Pub Charity v Department of Internal Affairs [2014] NZHC 1096 (22 May 2014)

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IN THE MATTER OF	the Judicature Amendment Act 1972 and the Declaratory Judgments Act 1908
IN THE MATTER OF	an application for judicial review and/or a declaratory judgment under the Gambling Act 2003 and the Gambling (Class 4 Net Proceeds) Regulations 2004
BETWEEN	PUB CHARITY Plaintiff
AND	THE DEPARTMENT OF INTERNAL AFFAIRS _Defendant

Hearing:	7-8 April 2014
Counsel:	D M O'Neill for Plaintiff K M Muller and T Badland for Defendant
_Judgment:	_{22 May 2014}

[1] Gaming machines that are located in pubs are owned by corporate societies (licence holders) which pay the pubs (venue operators) a fee for housing and managing the machines. The quantum of such payments is controlled by the provisions of the Gambling Act 2003 (the Act). Absent specific limits, the general test is that all expenditure of gaming proceeds by corporate societies, including on

_{the payment of fees to venue operators, must be actual, reasonable and
necessary.}

[2] Since 2004 a New Zealand Gazette notice (the 2004 Gazette Notice) has imposed further specific limits in relation to all such venue costs.¹These limits control what the licence holder may pay the venue operator both as regards specific tasks, and as an overall percentage of the licence holder’s gaming turnover. The effect of these limits is that if the actual cost to the venue operator of housing and managing the machines exceeds what the limit allows, the venue must absorb the

difference. A licence holder is expressly prohibited from finding other means to reimburse the deficit.

[3] These specific limits were first put in place in 2004. In 2008 a replacement notice was gazetted (the 2008 Gazette Notice), but the sole purpose of that notice was to clarify that the 2004 limits were GST exclusive.²The limits themselves were not increased. The 2008 Gazette Notice remains the operative document.

[4] The plaintiff is a corporate society licensed to run gaming machines. There are 46 such societies which have machines in pubs. The plaintiff is presently the third largest of these with 1884 machines across 160 pubs. It considers that the decision of the Secretary for Internal Affairs (the Secretary) not to increase the amounts payable by corporate societies to venues is unreasonable and it brings these proceedings in an effort to have the situation changed.

[5] The Act places no limit on the number of corporate societies which may be licensed to operate gaming machines. Further, once a society becomes a licence holder, no limit is placed on the number of machines they may own. However, the position is very different for the other necessary ingredient – available venues in which to place them. Here, territorial and local authority rules significantly limit the

_{available pool both in terms of the number of venues, and the number of
machines}

¹“Limits and Exclusions on Class 4 Venue Costs Notice” (2 September 2004) 111 New Zealand

²“Limits and Exclusions on Class 4 Venue Costs Notice” (17 July 2008) 114 New Zealand

³The 2008 Gazette Notice was recently the subject of judicial consideration in The Whitehouse Tavern Trust Board v The Department of Internal Affairs [2014] NZHC 662. I, therefore, cover the history only to the extent, and with the focus, necessary for this decision.

permitted in such venues. This creates a competitive environment as corporate societies seek to secure arrangements with approved venues.

[6] Once an arrangement is reached with an approved venue, corporate societies must enter into a venue agreement with it. This venue agreement is subject to the approval of the Secretary who has detailed a range of matters these agreements must cover. The agreements can last for a maximum of three years. This is in contrast to the corporate society licence which is reviewed annually.

[7] The scheme of the Act is to maximise the percentage of money spent on gaming machines that is returned to the community by authorised distributions. This is achieved by three basic rules –

(a) everything that is spent on machines must come back to the community other than prizes, and expenses incurred in providing the gaming operation;⁴

(b) all such expenses can only be expenses that are necessarily incurred and are reasonable in their quantum;⁵and

[8] Section 116 provides an additional tool for limiting costs and maximising returns by empowering the Secretary to impose more specific controls than that achieved by the general test of reasonable and necessary. It provides:

The Secretary may, by notice in the Gazette, set limits on, or exclude, the costs that may be incurred by a corporate society that conducts class 4 gambling.

