Paul Joseph Garcia v Raymond Henry Masters & Ors - [2005] NSWSC 480 - NSWSC 2005 case summary — Zoe

NSWNSWSC

Paul Joseph Garcia v Raymond Henry Masters & Ors

[2005] NSWSC 480

Supreme Court of NSW|2005-05-23|Before: Einstein J

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Source facts

Court

Supreme Court of NSW

Decision date

2005-05-23

Before

Einstein J

Source

Original judgment source is linked above.

Judgment (81 paragraphs)

[1]

CITATION : Paul Joseph Garcia v Raymond Henry Masters & Ors [2005] NSWSC 480

[2]

DECISION : Declarations and Orders made-see post paragraph 106

[3]

CATCHWORDS : Property Law - Equity - Licensing - Liquor Administration Board- Rights to Poker machine entitlements regulated by Gaming Machines Act 2001 - Equitable/beneficial interests in poker machine entitlements - Whether outgoing lessee/licensee can bind incoming lessee/licensee in relation to poker machine entitlements - Former lessee, business operator and holder of hotelier's licence surrenders lease and contracts to sell hotel business to new lessee/transferee of hotelier's licence - Complex of contractual provisions between former lessee and new lessee whereunder former lessee seeks to preserve alleged title to property rights in respect of poker machine entitlements - Lessors protect themselves with complex of contractual provisions between themselves and new lessee - Former lessee seeks relief against lessors and against new lessee who still holds hotelier's licence - Former lessee claims that new lessee is constructive trustee of poker machine entitlements for benefit of former lessee - Former lessee also claims relief in contract - Former lessee seeks to sell poker machine entitlements to outside third-party holder of hotelier's licences - Claim to orders that new lessee obliged to deal with poker machine entitlements to direction of former lessee by making application to Liquor Administration Board for transfer of entitlements to purchaser of entitlements from former lessee - Claims of former lessee upheld in very urgent circumstances

[5]

888 Casino and Tavern Pty Limited v Hurlfobe Pty Limited (1997) 8 BPR 15,505 Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Australian Elizabethan Theatre Trust, Re; (1991) 102 ALR 681 Barclays Bank Ltd v Quistclose Investments Ltd [1968] 3 All ER 651 Baumgartner v Baumgartner (1987) 164 CLR 137 Burns Philp Trustee Co Ltd v Ironside Investments Pty Ltd [1984] 2 Qd R 16 Calverley v Green (1984) 155 CLR 242 Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch to 276 Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Gosper v Sawyer (1985) 58 ALR 13 Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyd's Rep 344 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Jabetin Pty Ltd v Liquor Administration Board [2005] NSWCA 92 Jack v Smail (1905) 2 CLR 684 CASES CITED : Jones v Dunkel (1959) 101 CLR 298 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 Mellor v Liquor Administration Board [2003] NSWSC 38 Muschinski v Dodds (1985) 160 CLR 583 Nelson v Nelson (1995) 184 CLR 538 Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 Re Kessell (1936) 36 SR (NSW) 485 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 Slatter v Railway Commissioners (NSW) (1931) 45 CLR 68 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157 Wonall Pty Ltd v Clarence Property Corporation Ltd (2003) 58 NSWLR 23

[13]

11 An earlier lessee and business operator of the Hotel premises was a company called Goldsands Pty Ltd ("Goldsands") pursuant to an original lease dated 22 July 1994 with commencement date 1 July 1994 in respect of the Hotel premises (the "Original Lease") [the lessees being Goldsands and Mr Garcia]. Goldsands ceased to be the licence holder on 27 July 1994 on which date Mr and Mrs Masters became holders of the hotelier's licence. 12 As at the commencement date of the Original Lease, Mr Garcia was the nominated licensee of the Hotel on behalf of Goldsands and, in that capacity, the holder of hotelier's licence (the "Licence") in respect of the Hotel. 13 On 26 August 1994, Mr Garcia entered into a Partnership Agreement with Goldsands pursuant to which he became a partner with Goldsands in the business of the Hotel effective from 1 July 1994. He remained as licensee in respect of the Licence on behalf of the partnership. At this time the term of the lease held by Goldsands was due to expire on 31 December 2000. 14 In 1996, Mr Garcia entered into a further agreement with Goldsands whereby his partnership with Goldsands was dissolved. At the same time, he purchased Goldsands' interest in the Original Lease as well as Goldsands' interest in the business, assets and goodwill of the Hotel. The Original Lease was formally assigned to Mr Garcia by Goldsands with the express consent of the first and second defendants pursuant to a Deed of Assignment, Release and Guarantee. After that time, Mr Garcia remained at all material times the licensee in respect of the Licence on his own behalf and for his own sole benefit subject to the provisions of the Lease obliging him to preserve the licence for the benefit of the premises. 15 At the time of these arrangements and dealings, and prior to 1997, the relevant legislation, the Liquor Act, 1982, did not permit hoteliers to operate poker machines of the kind that became permissible in hotels from 1997 onwards. Prior to 1997, hoteliers were only permitted to keep "approved amusement devices" ("AADs") (commonly called "card machines"). A hotelier at that time could be authorised by the Liquor Administration Board under (the now repealed) section 161 of the Liquor Act to keep, use and operate up to 15 AADs, by way of a condition imposed on the hotelier's licence under that Act. 16 Upon the expiry of the Original Lease on 31 December 2000, Mr Garcia negotiated a new lease with the first and second defendants, being registered dealing 7380967 which commenced on 1 January 2001 and had an original termination date of 31 December 2003 (the "Lease"). Rent under the July 1994 Lease and the new Lease was fixed, and not related to the profits or turnover of the hotel business. 17 The Lease contains usual covenants for a hotel including covenants restraining the lessee from using the premises other than as a hotel (or similar use), requiring the lessee to keep the hotelier's licence current and in good standing, and appointing the lessor as the lessee's attorney for the purpose of applying to transfer the licence to the lessor or its nominee and/or applying for a new licence at the end of the tenancy. As in the case of the Lease falling for consideration in Jabetin these covenants recognise that the hotelier's licence was held by the lessee, with the statutory incidents provided in the Liquor Act 1982. Nonetheless the covenants recognise and protect the interests of the owners: cf Jabetin at [4]-[5]. 18 In 1997 the Liquor and Registered Clubs Legislation (Further Amendment) Act 1996 commenced. This permitted hotelier's such as Mr Garcia to keep, use and operate club-style poker machines for the first time.

