Me-Yin Lee and Caroline Day v New South Wales Lotteries Corporation & Ors

District Court of NSW|2007-06-18|Before: McDougall J, Mr J

CITATION: Me-Yin Lee and Caroline Day v New South Wales Lotteries Corporation & Ors [2007] NSWDC 386

CATCHWORDS: CONTRACTS - Fraud by Employee - Lottery Ticket Stolen - Scope of Employment - Conversion - Liability of Partnership - Claim for Contribution - Whether Employer of Thief Covered by Insurance Policy - Exclusion for Dishonest or Criminal Acts

State Lotteries Act, 1930 Lotteries Corporatisation Act, 1996 LEGISLATION CITED: Public Lotteries Act, 1996 Partnership Act, 1892 Law Reform (Miscellaneous) Provisions) Act, 1946 Fair Trading Act, 1987

Lloyd v Grace, Smith and Co [1912] AC 716 Reliance Permanent Building Society v Harwood-Hamper [1944] 1 Ch 362 In re J.S. (An Infant) [1959] 1 W.L.R. 1218 Abigroup Contractors Pty Ltd v Work Cover Authority of NSW (Inspector Maltby) [2004] NSWIRComm 270 Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 Ankar Pty Ltd v National Westminister Finance (Australia) Ltd (1987) 162 CLR 549 McDougall J in Tomlin v Ford Credit Australia [2005] NSWSC 540 Astley v Austrust Ltd (1999) 197 CLR 1 Hawkins v Clayton (1988) 164 CLR 539 Lloyd v Grace, Smith and Co [1912] AC 716 Morris v Martin [1966] 1 QB 716 Capricorn Financial Planners Pty Ltd v Australian Securities and Investments Commission (1999) 31 ACSR 46 Brown v Petranker (1991) 22 NSWLR 717 Brown v Petranker (1991) 22 NSWWLR 717 CASES CITED: Bristol Bank v Midland Railway [1891] 2 Q.B. 653 Le v Williams [2004] NSWSC 645 Johnson v Perez (1988) 166 CLR 351 Castellain v Preston (1883) 11 QBD 380 British Traders Insurance Co Ltd v Monson (1964) 111 CLR 86 Transport Accident Commission v CMT Construction (1988) 165 CLR 436 Prudential Insurance Co v Commissioner of Inland Revenue [1904] 2 KB 658 Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 a McCann v Switzerland Australia Ltd (2000) 203 CLR 579 Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd and 2 ors [2005] NSWCA 66 Goddard & Smith v Frew [1939] 4 All ER 358 West, Wake, Price and Co v Ching [1956] 3 All ER 821 Elders Ltd v Swinbank [1999] FCA 98 Lynn Gas and Electric Co v Meriden Insurance Co 33 NE 690 (1893)

Plaintiffs - Mei-Yin Lee and Caroline Day 1st Defendant/2nd and 3rd Cross Claimant - New South Wales Lotteries Corporation PARTIES: 2nd Defendant - Michael Pavlellis 3rd Defendant/1st Cross Claimant - Sheila Mandy Urech-Tan 2nd Cross Defendant - Australian International Insurance Limited

Counsel for the 1st Defendant (2nd and 3rd Cross Claimant) - Mr A.J.L Bannon SC and Ms T.L Wong COUNSEL: Counsel for the 2nd and 3rd Defendants (1st Cross Claimant) - Mr J Stevenson SC and Mr D Freeman Counsel for the 2nd Cross Defendant - Mr R Cavanagh

1st Defendant (2nd and 3rd Cross Claimant) - Eakin McCaffery Cox SOLICITORS: 2nd and 3rd Defendants (1st Cross Claimant) - Paltos & Co 2nd Cross Defendant - Boyd House and Partners

This case arises from a very bold fraud committed by the employee of a Sydney newsagent, in which he misappropriated a customer's winning Lotto ticket, received the proceeds of it, and then disappeared. The proceeds amounted to $574,074.08. Neither the fraudulent employee, nor the money he took, has ever been found. The main issue concerns who should bear the loss brought about by the fraud.

For many years NSW has had a government body which runs gambling games called lotteries. This began with the creation of the State Lotteries Office. The State Lotteries office was founded in NSW in 1931 with the proclamation of the State Lotteries Act, 1930. In 1991, the office became a statutory authority, being established by the New South Wales Lotteries Act, 1990. It was then called New South Wales Lotteries.

By the New South Wales Lotteries Corporatisation Act, 1996, New South Wales Lotteries was dissolved and its assets and functions were transferred to a new body called New South Wales Lotteries Corporation (Lotteries).

According to the Long Title to that Act it was: "An Act to establish New South Wales Lotteries Corporation as a statutory State owned corporation to develop, promote, conduct and otherwise participate in any lawful forms of gambling and gambling-related activities; to dissolve the statutory body named New South Wales Lotteries; to make consequential amendments to other Acts; and for other purposes."

Another New South Wales Act prescribes what lotteries may be conducted, and who may conduct them. This is the Public Lotteries Act, 1996. Only a person or body licensed under that Act may conduct a lottery in NSW. Licenses for that purpose are issued only by the minister of the Crown who administers the Act. One form of lottery conducted in NSW is called Lotto. A body, such as Lotteries, which is given a licence to run Lotto, may only conduct the game in accordance with approved rules.

Lotteries is and for some time has been a licensee to conduct Lotto in NSW. At the time when the events giving rise to this case occurred, there was in use a set of rules (the Lotto Rules) approved by the relevant Minister on 15th April 2004.

For the purpose of selling Lotto tickets throughout NSW, Lotteries has appointed a number of agents, usually NSW newsagents. When an agent is appointed, Lotteries writes a standard letter to the agent, setting out its requirements. The appointments are usually for three years, with three year renewals.

The standard letter requires the payment of a sum of money. When the money is paid, Lotteries installs a computer terminal and other items in the agency premises. At the same time, the agent is required to sign an 'Agency Agreement'. The agent and staff are required to attend a training programme. The agent is required to take out insurance, with Lotteries named as one of those insured. Set out below are the standard letter's provisions relevant for this case: " AGENCY AGREEMENT

This document is the legal contract between NSW Lotteries and the Agent which sets out the terms and operating conditions for the Agency for a three year period commencing from the date of appointment. Two copies of the new Agreement will be prepared for your signature. Both copies of the Agreement should be returned to NSW Lotteries where they will be countersigned and the official NSW Lotteries seal affixed to each one. Upon completion, one copy will be mailed to you and the other will be held at this Office and placed on your Agent file. …

Documentary evidence that you have taken out suitable insurance cover for the following requirements is necessary. 1. A policy of insurance in the amount of $8,000 against the theft, destruction or loss of materials supplied to the Agent by NSW Lotteries. NB: this relates specifically to the selling terminal. If you have more than one terminal you need to increase your cover accordingly. 2. A policy to cover theft or loss of all subscriptions received by the Agent in respect of all games sold on behalf of NSW Lotteries. 3. A public risk policy of insurance in the amount of $2,000,000 in respect of the business premises. 4. Workers' Compensation insurance as required by the Workers' Compensation Act 1987, as amended, in respect of all staff employed by the Agent in connection with the Agency created by the formal Agency Agreement. 5. A policy of insurance in the amount of $5,000,000 to cover the Agent for any claims or demands of every kind they may be required to meet under the Indemnity provisions of the formal Agency Agreement. 6. All agents must carry adequate insurance against loss, theft or destruction of Instant Lottery tickets. As a guide, agents should ensure the amount is sufficient to cover at least 5% of the face value of all tickets held.

With the exception of the Workers' Compensation policy all other policies should be taken out in the joint names of NSW Lotteries and the Agent, or bear an endorsement to existing policies noting the interest of NSW Lotteries and requiring the insurer to notify the Office at least 14 days before cover is to be terminated for any reason.

Security of Lottery products on your premises is of paramount importance. A safe for the secure storage of tickets and other documents as required by NSW Lotteries should already be installed at your business.

You are reminded that following your appointment as a Lotteries Agent, this condition is expected to be maintained and will be the subject of future inspections of your business."

Early in 2000, Mr Michael Pavlellis, together with Messrs Nick Theodorakopoulos and Anthony Skarparis, established a newsagency (the agency) called the World Square Newsagency Bookshop, at Shops 7 and 11, Hordern Arcade, 387 Pitt St, Sydney. At about the same time they received a letter from Lotteries containing the above paragraphs.

