Bath Gas Light Co. v. Claffy

A brief statement of the material facts will present the important question arising upon this appeal.

The plaintiff is a Maine corporation created under a special law of that state, passed in 1853, for the purpose of supplying gas for the lighting of the streets and buildings in the city of Bath. The United Gas, Fuel and Light Company is also a Maine corporation, organized in 1888, under a general law, by the execution and filing of a certificate, which in pursuance of the law of Maine was first submitted to and approved by the attorney-general, who certified that it was conformable to the Constitution and laws of that state. The certificate, among other things, specified that the corporation was organized to “ manufacture, lease, purchase and otherwise acquire, deal in, manage, use and sell any and all machinery, fixtures, appurtenances, appliances and plants for using and furnishing light, heat and power, and for any and all purposes for which gas is now used.” The plaintiff under its charter established a plant, and at the time of the execution of the lease now to be mentioned was engaged in supplying the streets and buildings in Bath with gas for lighting and other purposes. On the 10th day of 27ovember, 1888, it executed to the United Gas, Fuel and Light Company a lease of its property and franchises for the term of twenty-five years from 27ovember

The defendant Claffy alone appeared and defended the action. His sole defense to the general claim is that the lease was vltra vires, illegal and void, because (as is conceded) it was made without legislative sanction. If the court is compelled to accede to this contention by force of controlling authority,

The modern doctrine, as stated by Chancellor Kent, is to consider corporations as having such powers as are specifically granted by the act of incorporation, or as are necessary for the purpose of carrying into effect the powers expressly granted, and as not having any others. (2 Kent Comm. 299.) This doctrine is embodied in the Revised Statutes of Hew York, and the section relating to the subject is regarded as simply declaratory of the antecedent law. (1 Rev. St. 600, § 3.) It has been frequently stated that the validity of contracts of corporations is to be determined by comparing the contract made with the charter, and if upon such comparison it appears that the contract was neither expressly authorized, nor a necessary or reasonable incident to the exercise of the powers specifically granted, the contract is ultra vires. It seems that by the ancient common law a corporation could bind itself by a contract under its corporate seal, although the contract was not within the powers specified in the charter, and even although it contained negative words. This was in substance stated by Blackburn, J., in the case of Riche v. Ashbury Railway Carriage Co. (L. R. [9 Exch.] 262), citing as authority Sutton’s Hospital Case (10 Co. 1). He said: “If there are conditions contained in the charter that the corporation shall not do particular things, and those things are nevertheless done, it gives ground for a proceeding by sci. fa. in the name of the crown to repeal the letters patent creating the corpora

The modern and reasonable doctrine that contracts into which corporations may lawfully enter are such only as are expressly or impliedly authorized by their charters, is nevertheless frequently disregarded in practice, and when this is done and a corporation enters into a contract beyond its chartered powers, the question arises which has been the subject of debate and of much difference of opinion, how shall such a contract be treated by the courts, and whether the contract can create any rights as between the parties which the courts will enforce. ' There are some propositions pertaining to the general subject which are beyond dispute: One is, that a contract hy a corporation to do an immoral thing, or for any immoral purpose, or, to use a convenient expression, a contract malum in se, is void and gives no right of action. The doctrine, however, is not peculiar to contracts of corporations. It has its root in the universal principle that persons shall not stipulate for iniquity. Another principle of general recognition is that a corporation cannot enter into or bind itself by a contract which is expressly prohibited by its charter or by statute, and in the application of this principle it is immaterial that the contract, except for the prohibition, would be lawful. Ho one is permitted to justify an act which the leg

But in not infrequent instances corporations enter into unauthorized contracts, which are neither mala in se nor mala jprohibita, or when the only prohibition or restriction is implied from the grant of specified powers. It is this class of cases which open the field of controversy. Is such a contract performed by one party, but not performed by the other, void as between them to all intents and purposes, so that no recovery can be had under it against the jiarty who has received the consideration for his promise, but neglects or refuses to perform it, or is it so tainted with illegality that the courts must refuse to recognize it under any circumstances or enforce its obligation, whether as to past or future transactions? There are certain English cases which are relied upon by those who maintain the strict view that contracts of corporations ultra vires are under no circumstances enforceable in the courts. The principal of these cases are The East Anglian Railways Co. v. The Eastern Counties Railway Co. ( 11 C. B. 775 ); Macgregor v. The Dover & Deal Railway Co. (18 Ad. & El. 618), and The Ashbury Railway Carriage Co., Limited, v. Riche (L. R. [7 Eng. & Ir. App.] 653). The East Anglian case seems to have been the first one in England which sustained a defense of ultra vires interposed by a corporation as a defense to an action at law on a contract made in the name of the corporation. (See opinion of Erle, J., Mayor of Norwich v. Norfolk Railway Co., 4 El. & Bl. 397.) The defendant in that case, a railway corporation •owning and operating a railway, entered into a contract with

