the gaming machine business.   She effectively operated the Trophy Bar

under his direction.  She reported to him regularly.  She was instructed not to make any key decisions without referring them to Mr Keown.  On occasions when the gaming machine float was short, it was topped up with funds from Manukau. Similarly, in the case of short bankings, when it could, Manukau made up the difference.  This was contrary to the Act.   In short, what actually occurred rode roughshod over the Act’s requirements that there be a separation between those associated with the person holding the operator’s licence and the persons associated with the venue operator and venue manager and the statutory purpose for having these requirements.

[85]   Once the gaming machines ceased to be as profitable as expected, the requirements for daily banking and maintaining cash floats that the Act and the licence conditions imposed were not complied with.  The venture lurched along in a haphazard way with ever-increasing breaches of the legal requirements the Act imposed on it.   In early 2009, Internal Affairs conducted an audit of the gaming operation; later in 2009, Manukau ceased operating the gaming machines at much the same time as Internal Affairs suspended the licences for this gaming operation.

[86]     The off-site gaming machine operation ultimately came to an end.  By then, the operation had been losing money for some time and it was not a financially viable venture.  The failing gaming venture may have affected custom at the Trophy Bar, as it closed its doors.  The lessor took action against Shoye under the lease. Manukau and Shoye each lost money and each now seeks to recover all or some of such loss from the other.

[87]     In its closing submissions, Manukau accepted that Mr Keown had effectively put in place an “illegal off-site class 4 gaming operation”.  In its closing submissions, Shoye implicitly accepted that was so, as it focused its arguments in this regard by contending that Manukau could not disavow knowledge of Mr Keown’s illegal activities.

The claims

[88]     The first claim was brought by Shoye against Mr Wilson, who is a member of Manukau  and  who  guaranteed  Ms  Mara’s  performance  of  the  management agreement with Shoye.  Mr Wilson has not actively opposed this claim.  It was to proceed at the same time as the other claims by way of formal proof, but there was insufficient hearing time.  It remains to be heard.

[89]     Following Shoye’s claim against Mr Wilson, Manukau issued claims against Shoye in reliance on the venue agreement it had with Shoye.  Shoye then filed a statement of defence, which, amongst other things, raised affirmative defences, and counterclaims against Manukau.  These are the matters that have been heard and that now require determination.

Manukau’s claim against Shoye

[90]    In reliance on the 9 October 2007 venue agreement between it and Shoye, Manukau claims the following breaches of contract:

(a)      A breach  of  the  clauses  relating  to  the  banking  of  weekly  profit (clauses 3.3, 3.5, 4.1(j)(iv) and 4.1(k)(ix) in the second schedule of the agreement) between various dates:

Manukau alleges that there was a failure to provide gaming machine profits to Manukau in the sum of $65,172.76.  The consequence of Shoye’s failure to have proceeds from the gaming machines delivered to Manukau’s bank during the term of the agreement caused Manukau to incur courier costs of $4,200.   Consequently, Manukau seeks judgment in the sum of $69,372.76, interest and costs.

(b)      Breach of contract in relation to machine operating hours:

Manukau  contends  that  Shoye’s  failure  to  maintain  the  minimum

hours  of  operation  specified  in  the  first  schedule  of  the  venue

agreement has resulted in Manukau suffering lost profits in the sum of

$599,212.38.  Making adjustments for costs, taxes and levies, the lost profits as estimated by Manukau are $316,109.50.  That sum is sought in damages, plus interest and costs.

(c)       Alleged  breach  of  contract  in  relation  to  overpayment  of  venue payments:

Manukau submits that Shoye breached clauses 3.3 and 3.5 of the agreement by allowing overpayments of venue payments to be made in breach of the Act, such overpayments coming to the amount of

$114,039.50.  Judgment is sought in that sum, plus interest and costs. (d)     Breach of contract in relation to cash float:

Manukau  alleges  that  in  breach  of  clause  4.1(d)  in  the  second schedule of the agreement, Shoye failed to provide a cash float for the gaming machines and as a result thereof, Manukau was required to provide the float.  Judgment in the sum of $10,000 is sought.

