The house wins, again

Insurance eBulletin - 2 July 2013

Summary

On 5 June 2013, the High Court of Australia1 unanimously dismissed a gambler's appeal from a finding of the Victorian Court of Appeal that a casino and two of its employees were not liable to him for damages on the grounds that they had engaged in unconscionable conduct.2

The gambler contended that by permitting him to play, the casino acted unconscionably because it exploited his inability - by reason of a pathological gambling condition - to make worthwhile decisions in his own best interests at the gaming tables. 

The High Court's decision provides a useful analysis of the appropriate approach to be taken when dealing with unconscionable conduct claims, particularly those brought by problem or pathological gamblers. While this 'high rolling' gambler was unsuccessful, the High Court's decision leaves the door open for claims of this nature by other gamblers, provided that they can demonstrate 'special disadvantage'.

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Background

Harry Kakavas was a high roller who gambled substantial sums of money at Melbourne's Crown Casino. After turning over some $1.479 billion in 14 months playing baccarat, Mr Kakavas suffered losses totalling $20.5 million. He sued Crown for recovery of his gambling losses and Crown counterclaimed against him for a debt of $1 million.

Mr Kakavas' original action incorporated claims based on negligence, misleading and deceptive conduct, restitution, breach of statutory duty and unconscionable conduct under the general law and in breach of s 51AA of the Trade Practices Act 1974 (Cth). The breach of statutory duty claim was dropped and the trial judge struck out the other causes of action, save for the unconscionable conduct claim.3 In striking out the negligence claim the trial judge followed earlier authority4 that a casino operator does not owe a duty of care to protect a problem gambler against financial loss attributable to gambling merely because, to the casino's knowledge, the gambler has a gambling problem.

Mr Kakavas had a somewhat colourful history. He commenced gambling at Crown in 1994 at the age of 27 when he lost $110,000 of his father's money. He also defrauded Esanda Finance Corporation Ltd of approximately $286,000 and in the criminal proceedings which followed, he asserted that the fraud on Esanda was committed to support his gambling addiction. In November 2005, Mr Kakavas applied for and was granted a self-exclusion order by Crown.

Mr Kakavas was sentenced to serve four months in jail in early 1998. Upon his release, he sought revocation of the self-exclusion order from Crown. A psychologist's report accompanied the application and stated that Mr Kakavas' treatment had been very successful and that Mr Kakavas no longer felt a pathological compulsion to gamble.

The self-exclusion order was revoked in June 1998 but was immediately replaced by a withdrawal of licence by Crown (WOL) to enter in or remain upon its premises. The WOL related to pending armed robbery charges against Mr Kakavas, not to a concern about his gambling. Mr Kakavas did not accept the WOL and sought re-entry to Crown in the years that followed.

In 2000, Mr Kakavas moved to the Gold Coast and established himself as a property developer. By 2003, he was holding himself out as a highly successful businessman who made a lot of money out of property development and managed to combine the roles of real estate salesman and recreational gambler.

He came to Crown's attention after gambling large amounts of money at casinos at Las Vegas and in 2004 Crown executives gave consideration to allowing Mr Kakavas to return to the casino. This approval was granted in October 2004 on condition Mr Kakavas supply a letter from a psychologist stating that he no longer had any gambling problems. He obtained a qualified report from a psychologist who had seen him on only one occasion and tendered that report in support of his application for re-entry to Crown.

In January 2005, Crown decided to revoke the WOL and, later that month, Mr Kakavas was invited to Crown as a guest at the Australian Open and he also stayed at Crown in March 2005. He did not gamble on either occasion.

Mr Kakavas recommenced gambling at Crown in June 2005. Thereafter he came to Crown from the Gold Coast on 28 occasions until 17 August 2006. He brought with him significant amounts of 'front money' and his gambling turnover was such that it rendered him eligible for rewards under a Crown program for high rollers. This included flights in Crown's private jet, boxes of cash known as 'lucky money', free accommodation and meals and rebates on losses.

Mr Kakavas gambled large sums during his visits, winning large sums and losing large sums. Typically he would come to the casino for two to three nights at a time. He gambled during his visits but he also stopped gambling, took breaks and enjoyed Crown's largesse.

By August 2006 Mr Kakavas had lost $20.5 million and was indebted to Crown in the sum of $1 million. A Crown executive suggested that he take a break from gambling.

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High Court's judgment

The High Court noted that Mr Kakavas' case at trial was quite different to the appeal that ran before the High Court. During the trial, Mr Kakavas ran what was referred to by the Court as an "enticement case". That is, Mr Kakavas alleged that Crown engaged in unconscionable conduct in exploiting his alleged 'special disabilities' via a scheme designed to lure him back to the casino and offering inducements in order to procure him to enter and remain in the casino. Much was made of Crown offering the various inducements to Mr Kakavas: the private jet, the 'lucky money' awaiting him in the plane and all of the other benefits bestowed on this high roller during his gambling visits. This enticement case failed.

In what was described by the Court as a "bold strategy", Mr Kakavas departed from the "enticement case", attacking instead Crown's acceptance of the benefit of each wagering transaction at the gaming tables. The Court observed that "bold strategies do not always succeed" and, indeed that proved to be the case here, with the Court unanimously dismissing Mr Kakavas' appeal.

Mr Kakavas relied on an alleged exploitation by Crown of his inability (due to his pathological gambling condition) to make worthwhile decisions as to his own best interests while engaged in gambling.