We concede that a railroad or other corporation invested with powers in the exercise of which the public have an interest, and empowered by reason of its quasi public character to do acts and exercise privileges peculiar and exceptional to enable it to discharge its public duties, cannot, as against the public, abdicate its functions or absolve itself from the performance of such duties through an unauthorized transfer of its property and franchises to another body or corporation. We have so held in the case of Abbott v. The Johnstown, etc., Railroad Co. ( 80 N. Y. 27 ), where it was decided that a railroad corporation which, without legal sanction, had leased its road, was not thereby exempted from liability as carrier to a passenger injured by negligence during the operation of the road under the lease.

There are obvious reasons of propriety and public policy, the prevention of monopolies, among others, aside from the mere question of capacity under their charters, which enforce the now well-settled doctrine, that leases by such quasi public corporations, to be valid and effectual, must be authorized by statute. But where, as in the present case, such an unauthor

The lease now in question was not in any true sense of the word illegal. It was undoubtedly void as against the state. 'The parties to the lease assumed it to be valid. It was contemplated, as the provisions of the lease show, that the lessee would continue and extend the business before carried on by the plaintiff, and it is not suggested that it did not, during its occupation, discharge all the obligations to the public which

It is unnecessary now to determine whether a lessee under an ultra vires lease may relieve himself from liability in the. future by abandoning the possession and restoring, or offering to restore, it to the lessor.

The question as to the liability of the defendant for the taxes assessed in 1890 was, we think, correctly adjudged.

Finding no error in the record the judgment should be affirmed.

(dissenting). This action was founded upon a written instrument in the following form, viz. :

“ Know all men by these presents, that the United Gas, Fuel and Light Company, a corporation organized under the laws of Maine, and having a place of business in Gardiner, in that state, as principal, and John Claffy, of Brooklyn, Kings county, and state of Hew York, and John T. Rowland,

of Jersey City, Hudson county, and state of Hew Jersey, as sureties, are holden and stand firmly bound and obliged unto the Bath Gas Light Company, a corporation organized under the laws of Maine, and having a place of business in Bath, in said state, in the sum of fourteen thousand dollars ($14,000), to be paid to the said Bath Gas Light Company, or its assigns, to the which payment, well and truly to be made, we bind ourselves, our heirs, executors and administrators firmly by these presents.

“ Sealed with our seals, dated the tenth day of Hovember, one thousand eight hundred and eighty-eight.

“ The condition of the above obligation is such that, on the tenth day of Hovember, A. D. 1888, the Bath Gas Light Company aforesaid leased to the United Gas, Fuel and Light Company aforesaid its entire plant and charter rights for manufacturing and disbursing gas, subject to certain conditions fully set forth in said lease; and if the said United Gas, Fuel and Light Company shall faithfully and fully execute and perform the conditions of said lease, then this bond shall be void ; otherwise remain in full force.”

By the lease referred to the Bath Gas Light Company demised and let to the United Gas, Fuel and Light Company “the real estate, personal property, trade fixtures and incorporate rights belonging to and used by the said lessor in carrying on its business of manufacturing and supplying the inhabitants ” of the city of Bath, Maine, “ with gas.” The instrument stated that the intention of the lessor was “ to transfer and set over to the said lessee during the terms of ” said “ lease, and subject to the conditions ” therein “ named, all the rights to manufacture and sell gas under the provisions of the charter granted to the said Bath Gas Light Company on the 22d day of February, 1853, together with any amendments thereto; all the jnoperty held by it, the said lessor, in carrying on the said business of manufacturing or selling gas, whether the said property be real, personal or mixed; * * * to hold for the term of twenty-five years from the first day of Hovember, 1888, yielding and paying therefor the

The main defense set forth in the answer of Mr. Claffy, who was the only defendant sued, is that the lease was ultra vires and void, because the plaintiff had no power to let for a long-term of years all its property and franchises to another corporation engaged in the same business. The trial court held that the lease was void, but that the plaintiff could recover, as upon a quantinn meruit, for use and occupation, although no such cause of action was alleged in the complaint, and no proof given as-to rental value, aside from the rent reserved in the lease itself.