On 12th April 2000 they signed Lotteries' standard form of agency agreement, expressed to be for a period of three years.

On 26th March 2003 Mr Pavlellis' co-owners sold their shares in the newsagency to him and to his then new business partner, Sheila Urech-Tan. The result was that he now owned 75%, and she, 25%, of the business. He did not tell Lotteries of this change of ownership until the following year. In the meantime however, Lotteries sent him a new agreement (the agreement) to sign for a further three year agency, from 1st April 2003. On the cover page of the agreement, and in Item 7 in the schedule in it where the definition of 'The Agent' appears, the agents named were the original three. Mr Pavlellis' new partner was not named as a party. However he was the only agency owner who signed the new agreement, and he signed in the capacity of 'covenantor'. That word is defined in the agreement as "the person or persons specified in Item 6 of Schedule 1 who undertake the obligations imposed pursuant to clause 21.0 of this Agreement."

Clause 21 contains what the agreement calls a 'Guarantee and Indemnity', and by its terms the covenantor agrees with Lotteries inter alia to be jointly and severally liable with 'the agent' for observing the agreement's terms. 'The Agent' is defined as the three original partners.

So all three original partners were named as parties to the new agreement, but only Mr Pavlellis signed, and only he was named as the covenantor.

Mr Pavlellis began to trade, with his new partner. There was a meeting on 1st July 2004 between Mr Pavlellis, and Lotteries' 'territory manager', Mr Egan, when the change of ownership was discussed. It is Mr Egan's recollection that he told Mr Pavlellis to tell Lotteries in writing of the change in ownership, so the agreement could be amended. It is Mr Pavlellis' recollection on the other hand that Mr Egan told him that as he had originally owned 50% and had merely increased his share to 75%, there was no need to amend the agreement. Mr Egan was not required for cross examination. Counsel did not address me on how to resolve the factual issue or indeed whether it was necessary. In the way the trial ran, I conclude the parties decided that it was not necessary.

I took counsel for Mr Pavlellis to accept that the agreement governing his contractual relationship with Lotteries at relevant times was the agreement of 1st April 2003.

Pursuant to his obligations under the agreement, Mr Pavlellis took out and maintained in force a policy of insurance with Australian International Insurance Limited (AIIL). That policy has assumed some importance in this litigation.

In 2002 Mr Pavlellis met a man he came to know as Mr Chris Ong, an Indonesian national. (His full name is Chrishartato Ongkoputra). At that time Mr Ong was a delivery contractor, who delivered items to the agency. He applied for work there. He gave Mr Pavlellis the names of other customers as referees. Mr Pavlellis contacted them and they spoke well of him. So Mr Ong was employed, initially on a part time, and later on a full time, basis. By the time of the events with which I am concerned, he had worked for the agency for three years. He was one of three employees. He was the second longest serving employee.

On 11th December 2004 an English scientist, Dr Mei-Yin Lee, arrived in Perth to spend time with her family, who lived there. She spent Christmas there and left Perth for Sydney on 28th December. She met up with some friends in Sydney on New Years Eve. When she was out with her friends, she decided to buy a Lotto ticket. One of her friends was Caroline Day. They bought the ticket jointly, but in Dr Lee's name. They agreed that they would share any winnings equally. They bought the ticket from a newsagent at Darling Harbour.

On 4th January 2005 the group was out in the city. It was just after noon. The ticket owners decided to see if they had won anything. They went into Mr Pavlellis' newsagency. Mr Ong was on duty there. He was the only employee present that day between noon and 1pm.

Dr Lee handed him her ticket and asked him to check it. A Lotteries computer terminal was at the agency. It had a facility to permit agency staff to check to see if tickets had won prizes. Mr Ong inserted the ticket into the machine. The machine produced a printed receipt called a 'terminal receipt'. It read as follows:

" Saturday Lotto PRIZE CLAIM CONGRATULATIONS! ___________________________________________ TSN = 2922-17851678-150325 CLAIM AMOUNT: $575,074.08 AGENCY: 0112-01 DATE: 04 JAN 05 TIME: 12:18:32 ____________________________________________ THE PRIZE CHEQUE WILL BE FORWARDED TO THE ADDRESS PROVIDED ON YOUR CLAIM FORM AS SOON AS POSSIBLE AFTER PROCESSING BY NSW LOTTERIES CORPORATION. FOR ENQUIRIES CALL CUSTOMER SERVICES ON 1300 363 444 DURING BUSINESS HOURS. 2 9 2 6 - 1 6 4 4 1 8 7 1 - 1 5 2 8 2 5 _____________________________________________ "

It was immediately apparent that Dr Lee had won a large prize. Mr Ong handed her the terminal receipt. As he did he said "You can buy a house with your winnings." She could see that she and Ms Day had won over half a million dollars.

In 2004-5, when a prize-winning ticket was presented to an agency, the procedure was that the agency would pay the ticket's presenter the prize if the prize did not exceed $1000. However, when the prize was over $1000, it was necessary for the holder of the ticket to fill in a form called a 'Prize Claim Form' and either send it in to Lotteries with the winning ticket, or have the agent do that. The usual procedure was that after it had become apparent a large prize had been won, the agent would hand a blank Prize Claim Form to the holder to fill in. Where the agent was asked to deal with it, the form would be filled in and handed back to the agent together with the winning ticket. The form would be attached to the winning ticket, and both would be sent by the agent by mail to Lotteries. Lotteries would contact the winner by mail and ask for banking details. Either a cheque for the winnings would be sent to the winner at the address nominated on the claim form, or the money would be transferred electronically to an identified bank account.

In accordance with Lotteries' then practice, and as explained to her by Mr Ong, Dr Lee filled in and left the claim form and the winning ticket with Mr Ong. When filling in the form Dr Lee gave her father's Perth address as her address.

As can be expected, after Mr Ong had 'validated' the ticket, showing it had won a prize of $574,074.08, there was a great deal of excitement in Dr Lee's group. She and Ms Day had their photograph taken with the winning ticket, in the shop. Then they went out for a celebratory lunch.

At about 1pm Mr Pavlellis returned to the shop. Mr Ong told him a major prize had been won, that the winner was a 'backpacker' here on holidays, and that he had already mailed her claim form to Lotteries with the Lotto weekly returns. Mr Pavlellis when told the claim form had already gone thought Mr Ong a little over zealous in not waiting until he had got back before processing the claim, but did not think there was anything untoward.

In fact Mr Ong had not sent Dr Lee's prize claim form to Lotteries. It appears that at some time after Dr Lee left the agency, Mr Ong filled in a blank prize claim form nominating himself as the holder of the winning ticket. He attached that form - not Dr Lee's - to the ticket, and sent his claim form with the winning ticket to Lotteries. I infer he discarded or destroyed the claim form Dr Lee had filled in and given to him.

Although the claim form filled in by Dr Lee did not reach Lotteries, Dr Lee had a copy. The standard procedure at the time was for the agency to have on hand a stock of prize claim forms in pad form and in triplicate. When a form was filled in two carbon copies were made. The ticket holder would be handed a yellow copy of the form, with the terminal receipt attached. The white copy was the one sent to Lotteries. A third, green coloured form, was kept by the agent in the claim form pad. When Mr Pavlellis was told of the win he checked the then current claim form pad and saw a green version of what I infer was Dr Lee's claim form. The form filled in by Dr Lee read, in part, as follows:

NSW LOTTERIES ORIGINAL TICKETS MUST PRIZE CLAIM BE STAPLED HERE (UNREGISTERED TICKETS ONLY) (ATTACH TERMINAL IMPORTANT: ALL CLAIMS ARE RECEIPT TO YELLOW SUBJECT TO AND MUST BE MADE CUSTOMER COPY) IN ACCORDANCE WITH RELEVANT RULES OR REGULATIONS.

CLAIM INFORMATION

Unregistered Subscribers and Instant Scratchie Claimants must lodge claims for: (a) All prizes exceeding $1000 (Not payable until 14 days after the draw (excluding instant scratchies) (b) Prizes $1000 and under not collected from an agency within the time specified.
Inaccurate or insufficient information may lead to the claim being rejected.
Payments made pursuant to this claim, if any, will be by cheque or free ticket certificate to the name and address shown below.
If the claim is rejected, the claimant will be notified in writing.
The decision of the CHIEF EXECUTIVE OFFICER will be final.

