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thereto defendant claims that the plaintiffs in their dealings with the cotton bought and sold for his account, so conducted themselves as to violate the law of agency, and thereby to relieve him of all responsibility for their acts and of liability to them.

An enormous record has been presented to this court, setting forth in minute detail, with hundreds of exhibits, the various and intricate steps in a large number of transactions. The whole record has been carefully examined, but no attempt will be made to state more than the ultimate facts.

The New York Cotton Exchange was incorporated by a special act of the New York Legislature, chapter 365 of the Laws of 1871, amended by statutes passed in the years 1880, 1881, and 1883. The purposes of the corporation, declared in the act, were:

To provide, regulate, and maintain a suitable building, room or rooms, for a cotton exchange, in the City of New York, to adjust controversies between its members, to establish just and equitable principles in the trade, to maintain uniformity in its rules, regulations, and usages, to adopt standards of classification, to acquire, preserve, and disseminate useful information connected with the cotton interest throughout all markets, to decrease the local risks attendant upon the business, and generally to promote the cotton trade in the City of New York, increase its amount, and augment the facility with which it may be conducted.

The corporation was given power to make all proper and useful by-laws not contrary to the constitution and laws of the State of New York or of the United States. There are many by-laws and rules providing for the inspection, classification, storage, sampling, and delivering of cotton and generally regulating the conduct of the members of the exchange and protecting their customers.

Section 34 of the by-laws provides as follows:

Any member of the exchange who shall be interested in or associated in business with, or who shall act as the representative of, or who shall knowingly execute any order or orders for the account of any organization, firm, corporation, or individual engaged in the business of dealing in differences on the fluctuations in the market price of cotton without a bona fide purchase and sale of the property for an actual delivery (commonly known as a bucket shop), or for anyone acting as agent for such organization, firm, corporation, or individual, shall be deemed guilty of unmercantile conduct, which renders him unworthy to be a member of the exchange; and upon conviction thereof he shall be expelled from membership in the exchange by the board of managers.

The method of conducting purchases and sales upon the exchange is by public outcry across and around the “ring.” The ring is a space on the floor of the exchange inclosed within a railing, and encircled by an elevated platform 2 or 3 feet wide, led up to by a step or two. The amount and price are recorded by the exchange reporter.

Section 93 of the by-laws provides as follows:

No contract for the future delivery of cotton shall be recognized, acknowledged, or enforced by the exchange or any committee or officer thereof unless both parties thereto shall be members of the New York Cotton Exchange, and the contract shall be in the following form, viz:

New York Cotton Exchange. Contract. New York - In consideration of $1 in hand paid, receipt of which is hereby acknowledged,

-- have this day sold to (or bought from) -- - 50,000 pounds in about 100 square bales of cotton, growth of the United States, deliverable from licensed warehouse in the port of New York between the first and last days of next, inclusive. The delivery within such time to be at seller's option in one warehouse, upon notice to buyer, as provided by the by-laws and rules of the New York Cotton Exchange. The cotton to be of any grade from good ordinary to fair, inclusive, and if tinged or stained, not below low middling stained (New York Cotton Exchange inspection and classification) at the price of — cents per pound for middling, with additions or deductions for other grades, according to the rates of the New York Cotton Exchange existing on the day previous to the date of the transferable notice of delivery. Either party to have the right to call for a margin, as the variations of the market for like deliveries may warrant, and which margin shall be kept good. This contract is made in view of and in all respects subject to the rules and conditions established by the New York Cotton Exchange, and in full accordance with section 92 of the by-laws.

Verbal contracts (which shall always be presumed to have been made in the foregoing form) shall have the same standing, force, and effect as written ones, if notice in writing of such contracts shall have been given by one of the parties thereto to the other party during the day on which such contract was made, or on the next business day thereafter.

Section 118 of the by-laws provides thatIt shall be the duty of the seller, on the day on which transactions in contracts take place, to furnish a contract or slip and deliver his own, already signed, the opposite one in blank, to the buyer; the latter shall then sign his contract, or slip, and return it to the seller * * *; and the form of the slips is prescribed. A sample of such "slip" in evidence reads as follows:

New York, Auguest 31, 1906. Bought of Springs & Co., successor to J. H. Parker & Co., and agree to receive from them, subject to the by-laws and rules of the New York Cotton Exchange 2,500 B. cotton Dec. delivery at 9.08 R. H. R. & Co. which interpreted means 2,500 bales of cotton for December delivery at 9.08 cents per pound, and signed by the member of the exchange buying, and the corresponding sold note or slip specified that the signer agrees to deliver. This short form or slip under the by-laws is the equivalent of the long form of contract provided for, with all its terms and conditions.

