It has been deemed advisable to treat of transactions on the Stock Exchange under a separate heading: not that they are, in the main, subject to different statutory provisions; but as the facts in these cases are of a very special character, and to a great extent stand on common ground, it will probably facilitate reference if they are all grouped together instead of being scattered over the rest of the work. This Chapter is not intended to give an exposition of Stock Exchange transactions generally, but only so far as it has been sought to apply the gambling statutes thereto.[230]
It will be remembered that wagering transactions of this description were not touched by the earlier statutes of Charles II. and Anne, which applied solely to games and pastimes. So that until the passing of the statute we are about to mention, time-bargains, as they have been called, were not only lawful but were enforceable by action.
The chief statute on this subject was 7 George II., c. 8, commonly called Barnard’s Act, which provided—“That |7 Geo. II., c. 8.| all contracts or agreements upon which any premium should be paid for liberty to put upon, or to deliver, receive, accept, or refuse any public or joint-stock or public securities whatsoever ... and all wagers and contracts in the nature of wagers, and all contracts in the nature of puts and refusals relating to the then present or future value of any such stock or securities as aforesaid, shall be null and void.” The statute also inflicted penalties both for entering into such contracts and for making payments in respect thereof.
Section 8 made invalid all sales of stock not in the vendor’s possession.
The statute only applied to English public stocks, and not to foreign stocks nor to shares in companies.[231]
It also made the contracts and compounding for differences not merely void but illegal. Thus in Cannan v. Bryce[232] it was held that money lent for the purpose of compounding such differences could not be recovered. But in Faikney v. Reynous,[233] where a bond was given to repay money advanced by plaintiff to settle for differences, it was held that the bond was good.
The case of Nicholson v. Gooch[234] was an important case under this statute, and also seems to have some bearing on Stock Exchange transactions at the present day.
The bankrupt Lodge was a member of the Stock Exchange and the defendant was the official assignee of that body. By the rules of the Stock Exchange every member unable to fulfil his engagements was declared a defaulter, and all members indebted to him in respect of Stock Exchange transactions were to pay their debts to official assignees appointed by the Stock Exchange, whose duty it was to distribute the money received rateably among his Stock Exchange creditors. On 11th November, Lodge wrote to the secretary to say he could not meet his engagements, and large sums were paid to defendant by members who were his debtors. On 23rd November a petition in bankruptcy was presented against Lodge; on the 31st, Lodge was adjudicated bankrupt. The plaintiffs were Lodge’s assignees in bankruptcy. It seemed from the evidence that according to the customary way of dealing, speculative transactions and genuine sales were so mixed up, that it was impossible to separate the two; but the jury found that the majority of the transactions were speculative and the parties merely intended to settle differences. It seemed that the method of settling these differences was for the members on the account day to set off the amount of stock which they had respectively agreed to buy and sell, and by a fictitious bargain for the sale at the price of the day of as much stock as would cover the balance, and then settle by paying the difference in the price. The plaintiff sued defendant for the moneys they had received from Lodge’s debtors. The Court drew an inference of fact that they were all contract for differences only. Held, that the settling of differences without actual delivery of stock was, so far as the public stock was concerned, illegal by section 5 of Barnard’s Act. That money paid to defendant in pursuance of this illegal arrangement, and forming the fund sought to be recovered, could not be recovered, as it could not form part of Lodge’s estate.[235] Therefore the assignees had no title to it.
It had been attempted on the plaintiff’s behalf to apply the doctrine of Tennant v. Elliott, and so prevent the defendant from setting up the illegality against them.[236] But the Court held that this did not apply because defendant received the money, not as agent for Lodge or for his use, |Position of Official Assignee of Stock Exchange.| but on an implied mandate to distribute it according to the rules of the Stock Exchange.
Crampton, J., distinguished the receipt of money for differences on public stock which was illegal, and on ordinary shares which were not within the statute. In the latter case the doctrine of Tennant v. Elliott might have applied if defendant had received the money as Lodge’s agent, and subject to his disposal. But the receipt seems to have been under an adverse claim by virtue of the stock Exchange rules rather than as agent of the bankrupt.