DETAILS OF CLAIMANT CLAIMANT'S NAME SURNAME FIRST NAME (Mr, Mrs, Ms, Miss) LEE MEI-YIN

SIGNATURE OF CLAIMANT___(Sgd) M.Lee_____DATE 4 Jan 04 NFP____ AGENT INSTRUCTIONS 1. The White original of this form MUST be forwarded to NSW Lotteries with the relevant ticket in your next Prize Claims envelope. 2. Your Green copy MUST be retained for a minimum of two months. 3. The Yellow copy MUST be handed to the customer with the terminal produced receipt.

At the foot of the form appeared the agency number allocated by Lotteries to the agency, and the word 'Chris', which was in handwriting. The form filled in by Mr Ong had his name as claimant, an address at Wolli Creek, and a mobile telephone number. It had the same agency number and date. There was a 'x' placed in the 'Not for Publication' box, unlike the one signed by Dr Lee, which did not.

On 12 January 2005, having received the winning ticket with the prize claim form Mr Ong had filled in, Lotteries wrote to Mr Ong congratulating him on winning $574,074.08 and inviting him to return a form indicating his payment option. On the same day, he sent the form back, asking for the prize money to be transferred electronically to his account with the St George Bank. On 18th January Lotteries transferred the money to that account. Perhaps surprisingly, while all this was going on, Mr Ong kept turning up for work. A few days later Mr Ong told Mr Pavlellis he was having problems with his Australian visa and needed to return temporarily to Indonesia. He asked if he could have his job back on his return. He ceased work at the agency on 21st January 2005. Mr Pavlellis has not seen or heard from him since.

In the meantime, after much celebration, Dr Lee on 5th January 2005, left Sydney and returned to the UK. By the end of January, and not having heard from Lotteries, she asked her father to make some enquiries. On 31st January he telephoned Lotteries, and Lotteries learned, for the first time, that there was a potential problem. Lotteries proceeded to make detailed enquiries. A number of people were asked to give statements. Mr Pavlellis gave one. So did Dr Lee and all her friends. But Lotteries refused to pay her. Having paid out once on the ticket, it did not consider it should do so again. So eventually, on 12th January 2006, Dr Lee and Ms Day commenced proceedings. They sued Lotteries, as the first defendant, for inter alia breach of contract. They sued Mr Pavlellis and Ms Urech-Tan as second and third defendants, for, inter alia, misleading and deceptive conduct, and vicarious liability for Mr Ong's fraud under the principle in Lloyd v Grace, Smith and Co [1912] AC 716. They sued Mr Ong as fourth defendant, for monies had and received, and conversion of the ticket. (There is no proof Mr Ong was served with process, and he played no part in the hearing. I was not asked by any party to make any orders against him).

The proceedings brought by Dr Lee and Ms Day were defended by Lotteries and the agents. By its defence of 24th February 2006 Lotteries, whilst essentially conceding all the factual matters alleged against it, including that it had paid the prize money to Mr Ong and had not paid Dr Lee, asserted that by reason of the Lotto Rules, it did not have to pay. There were other defences pleaded, but that was the main one relied on.

Lotteries served a cross claim on the agents. Whilst denying it had any liability to Dr Lee and Ms Day, it argued that if the court should find Lotteries liable, and it had to pay them, then the agents should pay Lotteries either a sum to make up for what Mr Ong was paid, or a sum equal to what Lotteries had to pay Dr Lee and Ms Day, as well as its legal costs. It alleged the agents were in breach of the agreement and negligent, by not processing the lottery win properly. In their defence to the cross claim the agents denied any breach of agreement or negligence. Further, they alleged they were not responsible for the losses because when Mr Ong wrongfully took the winning ticket and used it for himself, he was acting outside the scope of his employment. So they were not vicariously liable. Alternatively, they alleged, if Lotteries could show the agents to be in breach in any way, no such breach or breaches could be said to have caused Lotteries' loss. That loss, they said, was due to lax systems Lotteries had at the time. To illustrate the point, they gave particulars of significant ways in which Lotteries had changed its systems after this incident.

As I have observed, by their agreement with Lotteries, the agents were required to take out insurance, including cover for Lotteries. However AIIL declined to cover either Lotteries or the agents when the fraud was exposed. It said the policy did not cover this situation. So both Lotteries and the agents cross claimed against AIIL. Each alleged the AIIL policy covered them, and that AIIL should have paid, but had not paid, so was in breach of the terms of the policy.

In its defence to those cross claims AIIL denied any liability to either claimant. It agreed it had issued a policy, but maintained the policy did not cover these events. Not long after the agents were sued by the plaintiffs, they issued a cross claim directed to Lotteries. In this they sought an indemnity from Lotteries in respect of the claim the plaintiffs had brought against them. This pleading was the first cross claim. Since Lotteries later settled the plaintiffs' claim, that, I understand, put an end to the plaintiffs' claim against the agents. In fact when that happened the plaintiffs filed notices of discontinuance against them. So the agents did not pursue that cross claim and it was not the subject of any submissions. As a formal matter, the first cross claim should be dismissed.

Eventually the case was set down for hearing. Lotteries then formed the view it was, or at least would be held, liable, to Dr Lee and Ms Day. Shortly before the hearing Dr Lee and Ms Day served an offer of compromise. Lotteries accepted the offer. The result was Dr Lee and Ms Day were paid $570,000 inclusive of their costs.

The money paid to Dr Lee and Ms Day did not come from Lotteries. It was paid by another arm of the NSW government, a statutory corporation called NSW Self Insurance Corporation, from a special fund called the Treasury Managed Fund (TMF). I shall return to consider that payment, and what, if any, legal effect it had on Lotteries' right to recover it. For the moment, it is sufficient to say that both the agents and AIIL argued at trial that even if Lotteries could establish any breach of contract or negligence by the agents, or breach of contract by AIIL, because TMF and not Lotteries paid the settlement money to Dr Lee and Ms Day, Lotteries suffered no loss, so its claim should be dismissed. Further, AIIL argued that if, contrary to that submission, Lotteries did suffer loss and could establish a claim under its policy, TMF was an 'insurer' for the purpose of the equitable concept of contribution, so this was a case of double insurance, and AIIL should pay only half of any of Lotteries' losses.

It was Lotteries' primary case that there were contractual breaches by the agents when they failed to send in Dr Lee's claim form with the winning ticket, and that that led to its paying $574,074.08 to the wrong person. But Lotteries also claimed in negligence.

The contractual argument against the agents relied on some aspects of the agreement which were not expressed to be in the form of a guarantee and indemnity, and some which did. Obligations of the agents in the agreement in helping to identify prize winners and process prize payments include: "The Agent must meet the following essential obligations in the performance of this Agreement. … 3.1.6 as the Agent of NSW Lotteries verify whether a Player is entitled to a prize in accordance with the Act and the Rules; 3.1.7 effect the payment of prizes as soon as practicable with respect to Licensed Lottery Games to valid prize winners (subject to compliance by the Agent with the relevant Rules applicable to the relevant Licensed Lottery Games); 3.1.8 maintain and keep secure all Equipment, Materials or other property of NSW Lotteries in the possession of the Agent from time to time. The Agent is liable for any loss or damage to NSW Lotteries property caused by the wilful acts or omissions on the part of the Agent or the Agent's Staff. "
Although reliance was initially placed on 3.1.8, I took Lotteries' counsel ultimately to concede that 3.1.8 concerned liability for Lotteries' electronic equipment, as opposed to other forms of property such as Lotto tickets, and had no relevance to the claim.

Clause 3.1.40 requires the Agency to "conduct the agency … solely for the Purpose and strictly in accordance with this Agreement, the Act, the Rules, the Regulations and the Terminal Operating Manual". "The Purpose" is defined by the agreement as "the proper conduct of the Agency and Licensed Lottery games in accordance with this Agreement, the Act, Licence, Rules, Regulations and Terminal Operations Manual". Clause 3.1.44 requires that the agent "maintain adequate control and supervision of all staff involved in the conduct of the agency".

Lotteries also relied on clause 3.1.29, which required the agents to keep correct all books of account and other records required by Lotteries relating to the conduct of the agency.

