In the absence of any provision in the submission, the award of
arbitrators or appraisers must be unanimous in matters of private
concern, but a majority can act when the matter submitted is one
which concerns the public.
The fact that public affairs are controlled by majorities is
probably the basis of the above rule, although the reason for the
distinction therein contained is not altogether clear.
Page 218 U. S. 181
The purchase by a municipality, under authority and direction of
the legislature of the state, of a water supply system, and the
determination of the price to be paid for an existing plant are
matters of public concern.
There is a distinction between an arbitration and an appraisal
of value, and although arbitrators may not independently take
testimony as to disputed facts, appraisers may, as in this case,
properly examine books and papers relating to the property, in the
absence of counsel, without being guilty of misconduct; and, in the
absence of bad faith, such examination will not vitiate the
award.
The legislature of a state may authorize a municipality to
purchase a water system which extends beyond the city limits and to
supply water to adjacent sections, and so
held that the
City of Omaha has such right, and that an appraisal of a water
system is not bad, and hence not binding on the city, because it
includes the entire system, parts of which are beyond the city
limits.
There is a presumption against an intent to dismember a complete
waterworks system, and an ordinance to purchase such a system will
not be construed as requiring such dismemberment, even if the city
had no power to use certain portions of the system.
Cost of duplication, less depreciation, of a water system, is
less than the commercial value of the system as a going concern,
and, even though the value of the unexpired franchise be expressly
excluded from the appraisal, where the parties contemplate the
purchase of a complete water system in operation, a reasonable
amount should be included in the appraisal for the "going value"
over the value of the physical properties.
A transaction of great magnitude such as the purchase by a city
of a water supply system will not be defeated because of minor
obstacles, and if the deed tendered includes a few properties to
which title is not perfect or if there are incumbrances on the
properties, the court can bring the proper parties in and the deed
can be modified and interests protected so as to carry out, and not
defeat, the transaction.
The facts are stated in the opinion.
Page 218 U. S. 191
MR. JUSTICE LURTON delivered the opinion of the Court.
This is a bill seeking the specific performance by the City of
Omaha of a contract for the purchase and sale of the system of
waterworks owned by the appellee company. The waterworks plant in
question was constructed in pursuance of legislative authority and
municipal ordinance, which need not be considered, for neither
party questions the sufficiency of either. The fourteenth section
of the ordinance of 1880, under which the waterworks were
constructed by the predecessor of the appellee, was in these
words:
"The City of Omaha shall have the right at any time after the
expiration of twenty years to purchase the said waterworks at an
appraised valuation, which shall be ascertained by the estimate of
three engineers, one to be selected by the city council, one by the
waterworks company, and these two to select the third:
Provided, That nothing shall be paid for the unexpired
franchise of said company."
In 1903, the city elected to exercise this option, and a board
of appraisers was appointed, one by each of the parties and a third
by the two so selected. This board of appraisers organized and
proceeded to take evidence, and, after considering the matter for
about three years, made an appraisement, fixing the value of the
system at $6,263,295.49. The appraiser appointed by the city did
not concur. The city rejected the award. Whereupon the company
filed this bill, which, upon final hearing, was dismissed upon the
sole ground of misconduct of the appraisers, other objections not
being passed upon. Upon appeal, this decree was reversed and the
cause remanded for a decree in pursuance of the opinion of the
appellate court. 162 F. 232.
The case is here upon a writ of certiorari allowed at a former
term.
Page 218 U. S. 192
Three major objections have been urged against the appraisement.
First, that it was not concurred in by all, second, that the
appraisers heard certain evidence without notice or giving the city
an opportunity to hear or rebut, and, third, that the property
valued includes a distributing system beyond the corporate limits
of Omaha, by which certain suburban villages are supplied, and that
to that extent the city made no contract to buy, and, if it did,
had no power to do so.