[20]

(d) played no role whatsoever in the acquisition, installation, maintenance or operation of the machines by Mr Garcia. The Creation of Poker Machine Entitlements 23 Effective from 19 April 2001 (the "Freeze Date") regulations were made under the Liquor Regulation 1996 which "froze" the number of poker machines that could be authorised by the Board, pending the passage of gaming reform laws at a later date. The history of those provisions is helpfully reviewed by Whealy J in Mellor v Liquor Administration Board [2003] NSWSC 38. On 2 April 2002 the Act was passed ending the "freeze" and reforming the law with respect to gaming machines. 24 Amongst other things, the GMA placed an overall limit on the number of machines that could be authorised in the state and in hotels and registered clubs (see section 10) and created, for the first time, a system of tradeable "poker machine entitlements". In essence, hotels which kept, used and operated poker machines as at 19 April 2001 had allocated to them a number of entitlements which corresponded to the number of machines kept, used and operated as at 19 April 2001: section 15 GMA. The holding of poker machine entitlements satisfies one of the preconditions to obtaining an authorisation to operate the corresponding number of poker machines: GMA section 56(4(a)). 25 Under the GMA "poker machine entitlements" are transferable to other holders of hotelier's licences: section 19(1), subject to forfeiture of 1 poker machine entitlement in every transfer block of 2 or 3 entitlements: section 20(3). The evident scheme of these provisions was to stop the growth of overall poker machine numbers (and indeed to reduce these numbers over time). At the same time, fluctuating demand for machines in different areas could be accommodated by facilitating the transfer of existing poker machine entitlements from one licence to another. Mr Garcia's Sale of the Hotel Business and Transfer of the Lease to Mr McAsey 26 As already indicated on 2 October 2002, Mr Garcia entered into an Agreement for the Sale of Hotel Business to the Mr McAsey (the "Business Sale Agreement"). The assets sold included plant, goodwill and certain stock, for a total consideration of $100,000. 27 Clause 11 of the Business Sale Agreement was in the following terms:

[31]

