Gambling debts, settlement, and a novel legal question: The lessons putting lawyers on notice

In a legally novel decision addressing questions the courts had not previously considered, Judge Scott Nash of the NSW Local Court found in favour of the defendants, while noting it came at a “financial cost that may diminish the practical value of their victory”.

The long-time wagering relationship between applicant Gary Benson and first defendant Michael O’Grady broke down over significant debts, leading to the commencement of Local Court proceedings and a judgment sum of $45,035.94 being entered in Benson’s favour.

The parties then entered a compromise agreement that provided Benson would “take all necessary steps” to set aside the earlier judgment in exchange for O’Grady paying $48,711.48 – being the judgment debt and interest – and a portion of Benson’s legal costs.

O’Grady also agreed to give Benson 25 per cent of prize money he received from poker tournaments in NSW and 20 per cent of the prize money from interstate poker tournaments, the court set out.

The second defendant to the Local Court proceedings personally guaranteed its performance, Benson contended.

Benson sought to have the compromise agreement enforced.

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Judge Nash determined the contractual agreement to be validly formed, “supported by consideration and constituted an accord and satisfaction according to ordinary contractual principles”.

The guarantee was also validly given, the court determined.

However, Judge Nash found Benson was acting as a bookmaker within the meaning of the Unlawful Gambling Act 1998 (NSW), having accepted wages, agreed to odds, maintained betting accounts, extended credit, reconciled liabilities, and pursued debts.

On these findings, section 56 of the act “therefore deprives” both the compromise agreement and guarantee of legal effect.

“Benson’s claim fails not because the compromise agreement or guarantee lack contractual validity, but because the legislation denies legal effect to agreements of that character when they derive from prohibited gambling,” Judge Nash said.

Reflecting on the decision, lawyer for the defendants, Tony Taouk of Magna Carta Lawyers, told Lawyers Weekly: “The intersection between statutory illegality, settlement finality and the ordinary law of contract is what makes the decision particularly interesting.”

The important point, he added, was that simply reducing a liability to a settlement agreement “does not necessarily put the underlying legality beyond reach”. When a statute has used broad language, parties may need to “consider whether the settlement itself remains caught by the statutory prohibition”, Taouk said.

Judge Nash said the choice of language was “significant”, noting that had Parliament intended only to capture persons conducting a formal business with a profit motive, “it could readily have adopted exclusive language directed to the carrying on of a business or enterprise”.

He found the legislation instead “deliberately employs broad and inclusive language”, and its characterisation was fact-dependent.

According to Taouk, where another statutory regime contains similarly broad language designed to prevent prohibited conduct from producing enforceable rights, “a later settlement may not necessarily sever the connection with the original transaction”.

Another important point was “form did not ultimately overcome substance”, with Taouk explaining the parties had already gone through litigation, judgment, and enforcement by the time of Judge Nash’s judgment. Nevertheless, Judge Nash had to look back at the source of the liability in order to make his decision.

Taouk said it was also important that the court did not say every person who regularly bets with another is a bookmaker.

“The judgment expressly recognised that there is no bright line between private wagering and bookmaking. It was the cumulative effect of the conduct that mattered,” Taouk said.

For practitioners, the decision was significant “both for settlement law and for understanding when an apparently informal wagering relationship may cross into regulated bookmaking activity”.

Lawyers should also not assume that a later settlement agreement has necessarily cured a problem with the underlying transaction.

“Ordinarily, lawyers think of a compromise as creating fresh rights and obligations and bringing the underlying dispute to an end.

“This decision demonstrates that where legislation expressly deprives agreements connected with prohibited conduct of legal effect, the court may look through the later contractual structure and examine the source of the liability.

“Lawyers therefore need to investigate the underlying transaction and the particular statutory regime before advising that a settlement, guarantee or other security will necessarily be enforceable,” Taouk said.

Given the court made clear there was no “single decisive factor” – having looked at the relationship as a whole, including the gambling activities – Taouk said lawyers should not assume an arrangement is private betting because there is no business name, office, advertising, or traditional bookmaking operations.

“Once an informal arrangement becomes regular, organised and substantial, clients should obtain advice before assuming that they are simply betting privately,” Taouk said.

“The consequences can extend well beyond whether a particular gambling debt is recoverable.”