Of course to a great extent the importance of this case was diminished by the Statute 23 & 24 Vict., c. 28 by which Barnard’s Act was repealed. |Repeal of Barnard’s Act.| At the same time it seems still of importance as showing the position of the official assignee of the Stock Exchange, i.e., the agent of the Stock Exchange, to distribute the money according to their rules; the defaulter, as a member of that body, binding himself to authorise the money in the event of his default to be paid to the Stock Exchange or their agent.
A late case bearing on this topic, and to a great extent confirming the views of Crampton, J., in Nicholson v. Gooch, is that of ex parte Grant re Plumbly.[237] Plumbly declared himself a defaulter and on the same day presented his petition in bankruptcy. By virtue of his being a defaulter the official assignee, as stated above, became entitled to receive money due to him for differences. An injunction was obtained in bankruptcy against the official assignee against receiving and collecting such debts, and an order to pay all sums that he had received to the trustee in bankruptcy. Against this order the official assignee appealed.
The evidence chiefly consisted of affidavits filed by leading members of the Stock Exchange. Some points in these affidavits call for special notice.
(1.) That contracts on the Stock Exchange are never for payment of differences, but are real transactions for cash ... contemplating transfer or delivery of the stocks, &c. The transfer and payment can only be rendered unnecessary by a new and equally real bargain, on the one part to accept and pay for on the same day, and on the other part to transfer or deliver, an equivalent amount of the same stocks, &c.
(2.) Members having bargains open in stocks and shares which the defaulter has contracted either to take or deliver, but which contracts he breaks by his default, pay to the official assignee the difference in value of stocks, &c., as determined by the prices fixed by the official assignee, at the time of such default, when the change in price is against such members; and on the other hand become entitled to claim against the fund so created in the hands of the official assignee for any such differences when in their favour.
(3.) The defaulter cannot claim differences on damages in respect of contracts which he has broken by his default, nor can he claim the moneys payable as differences under the rules to the official assignee.
(4.) Had Plumbly not become a defaulter nor a liquidating debtor, and had all the contracts been duly performed by him, none of the differences received by the official assignee would have found their way into Plumbly’s possession. In payment of differences, bank notes and cash do not pass and cannot be demanded. All payments on account of differences must be by crossed cheques on a clearing house banker, and the whole of the differences which a member is entitled to pay or liable to receive on each account day must all pass through the Clearing House together. If the balance is in his favour, he receives only the difference; otherwise, the general balance of all his dealings goes to his debit through the operation of the bankers’ clearing. The credit differences of each member are thus directly hypothecated for the payment of his debit differences.
The reader is referred generally to the affidavits in the case, which are set out in extenso in the report; but the above will be sufficient to render the judgment intelligible. Held (1) that the official assignee received the moneys by a title adverse to the trustee, who on that account could not claim them as received to his use. (2) The fund claimed was an entirely artificial fund, created by the rules of the Stock Exchange: if the contracts were winning ones, the trustee could not have enforced them at law, as the defaulter had shown his incapacity to perform the contracts himself: so that the differences could never have been payable to the trustee who was now claiming them. (3) That the trustee could not take advantage of those rules, to which alone the fund owed its existence, and claim the moneys, without also complying with them with respect to the distribution; i.e., he could not claim for distribution among the general body of creditors. James, L.J., put the case on a more general ground. If A owes money which is claimed by B and C, and he pays B, C cannot sue B; but payment does not discharge A, if wrongful.
The case shortly seems to come to this:—“Differences” are payable simply by the rules of the Stock Exchange, and not as a matter of contract between two parties; being payable to the official assignee by virtue of those rules, the fund thereby created in his hands must be subject to the same rules. That the official assignee receives these differences in his own right and not to the use of the defaulter’s trustee in bankruptcy.
It seems, then, that even if bargains for “differences” were known on the Stock Exchange (which it appears they are not), the rights of the official assignee with respect to them as against the trustee in bankruptcy would be governed by the above case, as he could only receive them under the rules, and not as a legal debt. |Nicholson v. Gooch and ex parte Grant compared.| The two cases seem to a great extent to stand on a common ground, though the former was not cited in argument in the latter. In both it was held that the title of the official assignee was adverse to that of the trustee in bankruptcy, so that the former could in no sense be considered his agent. In both the ratio of the decision was that the fund was entirely artificial and owed its existence to the Stock Exchange rules, as the moneys which formed the funds were irrecoverable at law. They were irrecoverable in Nicholson v. Gooch on the ground that the payments were in pursuance of illegal or void contracts; and in Plumbly’s case there was the additional reason pointed out that as he by his default was incapable of performing his part of the contract, he could not enforce it himself.
