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Tuesday, July 23, 2013

Enforceability of iGaming Debts in Ontario


As previously reported in Gaming Legal News, in October 2010 the Ontario Superior Court of Justice (Divisional Court) ruled in the case of Bérubé v. Rational Entertainment Limited that an Ontario resident who incurred debts while betting and gaming online on a website operated and regulated from outside Canada (“offshore iGaming”) was responsible for those debts as a matter of contract. In that case, the agreement which the Ontario resident assented to in order to use PokerStars’ website was held to require the Ontario resident to verify the legality of the use of that website in her jurisdiction. This was held to be “a complete answer to…submissions concerning the enforceability of an illegal contract.”

In Canada, there has been no attempt to prosecute the operators of offshore iGaming websites under the Criminal Code (the “Code”) where the only real connection between the website and Canada is that some of its customers are located in Canada. Similarly, Canadian businesses that have provided goods or services to such operators have not been subject to prosecution.

Canadian authorities nonetheless take the view that offshore iGaming operators are acting unlawfully when they accept persons in Canada as customers. In that environment, could the issue of “enforceability of an illegal contract” be used to prevent a Canadian company from enforcing its agreement against an offshore iGaming operator in a Canadian court?

Some guidance on this issue emerged last year in the decision of the British Columbia Supreme Court in Tsoi v. Lai. Lai operated a land-based operation relating to the playing of mah-jong for money. Tsoi lent Lai $50,000 in connection with that operation, which Lai used to provide credit to players, on the basis of an oral loan agreement.

The parties agreed that mah-jong is a “game” as that word is defined by section 197 of the Code. On that basis, the court held that Lai “therefore appears to have admitted to being involved in an illegal business, namely, keeping a common gaming house or betting house under s. 201” of the Code.

The British Columbia Supreme Court held that Tsoi, the lender, was “less at fault” than Lai, the keeper of the common gaming house. In making that determination, the court drew a contrast between Lai’s direct benefit from the illegal activity as against Tsoi’s indirect benefit by way of the interest he made on the loan.

The court went on to state that even if both parties were equally at fault, it would find in favor of Tsoi on the basis that to do otherwise would create an “unjust windfall” in the hands of Lai (also commonly referred to as “unjust enrichment”). Finding that Tsoi’s conduct did not rise to the level of being “egregious” as compared to earlier cases in which enforcement of agreements had been denied, the court stated that it had greater concern about unjustified windfall or unjust enrichment than it did about the nature of the illegality. The court relied upon precedents which held that concerns about unjustified windfalls may override a court’s concern about illegality, and it held in favor of the plaintiff and ordered that Lai repay the outstanding amount of the loan and interest owing to Tsoi.

The subjective nature of this analysis makes it difficult to provide a “one-size-fits-all” answer as to how Canadian companies that provide goods and services to offshore iGaming operators can structure their contractual relationships so as to make “illegal contract” arguments less likely to succeed. This makes it all the more important that Canadian companies entering into these relationships obtain legal advice from counsel experienced in the field, tailored to the specific circumstances that exist between the Canadian company and the offshore iGaming operator in question.

To read the full article, please check out the latest edition of Gaming Legal News.