Immediately upon executing an order, the member of the exchange notifies his customer by wire or by mail. A sample of the written notice is as follows:

New York, August 31, 1906. Mr. D. W. James.

DEAR SIR: In accordance with your instructions, we have this day made the following transactions for your account, subject to the rules and regulations of the New York Cotton Exchange:

Sold, 2500 Dec. 9.08

2500 " 9.09 Please take notice that all orders for the purchase or sale of cotton, coffee, grain, and provisions for future delivery are received and executed with the distinct understanding that actual delivery is contemplated and the party giving the order so understands and agrees. It is further understood that on all marginal business the right is reserved to close transactions when margins are near exhaustion without notice.


(Successors to J. H. Parker & Co.) All of said notice is in print with the exception of the address, the statement of the amount of cotton sold, and the price.

The order for these transactions was transmitted by telegraph in cipher, and the notification of execution was also transmitted by telegraph in cipher. The cipher was from Shepperson's Code of 1881, which has been in common use by dealers in cotton for many years, and was used by the plaintiffs and defendant through the years of their mutual relations. This code contains the following:

It is distinctly understood that all orders sent by this table are to be subject in all respects to the rules of the cotton exchange of the market where executed. With every telegram sent by this table, the following sentence will be read as part of the message, namely, this purchase has been made subject to all the by-laws and rules of

our cotton exchange in reference to contracts for the future delivery of cotton. All orders sent by this code to buy or sell for future delivery will be with the distinct understanding that the purchases or sales so ordered are to be in every respect subject to the by-laws and rules of the cotton exchange of the market in which they are executed.

The learned referee has found as matters of fact that in all the dealings between the plaintiffs and the defendant, the plaintiffs had contemplated actual delivery of the cotton bought and sold for the defendant; in some of the transactions plaintiffs actually received and delivered transferable notices with warehouse receipts for the said cotton; that the plaintiffs did not understand or know that the defendant did not intend to deliver or accept delivery of the cotton sold or bought by the plaintiffs for him, if such were his intentions; that the plaintiffs did not understand or intend that the said orders and requests were orders to pay money according to differences in the cotton market at the time of the purchase and at the time of the sale; that all receipts and deliveries of cotton made by the plaintiffs for the defendant on his contracts were genuine bona fide deliveries and receipts of cotton, and were not understood by the plaintiffs to be fictitious or formal transactions; that the cotton represented by the warehouse receipts received by and delivered by the plaintiffs on the defendant's contracts represented actual cotton of the character and quality capable of being used by actual users of cotton; that the above transactions were not wagers or bets made to depend upon the course of quotations and the prices of cotton on the New York Cotton Exchange and were not intended by the plaintiffs or understood by the plaintiffs to be such bets or wagers; that all the orders and dealings between the plaintiffs and the defendant were understood by both parties to be intended to be made upon the New York Cotton Exchange and in accordance with its rules, regulations, and customs; that the New York Cotton Exchange was a market for the dealings in actual cotton, for delivery and receipt of actual cotton, and was not an association or agency solely for the purpose of wagering and speculating on the fluctuations and prices of cotton. · These findings of fact are sustained by the evidence. That both the parties contemplated that the transactions should take place upon the cotton exchange and were to be controlled by its rules and customs is not susceptible of argument. The defendant, who, upon his own testimony, has been engaged in doing business through members of the cotton exchange upon that exchange for from fifteen to twenty years, and who, the testimony shows, has taken his profits from time to time without objection, for the purpose of avoiding this liability now testifies that his purpose was “to play the market," and that he did not intend either to deliver or receive a pound of the cotton which he ordered the plaintiffs to buy and sell upon the exchange for his account.

If we assume that such testimony, given under such circumstances, is credible, that would not be ground for declaring the transactions illegal. Bibb v. Allen (149 U. S., 480) was an action for commissions for services rendered and money paid and advanced by plaintiffs for and at the request of the defendants in selling for their account and as their agents cotton for future delivery according to the rules and regulations of the New York Cotton Exchange. The court reasserted

the proposition that it is well settled that contracts for the future delivery of merchandise or tangible property are not void, whether such property is in existence in the hands of the seller or to be subsequently acquired, and that the burden of proof is upon the party who seeks to impeach such transactions by showing affirmatively their illegality; that a transaction which on its face is legitimate can not be held void as a wagering contract by showing that one party only so understood and meant it to be; and in sustaining a judgment for the plaintiffs alluded to the fact that in the memorandum or slip contracts the sales were described as made subject to the rules and regulations of the New York Cotton Exchange; that the parties made use in their telegraphic correspondence of Shepperson's Code, and said:

It is shown that the rules and regulations of the New York Cotton Exchange recognized no contracts except for the sale and purchase of cotton to be actually delivered. These rules and regulations impose upon the seller the obligation to deliver the cotton sold, and upon the purchaser the obligation to receive it. * * * These rules, which were authorized to be made by the statute of the State of New York, under which the exchange was incorporated, enter into and form a part of the contracts of sale in this case.