The next statutory provision concerning this class of cases is contained in the statute we have discussed above, declaring all wager-contracts to be void. The question of the application of this statute to Stock Exchange transactions, depends upon how far such transactions are in the nature of wagers.
The Courts have more than once been called upon to adjudicate upon what have been supposed to be contracts for the payment of “differences,” that is the difference between the present and the future price of stock. Contracts of this sort have been called “time-bargains”; a phrase we shall avoid, as it seems to be used in more senses than one. An instance of such a contract, or rather of a contract which the jury found to be of this nature, is to be found in Grizewood v. Blane.[238] It will be seen that the bargain as the jury found the facts took the form of two collateral bargains, the result of which was that differences only passed between the parties.
The bargain was that plaintiff should purchase of defendant, and defendant should sell to plaintiff a certain number of shares in certain companies at a specified price. The said shares rose in price. The parties then entered into a second agreement to rescind the former one, and that defendant should buy of plaintiff the same number of similar shares at such increased prices, and that defendant should merely pay the plaintiff the difference between the two prices.
Defendant pleaded generally that the contracts were void under the statute, which plea was held bad, for not stating the facts which brought the case within the statute.
The case went to trial on issues of facts raised in the pleadings—that the contract was by way of wagering on the price of the shares, and was merely colourable; that it never was intended that the said shares should be bought and sold, but was a mere wager.
The plaintiff was a stock jobber; and the defendant had dealt with plaintiff through his broker. Evidence was given to show the former course of dealing between parties, that no shares ever passed, but the parties merely settled differences.
Jervis, C.J., directed the jury that if at the time of making the first contract the intention of the parties, as understood by both of them, was neither to purchase nor sell the shares, but only to settle differences, then the transaction was void under the statute.
The Court held that this ruling was right. The jury found that it was a mere gambling transaction—i.e., that it was the intention of the parties at the time that there should be no actual acceptance or delivery of the shares.
This finding of the jury upon the facts of this case have been questioned in later cases, probably through the Courts being in possession of more complete information as to the true nature of transactions on the Stock Exchange. Thus Bramwell, L.J., in Marten v. Gibbons,[239] and Brett, L.J., in Thacker v. Hardy,[240] both express their doubts as to the correctness of the view the jury took of the facts. The case had one peculiar feature, viz., that it was an action by a jobber against the principal on transactions affected through a broker, and as evidence was given of a long course of dealing between the parties, there may have been special circumstances in the case. It is remarkable that in Cooper v. Niel[241] the jury there found that the contract was simply for the payment of differences; but again Brett, L.J., in Thacker v. Hardy,[242] says he could see no evidence of it.
In the former case the broker became insolvent, and his trustee sued the defendant for indemnity in respect of the claims of the jobbers. But as the jury found that the contracts were mere wagers, the jobbers could not claim in respect thereof against the estate of the broker, and, being insolvent, payment could not be enforced against him by the rules of the Stock Exchange.
It seems that the test adopted in some of the cases, viz:—the intention of the parties to deliver or not is unless properly qualified and understood likely to be misleading. A sells to B. A may be a “bear” or speculative seller of what he does not possess; and B may be a “bull” or speculative buyer. Both parties may hope or intend to secure a difference in their favour, the one by re-purchasing, the other by a resale. Each party may suppose that the other may be willing at any time to close the bargain and settle by payment of differences, yet the bargain as stated in this simple way is in no sense a wager. The real test seems to be, what is the primary bargain between the two parties, to ascertain whether each of the parties could be called upon by the other in any contingency, under the terms of the contract, to deliver, or to take delivery and make payment. The subsequent arrangements which the parties may make, i.e., to close or settle by payment of differences even if carried out through a long series of transactions and even though in contemplation of the parties at the time of the contract, do not affect the question if it was not part of the original agreement that the bargain should be settled in this way, and if not the contract could not be a wager. The expectation of the parties might be upset by such a contingency as the winding up of the Company; and it is the strict rights of the parties to the bargain that must be regarded. This view of the matter is confirmed by a passage in the judgment of Lindley, L.J., in Thacker v. Hardy, 4 Q.B.D., at p. 689.