[9] The venue cost rules at issue here are the only time the power has been used.

[10] The 2004 Gazette Notice introduced and the 2008 Gazette Notice maintained four limits:

(a) Limit A regulates the amount that can be spent, per machine, on tasks that need doing every day and often several times a day (for example, filling machine hoppers, paying prizes, dealing with player inquiries). Included in these costs is electricity.

(b) Limit B regulates “weekly operating costs”. This covers the labour costs for starting up and closing down machines and analysing the player use of the machine, together with rental payments, insurance and interest costs.

(c) Limit C regulates “venues operating costs” which cover the labour costs involved in banking, cleaning, security and maintenance of the venue.

16 per cent of a licence holder’s gaming machine profit can be expended on venue costs.

[11] A feature of Limits A, B and C is that each Limit separately allows for a management fee. The fee may be up to 25 per cent of the actual costs that have been incurred under each Limit. This fee can be claimed, however, only if there is a gap between actual cost and the particular limit. For example, Limit A is 60 cents per machine per hour. If the actual cost is 40 cents then a further 10 cents may be claimed. If the actual cost is 50 cents, again only another 10 cents may be claimed for a management fee even though 10 cents is less than 25 per cent. Obviously if the actual cost is 60 cents or higher, no management fee can be claimed.

[12] The structure of the 2004 Gazette Notice largely followed the structure suggested in an independent report (the McCallum Petterson Report) the Secretary had previously commissioned. There were, however, differences. The McCallum Petterson Report had recommended a range of limits depending upon the location of the venue. Instead, however, a single limit reflecting the highest cost category was imposed. Second, the labour rates allowed for in the McCallum Petterson Report were increased by 50 per cent. Industry representatives had sought a larger increase. Next, Limit C includes an allowance for the costs of providing venue security, something not provided for in the McCallum Petterson Report. And finally, Limit D (the overall 16 per cent limit) was an extra limit not sourced in the McCallum Petterson Report.

[13] The original 2004 Gazette Notice was the subject of complaint to Parliament’s Regulations Review Committee which rejected the complaints. However, relevant to these proceedings, in the course of that process, the Secretary accepted there was an obligation to review on a regular basis the adequacy of the limits. That remains the Secretary’s position in these proceedings.

[14] Although the Limits have remained unchanged since 2004, the evidence shows that there has been constant review. This process has disclosed a level of dissatisfaction with the current method of controlling venue costs, as well as with the limits themselves (especially Limit A). It is also clear that, at least from the Department of Internal Affairs’ (the Department) viewpoint, that there has been a dearth of reliable data on which to either implement change or increase the limits.

[15] There have been several endeavours to address these issues. They need only be briefly summarised:

(a) In 2006 a departmental and industry working party was tasked with obtaining better information and making recommendations. It eventually reported in November 2007 and recommended that the

(b) Also in 2006, a Colmar Brunton survey was commissioned, seemingly out of concern over the relative lack of progress of the working party. The Colmar Brunton survey focussed on 10 top sites, and sought information from them to enable a more detailed picture to emerge of the amount of time spent on specific tasks. The gaming industry saw the outcome as supportive of increased limits. The Department was concerned about wide variations in the amount of time being spent by comparable venues on the same task. It also considered the results showed managers were doing too many tasks that lesser paid staff could do. In the Department’s view if the balance were adjusted to an equal ratio of managers to staff, all venues would be within the limits.

The Department said it would clarify the GST position, but not otherwise change anything without better information. It said any Limit A increase would need to be offset by changes to Limits B and C and it considered the current levels remained adequate.

(d) In 2008, a Department Benchmarking Project was undertaken where inspectors themselves observed the running of machines. This led to a conclusion that tasks were being allocated to the wrong Limit and that there needed to be guidelines on how much time was permissible for each task, but that the Limits were adequate to accommodate best practice.