Other clauses relevant include, in particular, the following:

7.1 The Agent must observe the Rules and Regulations applicable to the Licensed Lottery Games conducted by NSW Lotteries. The Agent agrees that any failure to observe the Rules and Regulations constitutes a breach of the terms of this Agreement as if they were reproduced in this Agreement and were covenants made with NSW Lotteries. 7.2 The Agent shall comply with all lawful instructions and directions received from NSW Lotteries from time to tome regarding: 7.2.1 the conduct and operation of a licensed Lottery Game; 7.2.2 operational and administrative procedures or systems relating to the Licensed Lottery Game; 7.2.3 the use of the Standard Equipment, the Additional Equipment and the Facilities; 7.2.4 the compliance by the Agent with the terms and conditions of this Agreement, and 7.2.5 without limiting the foregoing, the conduct by the Agent of the Agency

7.3 Any instructions or directions given by NSW Lotteries may be in writing or printing by letter, circular, facsimile or otherwise or may be given by person or telephone conversation and include messages sent through the Online system and appearing on the terminal screen. "

From time to time Lotteries sent newsletters called 'Network News' to its agents. One, issued on 11th June 2004, had a whole page of instructions devoted to claims procedures. Dealing with a claim from a customer such as Dr Lee, who was not registered with Lotteries as a regular ticket buyer, the instructions said, inter alia:

"Customer is given Prize Claim Receipt. Winning Ticket is attached to Prize Claim Form and sent to NSW Lotteries In your next Weekly Return"

The newsletter for 5th November 2004 contained the following: " Prize Claims

To ensure a claimant of an unregistered entry is paid their prize as quickly as possible after lodging a prize claim at your Agency, please ensure you and your staff follow these key points: CLAIM FORM - ask the customer to complete the Prize Claim Form, ensuring that all details have been completed legibly. WINNING TICKET - attach to the "NSW Lotteries Office Copy" (white). WEEKLY RETURN - return white copy with ticket attached to NSW Lotteries in your next weekly return. PRIZE CLAIM RECEIPT - attach to "Customer's Copy" (yellow) and give to the player. AGENTS COPY - retain the "Agent's Copy" (green) for a minimum of 2 months.

It was through newsletters such as those two that Lotteries says it gave agents 'directions' of the kind envisaged by clause 7.2. Mr Pavlellis maintained that he gave instructions to his staff, including Mr Ong, in compliance with the directions, as to how to deal with claims. And based on what Mr Ong did initially, and told Mr Pavlellis he did (post the ticket with Dr Lee's claim form) I have no doubt he did give him those instructions. Although the agents' counsel conceded that the winning ticket was not attached to Dr Lee's claim form and sent to Lotteries, they argued there was no contractual obligation to do so.

The agents argued that they did all they reasonably could or were obliged to under the agreement: its terms did not impose an absolute obligation. So that once they had acted reasonably, in training and instructing their staff, and in employing staff who were apparently honest and competent, they had complied in full with their contractual obligations.

Mr Stevenson SC conceded that the obligation in 7.2 was to comply with all lawful instructions and directions such as those in the "Network News" documents. But he argued that since at least one of the directions obliges the agent only to "please ensure you and your staff follow these key points" (see bulletin of 5th November 2004), and there is an assumption staff will often do the work involved in the processing of winning tickets, contractual compliance occurs merely by the giving of adequate instructions. Since it was not disputed Mr Ong was given appropriate instructions concerning major prizes, there was no breach. The promise in 7.2 did not amount to a guarantee by the agent that its staff would perform the requirement. Someone who is required to 'ensure' something does not guarantee it. Clause 7.2 did not of itself require the prize claim form to be sent to Lotteries.

Mr Stevenson relied on Reliance Permanent Building Society v Harwood-Hamper [1944] 1 Ch 362. A mortgagee when exercising a power of sale was there required to "take reasonable care to ensure that the price is the best price which can reasonably be obtained". Vaisey J said the 'reasonable care' required was to "make sure, to assure oneself, that…the price…[was] the best price…reasonably…[to be] obtained.". Mr Stevenson also relied on In re J.S. (An Infant) [1959] 1 W.L.R. 1218 at 1220 where Roxburgh J considered 'ensure' in a different legislative context. Mr Stevenson referred me to Abigroup Contractors Pty Ltd v Work Cover Authority of NSW (Inspector Maltby) [2004] NSWIRComm 270 in the context of a legislative requirement that "Every employer shall ensure the health, safety and welfare at work of all the employer's employees…". The NSW Industrial Relations Commission there referred with approval to an observation by Watson J in Carrington Slipways Pty Ltd v Callaghan (1985) 11 IR 467 at 470, that there was no reason to construe the words 'to ensure' other than in terms of their ordinary meaning of 'guaranteeing, securing or making certain'. Finally, Mr Stevenson drew my attention to Mount Isa Mines Ltd v Peachey, BC 9806349, where the Court of Appeal of Queensland, when considering a provision that "An employer who fails to ensure the health and safety at work of … employees … commits an offence…", agreed with the trial judge's construction of 'ensure' to mean 'make certain' or 'make sure'. In Mount Isa Mines the employer unsuccessfully argued he could not have been in a position to know that an employee wore the wrong work boots, thus could not be blamed when this contributed to his injury.

The authorities to which Mr Stevenson referred me, do not, I consider, give support for the agents' position. They strengthen the view I have that the agents had an absolute obligation to send Dr Lee's Prize Claim Form to Lotteries with the winning ticket.

The instruction to send Lotteries the Prize Claim Form with the ticket attached was such an important factor in ensuring receipt of the prize by the ticket's purchaser, that words such as 'ensure' can only have been intended in their context by the parties to mean 'guarantee', or 'make certain'. Further, all of the language of the agreement made plain the importance of the agents' adhering strictly to their obligations concerning winning tickets.

I find that Mr Pavlellis was contractually bound by clause 7.2 to comply strictly with the instruction that he send Lotteries any prize winner's prize claim form, attached to the winning ticket. In not complying with that instruction, which he received, Mr Pavlellis was in breach of his contractual obligation. I find the breach caused Lotteries to pay the prize money to the wrong person, namely Mr Ong.

In addition to relying on breaches of the provisions discussed above, Lotteries relied on a clause in the agreement called 'Release and Indemnity'. This clause, inter alia, says: "11.2 The Agent indemnifies and will keep indemnified the Minister, the Chief Executive Officer, NSW Lotteries, the Board of Directors of NSW Lotteries and the Government of the State of New South Wales from and against all claims and demands (including solicitor and client costs) for which the Minister, the Chief Executive Office, NSW Lotteries the Board of Directors of NSW Lotteries or the Government of New South Wales may become liable for or arising from or resulting from any act, omission, negligence, neglect, breach or default of the Agent or any or its servants, agents or contractors in the performance of the terms and conditions of this Agreement. The obligation under this clause is absolute and it is immaterial whether the claim or demand has resulted from an authorised act of the Agent and that a waiver or other indulgence has been extended to the Agent. The Agent's obligations will survive beyond termination of this Agreement for acts or deeds occurring during the term of this Agreement.

11.3 The Agent must indemnify and keep NSW Lotteries indemnified against theft, loss, destruction, damage, or delay (and in particular to terminals and/or instant lottery terminal owned by NSW Lotteries, related telecommunication equipment or other property of NSW Lotteries as supplied to the Agent) to any property of NSW Lotteries occurring within the Business Premises.

11.6 Without limiting the foregoing the Agent expressly acknowledges and agrees that the Agent will be liable to NSW Lotteries for any losses, damages, claims, demands, costs or other expenses borne or incurred by NSW Lotteries for which NSW Lotteries would become liable as a result of any failure whatsoever of the Agent to conduct the agency strictly in accordance with this Agreement and without limiting the foregoing the instructions and directions given to the Agent by NSW Lotteries or its authorised officers or agents."

It was Lotteries' contention that under either 11.2 or 11.6 or both (but not, it conceded, 11.3, which seems to be concerned only with items such as damage to the computer terminal), the agents are liable to indemnify Lotteries for any losses caused to it through the agents' failure to send in Dr Lee's Prize Claim Form with the winning ticket.

I construe 11.2 to be directed to claims arising from an exposure of Lotteries to some legal liability brought about by the agent's fault. See the words "arising from…any act, omission, [or] negligence…of the Agent or any of its servants…". But I do not consider Mr Ong's lodging his prize claim form created a legal liability in Lotteries. Had Lotteries realized the claim was fraudulent, it would have been entitled to reject it. Nor could it be said the plaintiffs' claim was one "for or arising from or resulting from any act, omission, [or] negligence…of the Agent…". That claim arose from Lotteries' contractual obligation. It arose quite independently of anything the agents, or Mr Ong, did, or did not do.

