Scottish Court of Session Decisions

This was an action by Henry Lowenfeld, liquidator of the Universal Stock Exchange Company, Limited, 49 Queen Victoria Street, London, against Richard Howat, Mabie, Dumfriesshire, for payment of £4812, 2s. 10d., the balance alleged to be due upon certain stock and share transactions as per account from 2nd April to 10th May 1889. The whole transactions amounted to £1,287,683, 16s. 7d. Mr Howat also sued the company for payment of £5834, 3s. 9d., being the price of Brighton A and Dover A stocks sold by him to the company, and of which price the company refused payment, on the ground that after crediting Howat with its full amount he was still due them on their total transactions the sum concluded for in their action.

In the first action the defender alleged—“No purchases or sales of stock as are referred to by the pursuer were ever made except the sales of £1450 Brighton A and £3100 Dover A, which were made by the pursuer or his pretended company on behalf of the defender. The pursuer or said company have never accounted for the proceeds of said sales, and the defender has raised an action therefor. The whole other pretended sales and purchases were mere gambling transactions for differences, and represented no real purchases or sales. The pursuer or said company never had the said stocks or shares in their possession or under their order, neither they nor the defender had funds to purchase or pay for the same, and the pursuer and his company represented to the defender throughout that he would never require to pay any money, but simply to pocket the proceeds of successful gambling.”

He pleaded—“(1) The pursuer has produced no title to sue, and he has none. (4). The transactions upon which the alleged debt by the defender to the pursuer arose, not being real transactions, but gambling transactions for differences, the defender is entitled to absolvitor.”

In the proof allowed by the Lord Ordinary the pursuer deponed—“The business of the company was carried on under the memorandum and articles. I was managing director of the company… It went into voluntary liquidation in the summer of last year with the object of increasing the capital and getting additional powers under new articles of association as a step to putting the company on a new and enlarged basis. In the course of the liquidation all the creditors were paid 20s. in the pound and the business re-started. In the course of carrying on the business of the

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company a book was issued called ‘How to Operate,’ a copy of which is produced. That book was very largely circulated. In October 1887 defender wrote to the company for a copy of the book ‘How to Operate,’ and to the best of my belief a copy was sent to him. In accordance with our custom his name was entered in the books, and market reports were sent to him regularly every week afterwards. The first time I saw defender was when he called for me at the office of the company. The first transaction was subsequent to that interview. He came in like an ordinary customer, and wanted to see me about stocks. The next thing that happened was that he sent an order, and an account was subsequently opened. The company are stock-jobbers—just as one man deals in gloves and another in boots, we deal in stocks. We are buyers and sellers. We are not agents or brokers; we are principals in the matter. (Q) And only deal as principals?—(A) Only. We have a document called ‘Terms under which the Universal Exchange Company carries on its business.’ We make that known to all who deal with us…. These terms are printed on the back of every bought and sold note and every order sent to customers, to prevent possible misunderstanding. From the time of his first order we had a number of transactions with defender, purchases and sales, as the account discloses. On the occasion of each transaction we sent him a bought and sold note in the ordinary way when he purchased, and when we bought from him the appropriate note was also sent. In the case of every sale to defender we undertook to deliver to him, and in like manner in every case of purchase from him we undertook to accept delivery from him. We were quite ready to carry out our undertakings in these respects…. The statement on record on his behalf, that with the exception of the dealings in Brighton A and Dover A, the ‘other pretended sales and purchases were mere gambling transactions for differences, and represented no real purchases or sales,’ is wholly incorrect. With regard to the further statement in the same answer, that ‘the pursuer, or said company, never had the said stocks or shares in their possession, or under their order, neither they nor the defender had funds to purchase or pay for the same, and the pursuer and his company represented to the defender throughout that he would never require to pay any money, but simply pocket the proceeds of successful gambling.’ With regard to that I say, we never represented anything to him, we gave him our terms of business, and said these were the terms we were prepared to deal on. We did not deal on any other terms than those expressed in the document to which I have referred. We were quite ready to fulfil the contracts we entered into, either by accepting or taking delivery of the stocks; it was always at defender's request that delivery was not taken or given. The £1450 Brighton A and £3100 Dover A stocks are, I believe, the stocks he referred to at his first interview with me; I think that was in the spring of 1889. He told me he had bought them for speculation, but found it would not pay him as the commission was so high, and that was the reason why he wanted to deal with us. He said he was not satisfied with them, and should prefer to buy something else instead. At that time we were interested in a very large investment in American railway stock—Missouri, Kansas, and Texas railway stock; we had half a million nominal value of it ourselves; and I told him if he liked to buy some of that, I thought it might turn out satisfactorily. To the best of my belief he then said,’ I will sell the stock and think the other matter over.’ An order in writing was taken from him to sell the stock, but no other order was taken that day to the best of my knowledge. He rather wanted to leave it to my discretion what to buy with the proceeds of the Brighton and Dover stock. We never do business on that footing, but as we had actually taken delivery of the stock and had it in hand, I did not mind in that instance, with the idea that if it turned out all right we should let him have the profit which might be on it, as we had his cash in hand, and in that way it was left. No definite order was passed…. If the defender's account had been closed at an earlier period there would have been a considerable profit to him. In the result there was a debit-balance of £4709, the sum sued for. After the account was rendered, defender came to see us—this was the second interview that I remember—and we went carefully through the account. He admitted that it was correct, and gave us a receipt admitting the indebtedness, dated 25th June 1889…. Cross.—The nominal capital of the company is £100,000 in 10,000 shares of £10 each. The number of shares taken up was 2953. All the capital was called up on these shares. … In 1887 the working capital was about £18,000, and when the company went into liquidation it was about £90,000 in addition to the goodwill; that was the actual amount of the surplus assets in addition to the goodwill. The company went into liquidation in 1889. In 1888 the amount of the company's investments in stocks and shares was £91,000; cash at bankers, £16,000; owing on current accounts, £24,000; roughly speaking, about £130,000 of available assets…. All the transactions appearing in the account sued on began with purchases except the Brighton A and Dover A stock. The stocks were purchased from the company by the defender. When he wanted to resell he would give his orders in the ordinary way I suppose. (Q) What did you understand by closing?—(A) I understand he wanted to buy off us so much stock, and so soon as it showed him a profit of 1 2 per cent. he wanted to re-sell it to us, to take his profit instead of keeping it as an investment. We should not be losers by that transaction; the transaction one enters into one day has nothing to do with the transaction one has on the second day…. It was when it dawned upon me that the