(e)       Breach of contract in relation to venue operation:

Manukau alleges that in breach of clause 4.1(n), the venue was closed to the public from around 5 September 2009; that this contravened clause 4.1(n), which refers to the first schedule concerning minimum hours of operation.  It is alleged that as a result of the closure of the venue, Manukau suffered loss in the sum of $638,032.51.

(f)       As  a  sixth  and  alternative  cause  of  action  of  breach  of  contract, Manukau  alleges  that  in  breach  of  clauses  3.3,  3.5,  4.1(j)(iv),

4.1(k)(ix) in the second schedule (banking) and 4.1(n) in the second schedule (operational hours of the agreement), Internal Affairs suspended the operator’s licence for a period of 30 days, the resulting

suspension causing Manukau the loss of $33,427.67.    Judgment is sought in that sum.

Shoye’s defence and counterclaim against Manukau

[91]     Shoye contends that it was unaware that Mr Joyce was nominated as venue manager in the 9 October 2007 venue agreement.  It alleges that, notwithstanding the provisions of that agreement, Manukau and Shoye agreed that Ms Mara was to be the venue manager, and that Ms Mara was to be responsible for the operation of the gaming machines at the venue.  Shoye agrees that the venue agreement contained the terms as pleaded by Manukau, but contends that Manukau and Shoye agreed to waive and/or vary the terms of the venue agreement.   Shoye contends that the breaches relied upon by Manukau were, in fact, committed by Manukau through its general manager, Mr Keown, and through Ms Mara, who is described by Shoye as the venue manager, as they were responsible for the operation.   Shoye further contends that Mr Keown and Ms Mara were at all material times employees or agents of Manukau and that in relation to the operation of the Trophy Bar and the gaming machines, Ms Mara acted under the direction of, and with the authority of Manukau  through  Mr  Keown and  in  accordance with  Mr  Keown’s  instructions. Shoye contends, therefore, that it is not responsible for any breaches of the clauses in the venue agreement relied upon by Manukau.  Thus, it denies any liability to pay the sums of money demanded.

[92]     Regarding Manukau’s third cause of action relating to alleged overpayments, Shoye contends that the overpayments were not made by Manukau to Shoye, but by Manukau to a company, Trophy Bar Limited, that company being a company incorporated  by  Mr  Keown  and/or  Ms  Mara  for  the  purposes  of  operating  the Trophy Bar and the gaming machines; and that Manukau was at all material times the beneficial owner of Trophy Bar Limited.   Thus, Shoye denies that Manukau made any overpayments to it and, therefore, that it is liable for such overpayments.

[93]     Shoye contends that in relation to the cash float, Manukau and Shoye agreed that Manukau would purchase the cash float from Shoye and thereafter would be

responsible for the provision of the cash float for the gaming machines.  It, therefore, denies it has any liability relating to the cash float.

[94]     Regarding the allegation of breach of contract for the venue being closed to the public from 5 September 2009, Shoye contends that it was Manukau, through Mr Keown, who instructed Ms Mara to turn off the gaming machines, and that it has no responsibility for the venue being closed.   It also contends that as Manukau voluntarily  surrendered   its   operator’s   licence   and/or   venue  licence   prior   to suspension by Internal Affairs, Shoye has no responsibility therefor.

[95]    Shoye raised a number of affirmative defences, the first being waiver and estoppel.  In its pleaded affirmative defence, Shoye alleged that notwithstanding the provisions of the venue agreement, Shoye and Manukau agreed that:

(a)      Manukau  would  be  responsible  for  the  operation  of  the  gaming machines in the Trophy Bar;

(b)Manukau  would  appoint  Ms  Mara  to  undertake  the  day  to  day management of the operation of the gaming machines and the management of the Trophy Bar;

(c)      Ms Mara operated the Trophy Bar on terms set out in a management agreement prepared by Manukau’s solicitors between Ms Mara and Shoye; and

(d)      Shoye   would   not   be   responsible   for   the   management   of   the

Trophy Bar or the gaming machines.

