City Index Ltd v. Leslie
 QB 98
 3 All ER 180
(Judgment by: Lord Donaldson of Lymington MR)
Between: City Index Ltd
Court of Appeal
Lord Donaldson of Lymington MR
Contract for differences
Plaintiffs licensed as bookmakers and authorised to carry out investment business
Plaintiffs' business consisting of acceptance of bets on share indices and future price of commodities
Whether unenforceable as wagering transactions
Whether 'contract for differences' or 'any other contract' to secure profit or avoid loss
Financial Services Act 1986 (c. 60) - ss. 1(1), 63, Sch. 1, paras. 9, 12
Carlill v. Carbolic Smoke Ball Co -  2 QB 484
Ellesmere (Earl of) v. Wallace -  2 Ch 1, CA
Universal Stock Exchange Ltd. v. Strachan -  AC 166, HL(E)
Futures Index Ltd., In re -  FLR 147
Gieve, In re -  1 QB 794, CA
Ironmonger and Co v. Dyne - (1928) 44 TLR 497, CA
Philp v. Bennett and Co - (1901) 18 TLR 129
Smith, In re -  2 DLR 104
Hearing date: 4-5 March 1991
Judgment date: 14 March 1991
Lord Donaldson of Lymington MR
The defendant, Mr. Leslie, is a young man who, at the material time, was only 21. In an application to the plaintiffs, City Index Ltd., for credit betting facilities of £500 per week he gave his age and described himself as a "financial consultant." Whilst he gave the name of his bankers, he vouchsafed no details of by whom he was consulted or employed or what he earned, no doubt because he was not asked to do so.
The plaintiffs describe themselves in a brochure as "the leading market makers for bets on the international share markets, financial indices and sports events." Consistently with this strange mixture of making markets and books, they are members of the Association of Futures Brokers & Dealers and "authorised persons" under the Financial Services Act 1986 as well as being licensed bookmakers.
The defendant was successful in his application and on 19 February 1988 he was granted a credit limit of "£500 maximum at any one time based on the sum of your cash position and open positions marked to market at the close of each business day." On 3 November 1988 this was increased to £10,000. Such was the defendant's initial success that on 16 November 1988 he was paid £5,500 by the plaintiffs. Then his luck or skill ran out and in the next few weeks he amassed an indebtedness to the plaintiffs of £43,080 against which he was only able to pay them £8,500.
The plaintiffs then sued the defendant for £34,580 together with interest and applied for judgment under R.S.C., Ord. 14. The defendant raised the defence that this sum was irrecoverable by virtue of the provisions of the Gaming Acts 1845 and 1892. The plaintiffs replied that in the case of all the defendant's transactions, the provisions of the Gaming Acts were disapplied by section 63 of the Financial Services Act 1986. Furthermore paragraph 33 of Schedule 1 to that Act requires the courts to disregard the Gaming Acts in deciding whether conditions exist as a result of which those Acts are to be disapplied.
This is not a novel contest, but it is one upon which there have been some differences of judicial opinion and this is the first occasion upon which it has had to be considered by this court. It has reached us in the form of an appeal by the defendant against a decision of Mr. A. R. Tyrrell Q.C., sitting as a deputy judge of the Queen's Bench Division, giving judgment in favour of the plaintiffs.
In Earl of Ellesmere v. Wallace  2 Ch. 1 Lord Hanworth M.R. considered in detail what are the essential elements of a wagering contract to which the Gaming Acts will apply in the absence of some contrary statutory provision. However it is unnecessary to pursue that aspect, since it is common ground that the transactions into which the defendant entered were such contracts and the only issue is whether the Gaming Acts are disapplied by section 63 of the Finanacial Services Act 1986. Before turning to that section and the other provisions to which it refers, it is necessary to describe briefly the nature of the transactions into which the plaintiffs offer to enter and of those into which the defendant in fact entered.
Although the plaintiffs do offer to enter into fixed odds bets, their principal business, as their name implies, seems to consist of what might be described as index betting, the essential feature being that the client or punter can win or lose variable amounts depending on the change or anticipated change in indices. In some cases there is a natural index, e.g. the FT 30, FT-SE 100, Wall Street Industrial and Hang Seng indices. In the case of currencies there are international rates of exchange which form an index. In the case of commodities there are market prices. When it comes to sport, it is necessary to create more artificial indices such as the aggregate of all race winners' numbers for each day of a meeting or, in the case of cricket, the number of runs scored in an innings or match. The defendant's transactions were not concerned with sport and I need only say that, if they had been, somewhat different considerations might well have applied. Every index has to have a closing date and time - the end of the account or the race meeting or the match or innings - and the client bets that the index will be more than or, as the case may be, less than a given number at that close.
