Naugatuck Water Co. v. Nichols

Andrews, C. J. The plaintiff is a corporation created by a special act of the General Assembly passed at its January session, 1887, “ for the purpose of supplying the town of Naugatuck with a supply of pure water for domestic and other uses.” The charter is found in the special acts of that session at page 571. It grants to the corporation the — 407 — privilege to take springs of water, to make dams for reservoirs, to construct aqueducts in any of the streets, to enter upon land, and to collect rents, and empowers it to borrow money, to give mortgages, to make contracts, and to do very many other things thought to be necessary or convenient to enable it to carry out the purpose of its creation. In addition to these things the charter provides that “twenty-five per cent of the capital stock shall be paid in before said company can exercise the privileges and powers herein granted.” Within the time limited by law the corporators named in the charter, and certain other persons associated with them, one of whom was the defendant, met, voted to accept the charter, chose directors and other officers, enacted by-laws, and organized themselves into a corporation under and pursuant to it. The defendant subscribed for twenty shares of the capital stock, of which the par value was twenty-five dollars a share. On the 25th day of July, 1888, the directors voted to call for, and issued a call for, an instalment of twenty-five per cent of the stock, to be payable on or before the 20th day of August then next. Of this call the defendant received due notice, but has at all times neglected and refused to pay it. On the 15th day of July, 1888, the plaintiff entered into a verbal contract with one Snow to construct for it its water-works. This contract was put into writing on the first day of August, and it was on that day executed by the parties. By the terms of that contract the plaintiff agreed to pay, and has since paid to Snow, over $17,000 for work done by him. The whole of the twenty-five per cent was not paid in until after the said first day of August. The trial court rendered judgment for the plaintiff to recover the instalment. The defendant has appealed. The substance of his reasons of appeal is, that he is absolved from his promise to pay for the stock for which he subscribed because the plaintiff undertook to contract with Snow for the construction of its water-works before the whole of the twenty-five per cent had been paid in. — 408 — . In the formation of a private civil corporation there are two classes of contracts to be considered. One is the contracts which the corporators or promoters make each with all the others in order to bring the corporation into existence, of which a subscription to the capital stock is an example, and which necessarily antedate its completed existence. These are the organizing contracts. The other class is the contracts which the corporation itself, after it comes into a complete existence, makes with third persons. Both these classes of contracts depend upon the provisions of the charter; and it is usual that the charter of every corporation contains provisions relating to each. The organizing contracts are made primarily by each of the subscribers with each of the others. They are also in a sense made with the corporation. But the making them is not an exercise of any of the powers or privileges granted to the corporation, because they are the steps necessary to be taken before the corporation is qualified to exercise any of the powers or privileges granted to it. It needs hardly to be said that there must be a full compliance with all the charter provisions relating to the organizing contracts before the corporation comes into such a legal existence as to be able to make contracts with third persons at all. Until these preliminary steps have been taken there is no legal person in being capable of exercising any power or privilege whatever. It is obvious enough that any omission or failure to complete the organization would affect any contract with a third person. How any premature contract with a third person could interrupt or hinder the organization is not so plain. If any organizing contract was by its terms conditioned that no such contract should be entered into, or if it was so made conditional by the provisions of the charter, then it would appear. The contract of subscription signed by the defendant is not by its terms conditioned upon anything relating to contracts which the plaintiff might make with third persons, unless the reference in it to the charter puts it in such a condition. If then the charter of the plaintiff contains no — 409 — provision making a subscription to its capital stock dependent for its validity upon tbe time when the company might enter into contracts with third persons, then there is no such condition in this case. There certainly is no express condition in the charter to that effect. The defendant claims that the provision of the charter above quoted is such a condition by implication, because it forbids the plaintiff to exercise any of the granted privileges and powers until the required part of the capital stock should be paid in. It does not seem to us that this claim can be sustained. Some of the powers and privileges granted to the plaintiff in its charter are hereinbefore enumerated. Prohibiting the exercise of any of these is quite a different thing from discharging a subscriber from the payment for his stock. The contract with Snow is foreign to the defendant’s subscription contract. It purpprts, indeed, to have been made by the corporation ; but in law it was not and could not have been, as at that time the corporation had no power to make it. It is not, however, a case of ultra vires. A case of ultra vires is where a fully existing corporation attempts to act upon some subject matter not within its charter powers. In this case the subject matter was within the powers conferred by the charter, but the corporation was not qualified to exercise those powers. Hence the executory contract, so far as the corporation was concerned, was inoperative. It was as though it had not been. In a case of ultra vires a corporation may become bound by the principles of estoppel. In this case it could only be bound by subsequent transactions from which a contract might be implied. Snow the contractor might, perhaps, have looked through the corporation and held those who assumed to act for it and in its name without authority liable as individuals. Beyond this we cannot see that any effect can be given to it as an executory contract. The argument made on behalf of the defendant admits that his subscription was valid and lawful except for the contract with Snow. The provision of the charter clearly forbade such a contract. Being forbidden it was void. Can — 410 — it be so that a void contract with Snow will release the defendant from his lawful one? If the defendant is not bound on his subscription then none of the subscribers are. All or none are bound. It cannot be that those who paid promptly are liolden and the defendant who refused to pay is released. If all are released the consequence is that those who paid one instalment can be compelled to pay no more; on the contrary, it would seem that they ought to have the amount refunded to them, otherwise they would be in a worse condition than those who refused to pay. The inevitable result of the defendant’s claim, if granted, would be disaster complete and overwhelming to the enterprise. The provision of the charter under consideration forbids the exercise of any granted power until the instalment was ¡oaid in. A careful regard for the public interest might naturally prompt the legislature to enact such a prohibition, while nothing but an injury done or threatened to the subscriber would be likely to suggest relieving him from making payment. Between these two things there is no legal connection. The relation of cause and effect does not exist. Neither implies the other. Either may well stand without the other, as either might be omitted without affecting the other. It must not be inferred that we regard the provision of tho charter as in the interest of the public alone; nor for the benefit merely of third persons. We entertain no doubt that it was designed to protect the stockholder as well. If the premature exercise of any granted power operated to the injury of any subscriber he ought not to be held to pay. But, on the other hand, if it was an advantage to him, and if it also tended to promote the purposes for which the corporation was chartered, it would be very unreasonable that he should not pay according to his promise. When any subscriber really suffers from such cause a remedy will not be wanting. We think a compliance with this provision is not a condition precedent to the right of the plaintiff to recover in — 411 — this action ; and that a disobedience to it does not operate to release the defendant from Ms promise. In this opinion Carpenter and Fenn, Js., concurred.