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defender could not take up the stocks which were standing in his name as at 26th April, amounting to £600,000, that I closed the account. It had not dawned upon me until then, but it occurred to me at that time that he was going in too heavily…. My letter of 25th April 1889 to defender means that we were beginning to get very much afraid of the account. It does not mean that he should re-sell the stocks to us at once; he might have sold them wherever he chose. By saying he had a great deal of stock open, I meant stock which had not been actually taken up—bought but not paid for. As it happened in this case, it had been bought from us; if you substitute the word ‘unsettled’ for ‘open’ that would give the exact meaning. The bargain has been closed certainly, but the stock is open in the slang of the market because it has not been paid for. The defender would have closed his stock if he had re-sold it or taken it up; you can close in both ways. He could have closed the stock referred to in the letter of 25th April by writing, ‘I will pay for these £100,000 Brighton A's; please deliver them to Herries, Farquhar,’ or anybody else; or by saying, ‘I will re-sell them to you at the best market price.’ We did not mind which way he did it, so long as he either took them up or sold. We suggested that he should close with the view of purchasing them at a cheaper rate later on. On 25th April he had £600,000 of stock open which he had purchased from us. That made £6000 of difference on each one per cent. of rise or fall. No doubt things did look rather black and not satisfactory on that date, and our letter would be the ordinary letter any stockbroker or jobber would write to a customer when he thinks he is incurring a liability he does not care to incur. When we received defender's telegram to close, as he did not give any instructions to take up, we understood the word ‘close’ in Stock Exchange slang to mean that he was to re-sell to us. We accordingly closed, and sent him the appropriate note. On 25th April 1889 I cannot say that we had purchases current covering the £600,000 of stocks which we had undertaken to deliver to defender on the 26th, but we had purchases current in the various stocks mentioned to a very large amount, and we may have had such purchases current for the full amount…. (Q) Was the usual course of dealing that he should purchase from and sell to you alone?—(A) Yes…. (Q) You had transactions with him to the amount of £1,287,683; did you expect he was going into these transactions with the view of taking up the stocks?—(A) I never analyse my customers' intentions. I did not know that he was speculating for the differences; it did not concern me what he wanted; I knew what I wanted. (Q) Did you seriously contemplate that he was to ask you for delivery of any of those stocks which he bought from you?—(A) We have been asked in cases like that. (Question repeated—(A) I did not consider it; I thought it was quite possible that he might; but I should have been surprised if he had.”.