31.1 The Vendor will indemnify the Purchaser in respect of any claim against the Purchaser by the previous lessee of the property, namely, Paul Joseph Garcia, which claim is over and above any previous claim or claims made by Paul Joseph Garcia in the total amount of Five hundred thousand dollars ($500,000.00), in respect of any poker machine entitlements attaching to the property and no claim in respect of any such claim by Paul Joseph Garcia will be made by the Vendor against the Purchaser. The Purchaser must immediately notify the Vendor in respect of any such claim made by Paul Joseph Garcia, in which event the Vendor must notify the Purchaser within 30 days of receiving such notification as to whether the Vendor proposes to defend the claim. If the Vendor states that it proposes to defend the claim, the Purchaser authorises the Vendor to Defend the claim in the name of the Purchaser should that be necessary at the cost of the Vendor. If the Vendor does not elect to defend the claim within the said period of 30 days, then the Vendor shall be obliged to make good the indemnity provided for in this special condition. This special condition does not merge on completion." The agreement for sale and transfer of the entitlements 34 Mr Garcia has negotiated [but by reason of the interlocutory relief has not been a position to enter into] contracts for the sale and transfer of three transfer blocks of the subject poker machine entitlements to respectively the licensees of the Evening Star Hotel [as to 2 transfer blocks] and the Triple Aces Bar [as to 1 transfer block]. 35 The proposal is that the contracts will be the subject to and conditional upon the approval of the Liquor Administration Board. 36 Draft contracts are apparently ready to be issued to the purchasers. The suggested urgency for relief 37 Counsel for Mr Garcia has put the following submissions to the Court in support of the suggested extreme urgency for curial determination of Mr Garcia's legal rights: · "if Mr Garcia does not obtain orders compelling the transfer of the PMEs as Mr Garcia directs before Mr McAsey ceases to hold over under his lease from the Lessors on 30 May 2005, Mr Garcia may lose his rights in respect of the PMEs as Mr McAsey may lose his under the GMA, or at the least, Mr Garcia will be compelled to establish his rights against or in relation to the Lessors in respect of the PMEs, a more difficult matter. It is a matter of considerable debate and doubt whether a Court could grant relief in fact "extending" the operation of the GMA, and whether the Lessors, who are not the holders of an hotelier's licence, would have a relevant right under the GMA to hold on trust for Mr Garcia. This is discussed below in the light of the recent decision of the Court of Appeal in Jabetin Pty Ltd v Liquor Administration Board and others [2005] NSWCA 92; · as PMEs are allocated "in resect of" an hotelier's licence (section 15(2)(a) GMA) and are only transferable to another hotelier's licence (section 20(1)), it may well be the case that only the holder of an hotelier's licence under the Liquor Act for the time being can make application to the Board to approve the transfer of PMEs. Accordingly, unless the Court makes the declarations sought by Mr Garcia with respect to his beneficial ownership of the PMEs Mr Garcia may lose all right to deal with the PMEs upon the termination of the lease on 30 May 2005. At that time, the "standard hotel covenants" contained in the lease between the Lessors and Mr McAsey will require Mr McAsey to transfer the hotelier's licence to the Lessors. The Lessors are 82 and 76 respectively, and one does not know whether they will or can be licensees or what they intend to do in respect of the hotelier's licence under the Liquor Act; · it may therefore be crucial that Mr McAsey be ordered to sign a transfer application in respect of the PMEs for approval by the Board and otherwise do everything on his part necessary to enable the approval and transfer, and that the Board approve that application, before 30 May 2005. Importance of the Orders Sought to Preserving Garcia's Rights · When application is made by McAsey to the Board for its approval to the "transfer" of the PMEs, the applicant must demonstrate to the Board that the proposed transfer is supported by each person who, in the Board's opinion, has a "financial interest in the hotelier's licence" relating to the Alexandria Hotel: section 19(3)(c); · the Lessors have already written to the Board asserting that they have a financial interest in the hotelier's licence pursuant to section 19(3)(c) GMA and requesting that the Board refrain from approving any transfers "until the Court proceedings between our clients and Mr Garcia have been finalised"; · the Lessors, through their correspondence with the Board, have caused a "dispute flag" to be placed by the Board upon its records in relation to this hotel. By memo dated 4 May 2005, the secretary of the Board advised various Board officers that such transfers of PMEs are not to be approved under a delegated power but are to be submitted to the Board "for direction or determination"; · an earlier memo from the secretary of the Board dated 22 April 2005 suggests that "the Board will not permit a transfer until the proposed litigation is resolved in the High Court"; · Mr Garcia's solicitor, Mr Deutsch, has sworn an affidavit (16 May 2005) in the these proceedings deposing as to the procedure adopted by the Board to satisfy itself as to whether a Lessors in fact have a "financial interest in an hotelier's licence". It is clear from that affidavit that, unless any hearing by the Board is expedited, it is highly unlikely that the Board will approve the transfer of PMEs prior to the expiry of Mr McAsey's tenancy; · it follows that unless the Court makes the declarations sought by Mr Garcia with respect to his equitable interest in the PMEs the plaintiff's rights may be defeated. On May 30 2005, the hotelier's licence (and with it the right to apply for transfer of the PMEs to another licence) may be transferred to the Lessors, if it can be, in accordance with the terms of the 2002 Lease." The material issues 38 It is appropriate to approach the material issues of principle which arise generally accepting the following short summary of fact put by counsel for Mr Garcia: · Due solely to Mr Garcia's efforts, an initial allocation of nine (9) poker machine entitlements was made in respect of the hotelier's licence of the Alexandria Hotel. · Those entitlements are valuable. At the present time a transfer "block" of 3 such entitlements sells for between $200,000.00 and $300,000.00 in the open market · From the time that such poker machine entitlements were allocated, Mr Garcia could have applied to the Board to approve the transfer of the PMEs to another hotelier's licence: section 19(3) GMA and he would have been entitled to any proceeds derived from sale of the PMEs. 39 There are a number of issues raised. The central although not the only issue is whether Mr Garcia, who, [notwithstanding the submissions to the contrary put by Mr and Mrs Masters and dealt with below], clearly up until the transfer of the hotelier's licence to Mr McAsey had a right in the subject entitlements, accurately described as "in the nature of property", · lost that right upon:

[43]

" AND for the more effectual preservation of the Licence of the said Hotel, the Lessee but only after default of the Lessee, irrevocably appoints the Lessors their executors, administrators and assigns their true and lawful attorney to transfer or cause to be transferred the Hotelier's Licence for the time being held in connection with the said premises to any person whomsoever and to apply for the renewal or removal of the said Licensee or any new renewal or removal or new licence or licences in the name of the Lessee or other person or persons in whose name the said licence or licences for the time being shall stand and to appear before any Licensing Court or Magistrate and employ a solicitor on behalf of the Lessee or other person or persons in whose name the said licence or licenses shall then be on any application for such transfer, renewal or removal or new licence to consent thereto or apply therefore and to receive all licences, certificates and other documents and to give valid receipts for same AND to pay all fees therefore or connected therewith AND GENERALLY to do and perform all such further acts, matters and things as shall be necessary or expedient to enable the Lessors or other person as aforesaid to obtain the renewal of any licence or any new licence or to the transfer of any licence existing and in force and in the name of the Lessee or other person or persons in whose name the said licence or licences shall then be to carry on and conduct the business of the said Hotel and to serve and to employ any other person or persons to serve in the name of the Licensee thereof to customers all spiritous and fermented liquors under and by virtue of the Hotelier's Licence for the time being granted to the said premises AND the Lessee hereby ratifies, allows and confirms and agrees to ratify, allow and confirm all and whatsoever the said Attorney or his agent shall lawfully do or cause to be done under or by virtue of these presents." 51 The Deed relating to Hotel Licence entered into on 7 July 1994 between Mr and Mrs Masters as "Lessor", Goldsands as "Lessee" and Mr Garcia as "Licensee" provided inter alia as follows:

[48]

