Econlib

The Library

Other Sites

 Front Page arrow Titles (by Subject) arrow § 117.: Option contracts, when illegal.— - A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1

Return to Title Page for A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1

Search this Title:

Also in the Library:

Subject Area: Law
Topic: The American Revolution and Constitution

§ 117.: Option contracts, when illegal.— - Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1 [1900]

Edition used:

A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint (St. Louis: The F.H. Thomas Law Book Co., 1900). Vol. 1.

Part of: A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, 2 vols.

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


§ 117.

Option contracts, when illegal.—

The common forms of gambling are not difficult to define or distinguish from harmless or unobjectionable transactions. The enforcement of the law against gambling in such cases is not trammeled with confusion as to what constitutes the gravamen of the offense. It is the staking of money on the issue of games of chance, or on the happening or not happening of a contingent event or act, in those cases in which the wager does not promote a public or private good. For many years, in all parts of the commercial world, a species of commercial gambling has been devised and developed, and which is still increasing in proportions. Large bodies of men in our commercial centers congregate daily in the exchanges for the purpose of betting on the rise and fall in the price of stocks, cotton, and produce. The business is disguised under the name of speculation, but it is nothing different from the wager on the result of some game of cards. The card player bets that he will win the game. The merchant, dealing in “futures,” bets that the price of a commodity will, at a future day, be a certain sum, more or less than the ruling market price. In neither case does the result add anything to the world’s wealth; there is only an exchange of the ownership of property without any benefit to the former owner. In the liquidation of both bets, A. passes over to B. a certain proportion of his property. Under the guise of speculation, it is given an air of respectability which makes the indulgence in it all the more dangerous to the public welfare. The disreputable character of the common forms of gambling, made so by public condemnation, is the chief protection against the evil. But men of respectability are engaged in option dealing; and the apparent respectability of the business develops, to a most alarming extent, the gambling spirit in all classes of society. Instead of striving to produce something that will increase the world’s wealth, while they accumulate their own, these men are bending every energy, and taxing their ingenuity, to take away what his neighbor has already produced. Apart from this injury to the public material and moral welfare, the commercial gambling, when developed to its present enormous proportions, unsettles the natural values of commodities, and the fate of the producer is made to depend upon the relative strength of the “bulls” and “bears.” Conceding the truth of these charges, and the evil effect of this species of gambling which has never been seriously questioned, it would be a legitimate exercise of police power to prohibit these commercial transactions.1 The difficulty lies not in the justification of this prohibitory legislation, but in discovering the wrongful element in the transactions, and in distinguishing them from legitimate trading. The so-called “option contracts” are in form contracts for the sale or purchase of commercial commodities for future delivery, at a certain price, with the option to one or both of the parties in settlement of the contract to pay the difference between the contract price, and the price ruling on the day of delivery; the difference to be paid to the seller, if the market price is lower than the contract price, and to the purchaser, if the market price is higher. Such a contract has three striking elements: first, it is a contract for future delivery; secondly, the delivery is conditional upon the will of one or both of the parties; and thirdly, the payment of differences in prices, in the event that the right of refusal is exercised by one of the parties. If the common-law offense of regrating were still recognized in the criminal law, all contracts for future delivery may be open to serious question.2 But that rule of the common law is repudiated, and it may now be considered as definitely settled that a contract for future delivery of goods is not for that reason invalid. If they infringe the law, it must be for some other reason than that the contract stipulates for future delivery. This is not only true, when the vendor has the goods in his possession at the time of sale, but also when he expects to buy them for future delivery. Lord Tenterden claimed that in the latter case the contract was a wager on the price of the commodity, and for that reason should not be enforced.1 But the position here taken has since been repudiated by the English courts, on the ground that it is not a wager, and if a wager, not one which tends to injure the public.2 The late English opinion is generally followed in the United States, and it may be stated, as the general American rule, that bona fide contracts for the future delivery of goods are not invalid, because at the time of sale the vendor has not in his actual or potential possession the goods which he has agreed to sell.3