These in their order:
1. The only matter to be determined was the value of the
waterworks system, which had long served the public. Its
construction had been authorized by legislative enactment under
which the municipal ordinance was passed. One section of this
ordinance provided that the city, at the end of twenty years, might
at its election purchase the works at a value to be determined by
appraisers. The contention is that the refusal of one of the
appraisers to concur in the valuation fixed by the majority
defeated the appraisal. The matter in question was in no proper
sense an arbitration. The contract was in all of its terms agreed
upon. One party was to sell and the other to buy at a valuation
determined by the board of appraisers, and unanimity was not
stipulated for. Unanimity was hardly to be expected in a board made
up as this was. When a matter of purely private concern is
submitted to the determination of either arbitrators or appraisers,
the rule seems to be that there must be unanimity of conclusion by
such board, unless otherwise indicated by the terms of the
submission.
Hobson v.
M'Arthur, 16 Pet. 182,
41 U. S. 192;
Green v. Miller, 6 Johns. 39;
Wheeling Gas Co. v.
Wheeling, 8 W.Va. 320, 351
et seq. The rule is,
however, otherwise when the submission is one which concerns the
public. In such submissions, whether it be the arbitration of a
difference or the ascertainment of a value, a majority may act,
unless otherwise indicated by the agreement for
Page 218 U. S. 193
submission. Why this distinction should exist is not altogether
clear. In both instances, the persons to whom the submission is
made are acting under a power, and must stay within it. The reason
probably lies in the fact that public affairs are controlled by
majorities, and, by analogy, a majority should control when the
submission is a matter which concerns the public. But, whatever the
reason, so are the authorities.
Colombia v. Cauca Co.,
190 U. S. 524;
People ex Rel. Washington v. Nichols, 52 N.Y. 478;
Wheeling Gas Co. v. Wheeling, 8 W.Va. 320;
Griffindley
v. Barker, 1 Bos. & Pul. 229.
The construction and acquisition of a system of water supply and
distribution was a public municipal function. The Nebraska
Legislature, in 1903, went so far as to require municipal ownership
of a water supply system in the City of Omaha, and that this should
be accomplished either by construction or by the purchase of the
existing system. The city, in compliance with and in the exercise
of the power conferred when the existing plant was constructed,
elected to purchase the existing system under the ordinance of 1880
and the power therein reserved. That in such circumstances the
determination of the price to be paid by a submission was a matter
of public concern is too clear for argument. The cases cited above
cover the point. The appraisal was not, therefore, defeated because
not concurred in by all.
The distinction suggested by counsel, that the authority for the
submission must come from the public, if there be anything of
substance in it, does not prevent the operation of the rule here,
for the purchase upon a valuation settled by appraisers was in the
ordinance of the city, in pursuance of legislative authority, and,
in a very true sense, was an authority to submit to appraisers
which came from the public.
2. The next objection is that the appraisers heard evidence in
the absence of the city and without opportunity
Page 218 U. S. 194
to reply, and that this was such misconduct as to vitiate the
valuation. As already hinted, this was not a board of arbitrators.
An arbitration implies a difference, a dispute, and involves
ordinarily a hearing and all thereby implied. The right to notice
of hearings, to produce evidence and cross-examine that produced,
is implied when the matter to be decided is one of dispute and
difference. But when, as here, the parties had agreed that one
should sell and the other buy a specific thing, and the price
should be a valuation fixed by persons agreed upon, it cannot be
said that there was any dispute or difference. Such an arrangement
precludes or prevents difference, and is not intended to settle any
which has arisen. This seems to be the distinction between an
arbitration and an appraisement, though the first term is often
used when the other is more appropriate.