(e) In 2009 the Department issued a consultation document containing its recommendations as to maximum permissible time for tasks. The response to this document convinced the Department that better information was still needed so a standardised costs schedule was created and made mandatory. This process of instituting these schedules, obtaining and analysing the now consistent data and then

reporting on it took longer than anticipated. There was an interim report in 2012 and a final report in 2013 (the 2013 Final Report). This exercise led the Secretary to decide the current system needing replacing.

(f) The 2013 Final Report was accompanied by a consultation document recommending a new way of dealing with venue costs. Responses to that have been received and are being analysed.

[16] During the course of these reviews, there would appear to have been two “formal” decisions about keeping the Limits unchanged. The first was in 2008 when it was decided the new 2008 Gazette Notice would only address GST. The second was some time in 2013. I have to observe the respondent’s evidence is scant on this. It is noted that beginning in mid to late 2012, a range of options were considered by the Department including an interim increase to Limits A and B. It seems this was rejected because the loss in returns to the community would be $859,000 per annum. Similarly an interim option of scrapping the Limits altogether and instead increasing the 37.12 per cent minimum return requirement was identified but also not favoured. Instead leaving the Limits unchanged pending significant change to the entire system was the “preferred” option, and a discussion document accordingly prepared and released.

[17] Before leaving this overview it is necessary to comment on one aspect of the

2013 Final Report, being the report which flowed from the introduction of the standardised costs schedule. Concerning Limits A to C, the returns showed that if one took the amount of actual time spent on the tasks, and added on the 25 per cent management fee:

(a) as regards Limit A (hourly costs), 29.1 per cent of venues incurred expenses greater than the allowed recovery limit;

(b) as regards Limit B (weekly costs), 19.2 per cent of venues incurred expenses greater than the allowed recovery for limit;

(c) as regards Limit C (monthly costs), 3.3 per cent of venues incurred expenses greater than the allowed recovery for limit.

[18] The Department’s analysis was that the venues that were most likely to exceed Limit A were venues with lower turnover and high wage costs. These were often found in rural settings with lower staff numbers meaning the manager did more of the work. The Department confirmed that the biggest driver of inability to meet the Limit A cap was the wage cost of the person doing the work.

[19] The above narrative is largely drawn from the only evidence filed by the Department, being an affidavit from Ms McShane who is presently the manager of Operational Policy in the relevant division of the Department. She has been involved in this area for many years, and was involved in the development of the current Act.

[20] The plaintiff had likewise filed a single affidavit, namely from Mr Martin Cheer. He has been the Chief Executive of Pub Charity since July 2007. No reply evidence was filed to the evidence of Ms McShane. Mr Cheer’s affidavit traverses the history of the reports, and highlights aspects of them supportive of the proposition that there should be regular reviews and adjustments of the limits. Pub Charity’s view on the current situation, in terms of the levels being inadequate, is then recorded.

[21] I consider there are deficiencies in the plaintiff’s evidence that need to be highlighted. The core of the plaintiff’s case is that the Court should declare that the limits contained in the 2008 Gazette Notice do not represent the current, actual, reasonable and necessary costs of a venue operator in 2013. It must be recalled that Pub Charity as a corporate society is not itself a venue operator, and is not permitted to be. But it does have 160 venues with whom it has venue agreements.

[22] Despite this, there is no evidence either from Pub Charity or these venues as to what might be reasonable in 2013, or where it is that the venues are struggling in terms of coming within the allegedly unreasonable limits contained in the

2008 Gazette Notice. No evidence is provided as to whether it is the actual costs or costs plus management fee that cannot be accommodated. Nor is there evidence from venues about the changes in their wage bills, or changes in other circumstances since the Limits were introduced. Instead the plaintiff relies on the evidence contained in the Department’s latest report (published after the proceedings were filed) that identifies 29 per cent of venues as exceeding Limit A. The Court is asked to infer, without assistance from the plaintiff, that this 29 per cent are otherwise efficient operators and simply cannot meet an unreasonable limit. Further, no analysis is provided as to what share of total turnover the 29 per cent represents. Finally, to the extent the plaintiff relies on the Department’s 2013 Final Report, there is no attempt to engage with the Department’s analysis as to why these venues may be struggling – ie it is mainly rural venues using managers to perform managerial tasks.