“What are called time bargains are in effect the result of two distinct and perfectly legal bargains, viz: (1) a bargain to buy or sell; (2) a subsequent bargain that the 1st shall not be carried through, and it is only when the first is entered into upon the understanding that it is not to be carried out, that you get a time bargain in the sense of an unenforceable bargain.” In a more recent case in the Court of Sessions, Scotland, Shaw v. The Caledonian Railway Company, a passage in Lord Shand’s[243] judgment requires attention. “If it appears clearly that the contracts and the dealings between the parties were for differences only and were not intended in any sense to be real transactions, and were not in effect real transactions, then they must be regarded as gambling transactions. If it appears that any writings which passed between the parties in the form of sale notes or otherwise were a mere form intended by both parties, to give form to the transaction, and to have no legal effect of any kind, then I do not think that writings under such circumstances would take the case out of the rule I have mentioned. But if contracts for the sale of shares or goods are entered into so as to create mutual obligations upon the parties, on the one hand to give and the other to take delivery, if the obligation is such as can be enforced if either of the parties think fit to do so, then I think we get out of the region of arrangements of mere differences of the nature of betting or gambling.
“If either one or both of the parties may, as and when he thinks fit demand or give delivery of stock and ask payment of the price under the contract, if that be so as to one of the parties, then I think the transaction has the mark or stamp of a real transaction and is inconsistent with the notion of transaction for mere differences.”
The passage in the judgment down to “betting or gambling” seems entirely to confirm the view above expressed, that a real transaction of purchase and sale must create “mutual obligations” to deliver and accept. A can call on B to complete and B can call on A. But the passage which follows seems to contain a somewhat different proposition: “If either one or both the parties may demand,” etc. This would cover a case where A can demand delivery from B, but B cannot from A. We shall have occasion again to allude to this seeming discrepancy when we come to deal with the case of Shaw v. Caledonian Railway again.
From the cases to which we are about to refer it would appear that in point of fact transactions on the Stock Exchange never do take the form of contracts for the mere payment of differences. |Contracts for differences not really known on Stock Exchange. Thacker v. Hardy, 4 Q. B. D.| Thus in Thacker v. Hardy,[244] from a remark in Lindley, J.’s judgment at (p. 689), it seems to have been stated by witnesses that time-bargains are unknown on the Stock Exchange. The real nature of the agreement in that case was found by Lindley, J., to have been as follows:—(1) That defendant was a speculator and employed plaintiff, a stock broker, to speculate for him on the Stock Exchange. (2) Defendant knew that in order to do so plaintiff would have to enter into contracts to buy or sell stocks, &c., and, to protect himself, to make other contracts to sell or buy respectively. (3) Plaintiff knew, as was the fact, that defendant never intended to accept or make actual delivery of the stocks, &c., bought or sold for him. (4) That defendant took the risk of having to accept or deliver, &c., hoping that plaintiff would be able so to arrange matters that nothing but differences would be payable to or by defendant. (5) That otherwise defendant would be unable to pay for what was bought or deliver what was sold.
Plaintiff brought an action for indemnity for what he had been called upon to pay in respect of these transactions.
This was a case it will be noticed turning on dealings between a broker and a member of the outside public, and so differed from Grizewood v. Blane. The judgment of Lindley, J., decided the following points:—
(1.) That agreements between buyers and sellers of stock to pay differences are gaming contracts within 8 & 9 Vict., c. 109, s. 18.
(2.) That that section of the statute only affects the contract which constitutes the wager. In this case plaintiff was bound to enter into the contract himself as principal. The contract between himself and the real principal was not a wager-contract, but an implied contract of indemnity.
(3.) That an agent is entitled to be indemnified against all liabilities incurred on behalf of his principal, unless such were illegal.
(4.) That the statute made gaming transactions void, and not illegal.
(5.) It had been argued that such gambling transactions were illegal at Common Law on the ground of public policy, relying on Lord Tenterden’s opinion in Bryan v. Lewis. But this was overruled in Hibblethwaite v. M‘Morrine.[245] Besides, it had required a special Act of Parliament to make gambling in the funds illegal, and that Act was repealed by 23 & 24 Vict., c. 28.
