App. Div.] First Department, March, 1910. 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. 481) 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 cannot 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 part of the contracts of sale in this case." Kingsbury v. Kirwan (77 N. Y. 612) was an action brought by cotton brokers 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 First Department, March, 1910. [Vol. 137. 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. Salomon (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 transferrable notices and warehouse receipts. Such warehouse receipt is transferrable from hand to hand and con App. Div.] First Department, March, 1910. stitutes 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 vernacular 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 five dollars 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 First Department, March, 1910. [Vol. 137. 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." Rule 6. Any member who may find that he holds, for account of his correspondents, contracts, both of sale and purchase, in the same month which offset each other, shall be authorized to offset and settle such contracts and to substitute therefor his own name, and he shall be responsible to his principals for the strict fulfillment of such contracts and shall be liable to them for all damages or loss they may sustain by reason of such substitution." Rule 7 provides: "* *That any party holding a contract against another, corresponding in all respects, except as to price, with one held by the other party against him, may close both by giving notice in writing to the opposite party at any time before notice of delivery; or, where a 'Ring' may be formed, all parties thereto shall be compelled to settle upon the terms hereinafter prescribed. * -*- It shall be the duty of each party to a transfer * * * * able notice or to direct settlements or to Rings' that have been accepted and upon which payments are due, to send to the clearing house in a sealed envelope addressed to the party from whom such payments are due a comparison slip of net balances due on such settlements," with further provisions providing the details of clearance settlements. * * In Board of Trade v. Christie Grain & Stock Co. (198 U. S. 236), the Supreme Court of the United States had under consideration the question of the legality of the transactions upon the board of trade and the specific methods herein complained of. The direct question was stated by the court as follows: "It is said that the plaintiff App. Div.] First Department, March, 1910. itself keeps the greatest of bucket shops, in the sense of an Illinois statute of June 6, 1887, that is, places wherein is permitted the pretended buying and selling of grain, etc., without any intention of receiving and paying for the property so bought, or of delivering the property so sold." Mr. Justice HOLMES said: "It appears that in not less than three-quarters of the transactions in the grain pit there is no physical handing over of any grain, but that there is a settlement, either by the direct method, so called, or by what is known as ringing up. The direct method consists simply in setting off contracts to buy wheat of a certain amount at a certain time, against contracts to sell a like amount at the same time, and paying the difference of price in cash at the end of the business day. The ring settlement is reached by a comparison of books among the clerks of the members buying and selling in the pit, and picking out a series of transactions which begins and ends with dealings which can be set against each other by eliminating those between as, if A has sold to B 5,000 bushels of May wheat, and B has sold the same amount to C, and C to D, and D to A. Substituting D for B by novation, A's sale can be set against his purchase on simply paying the difference in price;" and the legality of direct settlements, ring settlements and hedging was asserted. "The sales in the pits are not pretended, but, as we have said, are meant and supposed to be binding. A set-off is in legal effect a delivery. We speak only of the contracts made in the pits, because in them the members are principals. * * * The proportion of the dealings in the pit which are settled in this way throws no light on the question of the proportion of serious dealings for legitimate business purposes to those which fairly can be classed as wagers or pretended contracts. No more does the fact that the contracts thus disposed of call for many times the total receipts of grain in Chicago. The fact that they can be and are set off sufficiently explains the possibility, which is no more wonderful than the enormous disproportion between the currency of the country and contracts for the payment of money, many of which in like manner are set off in clearing houses without any one dreaming that they are not paid, and for the rest of which the same money suffices in succession, the less being needed the more rapid the circulation." The court also said: "This court has upheld sales of stock for future |