sidewalk below and kills some one, he may be guilty of murder and may pay the extreme penalty. Similarly, it is not necessary to determine whether the future trader at the time he sells actually expects to deliver on that specific contract or not, but only that he knows and is prepared to accept all the natural consequences of entering upon the contractual obligation in question. Intent in law and morals is a question of determining responsibility rather than of determining what consequences and expectations may have been clearly imaged in the mind of the person performing a specific act or initiating a course of conduct. The intent to deliver on a future contract does not presuppose a specific expectation to deliver. Section 4.-The legality and the results of ringing-out and of clearinghouse methods. CLEARING METHODS A MATTER OF ECONOMY.-The question of clearing-house methods deserves to be dealt with as a special topic in the discussion, though its legal disposition is clearly indicated in the foregoing cases. All types of clearing houses are merely varieties and adaptations of the device of substitution or offset, and have in view the handling of this work by the most economical methods. Whether the degree of their development and the comprehensiveness of their functioning in this field is at one or another stage of advancement, or of complication or simplification, should make no essential difference from a legal viewpoint, provided that delivery can be and is made on contracts that mature. The following definition of a bank clearing house is applicable also to an exchange clearing house : A clearing house is an association the object of which is to effect at one time and place the daily exchanges between the several banks which are members, and the payment of the balances resulting from such exchanges.1 After indicating the nature of the dealings of members with each other during the session of the exchange and the number of trades, both bought and sold, that each individual member will have made during the day, Chester Arthur Legg, author of a treatise on the law of commercial exchanges, says: It becomes necessary * * * to employ some method which, while not destroying the integrity of the contract of the customer, will nevertheless permit the various brokers to balance among themselves the "bought " contracts against "sold" contracts, and thereby reduce the amount of any particular stock or commodity which is owing to or from each member or broker.❜ the The ways in which this is accomplished have been described in a preceding chapter of the present volume. In the most highly developed system, hitherto referred to as the "complete clearing house," 1 National Exch. Bank v. National Bank of North America, 132 Mass. 147. 2 The Law of Commercial Exchanges, p. 306. the clearing house is substituted for the other party on all contracts open between houses-or such as will not cancel each other (as regards bushels)—in the transactions of the particular house, either during the day or on the carry over from preceding days. On trading between houses where bought and sold quantities balance each other, and therefore may be immediately offset, the settlement is also handled entirely through the clearing house. In the words of the typical rule of such a clearing house, "the clearing association assumes the position of buyer to the seller and seller to the buyer" in respect to all future trades. This is for the purpose of facilitating and simplifying settlements. It thus becomes no longer necessary to devise "rings," the process of offsetting being in effect automatic, if a house has bought and sold for its various customers equal quantities in a given option. 1 The Supreme Court of the United States in the Christie case, previously referred to,2 describes and comments on the ringing out and substitution process in the statement quoted below. The significance of the illustration is not affected by the quality of the constructive history incidentally introduced. The contracts made in the pits are contracts between the members. We must suppose that from the beginning as now, if a member had a contract with another member to buy a certain amount of wheat at a certain time and another to sell the same amount at the same time, it would be deemed unnecessary to exchange warehouse receipts. We must suppose that then, as now, a settlement would be made by the payment of differences after the analogy of a clearing house. This naturally would take place no less that the contracts were made in good faith for actual delivery, since the result of actual delivery would be to leave the parties just where they were before. Set-off has all the effects of delivery. The ring settlement is simply a more complex case of the same kind. These settlements would be frequent, as the number of persons buying and selling was comparatively small. The fact that contracts are satisfied in this way by set-off and the payment of differences detracts in no degree from the good faith of the parties, and if the parties know when they make such contracts that they are very likely to have a chance to satisfy them in that way and intend to make use of it, that fact is perfectly consistent with a serious business purpose and an intent that the contract shall mean what it says. * * SUBSTITUTION IN RELATION TO THE VALIDITY OF CONTRACTS.