"12 (k) at the expiration of the term or other sooner determination thereof transfer and assign and do all acts necessary for the transferring and assigning unto the Lessors or to such other person as the Lessors may appoint for that purpose the Hotelier's Licence of the premises for the then current year." "23 Power of Attorney [This clause was in similar terms to clause 14 of the 1 July 2001 Lease]" "29 (a) The Lessee shall procure that the Licensee shall from time to time shall do the following: (i) The Licensee, while the holder of the Licence, will carry on or cause to be carried on in and upon the Demised Premises the trade or business of a hotelier and retailer of liquor, as defined in the Liquor Act, 1982, and no other business; and the Licensee will not without the Lessor's consent, such not to be unreasonably withheld, appoint or permit any other person to carry on the business… (v) The Licensee for itself and on behalf of the Lessee hereby acknowledges that the goodwill of the business of The Hotel is part of the Demised Premises and that neither the Lessee nor its successors in the title has or will have any interest whatsoever in such goodwill upon the termination of expiration of the Lease for whatever reason. All parties agree that upon termination or expiration of the Lease for whatever reason, neither the Lessee nor the Licensee shall be entitle to receive any payment or compensation in respect of such goodwill. (vi) If the time for the exercise of the option to purchase in clause 30 has expired and the option has not been validly exercised within that time, the Licensee will, before the expiration of the Lease, execute a transfer of the Licence to the Lessor's nominee to take effect on the expiration or sooner determination of this Lease, as the case may be, and allow notice of such to be affixed to on or near the Demised Premises and remains so affixed during such time or times as shall be required by law in that regard. The Licensee will generally do or have done all acts and things as shall be necessary to enable any person nominated by the Lessor to obtain a transfer of the Licence. The preceding provisions of this subclause (xi) will also apply mutatis mutandis if this lease is terminated due to a default by the Lessee.

[50]

(viii) It is hereby acknowledged and agreed that the Licence is the Lessor's property and shall remain with the Demised Premises. The Licensee shall not make any application or cause or permit to be made any application for removal of the Licence or without the Lessor's consent seek to vary, revoke or impose any condition upon or in respect of the Licence or affecting the Demised Premises. (b) In consideration of the consent by the Lessor to the continuation of the appointment of the Licensee to hold the Licence the Lessee acknowledges and confirms that notwithstanding the appointment of the Licensee the terms and conditions of this clause 29 do not lessee the Lessee's obligations under this Lease. (c) The Lessee acknowledges that the Lessor's consent to the appointment of the Licensee to hold the Licence does not have the effect of giving the Lessee any proprietary interest in the Licence and the Lessee covenants with the Lessor that on the expiration of the lease, provided that the option to purchase contained in clause 30 has not been validly exercised, the Lessee will, at its cost, take necessary to steps to ensure that the Licence is vested in the nominee of the Lessor." The proposition advanced by Mr and Mrs Masters 55 The proposition for which Mr Stevenson appearing for Mr and Mrs Masters contended was that at all material times Mr and Mrs Masters were and remained the sole holders of "the ownership interest" in the hotelier's licence, a matter said to be so acknowledged in the above described contractual documents. Hence, so the submission suggests, it could never be said that either Mr Garcia or Mr McAsey ever had any "proprietary interest" in the hotelier's licence necessary to sustain the critical parameter emphasised in Jabetin that poker machine entitlements "go with the licence". Only Mr and Mrs Masters are said to have had property in the hotelier's licence sufficient to make good that critical nexus which, unless established, could never give rise to a severance of the equitable title to the entitlements from the hotelier's licence. 56 The submission is misconceived. There is a line of cases which expressly hold that there is no proprietary interest in a liquor licence. A hotelier's licence is a personal licence the creature of the material legislation. The matter was carefully examined and explained in the judgement of Griffith CJ in Jack v Smail (1905) 2 CLR 684 at 704-705. 57 Twenty five years later Slatter v Railway Commissioners (NSW) (1931) 45 CLR 68 again put the issue [at 78-79 per Gavan Duffy CJ, Starke and Dixon JJ] in the following terms:

[51]

"We think the evident purpose of the provisions incorporated in the tenancy agreement was to preserve the licence for the benefit of the premises, and at the end of the term to enable the landlords to ensure that it was available to the person who next occupied the premises under them. The advantage obtained by a landlord from such provisions does not, in our opinion, amount to a beneficial interest in the licence within the meaning of section 41 of the Liquor Acts. The tenant remains entitled to exercise the licence for his own benefit so long as he is entitled to occupy the premises. But the licence is exercisable by its terms only in the premises which the tenant holds of the landlord and when he ceases to occupy the premises he can no longer exercise the licence. The contractual rights given to the landlord to ensure that the licence is not destroyed or removed to other premises, but is kept on foot and transferred to a person chosen by the landlord, do no more than safeguard the interests of the owner [ recognised by identified sections of the Liquor Acts]." [emphasis added] 58 Five years later Jordan CJ followed this analysis in ex p Berry; re Kessell (1936) 36 SR (NSW) 485, 488 [cf Burns Philp Trustee Co Ltd v Ironside Investments Pty Ltd [1984] 2 Qd R 16 and 888 Casino and Tavern Pty Limited v Hurlfobe Pty Limited (1997) 8 BPR 15,505, unreported, Windeyer J] 59 There is no doubt but that Mr Garcia had been both before and after 7 July 1994 appointed to hold and held the hotelier's licence [see the recitals to the 7 July 1994 Deed Relating to Hotel Licence] and continued as licensee after 1 January 2001. Subject to being able to establish the circumstances necessary to prove (1) a separate contract; or (2) dealing giving rise to a trust situation, capable of recognition consonant with the Act, Mr Garcia clearly had the necessary status to sustain acquisition of rights pursuant to such a contract or trust. The submission that he had no such status by reason of the above-described contractual arrangements is rejected. In truth these contractual arrangements were directed to ensuring that the licence was kept on foot for the benefit of the premises and at term end transferred to the Lessors or their appointee. 60 It is appropriate to interpolate that the second reading speech in relation to the Act stated inter alia:

[53]

It is not proposed to confer ownership rights through the legislation. Entitlements will be issued in respect of a particular hotel licence or a certificate of registration for a club. In the case of a hotel, the licensee will be permitted to apply for the transfer of entitlements to another licence, provided the licensee can satisfy the board that the licence owner has consented. Many hotel licences are owned by one party and leased to another under contracts that may last as long as 20 years. There is concern that lessors may attempt to force the lessee from the business, thereby allowing the lessor to take advantage of the poker machine entitlements that are issued in respect of the licence. The bill includes a savings provision to give protection for the existing contractual rights of lessees." [emphasis added] 61 Nor is there substance in the notion that the Act gives the owner of licensed premises "ownership" of a hotelier's licence issued in respect of those premises. An owner of the premises may or may not become the licensee. An owner has rights in respect of the hotelier's licence [as for example may be seen in section 42 of the Liquor Act 1982 which provides that where a licence is current and the licensee is evicted from the licensed premises, or, to the exclusion of the licensee, the owner of the licensed premises comes into, or becomes entitled to possession of the licensed premises, the owner of those premises may apply for a transfer of the licence]. 62 The issue as to whether or not Mr and Mrs Masters have a "financial interest in the Hotelier's Licence" for the purposes of section 19 (3) (c) of the Act is dealt with below. Suffice it to say that a person with such a financial interest is at the least in a position of high advantage as his/her support to a proposed transfer is stipulated for in section 19(3)(c). Remaining issues 63 The remaining issues presently raised for determination concern inter alia whether or not in the particular circumstances here proven, Mr Garcia can establish a basis showing that the equitable title to the entitlements was severed from the licence that will have to be yielded up [by the new licensee] on the termination of the Lease. Jabetin did establish that entitlements are disposable (in accordance with the Act) independently of the poker machines. Hence as Mason P put it in Jabetin (at [67]):

[55]

" Quite apart from the implications derived from the scheme of the GMA…, the statutory allocation "in respect of" the hotelier's licence at the Hotel brought about the situation that, absent any separate contract or dealing giving rise to a trust situation capable of recognition consonant with the GMA, the entitlements will go with the licence. The Lease is silent as to separate disposition of the entitlements, but it does provide that the licence is effectively at the lessor's disposal after termination." The plaintiff's submissions 65 Clearly Mr Garcia seeks to discharge the onus resting upon him to identify that which separated the hotelier's licence and the entitlements "in respect of" it. Contractual rights 66 The first approach taken by the plaintiff is put in the following terms: · Mr McAsey is contractually bound to deal with the PMEs for the benefit of and as Mr Garcia directs. That is the plain effect of Clause 11 of the Sale Agreement, especially sub-clause 11.3. Mr Garcia seeks specific enforcement of his Sale Agreement with Mr Garcia, particularly of Clause 11, with particular injunctive and ancillary relief moulded to the nature of the PMEs, specific and valuable property rights not otherwise obtainable. See Meagher Gummow & Lehane' Equity - Doctrines and Remedies, [20-005] - 20-015] and [20-040], [21-195] - [21-205] · Mr Garcia seeks enforcement of the express contractual obligations contained in clause 11 and especially sub-clause 11.3 of the Sale Agreement. Mr Garcia submits that Mr McAsey's obligations under that agreement include an obligation to sign a transfer(s) of PME's in the prescribed manner and form: section 19(3)(d) GMA and to deliver such transfer(s) to Mr Garcia or his representatives for lodgment with the Board and do everything necessary to support the application. Trust 67 Further or in the alternative, the proposition put forward is that Mr McAsey is trustee of the PMEs for Mr Garcia and bound to deal with them as Mr Garcia directs. The submission is as follows: · further and in the alternative, Mr Garcia submits that Mr McAsey is a trustee of the PMEs for the benefit of Mr Garcia and must hold them for the benefit of Mr Garcia and deal with them as Mr Garcia directs. The trust arises either expressly, or as a resulting or constructive trust. The PMEs are property separate and distinct from the hotelier's licence in respect of which they are allocated and the PMEs are capable of being subject matter of a trust: Jabetin per Mason J at para 53; · the following matters are clear:

[61]