Counsel have cited and pressed upon us the case of
Continental Ins. Co. v. Garrett, 125 F. 589, as a case
where an appraisement of a fire loss was set aside because evidence
was heard in the absence of the parties. But that was a case where
the full amount of the insurance was claimed as the extent of the
loss. This was denied. It was therefore a plain case of the
submission of a dispute or difference which had to be adjusted. The
rule applicable to a judicial proceeding therefore applied. It was
in fact an arbitration, though the arbitrators were called
appraisers. The dispute concerned the thing which had been
destroyed, the value of something which was not to be inspected and
valued from observation, because it was not in existence. Evidence
was therefore essential to show what had been destroyed as well as
its value. The case is wholly unlike the one here presented.
In
Collins v. Collins, 26 Beav. 306, where there was a
contract for the sale of a brewery at a price to be fixed by
persons called arbitrators, one chosen by each party and a third by
these two, before entering upon valuation,
Page 218 U. S. 195
it was ruled that they were not arbitrators, but appraisers, and
the master of the rolls, Sir John Romilly, said:
"But I do not think that, in this particular case, the fixing of
the price of the property is an arbitration, in the proper sense of
the term. An arbitration is a reference to the decision of one or
more persons, either with or without an umpire, of some matter or
matters in difference between the parties. It is very true that, in
one sense, it must be implied that, although there is no existing
difference, still that a difference may arise between the parties;
yet I think the distinction between an existing difference and one
which may arise is a material one, and one which has been properly
relied upon in the case. If nothing has been said respecting the
price by the vendor and purchaser between themselves, it can hardly
be said that there is any difference between them. It might be
that, if the purchaser knew the price required by the seller, there
would be no difference, and that he would be willing to give it. It
may well be that, if the vendor knew the price which the purchaser
would give, there would be no difference, and that he would accept
it. It may well be that the decision of a particular valuer
appointed might fix the price and might be equally satisfactory to
both, so that it can hardly be said that there is a difference
between them. Undoubtedly, as a general rule, the seller wants to
get the highest price for his property and the purchaser wishes to
give the lowest, and in that sense it may be said that an expected
difference between the parties is to be implied in every case; but
unless a difference has actually arisen, it does not appear to me
to be an 'arbitration.' Undoubtedly, if two persons enter into an
arrangement for the sale of any particular property, and try to
settle the terms, but cannot agree, and after dispute and
discussion respecting the price, they say, 'We will refer this
question of price to A. B., he shall settle it,'
Page 218 U. S. 196
and thereupon they agree that the matter shall be referred to
his arbitration, that would appear to be an 'arbitration,' in the
proper sense of the term, and within the meaning of the act; but if
they agree to a price to be fixed by another, that does not appear
to me to be an arbitration."
In the present case, there was not only no antecedent
disagreement as to price, but the ordinance under which the
purchase was to be made provided that the property was to pass "at
an appraised valuation, which shall be ascertained by the estimate
of three engineers," etc. The board was accordingly made up of such
engineers, selected because they were experts of experience in the
service they were expected to perform. That it was the
understanding that these engineers were to examine and estimate the
value and acquaint themselves with the condition and extent of the
property in question in their own way, and not according to the
procedure required in a judicial proceeding, is made clear by the
avowals made by the counsel representing the parties at the
beginning of the valuation. Thus, the attorney for the city,
addressing the valuers, said:
"As to the matter of the procedure to be adopted by your board,
as to the method of arriving at the amount of property owned by the
water company, and the determination of its value, the City of
Omaha suggests that this board, having been appointed as experts in
regard to the value of such property, ought to make a personal
investigation as to the amount and extent of the property of the
water company, together with its condition, and determine therefrom
its value. As to the method of arriving at the amount and condition
of the property of the water company, the City of Omaha suggests
that this board may arrive at such facts by any method or means
deemed advisable by it, but that, if the board shall determine to
take proof and testimony before it, that it should go no further
than to the question of the amount and condition
Page 218 U. S. 197
of the property, and that said testimony should not be
conclusive upon this board, but simply for its advice and
information in the matter. It is not the opinion of the City of
Omaha that it would be proper or necessary to call expert witnesses
as to the value, since the members of the board have been selected
as experts [to] whose judgment the question of value must be
submitted upon the examination of the property."