-The possible effect of substitution in impairing the contractual obligation is disposed of by the United States Supreme Court in its opinion in Clews v. Jamieson. The defendant was a member substituted on a contract of sale of the original execution of which he had no knowledge and in whose existence he had no interest except as a result of substitution. Clews brought suit against the members of the governing committee of the Chicago Stock Exchange to recover funds. deposited with them, in trust, and also against the firm of Jamieson & Co., brokers and members in the Exchange, to recover damages resulting from a violation by them of their contract to purchase and pay for certain stock. The circuit court after a hearing gave judgment for a dismissal of the bill of complaint for want of privity of contract between complainants and defendants Jamieson & Co. This judgment of dismissal was affirmed on appeal by the circuit court of appeals, which court in its opinion discussed only the question whether or not the contract sued on was for gambling purposes and in violation of the statutes of Illinois on that subject. The court of appeals held that the contract did violate the statutes of Illinois and that the complaint was properly dismissed for want of equity. The complainants then petitioned the United States Supreme Court for a writ of error, which was granted. The pleadings admitted that the sales and purchases of stock were all made subject to the rules of the exchange. Justice Peckham, delivering the opinion of the court, disposed of the conclusions of the circuit court as follows: The circuit court did not question that upon the facts stated a contract came into existence whereby primarily Schwartz & Co. [brokers for Clews! were obliged to sell to Jamieson & Co. 700 shares of the stock named at the price of $222 per share, and it found no difficulty in holding that the undisclosed principals of either of these parties were entitled to step into the places of these respective brokers, and in their own name and for their own benefit insist upon the enforcement of the contract according to its terms; that under the rules of the exchange each of the brokers bound himself to the other broker and the principals whom the other broker represented to carry out the terms of the contract, but the court held that the evidence disclosed that Schwartz & Co. were only clothed with the authority to sell the stock at $229 and that their principals, the complainants herein, were not bound by a sale at any figure less than that sum, and that neither Schwartz & Co. nor any persons with whom that firm had contracted could have compelled the complainants to deliver the stock at a price less than $229. As the fact appeared that the contract between the respective brokers was for a sale at $222, the defendants Jamieson & Co., even under the substitution provided for by the rules of the stock exchange, could not hold complainants as principals of the contract for a sale at that price, and the court held that for want of mutuality the complainants are in no position to hold those defendants; that there was no identity of contract between the one the complainants authorized and the one entered into between the brokers, and the fact that the complainants now choose to accept it is of no consequence, the legal fact remained that they are not so bound, and, not being so bound, the defendants Jamieson & Co. on their part are not legally bound. If the contract had been for the sale and purchase of these shares at $229, there would have been no difficulty in the case upon the principle adopted by 1182 U. S. 461. 2 In law "privity' means the mutual or successive relationship to the same rights of property. "Privity of contract is the relationship which exists between two contracting parties. (See Bouvier's Law Dictionary, "Words and Phrases.") Used with reference to contracts, privity implies connection, mutuality of will, and interaction of parties. Woods v. Ayres, 39 Mich., 345, 350; 33 Am. Rep., 390. the circuit court. The bar to a recovery lay in the alleged fact that the sale was without authority, although really procured by Schwartz & Co. while acting as agents of the complainants. A principal can adopt and ratify an unauthorized act of his agent, who, in fact, is assuming to act in his behalf, although not disclosing his agency to others, and when it is so ratified it is as if the principal had given an original authority to that effect, and the ratification relates back to the time of the act which is ratified. Therefore, if in fact the sale at $222 had been unauthorized on the part of Schwartz & Co., the subsequent ratifications of their unauthorized act by the complainants was the same as a precedent authority to them. The failure of the complainants to repudiate the action of their agents in the sale immediately after it was reported to them would operate as a ratification. It is argued, however, on the part of complainants that there was no unauthorized action by Schwartz & Co.; that the sale at $222 was entirely proper and in accordance with the previous authority given complainants' agents, because the difference between $229 and $222 complainants' agents had already received by a draft drawn upon the fund in the hands of the governing