(c) Alternatively, there is a constructive trust, as in the light of the facts of this case, particularly those set out in paragraph 36 above, it would be unconscionable for Mr McAsey (or the Lessors) to retain the benefit of the PMEs. Muschinski at 615-616 and Baumgartner v Baumgartner (1987) 164 CLR 137 at 147 . Further, it is "indubitably correct" that the law as to constructive trusts is not to be forced into closed categories: Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681 - 700, Gummow J. · In particular, Mr Garcia submits that the terms of clause 11 of the Sale Agreement evince a clear intention to create a trust over the PMEs in favour of Mr Garcia. Clause 11 contemplates that Mr McAsey will or may come to hold certain rights in the PMEs. The parties have provided that, in that event, Mr McAsey will hold the benefit of such rights "on behalf of" and to the account of Mr Garcia: clause 11.4; and that Mr McAsey will do all acts and things necessary to enable the plaintiff to claim and enforce its rights in the PMEs. · Such duties are consistent with and referable to, the duties imposed on trustees of trust property. They specifically recognised that Mr McAsey, as the holder of the hotelier's licence, may be in a position to control the PMEs. The clauses contemplate that any such rights will be exploited for the sole benefit of Mr Garcia and clearly stamp the arrangements with the impression of a trust. Dealing with the issue 68 It seems clear that the facts of this case are quite different from those dealt with in Jabetin. The case does not seem to involve "unattached poker machine entitlements" [ie poker machine entitlements which are not attached to the holder of a licence], to use the words of Mason P (at [84]). To the contrary, Mr Garcia's case is simply that his contractual or equitable rights involved and involve only obtaining benefits from the subject entitlements which entitlement will never be detached from a hotelier's licence. The proposition is tied to the notion that entitlements are "in the nature of property". Hence something akin to what in property law is accepted as a present "legal title" is seen to be held by Mr McAsey in respect of the entitlements. This is an area where labels are of limited significance. The proposition is that albeit that Mr Garcia on and after transferring his interest in the hotelier's licence to Mr McAsey, did not himself hold any hotelier's licence to which the subject entitlements could be attached, his rights [flowing from the terms of his arrangements with Mr McAsey, whether in contract and/or pursuant to the creation of a trust] remained entirely consonant with the requirement that the legal interest in the subject entitlements be at all material times held by the holder of a hotelier's licence. 69 Notwithstanding that there are some difficulties with the proper construction of clause 11 of the Business Sale Agreement I am not able to fault this proposition. 70 The subject of clause 11.1 is described as "[t]he Vendor's right" : "if any, to ownership, compensation or damages, arising from the vendor's efforts, actions and expenditures in relation to gaming at the premises, resulting in the allocation of the Poker Machine Entitlements, whether statutory or otherwise, and whether now in existence or arising at any time after the date of this Agreement, is not included in the sale under this Agreement". 71 At the time when Mr Garcia entered into the Agreement for Sale of the Hotel Business he was still the licensee and consistently with Jabetin, he held what in other circumstances may be described as "the property" in the subject entitlements [cf earlier comment in relation to use of labels]. Clearly his rights in the subject entitlements were contingent upon the requirement that they be tethered to a hotelier's licence. Equally clearly, subject to that contingency, the rights to the entitlements were capable of being disposed of and made the subject matter of a trust relationship. 72 Use in clause 11.1 of the term "[t]he Vendor's right… to ownership…&c" does not expressly recognise the above described contingency. However that contingency arises as a matter of law from the proper construction of the Act.

[68]

Such statements exemplify the point made by Brennan J in his judgment in Codelfa at 401: "The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used."" [Emphasis added] 76 Hence I take it as axiomatic that: · the Court endeavours to give primacy to unambiguous words used in a written contract, this matter generally being approached in the manner outlined by McColl JA in Peppers Hotel Management supra; · the proper approach seeks the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract" (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 citing Lord Hoffmann, Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114; Peppers Hotel Management Pty Ltd supra at [66 et seq]; commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64]. Dealing with clause 11 77 The submission advanced by Mr and Mrs Masters was to the effect that clause 11 was incapable of supporting Mr Garcia's claimed contractual right for the reason that the clause was said to address a mere possibility [emphasis being placed upon the facts that: - clause 11.1 refers to "the Vendor's right, if any , to ownership, compensation or damages". - clause 11.2 begins " If the Vendor has now or acquires any such right in the future …"

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clause 11.3 refers to "any such right", and clause 11.4 refers to "such right"]. 78 The contention advanced by Mr and Mrs Masters was that: · the Agreement for Sale of Hotel Business does not address, let alone answer, the question "what is the right or interest of the plaintiff in the poker machine entitlements?" · there could never be any right to the "specific performance" of such a clause until it had been determined that the plaintiff in fact has "such right" to "ownership, compensation or damages" by reason of the matters referred to in clause 11. 79 These submissions are rejected. To my mind although clause 11 is far from felicitously expressed and leaves a deal to be desired, the clause, and in particular sub-clause 11.3 properly construed, sufficiently clearly identifies the parties objective intent which was that Mr McAsey be bound to deal with the subject entitlements for the benefit of and as directed by Mr Garcia. Clause 11.4 is confirmatory of that construction. 80 It seems plain that the whole of the environment with reference to which words in question were used involved an appreciation that the commercial purpose of clause 11 was to recognise against a background of some uncertainty as to the position at law, Mr Garcia's claimed right to "ownership" of the subject entitlements. The clause covered a number of possibilities. It may have been possible for the clause to have been more precise in terms of express reference to a right of or in the nature of "property" in the subject entitlements whether arising by either terms of the contract and/or reason of a trust relationship and/or by reason of particular nominate circumstances. That the clause appears to have been drafted in ambit fashion so as to cover a number of possibilities is not fatal to its operation in the fashion contended for by Mr Garcia. The clause is not void for uncertainty. As the above authorities make clear the Court considers the circumstances with reference to which the words in question were used and, from those circumstances, discerns the objective which the parties had in view. This was a commercial contract and should be construed so as to be given a sensible commercial operation. When one takes into account the circumstance that the parties expressly provided in clause 11.1 for an exclusion from the sale, of Mr Garcia's relevant right to 'ownership' of the subject entitlements, a construction other than that given in the above reasons would seem to create a particularly unreasonable result. Trust 81 It is well established that there is no dichotomy between contract and trust and that there is no difficulty in recognising the co-existence in one transaction of both legal and equitable rights and remedies: cf Barclays Bank Ltd v Quistclose Investments Ltd [1968] 3 All ER 651 per Lord Wilberforce at 656; Gosper v Sawyer (1985) 58 ALR 13 at 26 per Mason and Deane JJ at 26. The present circumstances justify the above finding in terms of contractual rights and the findings which follow in terms of rights in trust. Both the contractual and the trust rights are needed to give full ambit to the rights of Mr Garcia.