It is also held to be an unobjectionable feature in such contracts, that the vendee has no expectation of receiving the goods purchased into his actual possession, but intends to resell them before the delivery of the possession to him.1 To quote the words of the Kentucky court, “sales for future delivery have long been regarded and held to be indispensable in modern commerce, and as long as they continue to be held valid, one who buys for future delivery has as much right to sell as any other person, and there cannot, in the very nature of things, be any valid reason why one who buys for future delivery may not resolve, before making the purchase, that he will resell before the day of delivery, and especially when, by the rules of trade and the terms of his contract, the person to whom he sells will be bound to receive the goods from the original seller, and pay the contract price.”2

Nor is a contract necessarily hurtful to the public welfare, which provides on payment of a valuable consideration that one at a future day shall have the right to buy certain property or sell other property, according as one or the other happens to be advantageous to him. One may have a lawful and beneficial end in view in acquiring such a right of refusal.3 “Mercantile contracts of this character are not infrequent, and they are consistent with a bona fide intention on the part of both parties to perform them. The vendor of goods may expect to produce or acquire them in time for a future delivery, and, while wishing to make a market for them, is unwilling to enter into an absolute obligation to deliver, and therefore bargains for an option which, while it relieves him from liability, assures him of a sale, in case he is able to deliver; and the purchaser may, in the same way, guard himself against loss beyond the consideration paid for the option, in case of his inability to take the goods. There is no inherent vice in such a contract.”1 And the consideration for this option may very properly be the difference between the ruling market price and the price specified in the contract. For that would be the damage to the other party, resulting from the sale of the option or refusal.2

If each of the preceding propositions is correct, then the illegality of option contracts must depend upon the intention of the parties not to deliver the goods bargained for, but merely to pay the difference between the market price and contract price. The cases are unanimous in the opinion that a contract, for the payment of difference in prices, arising out of the rise and fall in the market price above or below the contract price, is a wager on the future price of the commodity, and is therefore invalid.3 It has, however, been held that the true test, for determining whether an option deal is a gambling transaction, is whether the contract can be settled in money, or the vendor or vendee can compel the delivery of the goods.1

If the contracts were in form, as well as in fact, agreements to pay the difference in prices, they could be easily avoided, and thrown out of court. But the contracts never assume the form of wagers on the price of the commodity. They are always in form undistinguishable from those option contracts, in which the parties in good faith have bargained for the refusal of the goods, and which are valid contracts. The following is a good illustration of the ambiguity of the form of the contract. “For value received, the bearer (S.) may call on the undersigned for one hundred (100) shares of the capital stock of the Western Union Telegraph Company, at seventy-seven and one-half (77½) per cent., at any time in thirty (30) days from date. Or the bearer may, at his option, deliver the same to the undersigned at seventy-seven and one-half (77½) per cent., any time within the period named, one day’s notice required.”1 There is no evidence on the face of this contract of the determination of the parties to settle on the differences in price; and while such a contract may be used as a cover for commercial gambling, it is not necessarily a wager on the future price of the commodity.

