A broker who signs a contract note as broker on behalf of a principal, whether named or not, is not personally liable on the contract to the third party. But if he makes the contract in such a way as to make himself a party to it, the third party may sue either the broker or his principal, subject to the limitation that the third party, by his election to treat one as the party to the contract, may preclude himself from suing the other. In this respect the ordinary rules of the law of agency apply to a broker. Generally, a broker has not authority to receive payment, but in trades in which it is customary for him to do so, if the buyer pays the seller's broker, and is then sued by the seller for the price by reason of the broker having become insolvent or absconded, he may set up the payment to the broker as a defence to the action by the broker's principal. Brokers may render themselves liable for damages in tort for the conversion of the goods at the suit of the true owner if they negotiate a sale of the goods for a selling principal who has no title to the goods.
The relations between brokers and their principals, and also between brokers and third parties as above defined, have been to some extent modified in practice by the institution since the middle of the 19th century in important commercial centres of "Exchanges," where persons interested in a particular trade, whether as merchants or as brokers, meet for the transaction of business. By the contract of membership of the association in whose hands is vested the control of the exchange, every person on becoming a member agrees to be bound by the rules of the association, and to make his contracts on the market in accordance with them. A governing body or committee elected by the members enforces observance of the rules, and members who fail to meet their engagements on the market, or to conform to the rules, are liable to suspension or expulsion by the committee. All disputes between members on their contracts are submitted to an arbitration tribunal composed of members; and the arbitrators in deciding the questions submitted to them are guided by the rules. A printed book of rules is available for reference; and various printed forms of contract suited to the various requirements of the business are specified by the rules and supplied by the association for the use of members.
In order to simplify the settlement of accounts between members, particularly in respect of "futures," i.e. contracts for future delivery, a weekly or other periodical settlement is effected by means of a clearing-house; each member paying or receiving in respect of all his contracts which are still open, the balance of his weekly "differences," i.e. the difference between the contract price and the market price fixed for the settlement, or between the last and the present settlement prices.
As all contracts on the market are made subject to the rules, it follows that so far as the rules alter the rights and liabilities attached by law, the ordinary law is modified. The most important modification in the position of brokers effected by membership of such an exchange is due to the rule that as, between themselves, all members are principals, on the market no agents are recognized; a broker employed by a non-member to buy for him on the market is treated by the rules as buying for himself, and is, therefore, personally liable on the contract. If it be a contract in futures, he is required to conform to the weekly settlement rules. If his principal fails to take delivery, the engagement is his and he is required to make good to the member who sold to him any difference between the contract and market price at the date of delivery. But whilst this practice alters directly the relations of the broker to the third party, it also affects or tends to affect indirectly the relations of the broker to his own principal.
The terms of the contract of employment being a matter of negotiation and agreement between them, it is open to a broker, if he chooses, to stipulate for particular terms; and it is the usual practice of exchanges to supply printed contract forms for the use of members in their dealings with non-members who employ them as brokers, containing a stipulation that the contract is made subject to the rules of the exchange; and frequently also a clause that the contract is made with the broker as principal. In addition to these express terms, there is in the contract of employment the term, implied by law in all trade contracts, that the parties consent to be bound by such trade usages as are consistent with the express terms of the contract, and reasonable. On executing an order the broker sends to his client a contract-note either in the form of the old bought and sold notes "I have this day [bought / sold] for you," or, when the principal clause is inserted, "I have this day [sold to / bought] from you." These are not bought and sold notes proper, for the broker is not the agent of the third party for the purpose of signing them as statutory memoranda of the sale. But they purport to record the terms of the contract of employment, and the principal may treat himself as bound by their provisions.