(6.) He did not infer as a fact that this contract was a contract for differences. The real nature of the transaction is stated above.
It will be seen, therefore, that the judgment treats of the case from two points of view: first, granted the main contract were in the nature of a wager. Held, in this case, that according to previous authorities, the right of an agent to be indemnified, was not affected. Second, that as a matter of fact, there was no wagering in the transaction at all, so that 8 & 9 Vict., c. 109, did not affect the question.
The case was taken up to the Court of Appeal, where the view taken by Lindley, J., as to the facts was confirmed; consequently it became unnecessary to consider the application of the statute to the case.
Bramwell, L.J., said he would assume that the broker might by the terms of the bargain be called upon to resell the stock, so that the principal would only have had to pay differences. That would not infringe the statute as a gaming contract, for the principal might at any time elect to take the stock and hold it as an investment ... also the broker might be unable to sell, if, for instance he had bought shares in an insolvent bank. There is no wagering in a transaction of that kind—the broker has no interest in the stock—it does not matter to him whether the market rises or falls; but when a transaction comes within the statute against gambling and wagering, the result of it does affect both parties.
In ex parte Rogers[246] the facts seem to have been substantially the same. A stockbroker named Evans issued a debtor’s summons against Rogers in respect of money due to Evans on the purchase and sale of stocks and shares on Rogers’ behalf, and for commission, and for money paid by Evans for carrying over[247] a portion of the said stocks and shares. The contracts were made by Evans, subject to the rules of the Stock Exchange, according to which Evans had to deal as principal between himself and the jobbers. It was understood between Evans and Rogers that the latter was only buying for the rise and never intended to accept delivery, but meant to sell them again before the next account day and receive or pay differences. Evans admitted that sometimes in buying the same kind of stock for two clients he bought the whole amount in one from the jobber, and then resold to the clients, but he could not say whether that had been done in respect of any transactions for Rogers. There was also evidence to show that Rogers had met Evans in his office, and authorised him to borrow money and pay the jobbers. It was sought on behalf of the debtor to distinguish the case from Thacker v. Hardy, on the ground that the broker had acted as a principal and not as an agent, having purchased for himself and resold to his clients, and that the transaction being in the nature of a wager was illegal (? void). But the Court held that there was sufficient evidence that the broker had paid money at the debtor’s request, therefore the case was within Thacker v. Hardy.
The case of ex parte Grant,[248] to which we have alluded above, is important on the present subject, chiefly from the evidence given in the case as to the course of dealing on the Stock Exchange, which seems to confirm the finding of Lindley, J., and the Court of Appeal, as to the facts of the case in Thacker v. Hardy. At p. 671 it is stated: “Contracts on the Stock Exchange are never for payment or receipt of differences. All contracts, &c., are real transactions for cash or for a day named, contemplating the actual transfer or delivery ... and which transfer or delivery can only be rendered unnecessary by a new and equally real bargain on the one part to accept and pay for on the same day, and on the other part to transfer or deliver an equivalent amount of the same stock.” It is then further stated that if a member having, say, bought stock which he was unable or unwilling to take up, he balances the transaction by selling a similar amount of (but not the identical) stock for the same settling day for which the bargain was originally made, so as to enable that particular transaction to be written off and balanced. “The whole amount of stock or shares to be taken and delivered balances itself at all times, |Differences, how adjusted.| but the amount of stock to be accepted from or delivered to the several persons with whom any member has dealings, is liable to vary with every new transaction entered into.” “When the settling day arrives each member only transfers or delivers and accepts and pays for the then balance of each particular description of stocks or shares contracted for with each person with whom he has dealt.”
The affidavits in this case should be carefully perused, as they afford a great deal of information as to the method of doing business on the Stock Exchange. It seems clear that the transactions there described can in no sense be in the nature of wagers—they consist of an original purchase or sale and a sub-sale or sub-purchase, the latter being probably to a person who was not a party to the original contract. Possibly if the sub-sale or sub-purchase were made between the original parties and were contemporaneous with the first contract, this might, according to the case of Grizewood v. Blane, amount to a wager, but this method of dealing seems to be unknown on the Stock Exchange.
No doubt the transactions which go on may be made a means of reckless gambling; but it is necessary to bear in mind Lindley, J.’s warning in Thacker v. Hardy against being misled by an epithet.