It is the ordinary rule of law that where a writing is susceptible of two constructions, one of which is legal, and the other illegal, that construction will prevail, which is in conformity with the law.2 Applying this rule to the construction of option contracts, it has very generally been held that these contracts are valid and enforcible, unless it be proven affirmatively that the parties did not intend to make a delivery of the goods bargained for, but to settle on the differences.3 And if it be shown that only one of the parties entertained this illegal intention, while the other acted in good faith, the contract will be void as to the first, but will be enforcible in behalf of the second.4 In delivering the opinion of the New York Court of Appeals5 Earl, J., said: “On the face of the contract the plaintiff provided for the contingency that on that day he might desire to purchase the stock, or he might desire to sell it, and in either case there would have to be a delivery of the stock, or payment in damages in lieu thereof. We should not infer an illegal intent unless obliged to. Such a transaction, unless intended as a mere cover for a bet or wager on the future price of the stock, is legitimate and condemned by no statute, and that it was so intended was not proved. 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.” This rule of construction is adopted by most of the courts, in determining the legality of these questionable contracts, but a different rule has been laid down by the Supreme Court of Wisconsin. The contract, which constituted the subject of the suit, was in form a legitimate transaction, and there was no proof that it was used as a cover for commercial gambling. The court declared it to be the duty of the plaintiff to show that he had made a bona fide contract for the delivery of the commodities bought and sold, instead of throwing upon the defendant the burden of proving that the contract was made for the payment of differences in price, and did not contemplate any delivery of the grain. The court claimed that it would “not do to attach too much weight or importance to the mere form of the contract, for it is quite certain that parties will be as astute in concealing their intention, as the real nature of the transaction, if it be illegal.” It may be safely assumed, that the parties will make such contracts valid in form; but courts must not be deceived by what appears on the face of the agreement. It is often necessary to go behind, or outside of, the words of the contract—to look into the facts and circumstances which attended the making of it—in order to ascertain whether it was intended as a bona fide purchase and sale of the property, or was only colorable. And to justify a court in upholding such an agreement, it is not too much to require a party claiming rights under it, to make it satisfactorily and affirmatively appear that the contract was made with an actual view to the delivery and receipt of grain, not as an evasion of the statute against gaming, or as a cover for a gambling transaction.”1 The power of the legislature to change this rule of construction,2 and to throw the burden of proof of the legality of the contract upon the party asserting it, cannot be questioned. But it is not within the power of the court to change it, as was done by the Wisconsin court. For the effective prevention of this commercial gambling, this change is most needful, and with one other regulation, which will be suggested here, the prohibition can be made as effective as any prohibition of an act, which operates as a trespass only indirectly through its injurious effects. The other needful regulation would be the prohibition of all contracts of sale for future delivery, where the vendor has neither the actual, constructive, nor potential possession of the goods sold. A man has an absolute right, in his personal or representative capacity, to sell for future delivery any goods which he may have in his actual or constructive possession, or which he may have the present capacity of acquiring at some future day. One has the right to sell commodities which he has purchased from another for future delivery, or to sell a growing or other future crop, or the flour that his mill will grind during a stated period. But one can serve no useful end by selling goods for future delivery, goods which he does not own, and which he does not expect to possess. Such future contracts may therefore be prohibited. With the aid of this legislation, and by casting the burden of proof upon him who asserts the legality of these questionable or doubtful contracts, gambling in futures may be subjected to a more effective restraint.

[1]A Missouri statute, which made it a criminal offense to make these option contracts, was held to be constitutional. State v. Gritzner, 134 Mo. 512. See to same effect, Wolsey v. Neely, 62 Ill. App. 141.

[2]See ante, § 107.

[1]“I have always thought, and shall continue to think until I am told by the House of Lords that I am wrong, that if a man sells goods to be delivered on a future day, and neither has the goods at the time, nor has entered into any prior contract to buy them, nor has any reasonable expectation of receiving by assignment, but means to go into the market and to buy the goods which he has contracted to deliver, he cannot maintain an action on such contract. Such a contract amounts, on the part of the vendor, to a wager on the price of the commodity, and is attended with the most mischievous consequences.” Lord Tenterden in Bryan v. Lewis, Req. & Moody, 386. See, also, Longmer v. Smith, 1 B. & C. 1.

[2]“I have always entertained considerable doubt and suspicion as to the correctness of Lord Tenterden’s doctrine in Bryan v. Lewis. It excited a good deal of surprise in my mind at the time, and when examined, I think it is untenable. I cannot see what principle of law is at all affected by a man’s being allowed to contract for the sale of goods, of which he has not possession at the time of the bargain, and has no reasonable expectation of receiving. Such a contract does not amount to a wager, inasmuch as both the contracting parties know that the goods are not in the vendor’s possession; and even if it were a wager, it is not illegal, because it has no necessary tendency to injure third parties.” Baron Parke in Hibblewhite v. McMorine, 5 M. & W. 58. See Mortimer v. McCallan, 6 M. & W. 58; Wells v. Porter, 3 Scott, 141.