committee. This is upon the assumption that there had been a margin put up by the parties to the sales on the July account in accordance with the rules, which had been carried over to the August account, and that into this deposit the money had been paid as the stock dropped from July 25 to August 3, and Schwartz & Co. had drawn the same out. If this plainly appeared in the testimony, the findings, or the stipulations of the parties, it would be an answer to the contention that the act of Schwartz & Co. in selling at $222 was unauthorized. * * * We see no reason why the complainants may not take advantage of the contract made by their agents and enforce the same against Jamieson & Co. The rules of the Chicago exchange clearly contemplate and provide for a substitution of names between the selling and the delivery days, and each party is kept secured by the margin originally put up, which is added to and taken from as the stock fluctuates in price from day to day. Hence the parties buying or selling may by virtue of this rule be liable to different principals represented in one original contract between the brokers. Upon the facts before us we think there was sufficient privity of contract between them to sustain this suit. * * * * * Another case directly to the point, quoted below at page 302, is that of Lehman v. Feld, involving results of the practice of substitution as carried out on the New Orleans Cotton Exchange. In a Minnesota case, where through the use by the members of the Minneapolis Chamber of Commerce of a complete clearing-house system substitution is even more far-reaching than at Chicago, the effect of such substitution upon the liability of a nonmember is dealt with as follows: 1 There is another corporation, known as the clearing association, which acts as a universal go-between, or clearing house, for these transactions. At the close of each day's business all these transactions are reported to the clearing association, which then becomes the opposite party to the transactions of each member for the purpose of offsetting the same. When the member is the 1 Van Dusen-Harrington v. Jungeblut, 75 Minn. 305; 74 Am. St., Rep. 463; 77 N. W. 970. buyer, the clearing association becomes the seller, and when the member is the seller the clearing association becomes the buyer. Then all of the transactions between that member and the clearing house are offset and the balance carried in the account between them until the next day, when a new balance is struck. But balancing new transactions is but a part of the business of the clearing house in regard to sales for future delivery. As the price goes up or down each day, the clearing house pays to the member or receives from him the difference in price on that day's balance; if, on balancing all transactions with him, it appears that he has bought more than he has sold, he is buyer as to such balance and the clearing house is seller, and vice versa. If he is buyer as to such balance, and wheat fell in price that day, he must pay to the clearing house the difference between the price on that day and the price on the day before, and vice versa. It will thus be seen that each member acts as a clearing house within himself as to all his customers, and that he offsets the transactions of his customers against each other, and only resorts to the clearing association for any balance of buyers over sellers or sellers over buyers among his own. customers. THE APPEARANCE OF TRADING IN DIFFERENCES.—The clearing system in the extreme case does not affect the obligation of the customer, or a principal on a future trade, in any manner. The fact of substitution does not deprive the principal of his rights under the contract. The nonmember's liability upon the contracts he has entered into is not changed by the clearing methods in use. Under the complete clearing house system, the requirement of “privity of contract” is fully met. The completing link in the chain of privity of contract or identifiability of the principal is established at Kansas City and Minneapolis by the definite requirement of the clearing-house rules that "when deliveries are made the oldest trade on the books must be closed first."1 The grain exchanges, in their rules and otherwise, emphatically condemn so-called "trading in differences." To an outsider the complete clearing house appears to constitute, in effect, a means of settling all trades by the prompt payment of differences and therefore is easily identified with such "trading in differences." It appears that one reason why the Chicago Board of Trade has been slow to adopt the complete clearing house, and has not yet adopted it, is this situation. The counsel of the Chicago Board of Trade, in a letter dated September 14, 1914, directed to the chairman of the committee in charge of drawing up a proposed new method of clearing, makes the following statement: I, at one time, advised against any change in the present system of offsetting trades, because, at that time, the legality of that system was under judicial scrutiny, and the argument against the legality of future trading upon your board rested upon the marked disproportion between the quantities delivered and the entire volume of trading. Since then the United States Supreme Court 1 Minneapolis Rule IX; at Kansas City, Art. VII, sec. 11. |