Bath Gas Light Co. v. . Claffy

Andrews, Ch. J. 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 *28 1, 1888, at an annual rent of $2,500, which the lessee covenanted to pay in semi-annual payments on the first day of May and the first day of November in each year, and also the taxes assessed during the term. Provision was made for the payment by the lessor to the lessee, at the expiration of the term, of the value of any improvements or extensions made by the lessee, and it was also provided that the lessee should give to the lessor a satisfactory bond for the faithful performance by the lessee of its covenants in the lease. In pursuance of the provision last mentioned, the United Gas, Fuel and Light Company, on the same day, executed a bond with the defendants John Claffy and John T. Howland as sureties, conditioned for the faithful performance by the company of the covenants in its behalf contained in the lease, which bond was delivered to and accepted by the plaintiff. The sureties were interested in the United Gas, Fuel and Light Company as stockholders, and Claffy (the appellant) was also a director. The lessee immediately, upon the execution of the lease, entered into possession of the demised property and paid the rent up to the 1st day of November, 1889, but defaulted in the semi-annual payment due May 1st, 1890, and on the 2nd day of August, 1890' (the rent remaining unpaid), the plaintiff re-entered and took possession of the demised property under a provision of the lease which authorized the lessor to enter and expel the lessee on failing to pay rent. The entry also was, as may be inferred, with the consent and, indeed, at the suggestion of the officers of the lessee. This action was brought on the bond against the lessee and the sureties to recover as damages the rent which fell due May 1, 1890, and the proportionate rent from that date up to August 2nd, 1890, and taxes which had been assessed against the property during its occupation by the lessee, which 'it had failed to pay. 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, *29 or from considerations of public policy which overbear in the particular case the rules of ordinary justice, it will be our duty so to declare and to say that, although the United Gas, Fuel and Light Company received and enjoyed the undisturbed possession of the demised property under the lease until the re-entry, and accepted and appropriated the benefit of the contract, nevertheless, when called upon to pay the rent which accrued during its occupation, it may defend itself on the ground that the plaintiff, in making the lease, exceeded its power and escape the performance of its obligation, and, further, that the defendant Claffy may, for-a like reason, avoid his guaranty. 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 *30 tion. But if the crown take no such steps it does not, as I conceive, lie in the mouth either of the corporation or of the person who has contracted with it to say that the contract into which they have entered was void as beyond the capacity of the corporation.” The ease came before the House of Lords on appeal from the decision of the Exchequer Chamber in favor of the plaintiff, and its judgment is reported in L. R. (7 Eng. & Ir. App.) 653. The action was to enforce a contract entered into by the defendant, a corporation incorporated under the Companies Act of 1862. The judgment of the Exchequer Chamber was reversed on the ground that the contract sued upon was expressly prohibited by the act under which the defendant was incorporated, and was, therefore, void. The House of Lords applied the general doctrine that an act done in contravention of an express statute is utterly void. 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 *31 islature within its constitutional power has declared shall not be performed. The series of cases in this state, known as the Utica insurance cases, afford an apt illustration. It was held that the restraining acts which prohibited the exercise of banking powers, including the discount of paper, by other than banking corporations, rendered void securities taken on such discount by corporations not possessing banking powers, and this, although the object of the restraining laws seems to have been the protection of the chartered banks in the monopoly of banking. 