Clause 11.6 however should be construed in a different light. Mr Stevenson SC argued that 11.6 imposes no obligation independent of the earlier parts of the clause, especially 11.2. That argument however ignores the words 'without limiting the foregoing'. The argument, if accepted, would have the opposite effect. Lotteries has incurred a loss, viz the payment to Mr Ong. The loss, as I have found, came about as a result of the agents' failure to conduct the agency in accordance with Lotteries' 'instructions and directions'. Although it may be said the expression 'would become liable' in clause 11.6 suggests a legal liability, whereas Lotteries did not have a legal liability to anyone by the agents' failure, in its context the word 'liable' is, I consider, used in the sense of 'exposed' or 'open to'. Thus I consider the agents were also in breach of Clause 11.6.

Mr Stevenson referred me to Andar Transport Pty Ltd v Brambles Ltd (2004) 217 CLR 424 and its adoption of the statement of principle in Ankar Pty Ltd v National Westminister Finance (Australia) Ltd (1987) 162 CLR 549, that when construing an indemnity "The liability of the surety is strictissimi juris and … ambiguous contractual provisions should be construed in favour of the surety". Mr Stevenson also referred me to "The Interpretation of Contracts" (Lewison, Sweet and Maxwell 2004) at 392, where the learned author noted the need, in such a clause, for unambiguous language.

I am not persuaded clause 11.6 contains ambiguity or lacks clarity. I reject the agents' argument that finding clause 11.6 creates a liability to indemnify Lotteries renders otiose clauses 11.2 and 11.3. Clause 11.2 deals with claims against Lotteries arising from the agents' negligence and the like in performing its obligations under the agreement. Clause 11.3 deals with financial losses or damage Lotteries may suffer, arising from the agents' failure to look after Lotteries' property. Clause 11.6 deals not with claims against Lotteries but with situations where Lotteries loses money or suffers some loss by reason of the agents' not following instructions or directions. Contrary to Mr Stevenson's argument, I consider that 11.6 imposes an independent obligation.

As I have noted, Ms Urech-Tan was not a party to the agreement. Nor was it contended she adopted it. Lotteries did not sue Mr Pavlellis' former partners for breach of it. It acknowledged that if it succeeded in contract it could only do so against Mr Pavlellis.

In the course of the hearing Lotteries sought to amend its cross claim against the agents to rely on section 9 Partnership Act to make Ms Urech-Tan liable for the agency's acts and omissions. Section 9 says: " (1) Every partner in a firm other than an incorporated limited partnership is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner; and (if the partner is an individual) after the partner's death the partner's estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of the partner's separate debts. …"

The amendments sought to make Ms Urech-Tan liable under the agreement, including under clause 11.6, if I found Mr Pavlellis in breach of it. At first, and over the objection of Mr Stevenson SC, I allowed the amendments. But in the course of the hearing Mr Stevenson asked me to vacate that order. Having heard further argument I acceded to his request and said I would give my reasons now. My reasons are: (a) The amendment, as it concerned the agency agreement, put Mr Stevenson and Mr Freeman in a potential position of conflict; there was an argument available to Ms Urech-Tan that she was not liable vis-à-vis Mr Pavlellis; but she could not put this argument since Mr Stevenson and Mr Freeman appeared also for Mr Pavlellis; (b) Although Mr Bannon SC submitted the point had no substance, I could see that it might, and that to do justice to the second and third defendants I would have to adjourn the proceedings for her to obtain independent advice; (c) The agents have no insurance, and AIIL has denied they are covered; they are said to have limited financial resources; (d) Ms Urech-Tan has recently had a death in her family. She was in Thailand for the funeral during the first two days of the hearing; (e) There is a strain on uninsured defendants in any litigation when resources are limited; (f) Lotteries is a government owned body; (g) The application for amendment was made very late.

There was no objection to Lotteries' amendment which relied on ss 10 and 12 Partnership Act, and I gave leave for that. That amendment only achieves significance if Lotteries' claim against the agents in negligence succeeds. I will now turn to consider that claim.

As an alternative to its contract claim, Lotteries asserted the agents owed a duty of care to it, and were in breach of the duty, whereby it suffered loss, namely paying the winnings to Mr Ong. The breaches were said to consist of failing to: (a) take reasonable efforts to ensure the prize claim form was provided to Lotteries; (b) take reasonable measures to ensure the ticket was not used for a fraudulent purpose; (c) keep accurate records, including the agent's copy of the claim form; (d) keep secure the books of claim forms; (e) ensure the claim form went in the weekly return; (f) maintain adequate control and supervision of Mr Ong; and (g) have a procedure to deal with major prize claims, including one which alerts the proprietors to the prospect of improper conduct by staff.

The agents however argued that since the parties had a contractual relationship, with extensive and explicit provision to allocate risk between them, any duty to Lotteries should be informed by, and bow to, the terms of the contract: Balkin and Davis "Law of Torts" (Butterworths, 3rd Edn) at [13.14] and the cases referred to by McDougall J in Tomlin v Ford Credit Australia [2005] NSWSC 540 at [125]-[127], especially Astley v Austrust Ltd (1999) 197 CLR 1 at [47].

It is true that the presence of a contract does not preclude an independent duty of care: Hawkins v Clayton (1988) 164 CLR 539. However, I find persuasively applicable here, albeit in the context of a contract for professional services, what Gleeson CJ, McHugh, Gummow and Hayne JJ said in Astley at [47]: "Rather than ask why the law should imply … a term in a contract for professional services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of the parties to the contract? The contract defines the relationship of the parties. Statute, criminal law and public policy apart, there is no reason why the contract should not declare completely and exclusively what are the legal rights and obligations of the parties in relation to their contractual dealings."

Here, Lotteries sent a lengthy letter with its requirements for the parties' future dealings, followed by a comprehensive agreement which, apart from providing it was the 'whole of agreement' (see cl 32.2(s) "This document…constitutes the entire agreement between the parties and supersedes all prior agreements and understandings") on its face contained comprehensive ways of dealing with eventualities. I acknowledge that a 'whole of agreement' clause is not necessarily conclusive. But here, for the above reasons, I think it has that effect. Thus, I do not consider the law of negligence has any say in regulating the parties' relationship. There was no relevant duty outside the agreement.

Thus it is not necessary for me to consider the arguments put to me in support of the proposition that the agents were negligent.

I reject the agents' defence that the acts of Mr Ong were outside the scope of his employment. It was the agents whose procedures in connection with dealing with winning tickets permitted employees opportunities of the type Mr Ong had and exploited. He was one of three employees required to assist with the processing of claims. Necessarily, he worked at the newsagency on his own from time to time. This put him in a position where, traditionally, an employer is held vicariously liable, because his employment put him into the position in which he was able to carry out the fraud: Lloyd v Grace, Smith and Co [1912] AC 716 @ 733 per Lord Macnaughten; see also Morris v Martin [1966] 1 QB 716 and Capricorn Financial Planners Pty Ltd v Australian Securities and Investments Commission (1999) 31 ACSR 46 at 51. Indeed, I did not understand Mr Stevenson to argue other than faintly that, the agents would not be vicariously liable for Mr Ong's actions.

The agents next argued that if Lotteries suffered a loss, the true cause was not the fraud but Lotteries' own inadequate systems. The agents tendered evidence which showed that after the fraud Lotteries changed its Lotto practices in a number of significant ways. From July 2005 prize winners had to deliver personally their claim form or send it to Lotteries by a secure method of postage. Secondly, winners were required to write their name and address on the back of the winning ticket. Thirdly, computer programmes were changed so that when a ticket was inserted in a Lotto terminal for checking and a prize of $10,000 or more won, the prize would not be shown on the computer screen. Fourthly, whereas claim forms before July 2005 were not sequentially numbered, after July 2005 they were. Later, a system was introduced whereby validation of an unregistered prize above $10,000 would "lock" the terminal, in which case the winner had to speak personally to Lotteries staff to confirm identity. The agents argued that any one of those measures if adopted by Lotteries six months earlier would have prevented Mr Ong's fraud.

I accept that any one of those measures may have prevented the fraud. No doubt there were many precautions which, either singly or in combination, could, if taken by Lotteries, have prevented the loss. But overwhelmingly, the fraud was, I find, the main cause of the loss.