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82 Mr Garcia's claim in trust is made out as against Mr McAsey. It may be arguable that the effect of clause 11 is to create an express trust or alternatively a resulting trust. There is a reasonable argument that from the circumstances the law presumes that a trust was intended, notwithstanding the absence of language clearly expressive of such an intention. 83 However, ultimately I have come to the conclusion that a constructive trust is seen to arise. As counsel for Mr Garcia has submitted, it is "indubitably correct" that the law as to constructive trusts is not to be forced into closed categories: Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681 - 700, Gummow J. I accept that it is seen to have been the plain intention of Mr Garcia and Mr McAsey under the Sale Agreement that Mr McAsey was not paying for and was not purchasing the property rights to the subject entitlements and that Mr Garcia should retain the right to deal with the entitlements and the benefit of them, provided that no breach of the Act would take place. To my mind subject to what is said below, the creation of this trust is capable of recognition consonant with the Act. The above described circumstances do make it unconscionable for Mr McAsey "not to recognise" the continued existence of an equitable interest in favour of Mr Garcia. It would be unconscionable for Mr McAsey to retain the benefit of the subject entitlements Muschinski at 615-616 and Baumgartner v Baumgartner (1987) 164 CLR 137 at 147. However that equitable interest will fall away unless Mr McAsey transfers the entitlements to another licensee before the expiration of the current Lease term. 84 There is however one issue arising concerning the requirement that no dealing giving rise to a trust situation can be recognised unless such dealing is seen to be consonant with the Act. Mr Garcia's claim in trust is effectively put as having a life extending beyond the date when Mr McAsey for whatever reason, ceases to be the licensee. In my view such a claim clearly contradicts the scheme of the Act. The Act does not appear to me to countenance a situation where the former licensee will be capable of holding and enforcing his or her equitable interest in respect of unnamed and unknown future licensee's for an infinite period. 85 This problem is avoided where the Court recognises the trust as imposing an obligation limited so that it does not extend beyond the date when Mr McAsey ceases to be the licensee. The case against Mr and Mrs Masters 86 The case pursued against Mr and Mrs Masters proves the following: · that the contractual arrangements entered into between Mr and Mrs Masters and Mr McAsey were generally contemporaneous with and to real extent interdependent with the contractual arrangements whereunder:

[71]

