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City Index Ltd v. Leslie

[1992] QB 98
[1991] 3 All ER 180

(Judgment by: Leggatt LJ)

Between: City Index Ltd
And: Leslie

Court of Appeal

Lord Donaldson of Lymington MR
McCowan LJ
Leggatt LJ

Subject references:
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

Legislative references:
Financial Services Act 1986 (c. 60) - ss. 1(1), 63, Sch. 1, paras. 9, 12

Case references:
Carlill v. Carbolic Smoke Ball Co - [1892] 2 QB 484
Ellesmere (Earl of) v. Wallace - [1929] 2 Ch 1, CA
Universal Stock Exchange Ltd. v. Strachan - [1896] AC 166, HL(E)
Futures Index Ltd., In re - [1985] FLR 147
Gieve, In re - [1899] 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 - [1952] 2 DLR 104

Hearing date: 4-5 March 1991
Judgment date: 14 March 1991

Judgment by:
Leggatt LJ

A contract for differences is a contract intended by both parties to end in the payment of differences. For this purpose a difference is the difference between a sale (or purchase) price at the time when a contract is made and the corresponding purchase (or sale) price when it is closed out. In order to give rise to a difference, the price by reference to which the sale or purchase is notionally supposed to take place is the published price of a stock, commodity or other property, or alternatively of an index.

The classic definition of a wagering contract was propounded by Hawkins J. in Carlill v. Carbolic Smoke Ball Co. [1892] 2 Q.B. 484 when he said, at pp. 490-491:

"a wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent upon the determination of that event, one shall win from the other, and the other shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known."

Which party will have to pay, and which receive, a difference contracted for is "dependent on the issue of the event," that is, the price at which the chosen stock, commodity or other property or index is standing when the transaction is closed out. Until that closing price is determined the result of the contract remains uncertain. The contract therefore is a wagering contract, such as was made null and void by section 18 of the Gaming Act 1845 until section 63 of the Financial Services Act 1986 came into effect.

By section 63(1) of the Act of 1986 "No contract to which this section applies shall be void... by reason of... section 18 of the Gaming Act 1845." Section 63(2) provides:

"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 contract was entered into by the plaintiffs by way of business. So the question is whether the making or performance of the contract be- tween the parties was an "activity" within paragraph 12 of Schedule 1. That paragraph refers to "Buying, selling... investments or offering or agreeing to do so..." Paragraph 28(1)(d) provides that in Schedule 1 "references to buying and selling include references to any acquisition or disposal for valuable consideration." By section 1 "In this Act, unless the context otherwise requires, 'investment' means any asset, right or interest falling within any paragraph in Part I of Schedule 1 to this Act." Paragraph 9 of Part I of Schedule 1 describes "Contracts for differences etc." as follows:

"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."

Although before the Act came into force, contracts for differences were void, other contracts which are superficially similar were not. These were contracts entered into for a commercial purpose, such as hedging. Such contracts may result in no more than the payment of a difference. But because they were made for a commercial purpose, they are not void as wagering contracts. That in practice is determined by whether the parties intended that any stock or commodity or other property should be delivered, by reference to which the contract was made. So in paragraph 9 of Schedule 1 the note declares:

"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."

From this it follows that

 delivery of property is made the test for distinguishing between a commercial contract and a contract for differences,
 the intention of both parties is made relevant, and
 the obtaining of profit is equated with securing it.

The references in the note to "the profit" and "the contract" suggest that it is intended to apply to every contract which is the subject of paragraph 9.

Traditionally contracts for differences were made by reference to a particular stock or commodity. That was because either afforded a fluctuating price the movement of which could not be predicted with certainty. But anything, such as an index, which has a fluctuating price and will therefore yield a difference is capable of fulfilling the same function. An index is defined by A Supplement to the Oxford English Dictionary (1976), vol. II, p. 281 as "a number showing the variation (increase or decrease) in the prices or value of some specified set of goods, shares, etc., since a chosen 'base' period (often represented by the number 100)..."

A FT-SE 100 contract is a futures contract for cash settlement. It is obvious that parties to it have no intention that the shares of which that index is comprised should be delivered. It is equally unlikely that an investor will hold a portfolio of shares which is so close to the composition of the index as to be directly related to its movement. But the index reflects, and to some extent creates, a quality share market, and an investor may therefore be able to obtain by means of a FT-SE futures contract substantial protection against adverse market movement. There must also be circumstances in which it is not desirable to require delivery under commodity futures contracts. This is why three categories of these and kindred contracts have been created: those which are rendered null and void by the Gaming Act 1845, those which are regulated by the Act, and those which are outwith both Acts by reason of their commercial purpose.

The plaintiffs in principle make their money by quoting a figure which represents a margin above the figure at which an index is standing, in the case of a "buy" bet, and a margin below that figure, in the case of a "sell" bet. But the bet price is still a price, and the customer wins or loses according to the movement of the index which results in a difference, one way or the other, between the price quoted and the price at which the transaction is closed out. That is a contract for differences, and it is not prevented from being so by the fact that the plaintiffs fix the starting price by adjustment of the index price instead of by taking the index price itself.

Miss Gloster argued on behalf of the defendant that the contracts sued on were not contracts for differences because (a) a contract for differences is related to the notional purchase (or sale) of a specific quantity of stock or other property, and (b) in a contract for differences there is at least notionally an obligation on both parties which is settled out for cash at a different date. But in my judgment, although these are two characteristics of the contract for differences as it was originally developed, neither is an essential feature of it. Miss Gloster's argument that the contracts sued on were not within the description of "any other contract" depends on the phrase "secure a profit or avoid a loss" having been used to refer exclusively to hedging. She has to admit that the argument is made almost unsustainable in view of the use in the note to paragraph 9 of the expression "obtain a profit" in a way which is clearly intended to be synonymous with "secure a profit." If there were any doubt, it is resolved by the wording of section 26(1) of the Prevention of Fraud (Investments) Act 1958 which defines "dealing in securities" as including

"making or offering to make with any person... 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..."

Presumably that definition also indicates the origin of the phrase "pretended purpose" though it does nothing to elucidate its meaning. Ironically, the phrase "pretended purpose" may originally have been thought more apt than "purpose" to describe a transaction the apparent purpose of which was to secure a profit, but the real purpose of which was to avoid a loss.

In my judgment the contracts sued on were contracts for differences within the meaning of paragraph 9 of Schedule 1. If they were not, because (contrary to my view) a contract for differences can be made only in relation to property capable of being, though not intended to be, delivered, then they would be within the description of "any other contract" in the alternative part of paragraph 9. I therefore agree that the appeal should be dismissed.

It is understandable that the difficulty of identifying some types of transaction should have resulted in some, such as betting on cricket scores, becoming regulated which might better have remained void as wagering contracts. The Secretary of State might therefore wish to consider amending Schedule 1 by order under section 2 to restrict the meaning of a "contract for differences" and "any other contract" for the purpose of paragraph 9 of that Schedule, so as to exclude betting on sporting activities.

Appeal dismissed.

Order nisi for costs against Legal Aid Board.

Leave to appeal refused.

 Solicitors: Cooksey & Co.; Rakisons. D. E. C. P.

Case Judgement
Table of contents
  Judgment by Lord Donaldson of Lymington MR
  Judgment by McCowan LJ
  Judgment by Leggatt LJ

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