Did Lotteries really have a liability to the plaintiffs?

The agents and AIIL both submitted that Lotteries caused the payment of settlement money to the plaintiffs when it had no legal obligation to do so. Therefore, they both argued, even assuming the agents were in breach of contract or negligent, Lotteries suffered no consequential loss. They relied for that argument on Rule 16 of the Lotto Rules. It is a form of exemption clause. It is as follows: " Rule 16 Limitation of Liability

(a) By entering a Game of Lotto or Game of Promotional Lotto a Player or Syndicate Player acknowledges that he or she has entered into an agreement with the Licensee and the Agent and agrees to be bound by the provisions of these Rules which subsist for the benefit of the Licensee, Directors, the Chief Executive Officer, the Agent and all Employees thereof. … (d) The Licensee, Directors, the Chief Executive Officer and each and every Employee or agent of the Licensee shall have no liability or responsibility to a Player or Syndicate Player or any other person for or in respect of: (i) any negligence, omission, delay or failure whatsoever on the part of any person in the carrying out or performance of any duty, function or discretion conferred or contemplated by the Rules in or about the conduct of any Game of Lotto or Game of Promotional Lotto; and (ii) without prejudice to the generality of Rule 16(d)(i) hereof, any negligence, omission, delay or failure in relation to: (1) the payment of a Prize or share of a Prize; (2) the processing and issue of a Ticket following acceptance of an Entry Form or Automatic Entry instructions; (3) the processing of a Ticket that has won a Prize or share of a Prize; or (4) the inclusion of an Entry or Syndicate Entry in any particular Game of Lotto or entry in a Game of Promotional lotto received by way of Entry Form or Automatic Entry.

It is of the essence of the argument, and I take the parties to agree, that when a Lotto ticket is sold, the buyer agrees that the Lotto Rules will apply to the game of Lotto in which the buyer participates.

A clear underlying assumption in the plaintiffs' contract count in their statement of claim was that the Lotto Rules applied to the contract with Lotteries. The agents and AIIL argued that if that were so, (and I find it must have been) then Lotteries could have relied on Rule 16(d) to deny liability to the plaintiffs: Rule 16 (d) was wide enough to cover acts of fraud, even of Lotteries' agent.

A previous version of the Lotto Rules was the subject of the Court of Appeal's consideration in Brown v Petranker (1991) 22 NSWLR 717. There it was Rule 16(e) under consideration. It is, essentially, the same as Rule 16(d). But it applies to the agent - not to Lotteries. There the exemption was held in its natural and ordinary meaning to cover a negligent omission by the agent to deal with a Lotto entry, such that it was not sent on to the Lotto operator, and the customer who bought the ticket was not paid the prize money he would otherwise have received. The unfortunate customer sued the agent, who relied on Rule 16(e). Clarke JA (Handley JA, Waddell AJA agreeing), said: "The ordinary meaning of those words is, in my opinion, clear. The agent is not to be liable for loss suffered by a subscriber flowing from the non-validation or non-delivery of a coupon provided that the event from which the loss was said to flow resulted from one of the four named causes. In the present case the non-delivery of the coupon resulted, according to the finding of the jury, from the failure on the part of the [agents] to forward it in due time to the head office of the company. It could also be said that the agent neglected or omitted to send it.

If therefore one applied the ordinary meaning of the words it seems clear that r 16(e) would apply and the appellants would not be liable for the respondent's loss"

Of course, the court was not there dealing with a deliberate act such as fraud.

I adopt and apply what I regard as the "natural and ordinary meaning of the [Rule] except insofar as that meaning may not give effect to the purpose of the scheme embodied in the [Public Lotteries Act] and the rules": Brown v Petranker (1991) 22 NSWWLR 717 at 722-3.

In doing so, I do not construe in Rule 16 (d) the words "any negligence, omission, delay or failure" as extending to deliberate acts. It cannot have been intended, for example, that a deliberate and capricious decision by a senior Lotteries executive not to pay a prize winner, could be excused by Rule 16(d). Nor, I consider, could it be said that an agent's deliberate decision not to do what is required in relation to winning tickets could be so classified. That would run contrary to what I construe as the legislature's intention. It is true the court noted in Brown at 724-725 that the purpose of the Lotto Rules is to place very strict controls on the conduct of Lotto which, absent those controls, would be open to fraud and abuse: "There is … a risk that frauds would be perpetrated in ways which might, unless there are strict rules, expose the director, the company, agents or branch lottery managers to the risk of loss. (For instance, the appellant claimed that the present case was a fraud.) These risks give rise to the need to introduce strict rules which, like r4, provide maximum protection to those administering Lotto, including agents, even though the effect of the rules is that a genuine subscriber may be forced to bear a loss which arises from the fault of, for instance, an agent.

This is not surprising for the game is, in every sense, a game of chance in which persons participate hoping, upon payment of a small fee and at long odds, to win a very large prize.

Furthermore, it is clear that official agents form a very important part of the operation of the game of Lotto. They are remunerated for their services but what they receive is very small indeed. In the instant case the appellants were entitled to receive ten cents commission. If agents were liable to pay very substantial damages to a subscriber in respect of the carelessness of one of their employees, for instance, then the recruitment of agents could, and eventually would, become almost impossible."

But the purpose of such strict rules is, as I perceive it, to provide an exemption from liability for the well meaning but careless or incompetent. It cannot have been the purpose of the rule to exempt the deliberate fraudsters, or those vicariously liable for losses caused by them. Thus I am not satisfied Rule 16(d) would have assisted Lotteries.

I am satisfied that when Lotteries was sued by the plaintiffs, Lotteries was, and would, had the case gone to trial, have been found liable for breach of contract, and, vicariously, for conversion by its agent's employee.

Lotteries argued that its liability to the plaintiffs, apart from its contractual obligations, arose from its vicarious liability for Mr Ong's conversion of the ticket.

Mr Stevenson initially argued the conversion count against Lotteries could not have succeeded, as by Rule 6(j) of the Lotto Rules, "A ticket shall at all times remain the property of the Licensee [i.e. Lotteries] and a Player or Syndicate Player shall deliver up any ticket to the licensee upon demand". Thus, the plaintiffs could not have proved title to the ticket. However, in the end I took Mr Stevenson to concede this contention could not succeed. Conversion may occur where the holder does not have legal title to the subject matter of the claim: Bristol Bank v Midland Railway [1891] 2 Q.B. 653.

I turn to consider the part played by Ms Urech-Tan. She gave no evidence. It is clear from the evidence of Mr Pavlellis however that there was a partnership; he had a 75% share and she a 25% share. I find that in January 2005 they were carrying on the newsagency in partnership within the meaning of that expression in s.1 Partnership Act 1892 (NSW).

Ss 10 and 12 Partnership Act provide: " 10 Liability of firm for wrongs (1) Subject to subsection (2), where by any wrongful act or omission of any partner in a firm other than an incorporated limited partnership acting in the ordinary course of the business of the firm, or with the authority of the partner's co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act. (2) For the purposes of subsection (1), a partner in a firm other than an incorporated limited partnership who commits a wrongful act or omission as a director of a body corporate, within the meaning of the Corporations Act 2001 of the Commonwealth, is not to be taken to be acting in the ordinary course of the business of the firm or with the authority of the partner's co-partners only because of any one or more of the following: …

12 Liability for wrongs joint and several (1) Every partner in a firm other than an incorporated limited partnership is liable jointly with the partner's co-partners and also severally for everything for which the firm while the partner is a partner therein becomes liable under either of the two last preceding sections. …"

Lotteries argued that any proved breach of duty of care by Mr Pavlellis satisfied the requirements of s.10 because the claim constituted wrongful acts or omissions of Mr Pavlellis, acting in the ordinary course of the business of the partnership, which caused loss or injury to people other than the firm's partners. Thus under s.12 Partnership Act, Mr Pavlellis and Ms Urech-Tan were jointly and severally liable for those acts or omissions.

I did not take the agents to submit to the contrary if I found in Lotteries' favour on that cause of action. But as I have found there was no duty of care, the issue does not arise for consideration.

Lotteries claimed alternatively for a complete indemnity, or for a contribution, from the agents, under s.5 Law Reform (Miscellaneous) Provisions) Act, 1946. However, in view of my earlier findings it is not necessary to consider this alternative claim.