The plaintiff is a corporation organized in 1853 under a special statute of the State of Maine, with authority to make, sell and distribute, in the usual way, illuminating gas to the

This company laid pipíes in 'the streets of Bath, carried on the business for which it was created, and pierformed its functions under its charter, from 1853 until the 10th of November, 1888, when another corporation, known as the United Gas, Fuel and Light Company, was organized under the general statutes of the state of Maine, with piower to make and furnish gas for lighting piurpioses, as well as heat and motive power derived from gas, for heating and manufacturing piurpioses, without restriction as to locality. On the same day that the last-named company was organized, the pilaintiff leased to it for the term of twenty-five years all its piropierty, rights and franchises, and thereupion the new company took piossession of all the property of the pilaintiff, including the gas plant, “ rights of way through the streets,” and four miles of gas mains laid in the piublic highways. It continued in piossession

-No express authority was conferred upon the plaintiff by its charter to execute a lease so sweeping in character as to part not only with all its property, but also with all its power to carry on business for a quarter of a century. There was certainly no implied power conferred upon the plaintiff to execute such an instrument, for the implied powers of corporations are confined to such as are incidental to those expressly granted and necessary for the convenient and proper enjoyment thereof. ( Village of Carthage v. Frederick, 122 N. Y. 268 , 271; People ex rel. Peabody v. Chicago Gas Trust Co., 130 Ill. 268 , 283; Beach on Corporations, § 637.) The plaintiff is a public or quasi public corporation, because it was created not merely for the private gain of its stockholders, but for the benefit of the public also. It owed certain express duties to the public, for it was bound to supply -with gas any street or public building upon request of the city council. ' It had a franchise from the city to lay mains in public streets for the purpose of furnishing gas to the inhabitants. It was under obligation, at any time, to transfer one-half of its stock to the city upon payment of a sum to be agreed upon, or adjusted by arbitration upon a prescribed basis of cost and profit. It was subject to the control of the legislature, could be given the power of eminent domain, and could be compelled by mandamus to discharge its duties to the public. The purpose of its creation was two-fold; first, to accommodate the public, both in its 'organized and unorganized capacity, by furnishing gas to the streets and buildings owned by the city and to the dwellings and business places of the people; and, second, to make it profitable for the stockholders to serve the public in this way. Its powers, therefore, were to be exercised in part for the

“ The manufacture of gas and its distribution for public and private use by means of pipes laid under legislative authority in the streets and ways of a city, is not an ordinary > business, in which any one may engage, blit it is a franchise belonging to the government, to be granted for the accomplishment of public objects to whomsoever, and upon what terms, it pleases. It is a business ox a public nature, and meets a public necessity for which the state may make provision.” (New Orleans Gas Co. v. Louisiana Light Co., 115 U. S. 650 , 669.)

The lease under consideration was a contract that wholly disabled the plaintiff from performing those duties to- the public that were required by its charter. It was a complete transfer, for the period of twenty-five years, of all corporate rights, jDOwers and property, except the right to maintain its organization, collect rents, declare dividends and the like. It could no longer carry on its legitimate business. It could neither make nor sell gas. It could not use the mains that it had laid in the public streets, by permission of the city authorities, for the purpose of distributing gas. It had parted with all control over its own property used to carry on its business. It had transferred to a rival corporation all its “ rights to manufacture and sell gas ” under the provisions of its charter. It had neither the means nor the right" to make or sell that commodity, the making and selling of which was the object of its existence. It could discharge no duty that