Mr Howat deponed—“It was quite understood that the transactions were to be for speculation only, not for delivery. That was distinctly said by both of us in Mr Lowenfeld's private office when I saw him. He spoke about speculating in £5000 or £10,000 worth of stock, and I asked, ‘Are you obliged to pay for that?’ and he said no, it was merely a speculation. He said they never paid for stock at all, it was never delivered, the transaction was only for the difference in the price. They never called on clients, he said, to pay for stock. The book ‘How to Operate’ explains that a transaction for the purchase of stock is closed by re-selling. The whole correspondence, including the orders and transactions, were entered into and proceeded on the footing I have stated, that there was to be no delivery given on either side, and nothing paid but differences. The only exception was the transaction in Dover A's and Brighton A's stocks which I had formerly bought through Herries, Farquhar, & Company. The whole of the orders I gave to pursuer's company were in writing, either in the correspondence or on orders. When I gave the orders which are referred to in this action, I never intended to take delivery of the stocks. It would not have been possible for me to do so…. I was in London on 13th April 1887, the date when the Brighton A's and Dover A's are entered in the account as sold. I had an interview on that date with Mr Lowenfeld about these stocks. I told him they had risen considerably since I had bought them, and asked whether he thought it would be wise to sell out. He said he did not think they would go any higher, and that he knew of something very good to invest in, namely, the Missouri, Kansas, and Texas railway stock. He showed me a map of the railway, and said the company held a large quantity of that stock, and he advised me to invest in it, which I agreed to do. I agreed to carry out the investment by selling the Brighton A's and Dover A's at the price of the day, and the proceeds were to be invested by the pursuer's company in Missouri, Kansas, and Texas railway stock. I did not intend to sell that stock again unless it went up considerably; it was an investment, and I was to take delivery. I was to give delivery of the Dover A's and Brighton A's, and I did so. It was a rule of pursuer's company that everything must be in writing, and I wrote on 22nd April in accordance with the arrangement we had come to. They replied on the 23rd, ‘As arranged when you called upon us last, the proceeds have already been invested in Missouri, Kansas, and Texas,’ and I believed that was the case. I first learned that that had not been done when they sent me the account in June. I had an interview after that, when pursuer said he had not invested the money, but had applied it to the reduction of the debt due by me on the other transactions. I did not know what to say, the account was there, and I believed I was legally bound to pay. I granted the acknowledgment which is in

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process under that belief. It was given when I was in London; it was already written when I went there. (Shown No. 10)—That is the acknowledgment; it is signed by me, but the body of it is not in my handwriting. I did not sign any document before commencing to transact with the company stating the terms on which the business was to be done. I knew that the terms of settlement were on all the purchase and sale orders, but I did not read them through…. On 26th April 1889 I received a letter from them advising me to close all my stocks, and I at once followed their advice, with the result that is shown in the account sued on. After crediting me with the price of the Dover A's and Brighton A's, which I sold to the company for investment, the account brings out a balance of £4812, 2s. 10d. against me…. The account sued on is a correct statement of the transactions which took place. I do not think I have been fairly dealt with by the company. The whole of the transactions took place in the period from 2nd to 26th April 1889. They amounted to £1,287,683, 16s. 7d.”

The “terms” referred to by the pursuer provided, inter alia, as follows:—“1. In all transactions the company acts as a stock and share jobber, buying from clients and selling to them direct on the company's sole responsibility, and in no case does the company act as broker or agent for a client…. 2. Every purchase or sale of stocks or shares contracted by the company is a bona fide transaction for delivery, the company always being prepared to deliver or take up on the settling-day specified in the contract any and every stock or share which it may have bought or sold. Clients may, if it suits their convenience, re-purchase or re-sell to the company, or any other stock dealers, any stocks or shares which they may have previously bought or sold; the company shall, however, have no power to compel them to do so, the company's intention on entering into any and every transaction being to deliver or take up the stocks bought or sold by them…. 4. Every transaction entered into by the company is to be completed on the settling-day specified on the contract. Should, however, clients find it inconvenient to deliver or take up any stocks or shares which they have bought or sold on such settling-day, they can, upon terms to be mutually agreed upon, arrange with the company to postpone the delivery until the next settling-day; but as it is the company's intention, on entering into the bargain, to deliver or take up all stocks or shares which they may have previously bought or sold, the company cannot be compelled by clients to thus postpone the delivery of stocks. …. 6…. Written contracts will be issued by the company to clients in respect of every transaction, and proper statements of account will be rendered by the company to clients, prior to settling-days, giving full particulars of every purchase or sale of stocks, contango or interest charges, cash payments, and any other transactions which may have taken place between the company and its clients since the date of the last statement of account…. 10. The company is frequently applied to for advice as to the probable fluctuations in the prices of stocks, and is willing to advise its clients, but any suggestions or advice so given are to be accepted by the clients on their own responsibility, and the clients are not in any case to hold the company liable or in any way responsible in respect of such advice or suggestions, or anything done in consequence thereof. Clients should always remember before accepting any advice or suggestion that the company acts as principal or jobber, and is therefore an interested party.”