As I have observed, following the litigation brought by the plaintiffs, Lotteries reached a settlement with them. But the plaintiffs were not paid by Lotteries. They were paid by TMF. Had TMF been an insurance company, the usual rules of subrogation would apply: Le v Williams [2004] NSWSC 645 at [65]. But the agents (and AIIL) argued that: (a) TMF is not an insurer; (b) So the principle of subrogation does not apply (c) As the principle of subrogation does not apply, the payment to the plaintiffs by TMF was a voluntary payment; (d) TMF had no legal obligation to Lotteries of the type an insurer would have; (e) There was no evidence Lotteries had an obligation to repay any amount recovered here, to TMF. (f) As the payment was voluntary, Lotteries, if it ever recovered the money, had no obligation to reimburse TMF or pay it the money; (g) As the underlying principle of damages in tort and contract is compensation ( Johnson v Perez (1988) 166 CLR 351 at 386), Lotteries cannot prove any loss.

At times, Lotteries has claimed its loss was the sum paid to the plaintiffs, and the costs it incurred in defending the case. At other times Lotteries has identified its loss as the sum it unwittingly paid Mr Ong. See for example [12] and [16] of its cross claim against the agents, and Transcript (3/5/07, p76.9: "The primary damages claim"). The primary claim, as I took it ultimately to be, was for compensation to replace the sum Lotteries paid to Mr Ong.

Mr Bannon submitted that insofar as Lotteries' damage was the sum paid to the plaintiffs, Lotteries' entitlement to it was based on the notion of equitable restitution. He argued that it was irrelevant whether Lotteries had an obligation to repay TMF, since it could hardly be the case that a wrongdoer could benefit from the payment by TMF.

In any event, he argued the document containing the substance of TMF's arrangement with Lotteries (and other NSW government entities) uses language consistent with an understanding that no wrongdoer is to benefit from a payment by TMF on behalf of the entity.

Clause 14 of that document ('Contract of Coverage') provides that TMF will pay 'to or on behalf' of Lotteries all sums it becomes legally liable to pay. The Appendix to the Contract of Coverage provides the TMF scheme is designed to reward 'agencies' financially which manage risk, and that agencies pay a 'premium that reflects their profile'. Further, clause 6 provides: "All entities shall protect all of their rights of recovery at law except as pre-approved by the Treasury,"
Clause 7.2 forbids the making of admissions without the Fund Manager's consent, and entitles the Manager, if it chooses, 'to take over and conduct, in the name of the protected entity, the defence or settlement of any claim'.

Clause 7.2 provides further: "The Fund Manager … shall be entitled to prosecute, in the name of the protected entity at its own expense and for its own benefit, any claim for indemnity or damages or otherwise."

In Castellain v Preston (1883) 11 QBD 380 there was suggested in an insurance context a test to distinguish a payment which reduced loss, hence a potential claim on insurance, from one which did not. The test was to ask whether the payment was intended to be for the benefit of the insured only and not for the benefit of the insured's underwriter (Bowen LJ at 405.3; Cotton LJ at 395.6). At 404-5 Bowen LJ said: "Suppose that a man who has insured his home had it damaged by fire, and suppose that his brother offers to give him a sum of money to assist him. The effect on the position of the underwriter will depend on the real character of the transaction. Did the brother mean to give the money for the benefit of the insurer as well as for the benefit of the assured?"

Castellain was apparently approved by the High Court in British Traders Insurance Co Ltd v Monson (1964) 111 CLR 86 at 95 and Transport Accident Commission v CMT Construction (1988) 165 CLR 436 at 442.5.

Apart from Castellain, and the Australian authorities apparently approving it, I was not referred by counsel to other relevant authority, nor have my own researches uncovered any. I conclude from Castellain that where a payment by a third party to someone who has suffered loss is not intended to benefit an insurer (or the party who caused or contributed to the loss), neither the insurer nor the wrongful party may receive the benefit of it.

In my view, the Contract of Coverage, especially 7.2, shows an assumption by TMF and Lotteries that moneys could be recovered from wrongdoers without diminution, notwithstanding a payment by TMF to someone with a claim against Lotteries. Thus TMF's payment to the plaintiffs could not be regarded as having been intended to reduce the loss, in the sense of preventing recovery, from another.

I have so far proceeded on the basis that TMF was not an insurer. The functions and obligations of TMF have similarities to insurance, but it is Lotteries' submission that TMF is a managed fund contributed to by the State of NSW and State authorities, from which the various bodies meet their losses, and is not an insurer. A classic description of a contract of insurance appears in Prudential Insurance Co v Commissioner of Inland Revenue [1904] 2 KB 658 at 663 (Channel J):

"[A contract of insurance is one]… whereby for some consideration, usually but not necessarily for periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment of a sum of money, upon the happening of some event".

That sounds very much like the arrangement between Lotteries and TMF. Though the two (TMF and Lotteries) are both arms of the NSW government, they are separate corporate entities and may, accordingly, contract with each other, such that one provides a form of insurance to the other.

In any event, as I understand the case ultimately put by Lotteries, the claim for the sum it paid to Mr Ong was its primary case. On that basis, the payment by TMF is not relevant, the argument that there was no loss proceeded on the assumption the loss was the sum paid to the plaintiffs.

In the end I do not consider it necessary to decide whether Lotteries had a contract of insurance with TMF. If the contract was one of insurance, and Lotteries' loss was the sum paid to the plaintiffs, subrogation applies. If it was not, for the reasons I have set out above, Lotteries has still suffered a loss, and neither the agents nor AIIL can benefit from the payment by TMF. In any event, I am quite satisfied the loss suffered by Lotteries was the sum it unwittingly paid to Mr Ong. That money has not been recovered by Lotteries.

Thus there should be a verdict and judgment for Lotteries on the Third Cross Claim against Mr Pavlellis for $474,074.08.

I shall turn now to consider the cross claims which each of Lotteries and the agents has against AIIL.

A court interpreting a policy of insurance must apply the ordinary and natural meaning of the words: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510; McCann v Switzerland Australia Ltd (2000) 203 CLR 579.

It is not in dispute but that each of the agents and Lotteries is an 'insured' under AIIL's policy. AIIL however has consistently denied any liability to the agents for their liability to the plaintiffs. It has also declined liability to meet the claim the plaintiffs made against Lotteries. The relevant coverage clause of the policy is as follows: "AIIL will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay to any entrant in Licensed Lottery Games (excluding punitive and/or exemplary and/or aggravated damages and/or any additional damages resulting from the multiplication of compensatory damages) resulting from any negligent act or omission committed by the Insured during the Period of Insurance in respect of the Processing of any entry to Licensed Lottery Games conducted by the New South Wales Lotteries Corporation".

The word 'Insured' is defined by 5.1 of the policy as follows: "5.1 "Insured"

Each of the following is deemed to be an Insured under this Policy to the extent set forth:

5.1.1 The named Insured specified in the Schedule. 5.1.2 Every Director, Executive Officer, Employee, Partner, Agent or Shareholder of the named Insured specified in the Schedule but only whilst acting within the scope of their duties in such capacity.

"Insured" does not include the interest of any other persons or entities other than as described in 5.1.1 and 5.1.2 above."

The policy has an exclusion provision which provides relevantly: "4. EXCLUSIONS

This Policy does not cover liability in respect of: … 4.3 claims arising from any dishonest or criminal acts by the Insured; 4.4 any claims arising from theft or fraud by the Insured; …"

In address, Mr Stevenson identified the agents' claim under the policy as the sum Lotteries had paid to the plaintiffs 'on our behalf' (on the assumption Lotteries' case against the agents were made out).

By reason of Mr Ong's fraud, the claim by the plaintiffs against Mr Pavlellis, had it gone to trial, was, I consider, irresistibly strong. The causes of action as pleaded against the agents were for misleading and deceptive conduct (s.42 Fair Trading Act) by representing to Lotteries, through its employee, Mr Ong, that he was entitled to the prize money, such that Lotteries paid him, and not the plaintiffs, the money; and by the fraud of Mr Ong, for which the agents were liable under the principle in Lloyd v Smith, Grace and Co. In their case against the agents the plaintiffs did not plead negligence.

Once Mr Ong had sent in his own claim form with the ticket, in my view, the agents were "legally liable" to the plaintiffs. I am also satisfied Dr Lee was an 'entrant', and that the Lotto game in which she bought the ticket was one of the 'Licensed Lottery Games': see definition in 5.2 of the policy.