[96]     Shoye contends the agreement was reached between Mr Keown (on behalf of Manukau) and Mr Joyce (on behalf of Shoye and Ms Mara) in September and October 2007; and that in reliance on the agreement, Shoye then:

(a)       Entered into the management agreement with Ms Mara;

(b)Relied upon Manukau and Ms Mara to meet the obligations of the venue operator and venue manager and all other obligations pursuant to the Gambling Act; and

(c)      Did not operate the gaming machines or otherwise carry out the obligations of the venue operator pursuant to the venue agreement.

[97]     Shoye alleged that Ms Mara acted in accordance with the instructions of

Manukau given by Mr Keown so that, in the circumstances:

(a)      Manukau and Shoye agreed to waive and/or vary the terms of the venue agreement insofar as they required Shoye to undertake the obligations of the venue operator and venue manager; and

(b)Manukau  is  estopped  from  relying  upon  the  terms  of  the  venue agreement insofar as they are inconsistent with the said agreement to waive and/or vary the agreement and the terms of the agreement.

[98]     However, in its closing submissions, Shoye abandoned the waiver argument and reframed the estoppel defence along the lines where it contended that it had relied on representations made to it by Manukau through its agent, Mr Keown, that:

(a)      Manukau would appoint Ms Mara to undertake the day to day management of the operation of the gaming machines and the bar;

(b)Ms  Mara  would  operate  the  bar  under  the  terms  set  out  in  the management agreement between her and Shoye;

(c)      Shoye, through Mr Joyce, would not be responsible for the day to day management of the bar or the machines.

[99]     Shoye also submitted that it was agreed that Ms Mara would be responsible for the operation of the gaming machines and the bar, that Manukau would retain some oversight of the operation, but that ultimately it would be her business.

[100]   Shoye did not apply to amend its statement of defence to reflect the alteration it had made to the affirmative defence based on estoppel.

[101]   As a second affirmative defence, Shoye pleads non est factum, alleging that Shoye, by Mr Joyce, executed the venue agreement believing the terms of the venue agreement and, in particular, the appointment of Ms Mara as venue manager were the same as the terms of the venue agreement executed in September 2007, save for the addition of further information required by Internal Affairs.

[102]  Shoye contends that Mr Joyce was not aware and was not made aware by Manukau or its solicitors at the time that he executed the venue agreement on behalf of Shoye that it had been changed by removing Ms Mara as venue manager and substituting Mr Joyce as venue manager.  Shoye contends that Mr Joyce executed the venue agreement on behalf of Shoye in the mistaken belief that the obligations of the venue  manager  were  to  be  undertaken  by  Ms  Mara  in  accordance  with  the agreement; thus, that in the circumstances, it is unenforceable by the doctrine of non est factum.

[103]   In its closing submissions, Shoye made it clear that the pleading of “non est factum” relates specifically to Mr Joyce having no knowledge of the change in the second venue agreement whereby Ms Mara was no longer named as venue manager, and Mr Joyce was named as venue manager in her place.  However, Mr Joyce is not a defendant in the proceeding.  No claim is made against him; nor is there a claim made against Shoye based on Mr Joyce’s failure to perform the role of venue manager.   The claims that Manukau makes against Shoye are based on Shoye’s failure to discharge its obligations as venue operator under the 9 October 2007 venue agreement.   The way in which Shoye in the plea and the closing submissions addresses the plea makes it clear that non est factum has no application to Mr Joyce’s execution of the 9 October 2007 venue agreement on behalf of Shoye whereby Shoye assumed the obligations of venue operator.

[104]   As a third affirmative defence, Shoye pleaded that it was an implied term that

Manukau would not put an end to Shoye supplying services as venue manager under

the agreement.  However, by the time it came to make its closing submissions, Shoye abandoned this affirmative defence.

[105]   Shoye  also  contends  that  it  did  not  cause  any  of  the  losses  alleged  by Manukau and that such losses as Manukau has suffered were caused by various acts of Manukau that were in breach of the venue agreement, or non-compliance with the Gambling Act.

