Coast Counties Real Estate & Investment Co. v. Monterey County Water Works

This is an appeal from a judgment in favor of plaintiff and against defendant and comes to this court upon a bill of exceptions.

The facts of the case follow. In the year 1907 plaintiff, referred to hereinafter as the Realty Company, had bought

The contract may be thus summarized. It recites the fact that the Water Company had never undertaken to deliver water above its gravity line and that the lands of the Realty Company were above the said line. In consideration of the sum of $9,000 paid to the Water Company it agreed to construct (as far as the sum of $9,000 would go to pay therefor) a water system, including fire mains, distributing pipes, hydrants, electric motors, or such other power plant as may be deemed most advisable by the Water Company, pumps, tanks, and suitable buildings to contain the plant to supply water for the lands of the Realty Company. The mains and distributing pipes were to be laid subject to the direction of the Realty Company with reference to the particular portions of the lands to be reached and benefited thereby. As soon as the work was completed

It is covenanted and agreed between the respective parties hereto that in lieu of surety bonds guaranteeing to said Water Company the cost of operating said water system until such time as it shall became a paying investment, the entire sum of money deposited hereunder by the Realty Company with the Water Company, and such other sum or sums as may hereafter be deposited by the Realty Company with the Water Company for securing extensions, shall be held by the Water Company as a guarantee to secure said Water Company against any possible loss in the operating of said water system, and the return of such money shall be at the discretion of the Water Company, and any portions which it may see fit to return to the said Realty Company will be, by the Realty Company, received as satisfaction in full of all claims or demands which it may have against the Water Company for the return of said money; provided only that said Water Company shall have faithfully kept and performed all the obligations on its part to be kept and performed. In addition the Realty Company was to deed to the Water Company four lots for buildings and rights of way for pipe-lines and fire mains. It, was especially understood that all covenants as to water rates in any lands situate within the corporate limits of the town of Monterey are subject to the ordinances of said town, regulating water rights therein. This agreement was dated March 6, 1907.

The Water Company contends that the contract imposes no obligation on it under any circumstances to return the money paid it by the Realty Company. • Incident to this the Water Company further contends that if it were liable for the return of any portion of the money, then under the contract it had the option to return the whole or any part thereof, which option it exercised. On the matter of the exercise of the claimed option it is found by the court, upon admission, that the Water Company offered to the Realty Company the sum of $10 as a full discharge of the money obligation, which offer was not accepted.

The issue thus presented brings us to a construction of the contract. All of the evidence as to prior negotiations and surrounding circumstances at the time of the execution of the contract have been recited. Neither party offered any other evidence to explain doubtful provisions of the contract or to illustrate just what the parties executing the contract had in mind. The secretary of the Realty Company, the officer of the said company who executed the contract in its behalf, was called as a witness. No one testified in behalf of the Water Company as to the circumstances surrounding the execution of the contract. We have therefore no extraneous aids to construction other than heretofore noted. In the early case of Walsh v. Hill, 38 Cal. 481 , the court says: “The only rule of much value—one which is frequently shadowed forth, but seldom, if ever, expressly stated in the books—is to place ourselves as near as possible in the seats which were occupied by the parties at the time the instrument was executed; then, taking it by its four corners, read it.” In Eastman v. Piper, 68 Cal.

With these rules in mind we may proceed to a discussion of the contract here, with a view of determining the proper construction to be placed upon the instrument as a whole. At the time of the execution of the contract the Water Company was already formed and operating and in its operation was performing a public service. (Const., art. XIV, sec. 1.) The opening recital of the contract states as much. Throughout the record before us all parties concede this. Being so engaged, we consider the Water Company as a qwcm-public corporation (Pasadena v. Pasadena Water Co., 152' Cal. 579 [ 93 Pac. 490 ]). There is a lack of facts to establish exactly the nature of the Water Company’s holdings or the character of its water appropriations. However, from the entire record and from the further fact that there is no claim to the contrary, we assume throughout that the company does not claim to be or to have been other than a public service corporation formed for the purpose of appropriating and distributing water to the area within which its appropriations were made and operating pursuant to the laws then in force. Indeed, if the water appropriated were claimed for such a use, then the right of the appropriator depended upon the user and the quantity that it could hold and claim would be dependent, then as now, upon

