Page:EB1911 - Volume 02.djvu/339

This page has been proofread, but needs to be validated.

This sum represents the net cost to the arbitrage house in London, and the money paid on the 28th of April left a profit of about 3⁄16%. The bonds being “to bearer” insurance was necessary for the safety in this, as in all similar transactions.

In the next example, however, this expense was unnecessary, the bonds being “inscribed.” On the 21st of May 1906 American Steel common shares were sold for cash in New York at 41 3⁄16 dollars per share, and were bought in London at 42 7⁄32 for the account day, May 31st. These figures are explained by the fact that transactions in the United States stocks and shares are on the fixed basis of five dollars per pound sterling, while as regards payments in New York the exchange varies daily. Railway shares are generally 100 dollars each. In the London market, however, five shares of 100 dollars would be £100 nominal. These shares, therefore, cost in London, at the purchase price of 42 7⁄32, £42 : 4 : 5. The money realized in New York for five shares at 41 3⁄16 was 205·93 dollars. A cheque on London was bought at 4 dollars 85¼ cents, realizing £42 : 8 : 9. It should be noted that the shares in these cases are generally lent by the New York correspondent, thus saving loss of interest. The resulting profit in this particular instance was 4s. 4d. for each five shares, divided between the London and New York arbitrage firms. Arbitrage operations with distant countries such as India are large and mainly profitable. Arbitrage with India consists chiefly in buying bills of exchange in London, such as India Council rupee bills amounting to about 16 millions sterling annually, and commercial bills drawn against goods exported to India. The counter-operation consists in purchasing in India, for short or long delivery, sterling bills drawn against exports to Great Britain of Indian produce, such as cotton, tea, indigo, jute and wheat. These operations greatly facilitate trade and the moving of produce from the interior of India to the seaports. Without this assistance Great Britain’s enormous trade could not be carried on, and she would have to revert to the primitive system of barter. The same advantages are afforded to her vast trade with China and Japan, with the material difference that the supply of government council bills is confined to the Indian trade. The balance of trade with all countries is generally settled by specie shipments; hence, with the Far East, silver and gold play an important part in arbitrage.

It will thus be seen that arbitrage fills a useful place in commerce; the profits are small because the competition is great; nevertheless huge transactions employing thousands of clerks result from this system.

The literature of the subject is extremely meagre. Lord Goschen’s Theory of Foreign Exchanges (London, 1866) is general and theoretical, but throws great light upon particular aspects of the philosophy of arbitrage, without touching specially on the details of the subject itself. The principal other works are: Kelly’s Cambist (1811, 1835); Otto Swoboda, Die kaufmännische Arbitrage (Berlin, 1873), and Börse und Actien (Cologne, 1869); Coquèlin et Guillaumin, Dictionnaire de l’économie politique (Paris, 1851-1853); Ottomar Haupt, London Arbitrageur (London, 1870); Charles le Touzé, Traité théorique et pratique du change (Paris, 1868); Tate, Modern Cambist (London, 1868); Simon Spitzer, Ueber Münz- und Arbitragenrechnung (Vienna, 1872); J. W. Gilbart, Principles and Practice of Banking (London, 1871); G. Clare, The A B C of Foreign Exchanges (2nd ed., 1895); Money Market Primer and Key to the Exchanges (2nd ed., 1900); J. Pallain, Les Changes étrangers et les prix (Paris, 1905).


ARBITRATION (Lat. arbitrari, to examine or judge), a term derived from the nomenclature of Roman law, and applied to an arrangement for taking, and abiding by, the judgment of a selected person in some disputed matter, instead of carrying it to the established courts of justice. In disputes between states, arbitration has long played an important part (see Arbitration, International). The present article is restricted to arbitration under municipal law; but a separate article is also devoted to the use of arbitration in labour disputes (see Arbitration and Conciliation).

