Relationship of broker and client —Strictly speaking, the relationship is that of broker and principal; but as the word " client " is so generally used in this connection it will be adopted in this article. Every person who deals on the Stock Exchange should have especial regard to Rule 53 of the Stock Exchange Rules. This rule is binding upon him to the extent of incorporating in his contracts with and through a broker a condition that they are to be performed subject to the legal and reasonable rules and usacres of the Exchange. It runs as follows:—" The Stock Exchange does 0 not recognise in its dealings any other parties than its own members ; every bargain, therefore, whether for account of the member effecting it or for account of a principal, must be fulfilled according to the rules, regulations, and usages of the Stock Exchange." That the rules and usages should be legal and reasonable is a necessary modification imported into the rale by the law. Some usages are undoubtedly inoperative on account of their illegal or unreasonable nature. Of such are usages to disregard Leman's Act [see BANK SHARES]; and that the execution of a BLANK TRANSFER implies an efficient authority to a broker to fill in the blanks. And one rule may certainly under some circumstances be illegal— the rule (59) that " no application which has for its object to annul any bargain in the Stock Exchange shall be entertained by the committee unless upon a specific allegation of fraud or wilful misrepresentation." It would not, for insta.nce, be recognised by the Court in a case where its operation would have the effect of enforcing an illegal or legally unusual or oppressive contract (Perry v. Barnett).
The broker's authority is derived from the instructions he receives from his client, and with these he must strictly comply. In accordance with a general rule of the law of agency the authority is determined by the death of the client, and so is it in the event of the bankruptcy of the client. A broker is therefore apparently entitled, upon notice of the death or bankruptcy, to close a client's account forthwith (Phillips v. Jones ; re Overbeg). A general authority to a broker to bny or sell is, in conformity with Rules 89 and 111, an instruction to do so for completion at the ensuing account, and not " for cash." But if the transaction is for the sale of a letter of allotment the bargain is for cash; and if for shairs in a new company, for the special settlement. Unless he has received special instruc tions from his client to carry over, a broker has no authority, when only authorised to purchase for the ensuing account, to carry over to the subsequent account (Maxted v. Paine). It is a very usual practice for a client to fix a limit of price in his instructions to his broker below or above which the broker is not to sell or purchase, as the case may be, a particular security. Such instructions last only for the current account (see Lawford v. Harris), and must always be strictly adhered to by the broker.
Consistently with the essential distinction between a stockbroker who is a member of the Stock Exchange and one who is merely an outside broker, it is a general principle that a broker must not sell his own securities to his client. Should a broker violate this principle his client would be entitled to recover any damages he had suffered, as where the broker had sold securities to him the price of which thereupon fell. The damages in such a case would be the difference between the price the client had paid for the securities and the price for which he could have sold them in the market immediately afterwards (Waddell v. Blockey ; Thompson v. Meade). Strictly speaking a broker has no right to " take in " securities for his client instead of effecting the transaction with a jobber, in order to carry them over. But as this is a frequent practice of brokers, and generally means a saving of expense to their clients, there is no reason why a client should object thereto. Certainly there is not if a saving is actually effected, and the broker does not charge brokerage as well as contango. Ile cannot legally charge the brokerage in
such a case, because he is acting as a principal and not as an agent.
As trustee of client's money.—Any money in the possession of a broker which belongs to his client is considered by law to be in his possession as a trustee for his client. The importance of this rule to a client is very great, for his money in the hands of his broker is thus treated as trust money. Consequently a creditor of the broker cannot attach such money. And even if the money is kept by the broker in his bank, mixed in the same account with his own money, yet it may be distinguished for the purposes of this protection from the other money. And all the drawings out by the broker for his own purposes must be attributed to his own money and not to his client's (Hancock v. Smith).
Indemnity.—On the settling day in the Exchange a broker is bound to pay for the bargains he has made during the account. It is important, therefore, that lie should receive by that day the moneys due to him from his clients, for he is responsible to his fellow-members whether his clients have paid him or not. Accordingly, if a client fails to pay him punctually he is out of pocket on the transaction until he obtains payment from his client. And the broker has a strict right to indemnity from his client in respect of his out-of-pockets of this nature. So in the case of default by the client he is entitled to resort to the Court in order to obtain reimbursement.
The method of dealing on the Stock Exchange and of the settlement of accounts is such that accounts between broker and client are most generally in the nature of differences or balances. The word " differences" has acquired, however, a popular signification that suggests a gaming or wagering trans action, and so leads many speculators to imagine that a broker is generally unable to recover from his client. But this signification is, as a general rule, an illusory one, for in practically all dealings on the Stock Exchange where the broker has entered into a firm contract with a jobber, the differences can be recovered from his client by the broker so far as they represent actual disbursements in respect of which lie has incurred liability on his client's behalf aad his proper commission. In Thacker v. Hardy the plaintiff, a broker, was employed by the defendant to speculate for him upon the Stock Exchange. To the knowledge of the broker the defendant, his client, did not intend to accept the stock bought for him or to deliver the stock sold for him, but expected that the broker would so arrange matters that nothing but differences should be payable by him; and the broker also knew that unless he could so arrange matters his client would be unable to meet the engagement which the broker might enter into on his client's behalf. Nevertheless the broker did enter into contracts on behalf of his client, and so became personally liable. The client having failed to indemnify the broker against this liability, he was sued by the broker. The client thereupon defended the action, but failed. It was held that the broker was entitled to recover; for his employment by the defendant was not against public policy, and was not illegal at common law, and, further, was not in the nature of a gaming and wagering contract. And so, in Forget v. Ostigny, where a broker was employed to make actual contracts of purchase and sale, in each case completed by delivery and payment, on behalf of a client whose object was not investment but speculation, it was held that these were not gaming contracts and that the broker was entitled to recover his disbursements. But if neither the broker nor his client ever contemplate delivery or accept ance or any actual transfer of any stock, both of them intending that the matter should be treated as a matter of differences only, and not of delivery or acceptance, then undoubtedly the broker would have no valid claim against his client. And this is so even though the parties put the contract into a form which cloaks or conceals the fact that they are gambling (In re Gieve).