Distortion of the law

August 1st, 2012
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A comment on the SCA judgment in FirstRand Bank Ltd v National Lotteries Board 2008 (4) SA 548 (SCA)

By Joe Louw

During March 2008 the Supreme Court of Appeal (SCA) declared that FirstRand Bank’s (FNB’s) Million-a-Month investment scheme constituted an unlawful lottery and therefore had to be discontinued. The finding, in my opinion, is law gone askew – it was a lawful lottery and should never have been closed down. The law was thus corrupted.

The Million-a-Month scheme was a type of lottery called a ‘promotional competition’ and, as such, qualified for exemption from the prohibitions in the Lotteries Act 57 of 1997. That contention was, however, never argued and it appears that the court alone noticed and mentioned its overwhelming significance.

How did this extraordinary situation arise? Why did the SCA not take into account its own significant conclusion in the penultimate paragraph of its judgment, where Nugent JA stated: ‘The functions that are expressly assigned to the board include “monitoring, regulating and policing” promotional competitions as that term is defined in the Act. In my view the lottery that is being conducted by the bank is indeed such a competition in that it is conducted for the purpose of promoting the use of its deposit account. (I should add that while promotional competitions are permitted by the Act if they comply with prescribed conditions there is no suggestion that the Million-a-Month account conforms with those conditions.)

Had the court taken this into account, it seems likely that a diametrically opposite finding would have been reached. Who should be held accountable for this debacle?

I respectfully suggest that responsibility must be shouldered by all involved: The appellant, the respondent, their respective advisers and, indeed, the court itself. Each of them failed in one way or another.

The far-reaching consequence of the court’s finding is that the parties spent a large sum on legal costs and, in the end, achieved nothing besides indelibly imprinting bad law into the legal system. The finding was also partially followed in the subsequent SCA case of National Lotteries Board v Bruss NO and Others 2009 (4) SA 362 (SCA), which was, in my view, also incorrectly decided. Wrong decisions make bad law.

The saga started when the National Lotteries Board applied for a declaratory order that the Million-a-Month scheme amounted to the conduct of an unlawful lottery under the Lotteries Act. FNB opposed the application, contending that unlawfulness was avoided because participation was not dependent on any form of stake or subscription.

The Million-a-Month scheme invited deposits from investors, which, if made, would confer on the depositor the chance of winning a prize – possibly as much as R 1 million. Deposits remained the property of the depositor and could be withdrawn at the depositor’s discretion. It followed that depositors did not pass ownership of the money, as would be the case in a normal purchase of goods or services.

For practical purposes, a prohibited lottery under the Lotteries Act can be understood as including any scheme in which participants pay or subscribe something in consideration for the right to receive a prize on the occurrence of a chance event (see R v Lew Hoi and Others 1937 AD 215 at 220; R v Ellis Brown Ltd 1938 AD 98 at 100; S v Midas Novelties (Pty) Ltd and Another 1966 (1) SA 492 (A) at 498; and the House of Lords judgment in Imperial Tobacco Ltd and Another v Attorney-General [1980] 1 All ER 866).

The three essential elements of a prohibited lottery may therefore be understood to be –

  • the venture of a subscription or stake;
  • a chance event; and
  • the award of a prize based on the outcome of the chance event.

The absence of any one of these elements serves to avoid the net cast by the Lotteries Act.

The prize and chance elements stem from the definition of ‘lottery’ and the requirement of ‘subscription’ arises from s 63, which provides:

‘Nothing in this Act shall apply in relation to any lottery … in respect of which there is no subscription’.

The effect of s 63 is that if there is no subscription in a scheme, the prohibitions in the Act will not apply to it, despite the fact that it is a lottery. A lottery in which there is no subscription may thus be categorised as a ‘lawful lottery’. It follows that running a lottery is not per se unlawful – only those in which there is subscription are unlawful.

‘Subscription’ is defined in the Act as

‘the payment, or delivery of any money, goods, article, matter or thing, including any ticket, coupon or entry form, for the right to compete in a lottery’.