The duty of the water company to furnish water to the land of the Realty Company was not unqualified. On the other hand, its right to refuse service was not absolute. The fact that a water company has undertaken to serve the entire municipality and that it would be of advantage to an inhabitant thereof, or a number of them, to have the water system extended to supply them would not of itself be sufficient to require or compel the company to make the extension. The duty which the water company has undertaken is of a public nature and to.meet a public necessity for the supplying of water to the community. The obligation of the company is not to supply each or any number of inhabitants of the municipality in demand, as an absolute right on their part, but it has only assumed and become charged with the public duty of furnishing it where there is a reasonable demand for it and a reasonable extension of the service can be made to meet the demand. It would hardly be claimed that the obligation of a water company, exercising a public service franchise, would require it in the demand of an inhabitant of a city, or even a number of them, residing at a long distance from a point in the city to which its mains are already extended, to further excavate the streets of the municipality at its own expense and extend its mains to them, where the rates to be charged for the water to be delivered would but to a slight extent compensate the company for the expenditures entailed in doing so— in fact, without any certainty that there would be a continuous consumption of water or a continuous payment of rates even after it was brought to them. (Lukrawaka v. Spring Valley Co., 169 Cal. 318 [Ann. Cas. 1917D, 277, 146 Pac. 640 ].) The law applicable is extensively reviewed in the cited case, which was a proceeding to compel the water company to furnish water to certain parties plaintiff. Applying the principles as therein enunciated to the situation existing at the time of the contract, the Water Company, under then existing conditions, could not have been compelled to furnish any water to the Realty Company lands inasmuch as this would have and did necessitate a complete new system of distribution. However, had the Realty

Therefore the only valid reason that would justify the Water Company’s refusal to serve water to the Realty Company lands, taking the fact to be that there was a sufficient supply, was the condition existing that by reason of expense of construction and lack of customers the expenditure incident to service was not warranted. With this reason removed there remained no other. Therefore, when sufficient assurance, by way of bond or deposit, was forthcoming, the duty of the Water Company to provide water for the Realty Company lands was enforceable.

This then, it is apparent, was the purpose of the written contract and its main purpose, namely, to secure water for the Realty Company lands and to insure the Water Company against a losing or unreasonable venture. The manner of securing against this loss ordinarily might have been by sufficient undertaking or deposit of money. The Realty Company did advance the money and the contract specifically states, to repeat, as follows: “It is covenanted and agreed between the parties that in lieu of surety bonds guaranteeing to said Water Company the cost of operating said water system until such time as it shall become a paying investment, the entire sum of money deposited hereunder by the Realty Company, and such other sum or sums as may hereafter be deposited by the said Realty Company with the Water Company for securing extensions, shall be held by the Water Company as a guarantee to secure the Water Company against any possible loss in the operating of said water system.”

This provision leaves little room for doubt and requires no construction beyond the plain words thereof. The term “in lieu of surety bonds” simply means that instead of offering and delivering an acceptable bond or undertaking conditioned that upon the investment becoming a paying venture the obligation of the bond would be discharged, a cash deposit, upon the same condition, "should be made. Throughout the provision the idea is further illustrated by use of the term “deposit” with reference to the sums advanced. The word “deposit” in itself conveys the idea

An elementary rule of construction is that apparent conflicts should, if possible, be harmonized. Proceeding, with this in view, we find no difficulty in the phrase “at the discretion of the water company.” The term “discretion” is to be construed as meaning an exercise of honest judgment, rather than arbitrary determination. This is the holding of our courts in Nave v. Taylor, 49 Cal. App. 311 [ 193 Pac. 508 ]; Security Trust Co. v. Clausen, 44 Cal. App. 734 [ 187 Pac. 142 ]; Foster v. Young, 172 Cal. 317 , [ 156 Pac. 476 ], Continuing this effort to harmonize, we read the remaining portion as though it were written thus: “and any portion of the money that the Water Company shall fairly determine to be returned shall be accepted as a full satisfaction of all demands.” Thus harmonized, or to the extent harmonized, this construction supports the claim of the Realty Company here, that the money was and is a deposit to be returned to it whenever the investment became a paying one.

It is likewise a rule of construction, requiring no citation, that the construction placed upon a contract by the parties thereto may be considered in determining the true construction. There is evidence in the record before us that the moneys in question, advanced by the Realty Company under the contract, were carried upon the books of the Water Company in its general ledger, as a liability, namely, a deposit, consumer’s deposit for the tract service. As a choice against the construction we adopt we have