On 23rd April 1889 the Exchange Company wrote to Mr Howat—“We beg to acknowledge with thanks the receipt of your letter enclosing certificates for £1440 Brighton A, and £3190 Dover A, which was bought of you. As arranged when you called upon us last, the proceeds have already been invested in Missouri, Kansas, and Texas. According to your instructions we have sold to you £100,000 each Dover A at 117 1 4, Brighton A @ 157 1 4, Midlands 147, and Great Westerns @ 158 1 2, contract for which we beg to enclose, and we note you wish to sell same at 1 2% profit.”

On 25th April they wrote—“We have just heard that Home Rails are likely to still further recede in price, and seeing you are a large bull of them we wish to communicate the fact to you that it might be advisable to forthwith close all bulls with a view of purchasing them at a cheaper rate later on, and should you wish to do this no time should be lost. Considering that you have a very large quantity of stock open great caution should be exercised in dealing in same.”

Mr Howat telegraphed on 26th April—“Thanks for letter received. Please close stocks as suggested.” The company replied—“We buy of you 100 each Great Northern A at 113 1 2, Dover A at 115 1 2, Brighton A at 155 1 2, Midlands at 144 3 4, Great Westerns at 157, and 50 each Metropolitan Consolidated at 89 1 2, North Westerns at 183.”

No. 10 of process was in the following terms—“I beg to acknowledge receipt of your account, which I find correct, and I hereby acknowledge that I am indebted to you to the extent of four thousand seven hundred and nine pounds seventeen shillings and sevenpence (£4709, 17s. 7d.), on which amount I agree to pay you interest at the rate of four per cent. per annum from the 29th inst. until the date of payment.”

At the close of the defender's proof his counsel called upon the pursuer, in terms of his undertaking, to produce the minute-book of the company, that excerpts might be made of the minutes relating to the liquidation.

The pursuer stated that careful search had been made in the company's office in London, but the minute-book had not been found, and that the pursuers were satisfied that it was either lost or destroyed along with other documents belonging to the old company.

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The defender put in documents per inventory and closed his proof.

The pursuer had before closing his proof put in as his title a copy of the minute appointing him liquidator, which he had obtained from Somerset House, but which was not certified. He now craved leave to put in evidence in substitution for that document a copy certified by the Registrar at Somerset House.

The defender objected to the reception of the evidence, on the ground that the pursuer had closed his proof. The Lord Ordinary sustained the objection and refused to allow the production.

In Howat's action against the company the Lord Ordinary ( Kyllachy) on 2nd July 1891 assoilzied the defenders from the conclusions of the action, and of the same date, in the action by Lowenfeld against Howat, the Lord Ordinary found that the pursuer had not produced any title to sue, and he therefore sustained the defender's first plea-in-law and dismissed the action.

“ Opinion.—[ After narrating the two actions]—Both actions therefore substantially involve the same question, viz., whether the debt entries in the company's account form a good charge against Mr Howat? and that again depends (for there is no question of the correctness of the account) upon the further question, whether the transactions between the parties were proper purchases and sales, or were, as Mr Howat alleges, mere gambling transactions, of which the only obligation on either side was for payment of differences.

On this question, having considered the proof and the various writings produced, I have come to the conclusion that my judgment must be in favour of the company. I think the documents sufficiently instruct that whatever facilities this company may give for speculation in shares and stocks, and whatever temptations in that direction it may put in the way of inexperienced persons, its transactions are real transactions, under which delivery of stock sold and acceptance of stock bought is made matter of obligation and may be enforced. That is certainly the effect of the documents, and in particular of the pamphlet, ‘How to Operate,’ which the company circulated, and of the printed terms and conditions which are brought under the notice of every customer, and are endorsed upon every bought or sold note which the company issues, and although the defender alleges that it was understood between him and the company that there should be no delivery on either side, but merely payment of differences, the officials of the company are emphatic the other way; and altogether I am bound to say that I think it is the effect of the evidence that whatever may have been contemplated as the probable mode of working out the transactions, it was distinctly made matter of contract that if it suited (as in certain states of the market it might suit) the interest of either party to demand delivery or acceptance, such delivery or acceptance might be enforced. In short, the business carried on by the company appears to be substantially the same as that of a jobber on the Stock Exchange. They appear to buy and sell indifferently, being ready to buy or to sell any stock quoted on the Stock Exchange at the market price of the day, and their profit as a rule arises not upon the rise or fall of a particular stock, but upon what is called the turn of the market, which is really a sort of commission. It is not alleged that in the transactions in question the prices charged were not fair prices, or that Mr Howat was unfairly dealt with. He would apparently have suffered exactly the same loss if he had bought and sold the particular stocks through a broker on the Stock Exchange, and although the transactions were certainly of sufficient magnitude to have suggested doubts as to Mr Howat's ability to carry them out except by payment of differences, I cannot say that I think it is proved that he could not have made arrangements to do so if necessary, or that there is anything in the amount of the transactions which is necessarily inconsistent with the company's view of the contract.