Kingsbury v. Kirwan (77 N. Y., 612) was an action brought by a cotton broker to recover on short sales of cotton made by them on defendant's orders. The principal defense was that the alleged contracts of sale were mere wagers on the future market price, and so void under the statute. The court stated the rule:

To render a contract for the purchase and sale of property void as a wagering contract, it must appear to have been the understanding when the contract was made that the property should not be delivered, and that only the difference in the market price should be paid or received.

Held, that the dealings of the parties were not shown to have been wagering transactions so clearly as to justify the court in nonsuiting plaintiffs.

In Story v. Solomon (71 N. Y., 420) the court said:

If it had been shown that neither party intended to deliver or accept the shares, but merely to pay differences according to the rise or fall of the market, the contract would have been illegal. We may guess that the parties were speculating upon the fluctuations in the price of the stock, and that the defendant was not to be required to take or deliver any stock in any case, but simply to pay differences. But a contract which can have legal interpretation and effect should not be condemned, without any proof, in that way. citing with approval Bigelow v. Benedict (70 N. Y., 202).

The defendant claims that the plaintiffs have not shown that they have expended and laid out for his benefit the amount sued for; that they did not keep on hand the specific contracts for future delivery made by them under his direction for his account up to the time that he directed them to close out the transaction by purchasing or selling, as the case might be, and that in their dealings with such contracts they violated their duty as his agents, and that therefore he is relieved from liability.

We do not think that the rules governing the relations of principal and agent apply in their entirety to the relation of the defendant as principal and the plaintiffs as members of the New York Cotton Exchange. They were not employed to buy a specific piece of property and to hold it for his account. No specific cotton, identifiable by marks and numbers, was ever within the contemplation of either party to the contract. By the rules of classification of the cotton exchange, where it was contemplated that the transactions should be had, good delivery could be made of any cotton certified as coming within the classification dealt in to be delivered at any time within the month of delivery specified. Cotton upon the exchange is dealt in by units of 100 bales of 500 pounds each, and such a unit is called a “contract.Actual delivery is made upon transferable notices and warehouse receipt. Such warehouse receipt is transferable from hand to hand and constitutes as valid a delivery as the actual carting away of the cotton itself from the warehouse. The very purpose of an exchange is to facilitate business, and as the growth of commercial and banking business has necessitated the economy of the banking clearing house, so the stock exchange and the cotton exchange have adopted clearing-house facilities. A broker upon the exchange may represent many customers, and may execute during the day with many other members many contracts, both of sale and purchase. It would be as idle to insist upon an actual delivery between the members of the exchange as it would be to compel the banks to cart to each other's banking house the actual money called for by the checks severally received by each upon the other. So that the rules of the exchange provide for certain methods of clearing. It will be remembered that each transaction occurs across the ring and is evidenced by a so-called slip, which is in effect a bought and sold note, or, in the venacular of the exchange, “a contract,” which provides for actual delivery. The first method of clearance is by direct settlement—that is, if A has sold to B and B has sold to A, the two contracts are offset one against the other. If there is a difference in the price, that difference is paid. Second, the ring settlement, which consists of three or more transactions which may be offset, and by payment of differences lead to the same result. By this offset there is a substitution through the chain or ring of parties. Another method is called the "street let-out," which is simply another method of arriving at a novation or substitution. These transactions are evidenced by the clearing-house sheets and the resulting differences are settled by checks drawn, each party being required to deposit up to $5 a bale as a margin for his transaction, from which the payments are made. This settlement of exchange transactions is entirely between the members of the exchange, who only know each other in the transaction, and in no way affects the customer, whose name in such transactions is never, as it is called, "given up” to the other side. A deals with B, as a member of the exchange, upon the exchange contracts, A not knowing whom B represents and B not knowing whom A represents. These settlements are not only permitted by the rules of the exchange, but are required. Section 119 of the by-laws provides that,

In case any member shall purchase or sell by order, and for the account of any person, without notice being given or required of the name of the party from whom such purchase, or to whom such sale was made, and it shall subsequently appear that such purchase or sale may be offset and settled by another contract, made by the said member for account of himself or others, he may make such offset and settlement at any time before the maturity of the original contract, and thereupon the said member, or his firm, if he be trading in the name of a firm of which he is a member, shall be substituted in the place of the said party from whom such purchase, or to whom such sale was originally made, and shall be deemed a party to the contract for all purposes. Such substitution shall not deprive the said member of his right to any sum to which he would be entitled as commission under the original contract.

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