[106]   Then, in its counterclaim for its first cause of action, Shoye alleges that it was an express or implied term of the “second venue agreement” that Manukau would comply  with   the  requirements   of  the  Gambling  Act   and   other  such   legal requirements.   I understand the reference to second venue agreement to mean the

9 October 2007 venue agreement.

[107]   Shoye  then  alleges  that  in  or  about  September  and  October  2007,  an agreement was entered into between Manukau and Shoye whereby Manukau performed the obligations of venue operator “pursuant to the second venue agreement”, the terms of the agreement being:

(a)       That Ms Mara would be the venue manager; and

(b)That Ms Mara would be responsible for performing the obligations of the venue operator under the venue agreement, including the performance of the duties as set out in the second schedule to that agreement;  these  including  ensuring  that  gaming  machines  were turned on during operational hours, maintaining cashflow compliance with the requirements of the Gambling Act, maintaining appropriate records, performing the duties of venue manager.

[108]   It is alleged that Manukau committed the breaches set out in its statement of claim and that as a consequence of Manukau’s breach of the venue agreement and the other pleaded agreement, it surrendered its licence to operate the gaming machines; its licence was suspended by Internal Affairs; the premises were closed to the public; on 21 December 2009, Shoye was forced to terminate the management

agreement; Shoye was forced to close the Trophy Bar; Shoye lost the Trophy Bar business; Shoye lost the income from the Trophy Bar business; Shoye was unable to meet the payments, the rent and outgoings under the lease of the premises, resulting in the landlord taking possession of the premises and cancelling Shoye’s lease; on

20 January 2010, Shoye had to make payment of $30,666.67 to Shoye’s landlord, in order to settle its liability under the lease; Shoye incurred liabilities to third parties in order to obtain funding to remain solvent; Shoye  claims a loss of value of the Trophy Bar business at $337,500; loss of income and additional amounts payable under lease of the Trophy Bar business, $366,565.07.  Shoye then contends that it has suffered other losses, being loss on sale of properties and surrender of life insurance policies, in order to raise funds to meet its financial obligations.  In all, the various items claimed by Shoye come to $1,155,527.88.

[109]   This claim is hard to understand.  On the one hand, it appears to refer to a separate agreement that resembles the agreement pleaded in paragraphs 30 to 34 of the second amended statement of defence, which relate to the affirmative defences of waiver and estoppel.   But these defences, based on the existence of a separate agreement, were abandoned.  On the other hand, the claim’s express reference to the second venue agreement, which earlier in this pleading is identified as the 9 October

[168]   Further, as Lord Haldane noted in Morris v Baron & Co [1918] AC 1 (HL) at

19, in determining whether there is a bilateral discharge of the contract, there must be a manifest intention of a complete extinction of the first contract and not merely a desire of an alteration in terms which still leave the first contract subsisting.  In the same case, at 25–26, Lord Dunedin discussed the difference between variation and discharge in these terms:

The difference between variation and rescission is a real one, and is tested, to my thinking, by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject-matter as the first but in a different way, it is impossible that the two should be both performed.

[169]   This  was  cited  with  approval  by  McMullin  J  in  New  Zealand  Needle

Manufacturers v Taylor [1975] 2 NZLR 33 (SC) at 39 to 40.

[170]   Here, from the outset, neither of the parties acted in accordance with their legal   arrangements.      Instead,   after   those   arrangements   were   approved   by Internal Affairs, they conducted themselves as if the earlier September agreements governed their relationship.  Their conduct resulted in a fundamental change of the legal arrangements for operating the gaming machines that went to the “very root” of

those arrangements: see British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 (HL) at 62. Given these findings, I am of the view that the parties have implicitly abandoned the original contract by not performing in accordance with its terms.

[171]   This means that the new arrangements stood on their own and they would have needed re-approval by Internal Affairs.   The Act requires any changes to legitimate (approved) contracts to be approved by Internal Affairs.   If, without approval from Internal Affairs, an approved gambling operation has been abandoned and a new set of arrangements have taken its place, there is a discrete gaming operation.   Unless separate approval from Internal Affairs is forthcoming, such an operation will lack approval; in which case the operation will amount to illegal gambling under s 9, and any contracts relating to this gambling will be illegal gambling contracts under s 14.  I consider that this is the only way to read the Act in accordance with its scheme and purpose.   The alternative view that in such circumstances   the   gambling   operation   would   continue   to   be   legal   until Internal Affairs suspended the licences would allow persons to circumvent the strict controls that the Act seeks to impose on gambling that does not conform to the Act’s requirements.     It  would  mean  that  persons  who  had  obtained  approval  from Internal Affairs  with  contracts  that  were  initially  legal  could  effect  fundamental changes  that  suited  their  own  ends,  but  which  were  contrary  to  the  Act’s requirements, and operate in this fashion on the strength of being a legal gambling operation that had merely failed to notify Internal Affairs of those changes.   This outcome would be so contrary to the Act’s scheme and purpose, and so undermining of Parliament’s attempt to strictly control and regulate legal gambling, that it would make a nonsense of the Act.