Roman Law.—Arrangements for avoiding the delay and expense of litigation, and referring a dispute to friends or neutral persons, are a natural practice, of which traces may be found in any state of society; but it is from Roman Law that we derive arbitration as a system which has found its way into the practice of European nations in general, and has even evaded the dislike of the English common lawyers to the civil law. The praetor, who had the arrangement of all trials or private suits and the formal appointment of judges for them, referred the great majority of such cases for decision to a judge who was styled usually judex but sometimes arbiter. The phrase judex arbiterve frequently occurs. The judex and the arbiter had the same functions, and apparently the only express basis for the distinction between the two words is that there might be several arbitri but never more than one judex in a cause. The term arbiter seems, however, to have been sometimes used when the referee had a certain degree of latitude, and was entitled to give weight to equitable considerations (Roby, Inst. Rom. Law, i. 318; Hunter, Roman Law (1897), p. 48; and see Cicero pro Rosc. Com. 4, ss. 10-13; Gaius, Inst. iv. s. 163). Apart from this system of compulsory reference by the praetor, Roman law recognized a voluntary reference (compromissum) to an arbiter or arbitrator by the parties themselves. The arbitrator ex compromisso sumptus had no coercive jurisdiction, and in order to make his award effective, the agreement of reference was confirmed by a stipulation and usually provided a penalty (poena, pecunia compromissa) in case of disobedience. The sum agreed on by way of penalty might be either specific or unliquidated, e.g. “whatever the matter may be worth” (Dig. iv., tit. 8, s. 28). The arbitrator ex compromisso sumptus, like the judicial arbiter, was expected to take account of equitable considerations in coming to a decision. If three arbitrators were appointed, a majority could decide; in case of two being appointed and not agreeing, the praetor would compel them to choose a third (Roby, ubi sup., i. 320, 321; Dig. iv., tit. 8, s. 17). As in English law, it was necessary that the award should cover all the points submitted (Dig. iv., tit. 8, s. 21).

Law of England.—The law of England as to arbitration is now practically summed up in the Arbitration Act of 1889. This statute is an express code as to proceedings in all arbitration, but “criminal proceedings by the crown” cannot be referred under it (ss. 13, 14). The statute subdivides its subject-matter into two headings. I. References by consent out of court; II. References under order of court.

(1) Here the first matter to be dealt with is the submission. A submission is defined as a written agreement (it need not be signed by both parties) to submit present or future differences to arbitration, whether a particular arbitrator is References by consent out of court. named in it or not. The capacity of a person to agree to arbitration, or to act as arbitrator, depends on the general law of contract. A submission by an infant is not void, but is voidable at his option (see Infant). A counsel has a general authority to deal with the conduct of an action, which includes authority to refer it to arbitration, but he has no authority to refer an action against the wishes of his client, or on terms different from those which his client has sanctioned; and if he does so, the reference may be set aside, although the limit put by the client on his counsel’s authority is not made known to the other side when the reference is agreed upon (Neale v. Gordon Lennox, 1902, A.C. 465). The committee of a lunatic, with the sanction of the judge in lunacy, may refer disputes to arbitration. As an arbitrator is chosen by the parties themselves the question of his eligibility is of comparatively minor importance; and where an arbitrator has been chosen by both parties, the courts are reluctant to set the appointment aside. This question has arisen chiefly in contracts, for works, which frequently contain a provision that the engineer shall be the arbitrator, in any dispute between the contractor and his own employer. The practical result is to make the engineer judge in his own cause. But the courts will not in such cases prevent the engineer from acting, where the contractor was aware of the facts when he signed the contract, and there is no reason to believe that the engineer will be unfair (Ives and Barker v. Willans, 1894, 2 Ch. 478). Even the fact that he has expressed an opinion on matters in dispute will not of itself disqualify him (Halliday v. Hamilton’s Trustees, 1903, 5 Fraser, 800). So, too, where a barrister was appointed arbitrator, the