The plaintiffs form their own view of what that number will be and quotes a "spread" consisting of two figures, the higher being at or above, and the lower at or below their own undisclosed forecast. This spread is continually being updated as the plaintiffs revise their forecast and details are obtainable by clients on the telephone. If the client thinks that the higher figure underestimates the level which the index will reach at the close, he will place an "up" or "buy" bet on the basis of that higher figure at, say, £10 per point although this is the minimum for the FT 30 index, the maximum being £2,000 per point. If he thinks that the plaintiffs have overestimated, he will place a "down" or "sell" bet on the basis of the lower figure. The plaintiffs for their part form their view on the basis of, inter alia, prices on the London International Financial Futures Exchange and other futures markets, where they can also deal with a view to laying off their potential liabilities. This may be of relevance, since it results in what as between the plaintiffs and their client may be a pure betting transaction becoming a factor in true market making.
If the client does nothing further, his bet will be closed at the closing time on the basis of the actual figure of the index at that time. Thus if the plaintiffs had quoted a spread of x and y, x being the lower figure and y the higher, and the client had made a "buy" bet, he would be paid £10 for every point by which the index exceeded y at the close. On the other hand he would be liable to pay the plaintiffs £10 for every point by which it fell short of y. Had the client made a "sell" bet, he would have been paid £10 for every point by which the index fell short of x and would have been liable to pay the plaintiffs £10 for every point by which it exceeded x. Unlike fixed odds or totalisator betting, the client does not hazard a known and limited stake. His liability is unlimited.
In fact it seems unlikely that most bets are allowed to run on to their natural conclusion at the close, because the clients always, and the plaintiffs sometimes, have the option of entering into a "sell" bet of equal amount to an outstanding "buy" bet and vice versa, the closing bet being made on the basis of the plaintiffs' then current spread. To give an example, suppose the client places a "sell" bet at £10 per point when the quoted spread is 1610-1616, his bet being based upon the lower figure of 1610. Later the quoted spread moves to 1580-1586. The client can place a "buy" bet at £10 a point based on the higher figure of 1586, set one bet off against the other and take a "profit" of the differences between 1586 and 1610 or 24 points at £10 per point.
Let me now turn to the statutory provisions. Section 63 of the Act of 1986 provides as follows:
- No contract to which this section applies shall be void or unenforceable by reason of -
- section 18 of the Gaming Act 1845, section 1 of the Gaming Act 1892 or any corresponding provisions in force in Northern Ireland; or
- This section applies to any contract entered into by either or each party by way of business and the making or performance of which by either party constitutes an activity which falls within paragraph 12 of Schedule 1 to this Act or would do so apart from Parts III and IV of that Schedule."
The defendant's transactions which led to the adverse balance claimed in this action consisted of bets on the Dow Jones Index and the price of Treasury Bonds. The plaintiffs submit that they fall within paragraph 12 of Schedule 1 to the Act which provides:
"Buying, selling, subscribing for or underwriting investments or offering or agreeing to do so, either as principal or as an agent."
Whilst it may be thought to be rather a loose use of language to describe a bet as an investment, the word "investment" is defined in section 1(1) of the Act as meaning "any asset, right or interest falling within any paragraph in Part I of Schedule 1 to this Act." The plaintiffs in fact rely upon paragraph 9, but it is worth looking at the subject matter of the other paragraphs in Part I in order to see its context. I take their descriptions from the italicised headings: 1. Shares etc.; 2. Debentures; 3. Government and public securities; 4. Instruments entitling to shares or securities; 5. Certificates representing securities; 6. Units in collective investment scheme; 7. Options; 8. Futures; 9. Contracts for differences etc.; 10. Long term insurance contracts; 11. Rights and interests in investments.
Several of these paragraphs include "notes" which substantially modify what would otherwise be the effect of the text of the paragraph which, to me at least, is a novel form of legislation and potentially somewhat confusing at least to a lawyer.