[172]   The de facto arrangements under which everyone operated were illegal.  This means that they cannot be enforced, without the assistance of the Illegal Contracts Act.  No one has sought the assistance of that Act.  Any attempt to draw on equity to give legal recognition and force to the arrangements that were actually undertaken also runs up against the principle of illegality that the Act imposes.  So the effect of the de facto arrangements is that they have caused none of the agreements to be enforecable.

[173]   Thus, when it comes to deciding if Manukau can now sue on the 9 October

2007 venue agreement, what is relevant here are the findings:

(a)       That Mr Keown had both implied and apparent authority to make the illegal de facto arrangements with Shoye and Ms Mara;

(b)That those de facto arrangements governed how Manukau and Shoye actually operated the gaming machine business at the Trophy Bar; and

(c)      Manukau  and  Shoye  had  implicitly  abandoned  their  legitimate

(approved) contractual arrangements.

In light of these findings, I am satisfied that Manukau cannot rely on the illegal but authorised conduct of its agent to shield it from the usual consequences of him replacing the 9 October 2007 venue agreement contract with another.   In such circumstances, to allow Manukau to later sue on the original contract would be to allow Manukau to rely directly on illegal conduct attributable to it for the purpose of showing that there was nothing capable of legal recognition standing in the way of its claim based on the performance of the original terms of its contract with Shoye. This offends the principle that no one should benefit from his or her own wrong as found in the maxim allegans suam turpitudinem non est audiendus and the related maxim ex turpi causa non oritur actio.  This principle has been applied in common law actions including contract and tort.  It is discussed in Francis Bennion Bennion On Statutory Interpretation (5th ed, LexisNexis, London) at 1105 to 1107 and its history  is  outlined  in  Pitts  v  Hunt  [1990]  3 All  ER  344  (CA).    In  Marles  v Philip Trant & Sons Ltd (No 2) [1954] 1 QB 29 at 38, a contract case, Denning LJ said:

... the principle is well settled that, if the plaintiff requires any aid from an illegal transaction to establish his cause of action, then he shall not have any aid of the court. That appears in all the books from Simpson v Bloss [7 Taunt

246] down to Berg v Sadler and Moore [[1937] 2 KB 158] and J Dennis & Co Ltd v Munn [1949] 2 KB 327]].

[174]   In  Vakante  v Addey  &  Stanhope  School  [2004]  4 All  ER  1056  (CA),  a statutory tort case, the Court of Appeal of England and Wales discussed the proper approach to when the principle should be applied at 1060:

[The proper approach] should be to consider whether the applicant’s claim arises out of or is so clearly connected or inextricably bound up or linked with the illegal conduct of the applicant that the court could not permit the applicant  to  recover  compensation  without  appearing  to  condone  that conduct.

[175]  In New Zealand, the application of the principle was confirmed in Silver v Mitchell [1932] NZLR 882 (SC), despite the principle not being relied on by the defendant. And in Equiticorp Industries Group Ltd (in stat man) v The Crown [1998] 2 NZLR 481 (HC), Smellie J confirmed the continued application of the principle, despite the enactment of the Illegal Contracts Act.

Absence of a pleading of illegality

[176]   The illegality of the de facto arrangements has not been pleaded by Shoye, even though it provides a complete defence for Shoye.  Given the form of its defence and  counterclaim,  which  plead  that  the  parties  were  acting  under  different contractual arrangements from those contained in the written form of the 9 October

2007 venue agreement, this is perhaps understandable.   But then in its closing submissions, Shoye implicitly abandoned its claim and its defence based on the existence of separate contractual arrangements that arose in September or October

2007 as it based its claims against Manukau solely on the 9 October 2007 venue agreement.  It is hard to see why Shoye has not raised what is an obvious defence to the claims it faces, particularly given the way it has framed its defence and counterclaim, which in part alleged the existence of these alternative arrangements.