There is, however, an Irish case,[249] which certainly seems open to question, in which the agreement was that the plaintiffs, as stockbrokers, should buy and sell for the defendant such stocks, &c., as the defendant might require on the terms that if a profit should result from the sale the plaintiffs should account to the defendant for such profit, deducting commission; if a loss, then the defendant was to pay the amount of such loss to the plaintiff, plus commission. Held that this was a wagering contract, as involving an agreement for the payment in receipt of losses or profits, and that the result would have been the same even if the plaintiffs had shown themselves liable to third parties and had sued on an implied contract of indemnity. The answer to this decision seems to be that even if there were a wager at all it was not a wager between plaintiffs and defendant.
It seems probable, therefore, in view of the facts laid before the Court as to the customary course of dealing on the Stock Exchange, and particularly having regard to the decision in Thacker v. Hardy, that the statute will have but little application to Stock Exchange transactions. |Effect of 8 & 9 Vict., c. 109, likely to be very small on the Stock Exchange.| Bargains may no doubt in many cases be mere speculations on the part of one party, but it is clearly stated by many witnesses before the Stock Exchange Commissioners in 1878, that a man’s intentions as to holding or reselling his purchases is not known to the other party, so that it cannot be a wager as between the two.
That this is the real state of the case is shown by the evidence given by Mr. Pyemont before the Stock Exchange Committee in 1878 (see p. 315). “With regard to wagering and gaming, I may say that it was in consequence of the remarks of the Lord Chief Justice which appeared in the Times the other day, that I was led to tender my evidence; I was sorry to see, in so high a quarter, such a total misapprehension of the action of the Stock Exchange. We have no such transaction on the Stock Exchange as wagering and gaming. The only possible approach to anything of the kind was dealing in dividends, which was always reprobated by the Committee. The accounts were never recognised if there were failures; and finding that not recognising them did not stop the practice, the Committee then made it penal to do so, but with that exception I have never known such a thing as a wager. Every £1,000 of stock which is sold on the Stock Exchange must be delivered per se or per alium. It must be delivered (whether demanded or not) and for this reason: If the buyer does not pass me a name on the name day, I sell it out through the secretary of the Stock Exchange for a name to complete the bargain. There is no such thing as a bargain left uncompleted. What I mean by per se or per alium is that if I have sold £1,000 stock to B, if I am not prepared to deliver it, I get D to deliver it to B on my account, and pay him for doing so. If B does not want it, he must find somebody who does. There is no such thing as fiction in regard to any part of a Stock Exchange bargain.”
It does not seem that a Time-bargain in the proper sense of the term, i.e., a contract for the future delivery of something the amount or value of which cannot be ascertained, is in the nature of a wager. Thus, as put by Bramwell and Cotton, L.JJ.,[250] the sale of next year’s apple crop would be a good contract.
So when a person enters into a speculative sale of stock on behalf of himself and another not having the stock in possession, it was held in the Court of Session that it was not a wagering transaction either as between the joint adventurers, or as between the buyer and seller. Mollison v. Noltie.[251]
A contract for “differences” on the Stock Exchanges though sometimes called a time bargain, is not such according to Bramwell, L.J., in the ordinary sense of the word. |Sale of prospective dividends.| So in Marten v. Gibbon[252] a question arose as to the validity of the sale of a prospective dividend. Defendant employed plaintiffs, who were stockbrokers, to sell for him the next dividend on £50,000 of South Eastern Railway A Deferred Stock, and plaintiffs sold it to a firm of dealers on the Stock Exchange. The dividends declared were in excess of the price at which the plaintiffs had sold them; so plaintiffs requested defendant to authorise them to pay the difference to the dealer. On defendant’s refusal plaintiffs paid the amount and sued defendant for indemnity.
It appeared that by Rule 61 of the Stock Exchange, the Committee did not recognise bargains in prospective dividends. There was no evidence as to whether the defendant was at the time of the contract in possession of the £50,000 of Stock.
It was argued for the defendant (1) That this was a transaction within 8 & 9 Vict., c. 109. (2) That as this was not a contract which the Stock Exchange would enforce, no authority to pay the difference could be implied, and there was no evidence of an express authority. (3) Defendant had revoked the plaintiff’s authority to pay.