[3]Head v. Goodwin, 37 Me. 181; Rumsey v. Berry, 65 Me. 570; Lewis v. Lyman, 22 Pick. 437; Thrall v. Hill, 110 Mass. 328; Heald v. Builders’ Ins. Co., 111 Mass. 38; Smith v. Atkins, 18 Vt. 461; Noyes v. Spaulding, 27 Vt. 420; Hull v. Hull, 48 Conn. 250; Hauton v. Small, 3 Sand f. 230; Currie v. White, 45 N. Y. 822; Bigelow v. Benedict, 70 N. Y. 202; Brua’s Appeal, 55 Pa. St. 294; Brown v. Speyer, 20 Gratt. 309; Philips v. Ocmulgee Mills, 55 Ga. 633; Noyes v. Jenkins, 55 Ga. 586; Fonville v. Casey, 1 Murphy, 389; Whitehead v. Root, 2 Metc. (Ky.) 584; McCarty v. Blevins, 13 Tenn. 195; Wilson v. Wilson, 37 Mo. 1; Logan v. Musick, 81 Ill. 415; Pixley v. Boynton, 79 Ill. 351; Pickering v. Cease, 79 Ill. 328; Lyon v. Culbertson, 83 Ill. 33; Corbett v. Underwood, 83 Ill. 324; Sanborn v. Benedict, 78 Ill. 309; Wolcott v. Heath, 78 Ill. 433; Crawford v. Spencer, 92 Mo. 498; White v. Barber, 123 U. S. 392; Gruner v. Stucker, 39 La. Ann. 1076; Wolffe v. Perryman (Ala.), 9 So. 148; Mohr v. Miesen, 47 Minn. 228; Miles v. Andrews, 40 Ill. App. 155; Pope v. Hanke, 155 Ill. 617; Warren v. Scanlan, 59 Ill. App. 138.

[1]Ashton v. Dakin, 4 H. & N. 867; Sawyer, Wallace & Co. v. Taggart, 14 Bush, 730; Cameron v. Durkheim, 55 N. Y. 425. But see contra, Brua’s Appeal, 55 Pa. St. 294; Fareira v. Gabell, 89 Pa. St. 89; North v. Phillips, 89 Pa. St. 250; Douglass et al. v. Smith, 74 Iowa, 468.

[2]Sawyer et al. v. Taggart, 14 Bush, 730.

[3]Story v. Salomon, 71 N. Y. 420; Kingsbury v. Kirwan, 71 N. Y. 612; Harris v. Lumbridge, 83 N. Y. 92; Bigelow v. Benedict, 70 N. Y. 202.

[1]Bigelow v. Benedict, 70 N. Y. 202. In this case A., for a valuable consideration, agreed to purchase gold coin of B. at a named price, the coin to be delivered at any time within six months, that B. might choose. This case, as a legitimate transaction, is more easily understood than where the option is to buy certain goods or to sell others, but the latter can exist under lawful circumstances and have a lawful end in view. See Story v. Salomon, 71 N. Y. 420. But see, contra, under State statute, Osgood v. Bander, 75 Iowa, 550; Schneider v. Turner, 130 Ill. 28; Sheehy v. Shinn, 103 Cal. 325; Riordan v. Doty, 50 S. C. 537; Sampson v. Camperdown, 82 Fed. 833.

[2]Story v. Salomon, 71 N. Y. 420; Harris v. Lumbridge, 83 N. Y. 92, and the cases cited in the next note.