Thus, although Mr Cavanagh submitted the agents had or would have had no liability to the plaintiffs, I do not accept that. Since Lotteries met the claim made against Lotteries and the agents, by the time of trial the agents no longer had a liability to the plaintiffs. But that is not to say there was not a time when, at least Mr Pavlellis, was 'legally liable'.

Next, Mr Cavanagh argued that, assuming it could be said the agents became 'legally liable' to pay a sum to an 'entrant', the liability was not one 'resulting from any negligent act or omission committed by the Insured…'. This was because there was no allegation of negligence by the plaintiffs in their pleading. However, I reject that submission. The policy does not require the agents be sued for negligence - merely that the liability be one "resulting from" a negligent act or omission. It would defy common sense that liability under the policy depended on how the pleader chose to characterise the agents' wrong when settling the plaintiffs' statement of claim.

In Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 cover was provided to a stockbroker for a claim "arising out of negligence in the conduct of the insured's business as stockbrokers". At 83 Bowen JA said: "To be entitled to indemnity … the insured has to show that the claim was one for which he is legally liable. … [T]he insured must also show it was a claim "arising out of negligence in the conduct of the insured's business as stockbrokers". Negligence in this context I take to mean a want of care or skill. I do not read it as referring in a technical sense to the tort of negligence. The policy is designed to protect the insured against the consequences of negligence in the conduct of the business of stockbrokers. The condition is met if the claim arises from a want of care or skill in the conduct of that business, whether the cause of action happens to be based on contract or tort. The words "arising out of" I take to mean originating in or springing from."

Thus it does not matter that what was pleaded against the agents was not a case of negligence. It is enough that the circumstances giving rise to the claim could be said to have originated in or sprung from, a negligent act or omission. As to whether that element is established, it is necessary to pass to AIIL's next argument.

Mr Cavanagh submitted that when an expression such as "resulting from" is used in a policy, the court must find the proximate cause. He submitted that the proximate cause of the agents' legal liability was not any negligence or breach of duty by them, but the fraudulent act of their employee, Mr Ong. That fraud, he argued, could not be said to be embraced by the expression 'negligent act or omission'. He referred me to Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd and 2 ors [2005] NSWCA 66 where the Court of Appeal considered, in a causation context, the width of the expression 'directly caused'.

In Goddard & Smith v Frew [1939] 4 All ER 358 the policy covered 'all losses…by reason of any act, neglect, omission, misstatement or error'. An agent of the insured estate agent had misappropriated rents collected for a client. At 36 Scott LJ said: "The real cause of the loss…was embezzlement by their servant. That was the true proximate cause of the loss…[which] cannot be brought within this policy" .

In another English case, West, Wake, Price and Co v Ching [1956] 3 All ER 821, an insured accountant argued that an embezzlement by a servant came within the expression 'loss…in respect of any act of neglect, default or error'. At 824 Devlin J said of those words: "These words are apparently wide, but it is plain on the authorities…that they do not extend to acts of dishonesty…at any rate unless it is shown that those claims are in respect of an act of neglect, default or error. The problem in this case is how to deal with a 'mixed' claim in which questions of dishonesty and negligence are raised".

At 825 Lord Goddard said: "If the proximate cause (this seems to be the test…) of the loss was the dishonesty of [the] servant, they could not recover under the policy; if on the other hand if it was their own neglect, they could recover."

In Elders Ltd v Swinbank [1999] FCA 98 at [97] Mansfield J said, when determining whether a claim had arisen out of "any negligent act or omission committed or alleged to have been committed…" that the appropriate consideration when deciding whether a policy covered an event was to look at the substantive nature of the claims made, rather than the name or names of the cause or causes of action ascribed to the conduct. His Honour referred with apparent approval to West Wake Price & Co.

AIIL argued the substantive nature of the plaintiffs' claim was one of fraud, so the policy provides no cover. Mr Bannon submitted that if that were so, the policy would have provided nothing. He referred to Lasermax for the proposition that courts will ensure policies are not given a nonsensical construction.

Mr Bannon relied especially on an extract from Lynn Gas and Electric Co v Meriden Insurance Co 33 NE 690 (1893) (Knowlton J) which appears at [112] in Lasermax and is as follows: "When it is said that the cause to be sought is the direct and proximate cause, it is not meant that the cause or agency which is nearest in time or place to the result is necessarily to be chosen…The active, efficient cause that sets in motion a train of events which brings about a result without the intervention of any force started and working actively from a new and independent source is the direct and proximate cause referred to in the cases…The question always is, was there an unbroken connection between the wrongful act and the injury - a continuous operation? In suits brought on policies of fire insurance it is held that the intention of the parties must have been to insure against losses where the cause insured against was a means or agency in causing the loss, even though it was entirely due to some other active, efficient cause which made use of it, or set it in motion, if the original, efficient cause was not itself made a subject of separate insurance…This is the only particular in which the rule in regard to remote and proximate causes is applied differently in actions on fire insurance policies from its application in other actions. A failure sometimes to recognise this rule as standing on independent grounds, and established to carry out the intention of the parties to contracts of insurance, has led to confusion of statement in some of the cases".

At [113] of Lasermax, McColl J (with whose reasons Ipp and Tobias JJA agreed) said the description of the exercise to decide whether a loss was caused by a peril to which a policy responds, "as requiring a determination as to whether [in that case a fire] was the efficient means or agency in causing the loss", is a useful encapsulation of the task required.

I consider that whether one adopts the expression 'substantive nature of the claims' or determines 'the efficient means or agency of causing the loss', one is driven inexorably to Mr Ong's fraudulent conduct. It is true, as Lotteries argued, that there were ways the agents could have adopted, and arguably should have, to avoid the risk that a dishonest servant might convert a winning ticket, so that it could truly be said there was 'negligence or breach of duty'. But the proximate cause, was, I consider, the fraud. Since the proximate cause of the agents' legal liability was the fraud, I am not persuaded it resulted from 'a negligent act or omission'. It follows that the policy does not meet the claim. There is an additional reason the policy does not meet the agents' claim. Mr Ong was the agents' employee. The word 'Insured' where it appears in the policy, includes employees of an insured. I am satisfied the claim by the agents is one 'arising from [a] dishonest or criminal act by the Insured' (see Exclusion 4.3) or one 'arising from … fraud by the Insured' (see Exclusion 4.4).

Mr Cavanagh put other arguments to me as to why the policy was not engaged, but I do not consider it necessary to consider them.

I am persuaded the agents' cross-claim against AIIL is not made out, and their cross claim should be dismissed.

In its cross claim against AIIL Lotteries sought indemnity from AIIL for sums it might become liable to pay the plaintiffs, arising from the allegations made by the plaintiffs in their statement of claim.

Applying the ordinary and natural meaning to the policy, I do not consider Lotteries' cross claim against AIIL can succeed. Assuming 'Insured' where it first appears is taken to mean Lotteries, I do not consider Lotteries' liability to the entrant was on "resulting from any negligent act or omission". Rather, it was one resulting from its contract with the entrant. Lotteries' argument was put in a number of ways, depending on how the word 'Insured' was construed - that is - as Lotteries, or the agents. It does not matter how the word 'Insured' is construed. It is not possible for Lotteries to get around the requirement that the claim against it result from a 'negligent act or omission' rather than the contract. Apart from Lotteries' difficulty in overcoming that hurdle, there is the added difficulty it has with the fraud exclusion. The reference to 'Insured' in that exclusion would, I consider, enable AIIL to deny liability to any of the 'Insured' where an employee of any of the 'Insured' where an employee of any of the 'Insured' was the person who executed the fraud.

Thus the policy affords no assistance to Lotteries. Its cross claim against AIIL should be dismissed.

In the result, no issues of double insurance arise as to the form of the orders.

Subject to submissions I receive, I propose to order: (a) The first Cross Claim be dismissed; (b) In Lotteries' Cross Claim against Mr Pavlellis, there be judgment for Lotteries against Mr Pavlellis for $574,074.08; as to the Cross Claim against Ms Urech-Tan there be judgment for Ms Ulrch-Tan; (c) The agents' Cross Claim against AIIL be dismissed; (d) Lotteries' Cross Claim against AIIL be dismissed.
I stand the matter over to 21st June 2007 for submissions on costs and on the form of final orders to be made. If agreement can be reached in the meantime, the parties may notify my associate, and provide draft orders.

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