Appellant next contends that the court erred in overruling its demurrer to the amended complaint of plaintiff, which demurrer raised the question of the statute of limitations. The action was instituted on April 21, 1924. The amended complaint alleged the execution of the contract, set forth in haec verba, in March, 1907. Alleged the payment of the advances, the last being in 1909. Then follows the allegation that on or about February 1, 1922, plaintiff learned, and alleges the fact to be, that said water-system is a paying investment and has, at all times since the execution of the agreement, been a paying investment. That plaintiff on February 14, 1922, made demand for the return of the money deposited, which moneys the defendant has failed, refused, and neglected to return, etc. The ground of demurrer was that the action was barred under the provisions of section 337, subdivision 1, and section 343 of the Code of Civil Procedure. The cause of action set forth in the amended complaint may be thus summarized, for the purposes of this branch of the discussion. Plaintiff alleges that in 1907 it deposited with defendant a sum of

We think that the amended complaint on its face did not show the action barred and that the allegations of the pleading were sufficient as against the demurrer. The statute was not pleaded in the answer, or otherwise, by way of defense.

The remaining question presented is whether or not the water system provided for in the contract ever became a paying investment. The trial court found that on January 1, 1919, the said system became a paying investment and ever since has continued to be a paying investment, but that prior to said date the Water Company sustained a loss in the operation of the system, amounting to $50. The judgment, following the findings, deducted this $50 from the amount deposited, as not being returnable.

By far the greater portion of the evidence offered was on the question of the return on the investment to determine its character as a paying investment under the terms of the

Let us review that evidence. The lands of the Realty Company were referred to on the boobs of the Water Company as the Withers Tract, and all of the evidence on the question now under review so designated the lands. When, under the contract, the Water Company undertook to install a high-pressure system as distinguished from the theretofore used gravity system, many changes were necessary. At that time the Water Company determined, in view of the prospective growth and increasing population of Monterey County, that the necessity for a high-pressure system was apparent as a part of its general scheme of distribution. That is to say, it was determined as a matter of good business policy, that if a high-pressure system was to be installed, it would be unwise to confine its capacity to the needs, actual or anticipated, of the Withers Tract alone. Therefore, when the high-pressure system was installed, a much greater expense was incurred than the money advanced by the Realty Company, in fact, about double that amount. Where small water-mains would have sufficed, even the anticipated needs of the tract, larger ones were installed and the whole scheme or plan embraced and intended what is now admitted to be the case, namely, that the installation became and is an integral part of the entire distributing system of the Water Company, which serves with water some 60,000 people, and a total investment of over $1,000,000. In addition to the main plant there was also installed what is called a stand-by plant, intended to secure the service against breakdown or other interruption of service in the main plant. Also, the record discloses that in the Withers Tract are some 1600 lots, all in private ownership and all homesite lots.

Both appellant and respondent presented much evidence on the question of what constituted a paying investment and particularly applying the testimony to the investment under discussion. As is not unusual, the conflicting conclusions arise from practically the same facts. Both sides used the books and records of the Water Company as the basis of computation, and many elaborately prepared diagrams and schedules were prepared and submitted for the court’s consideration. Should we take up these various and varying schedules and analysis charts, and attempt to classify each item therein, it would serve no useful purpose. As both sides

Much of the argument is advanced on the theory that to constitute a paying investment it must be shown that there will be realized by the Water Company a return of at least six per cent on the sum invested, after allowing all of the items of chargeable expense, including maintenance, depreciation, and fixed interest charges on the depreciation amount found. While all of this argument might properly be addressed to a rate-fixing body or commission, we do not hold it to be our sole guide. The record discloses that the Water Company is operating as a public utility under the control and supervision of the Railroad Commission. In its reports to said commission it has presented the investment as a whole and in its several units, as well as including all sums chargeable to maintenance, depreciation, etc. We presume that in fixing rates and revenue a fair return, under the law, has been determined by that body. However, we are not restricted in our inquiry to a return of any fixed per centum. It is obvious, from the record, that the Water Company, at no time, would have nor would it now, in the exercise of a prudent business plan, abandon the high-pressure unit or the Withers Tract service for a return of the amount invested. Should the owners of the Withers Tract determine upon a local or mutual service and seek to condemn that much of the water system devoted to their use, the same figure would undoubtedly show a return on investment and a loss through severance, that would establish a value far above the deposit amount.

To repeat, if we should set forth in detail all of the items contained in the many schedules and determine the exact

We accept the conclusion of the trial court, finding ample evidence to sustain it on this issue.

Judgment affirmed.

Cashin, J., and Knight, Acting P. J., concurred.

A petition for a rehearing of this cause was denied by the district court of appeal on February 13, 1929, and a petition by appellant to have the cause heard in the supreme court, after judgment in the district court of appeal, was denied by the supreme court on March 14, 1929.

All the Justices concurred.