[3]Rumsey v. Berry, 65 Me. 574; Wyman v. Fiske, 3 Allen, 238; Brigham v. Meade, 10 Allen, 246; Barratt v. Hyde, 7 Gray, 160; Brown v. Phelps, 103 Mass. 303; Hatch v. Douglass, 48 Conn. 116; Noyes v. Spaulding, 27 Vt. 240; Story v. Salomon, 71 N. Y. 420; Bigelow, v. Benedict, 70 N. Y. 202; Harris v. Lumbridge, 83 N. Y. 92; North v. Phillips, 83 Pa. St. 250; Ruchizky v. De Haven, 97 Pa. St. 202; Dickson’s Ex’or v. Thomas, 97 Pa. St. 278; Kirkpatrick v. Bonsall, 72 Pa. St. 155; Brown v. Speyer, 20 Gratt. 296; Williams v. Carr, 80 N. C. 294; Williams v. Tiedemann, 6 Mo. App. 269; Lyon v. Culbertson, 83 Ill. 33; Cole v. Milmine, 88 Ill. 349; Corbitt v. Underwood, 83 Ill. 324; Pickering v. Cease, 79 Ill. 338; Pixley v. Taggert, 79 Ill. 351; Barnard v. Backhouse, 52 Wis. 593; Sawyer v. Taggert, 14 Bush, 727; Gregory v. Wendall, 39 Mich. 337; Shaw v. Clark, 49 Mich. 384; Gregory v. Wattoma, 58 Iowa, 711; Everingham v. Meighan, 55 Wis. 354; Rudolph v. Winters, 7 Neb. 125; Dance v. Phelan, 82 Ga. 243; Fortenbury v. State, 47 Ark. 188 (not unconstitutional because in restraint of trade); Harvey v. Menill, 150 Mass. 1; McGrew v. City Produce Exchange (Tenn.), 1 Pickle, 572; Mutual Life Ins. Co. v. Watson, 30 Fed. 653; Sprague v. Warren, 26 Neb. 326; Davis v. Davis, 119 Ind. 511; Hahn v. Walton, 46 Ohio St. 195; Schumechle v. Waters, 125 Ind. 265; Jamieson v. Wallace, 167 Ill. 388; Wheeler v. McDermed, 36 Ill. App. 179; Stewart v. Parnell, 147 Pa. St. 523; Kullman v. Simmens, 104 Cal. 595; Sheehy v. Shinn, 103 Cal. 325.

[1]Sampson v. Camperdown, 82 Fed. 833.

[1]Story v. Salomon, 71 N. Y. 420; Amsden v. Jacobs, 75 Hun, 311; Schreiner v. Orr, 55 Mo. App. 406; Warren v Scanlan, 59 Ill. App. 138; Watte v. Wickersham, 27 Neb. 457; Bangs v. Hornack, 30 Fed. 97; Powell v. McCord, 121 Ill. 330; McGrew v. City Produce Exchange (Tenn.), 1 Pickle, 572.

[2]“It is a general rule, that wheresoever the words of a deed, or of the parties without deed, may have a double intendment, and the one standeth with law and right, and the other is wrongful and against law, the intendment that standeth with the law shall be taken.” Coke on Lyttleton, 42, 183.

[3]Story v. Salomon, 71 N. Y. 420; Kingsbury v. Kirwan, 71 N. Y. 612; Harris v. Lumbridge, 83 N. Y. 92; Williams v. Tiedemann, 6 Mo. App. 274; Ward v. Vosburgh, 31 Fed. 12; Crawford v. Spencer, 92 Mo. 498; Benson v. Morgan, 26 Ill. App. 22; Sampson v. Camperdown, 82 Fed. 833; Pratt v. Boody, 55 N. J. Eq. 175; Union Nat. Bank of Chicago v. Carr, 15 Fed. Rep. 438; and cases cited in preceding note.

[4]Rumsey v. Berry, 65 Me. 570; Williams v. Carr, 80 N. C. 94; Sawyer et al. v. Taggert, 14 Bush, 727; Gregory v. Wendall, 39 Mich. 337.

[5]Story v. Salomon, supra.

[1]Barnard v. Backhous, 52 Wis. 593. See, to the same effect, Cobb v. Prell, 15 Feb. Rep. 774.

[2]Riordan v. Doty, 50 S. C. 537.