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 *32 another railway company, by which it agreed to pay the parliamentary expenses which might be incurred by the latter company in the effort to obtain authority to extend its lines, whether the grant should be obtained or not, the intention being to turn over the concessions if obtained, together with the original, line, to the defendant under a lease, for which a parliamentary sanction was to be applied for. The concessions were only in part obtained, and no authority to make the proposed lease was given, and the project was finally abandoned. The action was brought on the contract to recover the expenses incurred by the plaintiff, amounting to more than twenty thousand pounds. It was held that the plaintiff was not entitled to recover, on the ground that the statute under which the defendant was incorporated prescribed that the funds of the defendant should be applied to the purposes for which it was incorporated, and that it could not legally enter into a contract involving the application of any portion of its funds to other purposes. The opinion relies upon cases in equity brought by shareholders to restrain the misapplication of corporate funds. The case of Macgregor v. The Dover & Deal Railway, and the case of The Ashbury Railway Carriage Company, though differing in detail, were decided upon the same principle, but in the latter case there was an express statutory prohibition which was regarded as prohibiting the contract there in question. It is important to observe that in each of these cases the action was brought against the offending corporation, or those in privity "with it, to enforce the unauthorized contract while it was still executory on the part of the corporation, and that the effect of a recovery would have been to divert and appropriate the funds of the corporation by the action of the courts, to unauthorized objects, to the prejudice of the legal rights of - stockholders and creditors. Without questioning these cases, it is quite apparent that they stand in justice upon a very different basis from the action in this case, which is brought by the corporation to enforce a contract, the enforcement of which will indemnify the plaintiff and its *33 stockholders for the deprivation of the use of the property of the corporation, during its possession by the defendants, under the unauthorized lease. The Supreme Court of the United States seems to be committed to a construction of the doctrine of ultra vires which would sustain the defense in the case now before us. Several cases have arisen in that court upon leases of railroads made without legislative sanction, in which it has been held that such leases are void as between the parties, and that no action can be maintained thereon to recover the rent reserved, even during the occupation by the lessee under the lease. In Thomas v. Railroad Company (101 U. S. 71) the defendant had leased to the plaintiffs a railroad for a term of years, reserving an option to terminate the lease at any time during the term, and the defendant, in case such option should be exercised, covenanted to submit to arbitration the ascertainment of the loss and damage to the plaintiffs by reason of such termination of the lease, and to abide by the award. The defendant exercised the option and terminated the lease and resumed possession of the road, and an action was bi’ought for ■& breach of the contract in respect to arbitration. The trial court determined the case against the plaintiffs on the ground that the contract sued upon was in substance a lease of the property and franchises of the defendant, which having been executed without legislative authority was illegal and void, and the Supreme Court affirmed the judgment. The action, it will be observed, was in substance an action to recover the value of the unexpired term of which the plaintiffs had been deprived by the action of the defendant, and the covenant sued upon was wholly executory. But, in the subsequent cases of Pa. Railroad Co. et al. v. St. Louis, A. & T. H. R. R. Co. (118 U. S. 290); Oregon Railway & Nav. Co. v. Oregonian Railway Co. (130 U. S. 1), and St. Louis, V. & T. H. Railroad Co. v. Terre Haute & Indianapolis Railroad Co. (145 U. S. 393), which were actions by lessor against lessee to recover rent accrued under leases of railroads during the occupation by the lessees, it was *34 broadly held that as the leases were made without legislative sanction they were void, and that no action could be maintained thereon to recover the past due rent, although the lessees were and still remained in undisturbed possession of the demised property. Mr. Justice Miller, in the case in 118 XL S., expressed a doubt whether there could be a recovery on a quamtum meruit. We concur with the opinion expressed by two of the learned justices of the court, who dissented from the judgment in the case last cited, that the decision carried the doctrine of ultra vires to an unjust extent, and the rank injustice which, as it seems to us, these cases sanction, justifies the observation of Lord St. Leonards in the case of The Eastern Counties Railway Co. v. Hawkes (5 H. L. Cas. 347, 370), that “the safety of men in their daily contracts requires that the doctrine of ultra vires should be confined within narrow limits.” 