Bath Gaslight Co. v. Claffy

• Decision Date: 01 December 1896
• Citation: 151 N.Y. 24,45 N.E. 390
• Parties: BATH GASLIGHT CO. v. CLAFFY et al.
• Court: New York Court of Appeals Court of Appeals

151 N.Y. 24

45 N.E. 390

BATH GASLIGHT CO.

v.CLAFFY et al.

Court of Appeals of New York.

Dec. 1, 1896.

Appeal from supreme court, general term, Second department.

Action by the Bath Gaslight Company against John Claffy, impleaded with the United Gas, Fuel & Light Company and John T. Rowland, to recover against defendant Claffy as one of the sureties on the bond given by defendant company to plaintiff to secure the performance of a lease made by plaintiff to defendant company of all its property and franchises for a term of 25 years. From a judgment of the general term (26 N. Y. Supp. 287) affirming a judgment in favor of plaintiff entered on a decision by the court, a jury trial having been waived, defendant Claffy appeals. Affirmed.

Vann, J., dissenting.

Abram J. Rose, for appellant.

James McKeen, for respondent.

ANDREWS, C. 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 & 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 November, 1888, it executed to the United Gas, Fuel & Light Company a lease of its property and franchises for the term of 25 years from November [151 N.Y. 28]1, 1888, at an annual rent of $2,500, which the lessee covenanted to pay in semiannual payments on the 1st day of May and the 1st 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 & Light Company on the same day executed a bond with the defendants John Claffy and John T. Rowland 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 & 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 semiannual payment due May 1, 1890, and on the 2d 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 2, 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 ultra 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, 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 & 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 New 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. Iron Co., L. R. 9 Exch. 262, citing as authority Sutton's Hospital Case, 10 Coke, 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 corporation.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 case 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 H. L. 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 contrariety 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 by 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. No one is permitted to justify an act which the legislature,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 prohibita, 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 party who has received the consideration for his promise, but neglects or refuses to perform it, or...