[23] Against that background I turn to the various challenges and applications.⁷

[24] The plaintiff first seeks a declaration concerning the meaning of s 116, the terms of which I set out again for convenience:

The Secretary may, by notice in the Gazette, set limits on, or exclude, the costs that may be incurred by a corporate society that conducts class 4 gambling.

The “costs” referred to in s 116 of the Act that the Secretary has to take into account are actual reasonable and necessary costs referred to in s 4 of the Act.

⁷In the Whitehouse Tavern Trust v Department of Internal Affairs (above, n 1), Collins J made a declaration that aspects of the Gazette Notice did not fully comply with the Act. No other relief was given. Neither party contended that the effect of this was to quash the 2008 Gazette Notice or otherwise render it of less than full force and effect. I also consider that is not the effect of that decision, so proceed to consider the plaintiff ’s challenges.

[26] Section 4 of the Act is the interpretation section. Costs are not defined in that section. The reference to s 4 in the proposed declaration is seemingly a reference to the definition of “net proceeds” which are defined as turnover, interest, and machine sale proceeds less “actual reasonable and necessary costs” in earning that money.

[27] The wording of the intended declaration seems to miss its target. As I understand the applicant’s case, the point of the exercise is to define and restrict the nature of any “limits” that might be imposed under s 116. However, the proposed definition attaches to the use of the word “costs” in s 116, not limits. Addressing the declaration on its terms, there is no reason to link the word “costs” to any definition in s 4 of the Act, especially when costs itself is not therein defined. The costs referred to in s 116 which the Secretary may limit are any expenses that it appears to the Secretary a corporate society may incur and concerning which it is thought specific controls or exclusions are needed. The word needs no gloss or explanation, and there is no policy reason to restrict the section.

[28] The range of costs that could attract the Secretary’s attention is broad. They may be costs that are commonly incurred and obviously necessary, but where quantum is an issue. Or they may be irregular expenses, such as the buyout costs of a management contract,⁸and be in need of limiting or even exclusion. There is no reason to constrain the power granted to the Secretary by s 116 to specific types of costs.

[29] The probable intended focus of the declaration, namely constraining the limits that may be imposed under s 116 to limits that reflect the reality of current day costs, will be addressed shortly.

... that the costs the Secretary should have taken into account in s 116 of the Act should be actual reasonable and necessary costs of running a licensed venue or site in 2013.

[32] This needs some modification. The power under s 116 has not been exercised since 2008 so at best the current limits could only reflect 2008 levels plus a margin. For analysis sake it is better to treat the proposition as being: when deciding in 2013 not to issue a new New Zealand Gazette notice with increased limits, the Secretary was obligated to have regard to what the present day costs for venues are.

[33] There can be no doubt this is correct and I do not understand it to be disputed. No declaration to that effect is needed. One cannot impose Limits, or decide not to amend them as the case may be, without considering the extent to which the existing Limits are preventing the recovery of expenditure that is otherwise reasonable, and within the contemplation of the Act.

[34] It is equally apparent that the Secretary was aware of this obligation and took it into account. While there is no direct statement by him to that effect, prior to the

2013 decision to maintain the existing Limits, the Secretary introduced the standardised costs schedule for the very purpose of acquiring the necessary information. This data thereby collected was then analysed and was the subject of the 2013 Final Report. That Report produces the data on which the plaintiff relies.

[35] The evidence shows that consequent upon that analysis, the Secretary accepted there were flaws in the current system and it needed changing. It was at the same time considered whether pending such change, there should be interim increases to Limits A and B, or alternatively the Limits should be scrapped altogether in favour of an increased minimum return. All these actions and assessments are directed at considering whether the current Limits are working and are adequate.

