City Index Ltd v. Leslie
 QB 98
 3 All ER 180
(Judgment by: McCowan LJ)
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
By section 18 of the Gaming Act 1845:
"All contracts or agreements, whether by parole or in writing, by way of gaming or wagering, shall be null and void; and no suit shall be brought or maintained in any court of law or equity for recovering any sum of money or valuable thing alleged to be won upon any wager..."
However, section 63 of the Financial Services Act 1986 provides:
- No contract to which this section applies shall be void or unenforceable by reasons of -
- section 18 of the Gaming Act 1845..."
To this must be added the terms of paragraph 33 of Schedule 1 to the Act of 1986:
"In determining for the purposes of this Schedule whether anything constitutes an investment or the carrying on of investment business section 18 of the Gaming Act 1845... shall be disregarded."
Together, that section and paragraph make it plain that the intention of the Act of 1986 is to reduce the circumstances in which a contract falls foul of section 18 of the Gaming Act 1845. With that principle in mind, I turn to consider the terms of paragraph 9 of Schedule 1 to the Act of 1986, upon which the result of this case hinges:
"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."
The first question that arises is what is meant there by the words "a contract for differences." Miss Gloster says it is a term of art, the meaning of which is to be discovered from the cases. It is, according to her argument, essentially a contract for payment of the difference between the price at which something is purchased at one date and sold at a later date (or vice versa). There is, at least notionally, an obligation on one party to deliver the stock and on the other to pay for it, which is settled in cash. In the present case, on the other hand, the amount to be paid by either party under the contract was not the difference between the price at which an asset was sold or purchased: there was no purported purchase or sale of any asset at all.
I react to this submission by wondering why those who passed into law the Financial Services Act in 1986 should have wanted to preserve a wholly notional obligation to deliver and pay for stock, in fact settled in cash. In any event, however, I am inclined to agree with Mr. Oliver that the cases to which Miss Gloster refers show "a contract for differences" to be more a term of opprobrium than a term of art. As he points out, a contract for differences was void under the Gaming Act 1845 and it was therefore necessary to dress it up as a sale or purchase. Essentially, the transaction was a sham.
What seems plain to me is that the draftsman of the Act of 1986 considered "a contract for differences" to be a contract "the purpose or pretended purpose of which is to secure a profit or avoid a loss..." Mr. Oliver put as an argument against this interpretation that "any other contract" means one that is not "a contract for differences." That might make sense if the paragraph stopped there, but, when one takes into account the remaining words, it becomes plain, in my judgment, that "a contract for differences" is being treated as an example of a contract "the purpose or pretended purpose of which is to secure a profit or avoid a loss." Moreover, if Mr. Oliver were right, I would expect the paragraph to refer to "any contract" and not to "any other contract." However, it will not matter, provided that Mr. Oliver is right that the contract in the present case was one "the purpose or pretended purpose of which is to secure a profit or avoid a loss."
Miss Gloster submits that the contract in this case did not fall within those words. She argues that both parties to a naked bet enter into it with the purpose of winning; neither of them intends to secure a profit or avoid a loss. Securing a profit means securing in the sense of protecting a profit that the party at the time of entering into the contract has already made or at least has the potential of making; and likewise in no circumstances can a party to a naked bet be said to be entering into it for the purpose of avoiding a loss. "The wording of the phrase," she says, "is a composite one that describes the activity of hedging."
The phrase "pretended purpose" posed difficulty for her, as indeed it did for all concerned with the case. She offered the suggestion that "The intention is to validate a contract which purports to be an operation with a valid commercial purpose. It does not arise in this case because it is admitted it was a bet." I must say that I find very unattractive the suggestion that, if you dress up a bet as a hedging operation, it is all right but, if you frankly call it a bet, it is unacceptable. I would prefer not to hold that that was the legislature's intention. What the intention actually was remains unclear. It may be that the draftsman simply lifted the phrase without thought from section 26(1) of the Prevention of Fraud (Investments) Act 1939 where "dealing in securities" was defined as:
"making or offering to make with any person, or inducing or attempting to induce any person to enter into or offer to enter into -... (b) 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..."
To support her argument that paragraph 9 requires the contract to be of a hedging nature, Miss Gloster is obliged to place great stress on the use of the word "secure" and to interpret it as meaning to protect a profit made or at least potentially made. At first sight "secure" is a strange word to use if all that was meant was "make a profit." In section 3(1) of the Company Securities (Insider Dealing) Act 1985 the phrase used is "with a view to the making of a profit or the avoidance of a loss." I think it probable, however, that the draftsman got the phrase "to secure a profit" from the definition in section 26(1) of the Act of 1939 which I have already set out. There, however, it is perfectly plain that "to secure a profit to any of the parties" meant no more than "to make a profit for any of the parties." That "to make a profit" was all that was meant in paragraph 9 is, in my judgment, proved beyond doubt by the words of the "note" included in it, which speaks of the parties' intention "that the profit is to be obtained or the loss avoided." Why, incidentally, a "note" in the terms used was needed at all has excited argument in this case. I can only think that it was intended to state the obvious, namely that it is not a contract for differences etc. if actual delivery is intended.
In the end, accordingly, this case boils itself down to the question whether the contract made between the parties had as its purpose either the making of a profit or the avoidance of 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." The purpose of the contract was, I have no doubt, the making of a profit. Whether a profit was made and by whom was to be determined by reference to fluctuations in the value or price of property in an index designated for that purpose in the contract. Hence, in my judgment, the transactions between the defendant and the plaintiffs were not bare wagering transactions and void so as to disentitle the plaintiffs to sue upon them.
I would dismiss the appeal.