[177]   In answer to Shoye’s counterclaim in which it purported to sue Manukau for breach   of   the   de   facto   arrangements,   Manukau   pleaded   that   the   de   facto arrangements were illegal.   Given Shoye’s implicit abandonment of this claim, through  its  failure  to  address  it  in  its  closing  submissions,  Manukau’s  plea  of illegality is no longer relevant.

[178]   However, the absence of a clear straightforward plea of illegality regarding the de facto arrangements under which everyone actually operated does not preclude this Court from reaching a finding of illegality on this topic.  In principle, once an illegality arises on the facts, it is the duty of the Court to inquire into the illegality:

see Duncan v McDonald [1997] 3 NZLR 669 (CA); and Snell v Unity Finance Co Ltd [1964] 2 QB 203 (CA). In Duncan v McDonald at 677, the Court of Appeal said:

While it may have suited Mr Duncan not to accuse the McDonalds of dishonesty, that question was in reality always a live issue. Furthermore, it is the duty of a Judge to take note of illegal conduct even if it is not pleaded. The Courts may decline to assist a plaintiff who has been guilty of illegal or immoral conduct of which the Court should take notice: Euro-Diam Ltd v Bathurst [1990] 1 QB 1 at p 35. When Anderson J concluded that the McDonalds had been dishonest participants in illegality it was proper for him to make such a finding even if the issue had not been directly raised by the pleadings or in argument.

It was suggested by Mr Thorp that the Judge should not have made his finding   without   first   warning   the   McDonalds   and   giving   them   the opportunity of responding from the witness box and calling further evidence on the question. Mr Harrison QC accurately submits, however, that the question was so obviously before the Court that the McDonalds must have been aware of the need to establish their honesty. There was no call in the particular circumstances for any such warning from the Judge.

[179]   I consider that the present case fits within the Duncan v McDonald mould.  I consider that it has suited the parties, each for different reasons, to avoid a clear-cut argument that what actually transpired was illegal gambling.  I also consider that the question of whether the real arrangements between Shoye and Manukau amounted to illegal gambling has been touched on enough in the hearing of the proceeding for everyone to be aware of the need to address it, if at all possible.

[180]   It follows, therefore, that Manukau cannot now sue Shoye for breach of the

9 October 2007 venue agreement.

Shoye’s claim against Manukau

[181]   Shoye’s  case against  Manukau  is  unsatisfactory.    Its  closing  submissions argue a different case in many respects from that pleaded in the second amended statement of defence and counterclaim.  As I have found that Manukau cannot succeed in its claim against Shoye, the alterations to the statement of defence have become irrelevant.  But there remains the counterclaim.

[182]   In essence, Shoye by various means now seeks to recover the loss of the Trophy Bar business and other losses that it alleges it has suffered through the gaming machine operation closing and through Manukau not operating the gaming machines legally.  However, I consider that Shoye cannot avoid the impact of its own illegal participation in this operation on its ability to make the claims that it does.  I shall deal with each claim sequentially.

First cause of action: breach of contract

[183]   Shoye’s  closing  submissions  focus  solely  on  the  alleged  breach  of  the

9 October 2007 venue agreement regarding the implied term in that agreement that Manukau would comply with the Act.  Manukau had admitted the existence of this term.

[184]   The question is whether Shoye can successfully sue Manukau for a breach of this term, given the existence of the de facto arrangements under which each party operated.  For the same reason as I found that Manukau could not sue Shoye for breach of this agreement, I consider that Shoye cannot do likewise.

[185]   Manukau argues that:

Shoye’s pleadings and defensive theories (that there was this side deal or representation or estoppel or waiver of parties’ roles) assert an illegal state of affairs that Shoye would not be entitled to rely on as a matter of law, whether approached under the Illegal Contracts Act or the doctrine of ex turpi causa.