[36] To conclude on this, the plaintiff’s claim that the adequacy of the existing Limits is a relevant consideration when determining whether to increase them is accepted. The proposition is self evident and no declaration to that effect is required. As for its application to the present case, the evidence shows the Secretary to have been aware it was a matter he must consider, and to have done so.

[37] At one point in the pleadings an alternative wording of the declaration was proposed. Its effect, if made, would be to say that any venue limits imposed by the Secretary needed to accommodate the actual, reasonable and necessary costs currently being incurred by venue operators. There is also in the pleadings an error of law claim to like effect, it being pleaded that the 2008 Gazette Notice involved an error of law because it did not reflect 2013 costs.

[38] The proposition, however framed, cannot be correct since it is contrary to the purpose of s 116. Section 116 is a power given to the Secretary to additionally limit certain expenses. In other words, to go beyond the general limit in the Act of reasonable and necessary, and further circumscribe expenditure. The plaintiff’s interpretation would restrict the Secretary, under s 116, to merely declaring what are reasonable and necessary costs. Such an interpretation is not warranted by the wording of the section and would render s 116 of no practical utility. Further, it is a proposition specifically rejected by the Select Committee considering the Bill. The Committee considered a submission that the general test was sufficient constraint but expressly recommended the retention of what was to become s 116.

[40] I deal next with the claim that the decision to not increase the Limits was an unreasonable exercise of discretion. In support, whilst acknowledging the Act’s emphasis on maximising community returns, the plaintiff submits it is equally a key theme that an operator’s actual, reasonable, and necessary costs be able to be deducted from turnover. The plaintiff emphasises that the current levels were set in

2004 and have not been changed. Further, throughout the various reports and processes that have been earlier detailed in this judgment, there has been consistent

support for both an increase in Limit A, and a linking of all the Limits to the CPI. Finally, in 2013 the Department’s own information shows that for nearly 30 per cent of venues, Limit A is not allowing venues to recover all costs (including the

25 per cent management fee). These factors together are submitted to establish that it must be an unreasonable exercise of discretion for the Secretary to have decided not to change the existing Limits.

[41] For several reasons I do not consider this claim can succeed. First, as noted earlier, the plaintiff ’s evidence does not provide a basis on which one could conclude it was unreasonable for the Secretary to decide that the current limits could continue pending a complete overhaul. The plaintiff understandably places emphasis on the fact that 30 per cent of venue operators are presently not being fully compensated for the tasks covered by Limit A. But, of course, the converse is that notwithstanding no change since 2004, 70 per cent still are.

[42] Second, and related to this, I accept the defendant’s submission that the 2013

Final Report which is the source of these figures must be taken as a whole. The authors of the 2013 Final Report note there is some question over the reliability of figures and also suggest the problem most often appears in a particular type of venue. Further, suggestions are then made within the report as to how these venues might make adjustments so as to come within the Limits. The plaintiff offers no contrary evidence querying the reasonableness of these suggestions.

[43] Third, there is no evidence as to any “harm” caused by the Secretary’s decision. Accepting the 30 per cent figure as accurate, the decision not to amend the Limits simply means that those particular venues are required to absorb some costs. It is important to recognise it is not all expenses, just the ones covered by Limit A. In my view, it is not on its face an unreasonable decision by the Secretary to decide that in the interim those businesses will just have to absorb a level of non-recovery for those tasks. It is after all a voluntary activity.

[44] A claim that it is unreasonable for the Secretary to require some venues to operate at less than full cost recovery would require acceptance of the underlying proposition that it is a principle of the Act that a venue operator’s costs will be fully

reimbursed. I do not accept that. The proposition fails to distinguish sufficiently between a corporate society’s ability to deduct expenses from turnover, and a venue operator’s ability to be reimbursed for costs incurred in running the machines. It is corporate societies to which the Act’s criterion of reasonable and necessary costs is directed. The Limits cap what a corporate society can pay a venue, but do not prevent the corporate society from expensing those payments. Indeed the Limits serve to assist a corporate society to meet both specific requirements on them and their general licence obligation to maximise returns. Second, for the reasons given, the power granted in s 116 tells against the proposition that all of a corporate society’s reasonable costs will always be able to be recovered. Its very purpose is to allow further restrictions on such costs.