His unconscionable conduct claim was based on Justice Mason's formulation of the test in Commercial Bank of Australia Ltd v Amadio5 which requires that one party by reason of some condition or circumstance is at a special disadvantage vis-à-vis another and the other party takes an unfair or unconscientious advantage of the opportunity created by that special disadvantage. The special disadvantage must seriously affect the ability of the innocent party to make a judgment as to their best interests and the other party must know or ought to know of the existence of that condition and of its effect on the innocent party.

Justice Deane in Amadio formulated the test in slightly different terms. In his view, the two requirements were that (a) one party to the transaction must be under a special disability in dealing with the other party so that there was an absence of any reasonable degree of equality between them and (b) that disability was sufficiently evident to the stronger party to make it unfair or unconscientious that the stronger party procure, or accept, the weaker party's assent to the impugned transaction.6 

Mr Kakavas claimed that insufficient attention had been given to the fact that he was a problem gambler and too much attention had been directed simply to whether he enjoyed equality of bargaining power with Crown.

Mr Kakavas also alleged that because Crown knew, or ought to have been aware of, his special disadvantages, or was sufficiently on notice of them, it was obliged to make further inquiries and because it did not do so it ought to disgorge its 'winnings'.

Crown contended that the trial judge's findings supported the proposition that Mr Kakavas' gambling condition did not deprive him of the ability to make a worthwhile choice whether or not to gamble, or to continue to gamble, and that Crown's employees did not knowingly exploit his abnormal interest in gambling.

In endeavouring to reconcile the differences in the approaches of Justices Mason and Deane in Amadio, the High Court said that the unconscionable conduct test looks to the conduct of the stronger party and that "essential to the principle … is that there should be an unconscientious taking advantage by one party of some disabling condition or circumstance that seriously affects the ability of the other party to make a rational judgment as to his or her own best interests."7

The Court clarified Justice Deane's approach in Amadio, stating that "the absence of a reasonable equality of bargaining power by reason of the special disability of one party to a transaction, while not decisive, is important given that the concern which engages the principle is to prevent victimisation of the weaker party by the stronger."8 (Emphasis added).

The Court went on to explain that a demonstrated inequality of bargaining power or inadequacy of consideration moving from the stronger party to the weaker would not always give rise to a finding of unconscientious taking of advantage. Fundamentally, courts must ensure that it is fair, just and reasonable for the stronger party to retain the benefit of the transaction. The purpose is not merely to relieve the plaintiff of their own foolishness, but rather, to prevent victimisation.

The High Court cited its earlier decisions of Jenys and Tanwar9, explaining that in applying the Amadio principle, the task of the courts is to determine whether the whole course of dealing between the parties has been such that responsibility for the plaintiff's loss should be ascribed to unconscientious conduct on the part of the defendant. The approach is not to consider special disadvantage in isolation from other circumstances of the impugned transactions.

Having expressed this view about the test to be applied in this case, the High Court:

  • did not accept that Mr Kakavas' pathological interest in gambling was a special disadvantage which made him susceptible to exploitation by Crown, or that he was incapable of making rational decisions and choosing to refrain from gambling at Crown;
  • held that Mr Kakavas did not show that his gambling losses were the product of exploitation of a disability, special to him, which was evident to Crown employees; and
  • held that constructive notice was not sufficient to invoke the Amadio principle. Actual notice of a special disadvantage is required although "wilful ignorance" might be sufficient.

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Implications

This case is an important one, as it clarifies more broadly the approach that is to be taken when examining whether a party to a commercial transaction has engaged in unconscionable conduct.

The High Court's decision is consistent with the recent theme of ascribing personal responsibility to individuals for their own actions. In this case, Mr Kakavas was responsible for his gambling transactions that were variously described as "arm's length commercial transactions, voluntarily engaged in","risky, improvident, transactions in which 'no quarter is asked and none is given by either party" and "not 'special' in the sense that they were conducted fairly and in accordance with the general rules of the game applicable to all players".

It seems that plaintiffs will need to establish conduct amounting to victimisation or the exploitation of a disability special to the plaintiff, that was evident to the defendant.

In establishing unfair exploitation of the other party's weakness, proof of a "predatory state of mind" will be required. Mere inadvertence or indifference to the best interests of the other party will be insufficient. Plaintiffs will need to establish that the relevant employees had an awareness of the personal disability affecting them, and cannot rely on constructive notice.

Interestingly, the High Court noted that this case did not concern a casino operator preying upon a widowed pensioner or a gambler who is evidently intoxicated, adolescent, senescent or simply incompetent. These more traditional areas might yet yield claims, however the diagnosed problem or pathological gambler is likely to have difficulty establishing a cause of action based on unconscionable conduct in the future.10

Authors
Patrick McGrath | Partner
Kate Clark | Special Counsel

 


1 [2013] HCA 25.
Kakavas v Crown Melbourne Ltd [2012] VSCA 95.
Kakavas v Crown Ltd [2007] VSC 526.
Reynolds v Katoomba RSL Services Club Ltd (2001) 53 NSWLR 43.
5 (1983) 151 CLR 447 at 462
6 ibid at 474
Kakavas v Crown Melbourne Ltd [2013] HCA 25 at [118]
8 ibid at [117].
Jenyns v Public Curator (Q) (1953) 90 CLR 113; Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315
10 Similarly, following the Reynolds decision (see Note 4 above), problem or pathological gamblers will have significant difficulty establishing negligence claims against gambling institutions.

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