But the Court held (1) That it must be assumed, in the absence of evidence to the contrary, that the defendant had the £50,000 of Stock in his possession at the time of the contract. Therefore, although an agreement of this kind would have been within Barnard’s Act, it was not within 8 & 9 Vict., c. 109, any more (as was put by Blackburn, J.) than the purchase from a fisherman for the next haul of his net at a fixed sum. Even if it were a wager as between the principal and the broker, it could not be assumed that the jobber knew that it was. (2) That the meaning of Rule 61 was, only that the Committee would not enforce such a contract by expulsion, but the contract was otherwise left good between the parties. The broker therefore, having at defendant’s request entered into a contract on which he was personally liable, the defendant could not revoke plaintiff’s authority.
Since this case was decided, the rule of the Stock Exchange (No. 61) on this subject has been changed into one of a prohibitive character, it being there provided “That no member shall enter into bargains in prospective dividends in shares or stock of railway or other companies.” So that while this rule continues in force, no question is likely to arise as to the rights or liabilities of members of the Stock Exchange in bargains of this description.
The case, it will be seen, leaves quite unsettled what the result of a bargain for the sale of dividends of Stock not in vendor’s possession. It is submitted that the result of such a bargain would be that the jury would, on the facts, find that such were only in the nature of a wager, and that the question would be left to them as one of fact.[253]
So much for differences on the Stock Exchange. It must not, however, be assumed that transactions in stocks and shares or indeed any kind of goods are never bargains for differences only, and so equal to wagers. Those dealings in outside Stock Exchange places, |Bucket shops.| commonly known as “bucket shops,” sometimes take that form, see, for instance, Reggio v. Steven,[254] where the terms of defendant’s prospectus, on the footing of which dealings had taken place, stipulated that all bargains should be settled by payment of differences. These bargains were held to be wager contracts. In Shaw v. Caledonian Railway Company[255] to which allusion has already been made, the real issues in the action were between the plaintiff Shaw and “R,” a customer. Plaintiff carried on business as a stock and share dealer, not a member of the Stock Exchange. The terms on which the dealings were conducted were as follows: the parties dealt as principals not as principal and agent. “R” bought or sold of Shaw, but in the main he bought. He deposited cover with Shaw to the extent of 1 per cent. on the stocks he had opened. If the price of the stock dealt in went against “R” to the extent of 1 per cent., it was Shaw’s duty to close the transaction. Prices were regulated by the tape. If “R” bought of Shaw at 100 and the stock fell to 99 (middle figure) it would be Shaw’s duty to close that stock by re-purchasing from “R” at the lower price, so that “R’s” loss was to be limited to the extent of 1 per cent., unless before the closing “R” should deposit more cover.
It appears from the judgment of Lord Shand, at p. 477, though it does not appear from the report of the evidence given in the case, that all these dealings were for the next Stock Exchange account day, but that subject to Shaw’s duty to close, “R” had the right of carrying over to the subsequent account, (see post as to this transaction, p. 108) but so long as the stock did not go against “R” to the extent of the cover, “R” had the right of (1) keeping the bargain open, of (2) closing by resale or repurchase from Shaw, (3) calling on Shaw to deliver the stocks and paying for them. On some occasions “R” was on the account day credited with dividends on the stocks he had opened, and with a premium on new stocks issued in right of old, also on one occasion he was credited with a contango. (N.B.—This must have been on a “bear” transaction, see post as to this, p. 113.) All the transactions between the two were completed by payment of differences, but it was otherwise with some of the customers of Shaw. It appears that if “R” sold, Shaw had a right to call for delivery (see the evidence of Willis and Lord Shand’s judgment, at p. 477),[256] but this seems to be the only option that Shaw had, and the transactions out of which these proceedings arose were nearly all purchases by “R.” The Court held that these were real transactions of purchase and sale, and not difference bargains. (1) The crediting him with the dividends, &c. showed him to be absolutely the owner of the stocks, (2) because “R” could at any time have gone and demanded delivery.