It is immediately apparent from the definition that the meaning attributed to the word extends well beyond its ordinary meaning. Suffice it to say, for present purposes, that the courts in South Africa and in other countries with similar legislation have held in a long line of cases (for example, the Ellis Brown case) that if the right to compete in a scheme passes as a result of the purchase of a product or service, the element of subscription is present in the price paid for the product or service concerned, despite the fact that the price may be the normal or usual price for the goods or service in question.

The comma after the word ‘payment’ in the definition is clearly an oversight, as the court pointed out in the Million-a-Month judgment. It is, however, clear that there will be subscription if the ‘right to compete’ vests consequent to either the ‘payment’ or the ‘delivery’ of money.

The fundamental basis of FNB’s opposition to the National Lotteries Board’s application was that there was no subscription in the Million-a-Month scheme since those who invested in the scheme got their money back. Thus, they had not lost anything. It seems that this argument is fallacious. There is nothing in the definition of ‘subscription’ that requires that money (or whatever the stake may be) must be lost.

In support of its contentions, FNB relied on the findings of Van Dyk J in Boardman v Minister van Finansies en ’n Ander 1984 (1) SA 259 (T). The Boardman judgment dealt with the Defence Bonus Bond scheme run by the state before 1984. Essentially, the acquisition of a bond brought with it the right to be in contention for a substantial prize. Holders of bonds were naturally entitled to redeem their bonds at will after a stipulated time.

The plaintiff, Boardman, lost bonus bonds worth R 100 000 and sought to recover his investment from the state. He contended, inter alia, that the bonus bond scheme was illegal because it was a lottery prohibited in terms of the Gambling Act 51 of 1965 and, since the purchase and sale of the bonus bonds was an illegal transaction, he was entitled to the return of his money.

It must be mentioned that at the time the Boardman case was decided, lotteries were regulated by the Gambling Act. The Lotteries Act repealed the Gambling Act and re-enacted provisions substantially similar to those in the Gambling Act, save for one significant change, which I refer to below.

Van Dyk J rejected Boardman’s contentions and held that the Defence Bonus Bond scheme was not an unlawful lottery because the investor was assured of receiving the equivalent of his investment when the bond was redeemed and thus could suffer no loss. Nugent JA observed in the Million-a-Month finding that Van Dyk J appeared to have considered that to be self-evident, because he expressed himself in ‘a scant two sentences’:

‘I think that it is such general knowledge, that the court can take notice of it, that a lottery is a gamble and the gamble lies in the fact that a person will lose his or her “stake” if [he or she does] not win the prize … . [It] requires no persuasion to come to the conclusion that all the activities that occur with the purchase and sale of bonus bonds, with the exception that the owner of such a bond might also come into contention for a bonus over and above his or her 5% tax-free interest, take place without any risk of loss of his or her investment’ (Nugent JA’s translation).

A significant feature of Van Dyk J’s judgment is the absence of any reference to the word ‘subscription’ or its Afrikaans equivalent ‘bydrae’, or their respective definitions in the Gambling Act. Instead, the judge repeatedly uses two conspicuously different words, namely ‘stake’ and ‘inset’. Van Dyk J’s consistent use of different words makes it difficult to resist the conclusion that the judge never noticed the short sentence at the end of the Gambling Act that excluded from the general prohibitions those lotteries in which there is no subscription. The judge also did not seem to notice the definition of ‘subscription’. Almost forgivable, perhaps, considering that the word only appears twice in both the Gambling Act and the Lotteries Act – in the beginning and at the end. Van Dyk J is not the only judge who failed to notice the exclusion of lotteries in which there is no subscription – one judge mistakenly pronounced that the word is not used anywhere other than in the definition.

Most significantly, perhaps, is that the judge did not seem to notice that ‘subscription’ includes not only payment but also delivery of money. In short, I believe that the judge erred. FNB’s counsel seems to have ill-advisedly relied on Van Dyk J’s reasoning in the futile attempt to persuade the SCA that the Million-a-Month scheme was not a lottery.

