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.
Sale of dividends of stock not in possession.
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]]