It is, however, submitted that this decision is untenable. In the first place “R” had an option in all cases where he purchased of either completing by taking delivery or of settling by the payment of differences; Shaw being the seller, was not by the contract entitled to call on “R” to take delivery and pay. It seems that when “R” elected (as he was entitled to do by the contract) to treat it as a difference bargain, the exercising of this option related back to the time of the contract and gave the transaction the character of a difference bargain from the first. The facts do not fulfil the requirements suggested by Lord Shand for making a real bargain, the “mutual obligations” to take and deliver, see ante p. 95, seeing that Shaw had no option in the matter at all events until the cover was run off, and then the contract was that the settlement was to take place by payment of differences. The fact of the dividends, the premium, and the contango, being credited to “R” seems to give very little weight one way or the other, and are quite consistent with a special arrangement in connection with a difference bargain. See per Turner, L.J., in ex parte Marnham.[257]
It has above, at p. 96, been suggested that the judgment of Lord Shand seems to contain two conflicting tests of a “real bargain;” on the one hand he suggests “mutual obligations,” on the other, it is said to be sufficient if either party can compel completion. No doubt “R” had the right of calling for completion, and had he done so then the transaction would have been a genuine purchase. But where one of the parties has the option of electing which form the bargain shall ultimately take, purchase or difference bargain, it is submitted that the legal attributes of the transaction must be determined by the form which it ultimately assumes in fact.
A later Scotch case, The Liquidator of the Universal Stock Exchange v. Howat, is open to the same criticism. The terms on which the plaintiff company dealt with the defendant were of a somewhat similar character to those proved in Shaw v. The Caledonian Railway. The conditions endorsed in the bought and sold note stated that the Company acted as principal in all sales and purchases and not as broker, being in all cases prepared to deliver or take up. Clients might, if it suited their convenience, repurchase or resell from or to the Company any stocks which they might have sold or bought to or from the Company, but the Company could not compel them to do so. Some of the defendant’s instructions to the Company to sell to him contained instructions to repurchase from him (or close) at a certain profit. The action was brought to recover differences on stocks which defendant had purchased and which had been closed by plaintiffs on defendant’s instructions. The Court held that these were real transactions of purchase and sale.
Per the Lord President, at p. 135: “It is much more likely that the arrangement was, that the transactions should be as was expressed in the writings, that the legal rights of both parties should stand as so expressed; but that the attention of both parties should be directed towards escaping from the unpleasant consequences ... if contrary to the interests of both, delivery were demanded and given.”
It is, however, submitted that the effect of the conditions quoted above, gave the customer an absolute right or option to close his stocks and pay or receive differences; and that when he exercised this option it gave the transaction the character of a difference bargain. These being the rights of the defendant, it is difficult to see how the rights of the Company were in respect of real transactions.[258]
There is another kind of transaction on the Stock Exchange, as to which there may some day be a question how far it is a gaming contract within the statute. These are called “Options.” |Options.| Options are described by a witness giving evidence before the Stock Exchange Commission of 1878,[259] as the purchase of the right to buy or sell particular stock on a particular day at a fixed price, e.g., the price of Russian Stock is 83 to-day, and a person wishes to acquire the right to buy that stock on some future day, |Calls.| believing that the price will then be higher, and is desirous of not risking more than a certain sum of money in a transaction, say 2 per cent. He would probably be obliged to give 85 for the stock for the end of March, upon the condition, that if he did not wish to take up the stock, he must pay 2 per cent., the difference between the day’s price and the price at which he bought: that is in effect paying 2 per cent. for the right of saying at the end of March whether he will or will not buy the stock at 83. If he does not buy he loses 2 per cent., and the stock must rise 3 per cent. by the time before he can make 1 per cent. profit. |Puts.| Then there is the converse case of a put, which is payment of a premium for the right to sell, or call upon a man to take delivery of, so much stock at a fixed price. This is akin to a Bear transaction, and of course the option will only be exercised in the event of a fall in the price. The person who would accept this obligation would be an intending purchaser, who is willing to give a price equal to the price of the day, minus the premium. Suppose the price of stock be at 90, A is desirous of purchasing, but does not wish to give more than 88. B, believing they are about to fall, wishes to “bear” them without incurring the risk of heavy loss. So B gives A 2 per cent. for the right on a future day of calling on A to take delivery of so much, at the price of the day—90. If they fall to 87, B will exercise the option and make 1 per cent. profit, while A has got the stock virtually for 88, which he was willing to give. If B does not exercise the option, A secures his 2 per cent.