The SCA rejected FNB’s argument, along with the Boardman findings.

I believe that FNB’s counsel failed their client by ignoring a highly significant difference between the Gambling Act and the Lotteries Act. The latter included a provision entirely foreign to the former: Section 54 exempted from the prohibitions in the Act activities called ‘promotional competitions’, which were defined as lotteries –

‘conducted for the purpose of promoting the sale or use of any goods or services’.

Lotteries – or promotional competitions – that complied with the requirements of s 54 were exempt from the prohibitions in the Act (s 54 has subsequently been repealed by the Consumer Protection Act 68 of 2008).

It seems clear that FNB’s scheme was designed to promote FNB’s banking service in trying to attract investments in the Million-a-Month scheme. I suspect that, had FNB relied on the s 54 exemption, the outcome of the matter would have been entirely different, but it never argued the exemption point, and apparently did not even consider it. This was, in my opinion, another error.

I express strong views in support of my contention that the Million-a-Month scheme was an exempt promotional competition. It appears that I am not alone in embracing this view.

For example, towards the end of the Million-a-Month judgment, Nugent JA comments on the Boardman case and the provisions of s 54. The judge said:

‘For there is no doubt that the bank’s scheme falls within at least the extended meaning of a lottery as it is defined and the only question is whether it lacks a subscription and is thus excluded from the Lotteries Act by s 63.

The bank’s case is that nothing is lost or put at risk by the customer who pays money for deposit to the account – he or she is assured that its equivalent will be returned – and for that reason the payment lacks the characteristics of a stake. That argument appealed to Van Dyk J in Boardman v Minister van Finansies, which is on all fours with the present case in all material respects. I will return to that case – and the bank’s argument – presently but first there is an observation that needs to be made.

[The board’s functions] include “monitoring, regulating and policing” promotional competitions as that term is defined in the Act. In my view the lottery that is being conducted by the bank is indeed such a competition in that it is conducted for the purpose of promoting the use of its deposit account. (I should add that while promotional competitions are permitted by the Act if they comply with prescribed conditions there is no suggestion that the Million-a-Month account conforms with those conditions.) On that point, too, the appeal must fail’ (my emphasis).

Nugent JA opined that the Million-a-Month scheme was a promotional competition as defined, but he took this conclusion no further. He did not inquire whether or not the promotional competition complied with the ‘conditions’ prescribed by s 54 to gain exemption. However, the Million-a-Month scheme was undoubtedly an exempt promotional competition. Despite this, neither of the parties raised the issue – it was left to Nugent JA to do so, but by then it was too late.

Conclusion

The National Lotteries Board’s application was ultimately successful and the Million-a-Month scheme was declared to be an unlawful lottery. It was, however, not an unlawful lottery. It was, in fact, an exempt promotional competition and I believe that the National Lotteries Board should never have proceeded with its application. Substantial costs were incurred and an incorrect finding was indelibly imprinted in the law reports.

I believe that FNB was badly advised to rely on the absence of subscription argument and should, at the very least, have raised the exemption argument in the alternative.

It was left to the SCA to raise the s 54 exemption; but it did so only in passing. This raises the question: Should the court not have called on the parties to address s 54 in the interests of justice?

In my opinion, the law – indeed justice itself – has been corrupted. This is significant and sad. Conduct that was not unlawful was incorrectly declared to be unlawful.

Sadly, the corruption of the law did not end there. The subsequent SCA judgment in the Bruss NO case, which relied at least in part on the Million-a-Month finding, also went badly awry. This case arose from a similar successful application by the National Lotteries Board for an order declaring unlawful the WiniKhaya competition, which had raised millions for charities. As a result of the decision, the charities were left to find another source of funding.

One is left to hope that similar fiascos will not further corrupt the law.

Joe Louw Dip Law (Unisa) is a retired attorney.

This article was first published in De Rebus in 2012 (Aug) DR 59.

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