On the whole, therefore, I must, in Mr Howat's action, grant absolvitor to the company, and a corresponding result would have followed in the company's action but for the difficulty as to the liquidator's title to sue, which, so far as concerns his action, seems to me to be insuperable.

The title of the liquidator depends of course upon the minutes of the company, and the proper evidence of the winding-up and of the liquidator's appointment is of course the minute-book of the company, kept and signed in terms of section 67 of the Companies Act of 1862. That being so, and Mr Howat having denied on record the pursuer's title, and tabled a plea of want of title, and called for production of the minutes, it was, I think, incumbent on the liquidator to have produced the minutes or to have produced some statutory equivalent. It appears, however, that the minutes have either been destroyed or lost, and the only document produced before the close of the liquidator's proof in support of the liquidator's title was a copy from Somerset House. That document was produced as a certified copy, said to be admissible under section 6 of the Companies Act 1877, but apparently by some oversight it is not certified or signed by the proper officer, and is accordingly in my opinion of no value. After his proof was closed the liquidator sought to remedy this defect by producing a second copy properly certified, but Mr Howat's counsel, while willing to allow production of the minutes, declined, in the absence of the minutes, to allow this new copy to be put in evidence. He objected that the pursuer's proof was closed, and I confess I see no answer to this objection.

“I must therefore in this action find that the pursuer has not instructed any title to sue, and shall therefore dismiss the action. And with respect to expenses, I think the only course I can follow is to find no expenses due to or by either party in either action.”

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Both parties reclaimed.

Argued for Lowenfeld—(1) On the question of title—The objection taken to title by Howat, and sustained by the Lord Ordinary, was very unreal. Owing to inadvertence the document produced before the Lord Ordinary lacked authentication, but that had now been remedied, and any defect that then existed had now been cured. When the document was first tendered no objection was taken to it, and the time for objecting was past— Robertson v. Thom, December 29, 1848, 11 D. 353; Christie v. Thompson, January 28, 1859, 21 D. 337; Court of Session Act 1868 (31 and 32 Vict. cap. 100), sec. 72. (2) On the merits—It was too late for Howat, after the transactions had turned out unfavourably for him, to seek to escape liability on the ground that they were gambling transactions. The documents showed that the transactions were real. The regulations of the company corroborated this, and the Lord Ordinary after hearing the evidence was satisfied that they were so. Howat in his own evidence did not stand well. He knew that if he had wished it he could have got delivery of any of the stocks which he purchased, and it was by his own desire that they were re-sold at a loss. He was aware of the terms upon which the company did business, and they were incorporated into every transaction. The transactions were not so enormous, looking to the character of the shares, as they were all good marketable stock. Besides, Howat, both in his evidence and by his writ, had acknowledged the correctness of the account sued for, and his repudiation of it afterwards was an afterthought, and under professional advice— Newton v. Cribbes, February 9, 1884, 11 R. 554; Shaw v. Caledonian Railway Company, February 20, 1890, 17 R. 466.

Argued for Howat—The correspondence and documents passing between the parties showed that the transactions were not real, but only for differences. The orders to buy were accompanied by directions to sell when the prices would show a profit of 1 2per cent.; this showed that the transactions were merely for differences. The terms printed by the company on the back of the bought and sold notes were framed for the purpose of evading the law, but the Court would look behind these at the real transactions between the parties. The evidence and the documents, looked at fairly, showed that this was a series of gambling transactions to which the Court would not give effect. The company had not the means of handing over to the purchaser so large a quantity of stock. The transactions were quite beyond the scope of their business— Heiman v. Hardie, January 7, 1885, 12 R. 406; Bell's Prin., secs. 364–5.

At advising—