Paragraph 9, the true construction of which lies at the heart of this appeal, is in the following terms:
"Rights under a contract for differences or under any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property of any description or in an index or other factor designated for that purpose in the contract.
Note. This paragraph does not apply where the parties intend that the profit is to be obtained or the loss avoided by taking delivery of any property to which the contract relates."
In the common coin of political life it is not uncommon to encounter condemnation of "City speculators." It is not for me as a judge to join in that debate, but the day to day working of the markets form part of the background to this dispute and have to be taken into consideration.
The commodity and financial markets exist to meet real commercial needs. Perhaps the simplest illustration can be provided by the commodity markets. The user of the commodity who is probably a manufacturer needs to be able to maintain stability in the price of his product or at least to be able to calculate his costs and therefore his price for a product which he may not be able to market until some time in the future. If the producer of the commodity is prepared to bind himself to supply particular quantities at agreed prices at some time in the future, there is no problem, but this is a relatively rare situation. The producer may not know whether his crop will be good or bad in terms of quality or quantity. He may, and usually will, be most unwilling to enter into any contracts at the time at which the consumer needs to be able to fix his costs and prices.
The markets exist to reconcile the apparently irreconcilable needs of these two groups, the producer of the commodity and the user of it. It can do this in a number of ways, but in essence those who operate in the markets back their judgment of how the price will move between the moment when the user needs to achieve certainty as to his costs and the moment when the producer is willing to enter into firm contracts to supply. In its simplest form the dealer in the market enters into a forward contract with the user and waits to buy from the producer, hoping that the forward price which he has agreed with the user will be higher than that which he eventually has to pay the supplier. In a slightly more sophisticated form, he watches the market and if at some intermediate stage he thinks that he has wrongly forecast the movement in price, he finds another dealer who takes a different view and enters into a buying contract with him, thus crystallising any profit or avoiding any further loss. In a yet more sophisticated form dealers who do not wish to be involved in taking a long term view of how the price of the commodity will move, will enter into pairs of contracts, one for the notional sale and one for the notional purchase of a particular quantity of the commodity, the intention of both parties being that no property in the commodity shall pass, but that the contracts will be fulfilled by paying sums of money based upon price differences at different times. This is a contract for differences of the type considered in Universal Stock Exchange Ltd. v. Strachan
 A.C. 166
, where the contracts related to shares rather than commodities, a market in which there is also a need for a degree of stability and predictability.
From contracts for differences it is but a short step to contracts based upon the movement of price indices which achieve the same basic objective.
Clearly this system would not work if all dealers in the market took the same view as to future movements in prices and equally clearly the more people there are dealing in the market, the greater the opportunity for a diversity of view. So it comes about that the intervention of "speculators" from outside the market is not wholly unwelcome and indeed may in some circumstances contribute towards the achievement of the real objective of the market, although in some circumstances they can unsettle a market in no one's interests other than their own.
It is against this background that I have to consider the issues in this appeal.
Section 63(2) with its reference to "any contract entered into by either or each party by way of business" reflects the fact that there will be people who deal occasionally in the market as speculators doing so otherwise than in the course of business. It suffices therefore if one of the parties is contracting in the course of business. The defendant was clearly contracting as a speculator, but the plaintiffis were doing so by way of business. The first requirement of section 63 is therefore met and it is necessary to move on to paragraph 12 of the Schedule.
The plaintiffs claim that, within the meaning of "buying" and "selling" in paragraph 12, they sold and the defendant bought rights under something which constituted both "contracts for differences" and "other contracts" within the meaning of paragraph 9. There would be some difficulty about the concept of either party selling or buying rights were it not for the fact that these terms are given an extended meaning by paragraph 28(1) of the Schedule which provides: "In this Schedule -... (d) references to buying and selling include references to any acquisition or disposal for valuable consideration." Clearly the plaintiffs and the defendant were acquiring rights for valuable consideration consisting of their mutual obligations under the contracts. I can therefore turn at once to the nature of those contracts and to paragraph 9.
A "contract for differences" is not defined, but in my judgment it describes a contract of the type considered in Universal Stock Exchange Ltd. v. Strachan
 A.C. 166
, namely, related to contracts for the sale and purchase of shares or commodities to be fulfilled by the payment of differences in price and not by delivery. The defendant's transactions had nothing to do with such contracts.