Mr Garcia surrendered his Lease to Mr and Mrs Masters; - Mr Garcia entered into the Business Sale Agreement with Mr McAsey, [The material detail of the interconnections of these sundry contractual arrangements have already been fully set out] · by letter dated 11 July 2002 Mr and Mrs Masters by their solicitors, acting on instructions, made clear that they had been given advice that the beneficial ownership of the subject entitlements was vested in Mr and Mrs Masters and sought an undertaking that Mr Garcia would not deal with the entitlements otherwise than with the consent of Mr and Mrs Masters. This communication predated the Business Sale Agreement and forms a link in a chain of evidence proving that at material times Mr and Mrs Masters must be taken to have been aware of the terms of the Business Sale Agreement insofar as it dealt with the subject entitlements; · Clauses 30 and 34 of the 14 October 2002 Lease to Mr McAsey and Clause 31.1 of the Contract for Sale annexed to the 2002 Lease to Mr McAsey are explicable only upon the basis that Mr and Mrs Masters were at the material time, aware of the contractual arrangement between Mr Garcia and Mr McAsey constituted by the material provisions of the Business Sale Agreement and were seeking to protect their own contractual position. 87 Notwithstanding these facts Mr Garcia has not been able to prove that Mr and Mrs Masters consented or in any other way lent their imprimatur to Mr Garcia's claim to a legal entitlement to enforce the alleged contractual/trust rights stipulated for in the Business Sale Agreement. However Mr and Mrs Masters were clearly aware of the material terms of that Business Sale Agreement and as already indicated, sought to protect themselves against the event that Mr Garcia ultimately was shown to be entitled to enforce such rights. In my view the present is a case where the Jones v Dunkel (1959) 101 CLR 298 inference arises, as the course of evidence did throw up facts requiring an answer if it be that Mr and Mrs Masters would seek to contradict the proposition that they had been aware of the terms of the Business Sale Agreement insofar as it dealt with the subject entitlements at the time that Agreement was being negotiated and was then executed. The whole of the factual circumstances proven have already been set out and [even without the need for Mr Garcia to seek to rely upon Exhibit P 3] it is clear that an evidentiary onus fell upon Mr and Mrs Masters to rebut, by means which lay in their hands rather than those of Mr Garcia, the inference which the facts, unanswered and unexplained, readily permit [cf United States Surgical Corporation v Hospital Products International supra at 258]. 88 Even if Mr and Mrs Masters were not clearly aware of the material terms of that Business Sale Agreement at the time when that Agreement was being negotiated and was then executed, they certainly at the present moment have knowledge of the terms of that Business Sale Agreement and upon the publication of this judgment will have the fullest notice of the trust presently upheld. 89 Section 42 of the Liquor Act 1982 contains detailed provisions covering applications for a transfer of a licence in circumstances where, to the exclusion of the licensee, the owner of a licensed premises comes into, or becomes entitled to, possession of licensed premises. In the circumstances proven were Mr and Mrs Masters, while Mr McAsey remains licensee, to participate with him [or in their own right] by engaging in an attempt to deal with, or dispose of, or to take any action to recognise or cause the transfer of the subject entitlements otherwise than to the direction of Mr Garcia, this would constitute knowing participation in a breach of trust. To use the words of Sachs LJ in Carl Zeiss Stiftung v Herbert Smith & Co (No 2) [1969] 2 Ch to 76 [at 298], what would be involved "would entail both actual knowledge of the trust's existence and actual knowledge that what is being done is improperly in breach of that trust…". [cf the observations of principle in United States Surgical Corporation v Hospital Products International [1983] 2 NSWLR 157 at 252-258 per Moffitt P, Hope and Samuels JJ] 90 At a practical level naturally Mr McAsey's legal obligations owed to Mr Garcia and upheld in these reasons will be of a very different order on or soon after Mr McAsey ceases to hold over under his Lease. 91 As Mr and Mrs Masters are parties to these proceedings they will be bound, as will Mr McAsey, by the courts determination as to Mr Garcia's legal rights concerning the entitlements and concerning whether Mr and Mrs Masters have a present entitlement to receive any income from the business carried on under the authority of the licence or any other financial benefit or financial advantage from the carrying on of the business (whether the entitlement arises at law or in equity or otherwise)" for the purposes of section 19 (3) (c) [cf 19 (5)] of the Act. 92 In the particular circumstances I do not see that there is any question of the subject entitlements "falling into an unlicensed 'black hole" for even a moment: cf Mason P in Jabetin at [86]. Whether the Lessors have a "financial interest in the Hotelier's Licence? 93 Submissions have also been advanced in relation to whether Mr and Mrs Masters have a "financial interest in the hotelier's licence". 94 In my view the submissions on this issue addressed to the Court by counsel for Mr Garcia are in the main of substance. In what follows a deal of those submissions of adopted in their entirety. 95 Both the (surrendered) lease to Mr Garcia and the (current) lease to Mr McAsey contain similar provisions with respect to the preservation of the hotelier's licence. 96 As already observed, referring to the clause numbers contained in the current lease, there are provisions whereby the tenant is required to use the premises only as an hotel (clause 12(b)), to keep the premises open as an hotel (clause 12(c)), to make any necessary applications to preserve the liquor licence relating to the premises (clause 12(c)), not do anything whereby the hotelier's licence may be suspended or jeopardised (clause 12(d)), to notify the Lessors of any legal process relating to the licence (clause 12(e)) and to transfer the licence to the Lessors upon expiry of the lease term (clause 12(k)). To further secure the Lessors a power of attorney is conferred upon the Lessors, empowering them (inter alia) to sign a transfer of the hotelier's licence to whomsoever they may appoint. 97 Clause 29 repeats certain of the obligations set out in clause 12. In addition, it contains an acknowledgement from the tenant that the hotelier's licence "is the Lessors's property and shall remain with the Demised Premises": clause 29(viii) and that the tenant will not apply to remove the licence to other premises. 98 As already pointed out, in Jabetin of the Court of Appeal considered the question of what constitutes a "financial interest in an hotelier's licence" for the purposes of section 19(3)(c) GMA. The Court of Appeal determined that sections 19(5) and (6) GMA exhaustively define the circumstances in which a person will be held to have a "financial interest in an hotelier's licence" for the purposes of section 19(3)(c): see per Mason P paras 41 - 48 and, and Hodgson JA at 91-96. 99 In the present case the Lessors's entitlements are limited to receipt of periodic rent and enforcement of rights under the lease in certain circumstances. Specifically, there is no entitlement to receive any amounts from the carrying on of the lessee's business (such as, for instance, a percentage rent calculable by reference to the turnover of the hotel). 100 In Jabetin the Court of Appeal rejected the argument that covenants similar to those contained in this lease conferred a "financial interest in a hotelier's licence" within the meaning of section s19(3)(c), (5) and(6): see especially per Mason P at para 46 and per Hodgson JA at paras 91 - 95. 101 Hodgson JA in particular (at paragraph 95) referred to "well known" and "common" practices whereby hotel leases contain covenants giving control of the hotelier's licence to the owner upon expiry of the lease term. His Honour said that it would be surprising if, in that context, the legislature intended that section 19(6) should only apply to hotel leases which did not include such standard covenants. 102 At paragraph 96 of his Honour's judgment, another argument raised by the Lessors was dismissed. The argument was that the increased value of the reversion accruing to the Lessors is a present "financial benefit or financial advantage" which brought the Lessors within section 19(3)(c). His Honour rejected that argument because, as his Honour pointed out, while such a benefit may in fact accrue to a Lessors it does not amount to an "entitlement" to any such benefit within the meaning of section 19(5). 103 I accept that the present case [in relation to the absence of a financial interest in the Lessors] is not materially distinguishable from Jabetin supra. 104 Mr McAsey's acknowledgement that the Lessors comprise the "licence owner" is immaterial. As the Court of Appeal has held, sections 19(5) and (6) afford an exhaustive definition of the term employed in section 19(3)(c). 105 The holding is that the Lessors do not for the purpose of section 19(3)(c) have and are not to be taken as having a financial interest in the hotelier's licence. Ruling on evidence 106 During the hearing the Court reserved a decision on the admissibility of the letter from the solicitors for Mr and Mrs Masters addressed to Mr Garcia dated 11 July 2002 [MFI P1]. The document is admitted into evidence as Exhibit P4. Orders

Paul Joseph Garcia v Raymond Henry Masters & Ors

At a glance

Court

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Before

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Judgment (81 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (21)

Cited By (3)