Although the lease was ultra vires it does not follow, simply on that account, that it cannot be enforced, so far as it has been executed, by compelling the lessee to pay rent for the period that it was in the actual possession and enjoyment of the property leased. While courts of all jurisdictions seek to afford a remedy for the value received by one party from the practical performance of an ultra vires' contract by the other, they differ as to the ground of recovery. The position of the Supreme Court of the United States upon the subject is that a contract made by a corporation, which is unlawful and void because beyond the scope of its corporate powers, does not, by being carried into execution, become lawful and valid, and that the proper remedy of the party aggrieved is to disaffirm the contract and sue to recover, as. on a guantmm meruit, the value of what the defendant has actually received

In many of the states the same rule prevails where the contract is simply ultra vires and not malum prohibitum. "While the contract is held to be void, the party who has received value under it is compelled to refund, after rescission by the other, either in an action at law for money had and received, or in a suit in equity to compel an accounting and restitution. ( White v. Franklin Bank, 22 Pick. 181 ; Morville v. Am. Tract Soc., 25 Am. Rep. 40 ; Davis v. Old Colony R. R. Co., 41 Am. Rep. 221 ; Paul v. Kenosha, 94 Am. Dec. 598 ; Moore v. Swanton Tanning Co., 60 Vt. 459 ; Anthony v. Household S. M. Co., 16 R. I. 571 ; Harriman, v. First Baptist Church, 63 Ga. 186 ; Day v. Spiral Springs Buggy Co., 57 Mich. 146 .)

The application of these principles to this case would defeat the plaintiff, for, unless there could be a recovery from the lessee upon the lease, there could be none against its sureties upon the bond, as their sole agreement was that the former should “faithfully and fully execute and perform the conditions of said lease.” (Rosa v. Butterfield, 33 N. Y. 665 ; Stewart v. Bramhall, 74 N. Y. 85 ; Union National Bank of Pittsburgh v. Wheeler, 60 N. Y. 612 ; 3 Am. & Eng. Ency. of Law, 889.)

“ The obligation of the surety being accessory to the obligation of some person who is the principal debtor, it is of its essence that there should be a valid obligation of a principal debtor. The nullity of the principal obligation necessarily induces the nullity of the accessory.” (Theobald Prin. and Sur. 2; Chitty on Contracts, 499.)

On the other hand, the courts of this state have permitted a recovery upon the contract itself, although ultra vires, when wholly or partly performed, for the reason that to hold other

Thus, the court, through its chief judge, after a review of the statutes, said: “ It would seem to follow from these statutes that the supreme legislative authority of this state does not regard the transfer of the property and privileges of one railroad corporation to another with a view of their operation by the lessees thereof, as either contrary to good morals or public policy.” (p. 617.) The court considered, but did not decide, the question, which arose in that case, whether a lease by a railroad corporation of its property and privileges to an individual was ultra vwes or not, as it held that the grantee in such a conveyance, at least so far as the contract has been executed, is estopped from contesting the title of his lessor, or the validity of the conveyance by which he has acquired, and still holds, possession of the leased property.

Where the contract of a corporation is contrary to public policy, solely because made in excess of its rightful powers, but it is free from every other vice, it is not illegal in the sense of the maxim, ex turpi contractu non oritur actio. Such a contract, when partly performed, may well be proportionately enforced where justice requires it, in order to prevent a defendant from alleging his own wrong for the purpose of avoiding a just responsibility. When, however, the contract of a corporation is contrary to public policy for some cause that would avoid the contract of a natural person, as, for instance, an agreement tending to defeat or impair the interest of the state, a more serious question is presented. The abnegation, by contract, of a public duty, while not modum prohibitum

In order to prove the common law as it exists in the state of Maine, upon the principal question involved, the defendant read in evidence, without objection, the following authorities ; Gould v. Bangor & P. R. R. Co., ( 82 Me. 122 ) ; Edison U. M. Co. v. Farmington E.L.& P. Co. ( 82 Me. 470 ); Bailey v. Trustees M. E. Church ( 71 Me. 472 ); Franklin Co. v. Lewiston Inst. for Savings ( 68 Me. 43 ); Cummings v. Webster ( 43 Me. 192 ); Andrews v. Mutual Fire Ins. Co. ( 37 Me. 256 ), and Bangor Boom Corporation v. Whiting ( 29 Me. 123 ). The plaintiff read in evidence Inhabitants of Bucksport v. Woodman ( 68 Me. 33 ), which is doubtless a miscitation, as it has

All concur with Andrews, Oh. J., for affirmance, except Vann, J., dissenting.

Judgment affirmed.