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 *35 ized lease lias been made, and the lessee has received and enjoyed the possession of the property under the lease, is there any public policy which requires that the lessee should be permitted to escape the obligation imposed by the contract to pay the rent reserved during the enjoyment of the property ? It is doubtless true, as has been suggested, that the corporation in such cases cannot, without the consent of the state, change its obligations to the state or the public, and discharge itself from its public duties. But the law affords ample remedy for the usurpation by corporations of unauthorized powers, through proceedings by injunction or for the forfeiture of their charters. If a lease by a corporation, made in excess of its powers and without legislative sanction, is illegal in the ordinary and proper sense of the term, it may be properly conceded that no action could be maintained upon it. The lessee, when sued for the rent, could set up the illegality of the contract, and the defense would prevail, however inequitable the defense might be. But the term “ illegal,” which is frequently used to describe a contract made by a corporation in excess of its corporate powers, in most cases means simply that the contract is unauthorized, or one which the corporation had no legal capacity to make. Such a contract may be illegal in the true and proper sense, but it may also be one involving no moral turpitude and offending against no express statute. The inexact and misleading use of the word “ illegal,” as applied to contracts of corporations, ultra vires only, has been frequently alluded to. (Comstock, C. J., Bissell v. M. S. Railroad Co., 22 N. Y. 268; Archibald, J., Riche v. Ashbury Railway Carriage Co., L. R. [9 Exch.] 293; Lord Cairns, S. C. on appeal, L. R. [7 Eng. & Ir. App.] 672.) 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 *36 rested upon the plaintiff. The state lias not intervened, and the possession of the property has now been restored to its original proprietors. The contract has been terminated as to the future, and all that remains undone is the payment by the lessee of the unpaid rent. We think the demands of public policy are fully satisfied by holding that, as to the public, the lease was void, but that, as between the parties, so long as the-occupation under the lease continued, the lessee was bound to pay the rent, and that its recovery may be enforced by action on the covenant. Public policy is promoted by the discouragement of fraud and the maintenance of the obligation of contracts, and to permit a lessee of a corporation to escape the-payment of rent by pleading the incapacity of the corporation to make the lease, although he has had the undisturbed enjoyment of the property, would be, we think, most inequitable and unjust. It has been suggested, to avoid the apparent, injustice which would result from holding that there could be no recovery on the contract for past-due rent, that there might, be a remedy on an implied contract to pay the value of iliense of the property. But if the express contract was illegal in a proper sense, and the parties to the lease were guilty of' a public wrong, so as to preclude a court of equity to entertain jurisdiction on the application of a lessor to be relieved from the lease and to be restored to the possession of the-leased property, as was held in the case of The St. Louis, V. c& T. H. Railroad Co. v. Terre Haute & I. Railroad Co. (145 U. S. 393), then surely it would be a mere evasion and would be inconsistent with legal principles for -the court to-imply a contract from the occupation under the illegal lease-to relieve the wrongdoer from the dilemma into which he had voluntarily placed himself. We think the rule which should be applied is that the lessee is bound by the contract so long as he remains in possession. 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. *37 The courts in this state from an early day, commencing as far back as the Utica Insurance cases, have sought to regulate and restrict the defense of ultra vires so as to make it consistent with the obligations of justice. (Utica Ins. Co. v. Scott, 19 John. 1; Curtis v. Leavitt, 15 N. Y. 9; Bissell v. M. S. Railroad Co., 22 id. 260, Op. Comstock, C. J.: Parish v. Wheeler, Id. 495 ; Whitney Arms Co. v. Barlow, 63 id. 62 ; Pratt v. Short, 79 id. 437; Woodruff v. Erie Railway Co., 93 id. 609; Starin v. Edson, 112 id. 206.) The case of Woodruff v. Erie Railway (supra) is very much in point in the present controversy. It was there held that the lessee of a railroad could not resist the payment of rent which accrued during its occupation under the lease on the ground that the lessor’s title was derived under an ultra vires transaction. Our conclusion, therefore, is that the main question was properly decided against the defendant. It is said, however, that the contract was a Maine contract, and that by the law of that state the lease was illegal and void and no action could be maintained upon it. / It is a sufficient answer to this claim that the law of Maine on the subject does not appear by the record, and that it is the duty of this court, therefore, to determine the case according to the law of Hew York as established, or in the absence of controlling authority, as justice having regard to all interests may seem to the court to require. 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.