I accept this argument.   Shoye has not denied the existence of the de facto arrangements, and indeed in its pleading appeared to base its claim against Manukau on a breach of the terms of those arrangements.  In its closing submissions, Shoye sought to argue that Manukau had given it assurances that Manukau would appoint Ms Mara to undertake the day to day management of the operation of the gaming machines; the terms on which she would do so being set out in the management agreement; and that Shoye would not be responsible for the management of the bar and the gaming machines.  This argument, although based on estoppel rather than contract (as pleaded in the second amended statement of defence and counterclaim), is in substance no more than a further attempt to argue that the legal arrangements

Internal Affairs had approved were replaced by something else.   Try as it might, Shoye  cannot  escape  the  reality  of  how  the  gaming  machine  operation  at  the Trophy Bar was actually carried out.

[186]   Just as I found that Manukau’s agent, Mr Keown, had effectively sidelined the 9 October 2007 venue agreement and replaced it with the de facto arrangements, I find that Shoye was a willing participant in this occurrence.  Thus, it cannot now resurrect the 9 October 2007 venue agreement for the purpose of pursuing its own breach of contract claim against Manukau.

[187]   Regarding  the  other  alleged  breaches  of  contract,  which  are  framed  as breaches of the “real” agreement in paragraphs 39 and 40 of the second amended statement of defence and counterclaim, Shoye made no submissions on this aspect of the first cause of action in the counterclaim, and so I am treating it as having been abandoned.  Certainly I can see no basis for upholding a claim for breach of a “real contract” that insofar as its terms have been established as constituting the de facto arrangements would be an illegal contract.  Nor has Shoye asked me to consider validating it under the Illegal Contracts Act.  Thus, the first cause of action in the counterclaim fails.

Second cause of action: breach of s 9 of the Fair Trading Act 1986

[188]   This claim relies on the same conduct as Shoye relied on to found its claim that Manukau was in breach of the implied term in the 9 October 2007 venue agreement to comply with the Act.  It is not open to Shoye to make this claim, for the same  reason  as  I  found  regarding  the  breach  of  contract  claim.    Shoye  was  a knowing and willing participant in de facto arrangements that I have found to be illegal.  It cannot, therefore, complain about Manukau’s failure to comply with the obligations imposed on it by a venue agreement and licence conditions in accordance with which neither party operated.  I accept Manukau’s submissions in this regard.

Third cause of action: inducement of breach of contract

[189]   Shoye contends that Manukau, through Mr Keown, induced Ms Mara to breach the terms of the management agreement, thereby causing loss or damage to Shoye.

[190]  Shoye has outlined the criteria for establishing a claim of this type.  One criterion is that there is a legally enforceable contract in existence.  Shoye contends that   the   management   agreement   between   Shoye   and   Ms   Mara   meets   this requirement.  I do not agree.

[191]   I  have  already  found  that  the  management  agreement  forms  part  of  the de facto arrangements that I have concluded constitute an illegal gambling contract. In this regard, I have found that the operation of the off-site gaming machines at the Trophy Bar was conducted in a manner that was so fundamentally different from that approved by Internal Affairs that the approved gambling and what actually occurred cannot be seen as one and the same.

[192]   There is an additional reason why this claim fails.  Manukau has argued that another essential criterion for this cause of action is a requirement that the interference be done to harm or bring pressure to bear on the plaintiff: see Jiao v Barge, CA236/05, 19 July 2006.  Manukau argues that Shoye cannot prove this essential element of the claim.  Manukau submits that is illogical to suggest that the rationale behind the tortious conduct was to target Shoye.  Manukau points out that Shoye was the only party who got the benefit of the bargain that the parties made in the sense that throughout the life of the gambling operation, Shoye received the weekly payments that it was due under the management agreement.  The evidence shows that Ms Mara made a priority of paying Shoye and that the constant regular payments were the cause of the financial difficulties that the Trophy Bar found itself in.  In its closing submissions, Shoye did not address this criterion.