[45] Finally, I accept the defendant’s submission that it was reasonable for the Secretary to prefer to allocate resources to consulting on, and implementing, a new scheme. Going the other way and making interim changes to the Limits would both cause a significant loss of money to the community, and could only occur after the formal consultation processes mandated by the Act were carried out. It was open to the Secretary to choose a different path.

[46] Overall, I do not consider the plaintiff established a serious issue to be tried in terms of the reasonableness of the decision. The plaintiff itself is not directly affected by the decision and indeed is assisted by the Limits. There is no evidence from the venue operators, all of whom must have contracted within the last three years to house machines knowing what the existing limits were, and yet nevertheless agreeing to manage machines. The Limits have been under constant consideration since 2004, and were reconsidered in 2013 on the basis of what appears to be the best data available. That data shows that the 2004 levels are still adequate for

70 per cent of venue operators, including providing a 25 per cent management fee. Finally, at least in the Department’s view (unchallenged by evidence in these proceedings), there is scope for some of the 30 per cent who are not presently being fully reimbursed to make adjustments so as to come within the limits.

[47] The final challenge I consider it necessary to address in any substantive way is the claim that the plaintiff had a legitimate expectation that the limits would be increased.

(a) a commitment by the public authority, whether made by promise, policy or settled practice, to act in a certain way; and

(b) reliance on that promise by the aggrieved person, such reliance needing to be shown to be legitimate in the sense of being reasonable given the nature of the promise.

[49] The plaintiff here fails on both limbs. It is undoubtedly the case that there have been suggestions of, and support for, adjustment to Limit A, and for regular reviews and adjustments to all Limits. These proposals have come from the independent assessors, industry people and even within the Department. But there has never been a commitment by the Secretary to act on them, at least as regards changing the figure. It is, however, accepted there is an obligation to keep the Limits under review.

[50] Proposals to change Limit A have consistently been met by the Department with either a caution that compensatory or balancing changes will be needed elsewhere, or the response that the data is insufficient to establish both the inadequacy of the current Limit and what it should be changed to. None of this amounts to a commitment by the relevant authority to actually increase the Limits.

[51] Further, the content of both the 2004 Gazette Notice and the 2008 Gazette Notice tells against the existence of any such commitment. The 2004 Gazette Notice did not contain a provision for CPI adjustment, despite it being recommended by the McCallum Petterson report. The 2008 Gazette Notice did not increase the Limits

_{even though they had been in place since 2004. Both these facts are
inconsistent}

¹⁰Comptroller of Customs v Terminals [2012] NZCA 598, [2014] 2 NZLR 137 at [125].

with the claimed commitment. The plaintiff accordingly fails to establish the first limb.

[52] As regards the second limb of reliance, the plaintiff led no evidence of having relied on the alleged commitment so must fail. The absence of evidence is not surprising. Venue agreements last three years, so any reliance could only relate to commitments entered into within that period. By 2010 (the oldest date for any contract), it must have been obvious no increase was imminent or promised. Further, even if there were a commitment to increase the Limits, it is not clear how the plaintiff could claim to have relied on such a commitment to its detriment. By doing what? The Limits help a corporate society to carry out its obligations by controlling its expenses. There is no evidence of detriment to a corporate society.

[54] Other challenges under the heads of errors of law or failure to have regard to relevant considerations are pleaded but need not be addressed. They are variations on the same points already considered and to address them individually would be merely to repeat what has been said.

[55] For the reasons given all challenges are rejected, and the applications for a declaration are declined. The defendant is entitled to costs and reasonable

High Court of New Zealand Decisions

Pub Charity v Department of Internal Affairs [2014] NZHC 1096 (22 May 2014)