That leaves the alternative of
"Rights... under any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations... in an index or other factor designated for that purpose in the contract."
The note to paragraph 9 is not, as such, an obstacle to the plaintiffs because the contracts did not relate to any property.
Miss Elizabeth Gloster, who appeared for the defendant, submits that the defendant's transactions do not fall into this category and I cannot do better than quote from her skeleton argument:
"The betting contract between the [defendant] and the [plaintiffs] does not fall within the description of 'any other contract' in paragraph 9 of Schedule 1 to the Financial Services Act 1986 as it does not have the purpose or pretended purpose required by that paragraph. That purpose is 'to secure a profit or avoid a loss.' Both parties to a naked bet (i.e. where neither has any interest in that contract other than the sum or stake which he will so win or lose) enter into it with the purpose of winning. Neither of them will have the actual or pretended purpose of securing profit or avoiding loss. Securing a profit is not the same as winning. Securing a profit means securing in the sense of protecting a profit that the party at the time he enters into the bet, already has the potential of making. Likewise in no circumstances can a party to a naked bet be said to be entering into it for the purpose of avoiding loss. He would only do so in circumstances where he entered into the bet for the purpose of avoiding a potential for loss which already existed at the time he entered his bet. The wording of the phrase is a composite one that describes the activity of hedging. It is not apt to describe naked betting."
Although at one time I was much attracted to this argument and by the way in which Miss Gloster presented it, I have ultimately come to the conclusion that it must be rejected. The crucial phrase "the purpose or pretended purpose of which is to secure a profit or avoid a loss" is indeed odd if looked at divorced from its legislative ancestry. The law does not normally take kindly to pretences, yet here is a statute legitimising a contract which may involve a pretence. Again "secure" is a word of more than one meaning. It can mean "obtain," but it can also mean "ensure" or, as Miss Gloster submits, "protect."
The explanation for the inclusion of the word "pretended" is twofold. First, I accept another of Miss Gloster's submissions, namely, that the reference to "purpose or pretended purpose" also relates back to "a contract for differences" and is not confined to "any other contract." In the former context it is clearly intended to legitimise contracts which, whilst pretending to be agreements for the actual sale and purchase of shares, commodities or other property, are intended by the parties to be fulfilled by the payment of differences. Second, the wording of the paragraph obviously owes something to the definitions of "dealing in securities" in section 26 of the Prevention of Fraud (Investments) Act 1939 and section 26 of the Prevention of Fraud (Investments) Act 1958 which include entering into "any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities," such transactions not being inherently unlawful, but requiring to be licensed.
These legislative ancestors of the paragraph also tend to show that the words "secure a profit" are not used in the sense of protecting profits arising under another contract by means of a secondary hedging transaction, because "secure a profit to any of the parties from the yield of securities" must mean "obtain a profit." This tentative approach is confirmed by the note to the paragraph which excludes a transaction "where the parties intend that the profit is to be obtained or the loss avoided by taking delivery of any property to which the contract relates," thus equating "secure" with "obtain."
Although it is not a matter for the courts, it is for consideration whether betting transactions of the type entered into by the defendant should be excluded from the ambit of the Act of 1986 by the exercise of the Secretary of State of his powers under section 2 of the Act or whether advice should be given by the Secretary of State under section 206 or action taken by the regulatory authorities with a view to preventing excessive credit being granted to the youthful or inexperienced. In expressing this view I seek to echo and reinforce the remarks of Mr. A. R. Tyrrell Q.C., who concluded his judgment by saying:
"This case demonstrates that young persons are enabled to place bets in circumstances where they do not know the limit of their possible liability, so that large sums can be lost in short periods. I venture to suggest that the Association of Futures Brokers & Dealers, and perhaps the Secretary of State, should consider whether there can be included in the Association's rules any provision that would at the very least limit the liability of the young. I am sure much human misery to young people and their families will be avoided if they can do so."
The judge held that the transactions were related to rights under contracts for differences and did not therefore need to consider whether they were also alternatively "any other contracts." In my judgment, they were not contracts for differences, but were "any other contracts" within the meaning of paragraph 9. Either suffices to justify giving judgment against the unfortunate defendant.
Accordingly, I would dismiss the appeal.