[193]   There is no doubt that Mr Keown discouraged Ms Mara from reporting to

Shoye  as  she  was  required  to  do  under  the  management  agreement,  and  that

Manukau’s conduct was not consistent with its obligations as the holder of a class 4 gaming machine operator’s licence or the venue agreement.   I have found that Manukau, through its agent, Mr Keown, departed from the approved legal arrangements and embarked on what I consider to be a different and, therefore, illegal gambling operation.  Nonetheless, there is nothing to suggest the interference by Manukau (through its agent, Mr Keown) with Ms Mara’s performance of the management agreement with Shoye, or Manukau’s decision not to run the gaming machine operation in the legally approved manner, was done in order to harm or bring pressure to bear on Shoye.

Loss

[194]   Shoye claims the following losses:

(a)       Loss of value of the Trophy Bar business, $337,500;

(b)      Loss of income and additional amounts payable under the lease of the

Trophy Bar business, $366,565.07;

(c)       Liability for loss on sale of 3 Eastridge Court, Howick, $43,816.87;

(d)      Liability    for    loss    and    surrender    of    life    insurance    policies,

$140,649.60; and

(e)       Payment made to landlord of Trophy Bar business in settlement of liability under lease, $30,666.67.

[195]   Regarding the first and second heads of loss, I consider that Shoye has failed to prove that Manukau is responsible for this loss.  The loss of the Trophy Bar business and any income Shoye might have received from leasing the bar to a third party was the direct result of the failed and illegal gambling operation.  Shoye was a willing participant in that operation.  It was also a knowing participant in the sense that I have found that Shoye would have known that what was actually occuring did not resemble the legal obligations it had as venue operator under the licences and

9 October 2007 venue agreement.

[196]   I  have  difficulty  seeing  how  the  last  three  heads  of  loss  could  ever  be properly claimed as they are too remote, particularly regarding the sale of the unit at Howick and the surrender of the life insurance policies.  In essence, here, Shoye is attempting to recover a loss of opportunity due to it deciding to apply these funds to make up for the reduction in income that it suffered once the Trophy Bar ceased operating.  But in any event, because I have found that Shoye has failed to make out the other elements of its claims, I do not propose to deal further with the question of loss.

Conclusion

[197] To return to the four legal questions posed in [8]. First, for the reasons outlined herein, the illegitimate arrangements under which the parties operated were entered into by Manukau’s agent acting in accordance with Manukau’s implied and apparent authority.

[198]  Secondly, when it comes to the question of recognising that the legitimate contract was implicitly abandoned by the parties, I consider that this aspect of the case is inextricably linked with the illegality issue.  The parties should not be able now to treat as live, and therefore actionable, a contract that the facts show they had abandoned in order to work together under a different, albeit illegal set of arrangements. To find otherwise would be to allow them to sue to recover losses that are a consequence of their illegal gambling operation.

[199]   Thirdly, I consider that it is impossible for this Court to allow the parties to sue and to recover for breach of their legitimate arrangements, which neither performed.  The illegality of what actually occurred precludes the parties from suing on their real arrangements.   Allowing them to recover their losses by resorting to their legitimate arrangements would be contrary to the scheme and purpose of the Act and to the legal principles identified herein.  For the Court to allow such an outcome would necessarily entail the Court condoning the parties’ unlawful conduct in operating off-site gaming machines in a way that contravened the Act.

[200]   Fourthly,   the   legal   principles   regarding   illegality   make   it   clear   that irrespective of whether illegality has been pleaded or not, this Court has a duty to recognise the presence of illegal conduct and to deal with it.

[201]   It follows that, for the reasons outlined herein, the claims that Manukau and

Shoye make against each other must fail.

Result

[202]   Manukau’s claims against Shoye are dismissed.

[203]   Shoye’s claims against Manukau are dismissed.

[204]   Leave is reserved to the parties to file memoranda as to costs.

Duffy J

Counsel:      M R T Colthart P O Box 535 Shortland Street Auckland 1140 for the Plaintiff in

Proceeding CIV-2009-404-007912 and for the Defendant in Proceeding CIV-

2010-404-004422

Solicitors:    Heimsath Alexander P O Box 105884 Auckland City Auckland 1143 for the Defendant in Proceeding CIV-2009-404-007912 and for the Plaintiff in Proceeding CIV-2010-404-004422

Lee Salmon Long P O Box 2026 Shortland Street Auckland 1140 for the Third

Party in Proceeding CIV-2009-404-007912