Counsel for the water company appear to have fully concurred in
this view of the function of the board.
That the great bulk of the evidence was heard or submitted in
the presence of counsel representing both sides is true. This
course did not, however, preclude them from enlightening their
judgment as experts by either personal inspection or by informing
themselves in any other way of the value of the plant in question
without calling in counsel, if they desired further information.
The thing complained of is that the valuers called upon the company
for their books, and that they had these books gone over by an
expert auditor of their own selection. This, counsel say, was done
without notice to the city, and after the close of the hearings.
But it was not done secretly, for the city learned of it and asked
an opportunity to be present when the books were submitted. What
information was derived from the books is not shown. We have only
the lone fact that the appraisers, of their own motion, asked an
opportunity to look over and have audited the company's books, and
that the company granted the privilege as "confidential
information" for the use of the appraisers only. Neither are
counsel justified in saying that the books were called for after
the matter was in the hands of the appraisers for conclusion. When
the parties had submitted their maps, plats, blue prints, and such
other evidence throwing light upon the value of the plant, as they
desired, and had been heard in argument and upon brief, the
chairman of the board said in substance to
Page 218 U. S. 198
counsel that much time would be necessary to reach a conclusion;
that the real work of valuation had been but begun, and that "much
more information must be sought by this board."
There is not the slightest evidence in the record of partiality,
bad motive, or misconduct affecting the action of the board. Its
members appear to have been gentlemen of high character,
professionally and otherwise, and if their conclusion is to be set
aside, it must be because they deemed it within their power to have
a confidential examination made of the books of the company to
assist them in arriving at a valuation.
If this was a technical arbitration of a matter of dispute or
difference between the parties, to be heard and decided upon
evidence submitted, the examination of the company's books without
the consent of the city or the presence of its representatives
would be such misconduct as would vitiate the award. In such a
matter, the rules relating to judicial inquiry would apply.
Continental Ins. Co. v. Garrett,125 F. 589, and cases
cited. But in an appraisement, such as that here involved, the
strict rules relating to arbitration and awards do not apply, and
the appraisers were not rigidly required to confine themselves
either to matters within their own knowledge, or those submitted to
them formally in the presence of the parties, but might reject, if
they saw fit, evidence so submitted, and inform themselves from any
other source, as experts who were at last to act upon their own
judgment.
Kelly v.
Crawford, 5 Wall. 785,
72 U. S. 790;
Railway Co. v. Moore, 64 Pa. 79, 91;
Palmer v.
Clark, 106 Mass. 373, 389;
M. E. Church v. Seitz, 74
Cal. 287;
Curry v. Lackey, 35 Mo. 394.
In the absence of any evidence of actual bad faith, we do not
hesitate about agreeing with the circuit court of appeals in the
conclusion that there was no such misconduct as to vitiate the
valuation.
Page 218 U. S. 199
3. The next contention is that the valuation includes property
not within the submission, and which the city did not have power to
buy. The point from which the water wax taken by the existing water
plant was beyond the corporate limits of Omaha. In the immediate
suburbs of the city, there are several villages outside the
corporate limits. The distributing system of the Omaha Water
Company has, from time to time, been extended to these outlying
suburban towns. It is now said that the appraisers have valued
these outlying distributing systems as a part of the plant to be
acquired by the city under the ordinance electing to purchase.
As to the power of the city: the charter, § 61, Laws of
Nebraska, 1887, c. 10, provided for the construction and
maintenance of waterworks "either within or without the corporate
limits of the city." This is said to only allow the location of
pumping works or source of supply outside the city. The city does
not, therefore, object to valuing the supply station and mains
extending to the city as within the contemplated purchase. But it
is said that the authority is limited to a distributing system
wholly within the corporate limits. That the primary purpose was to
supply the people of Omaha with water for public and private
purposes is clear. But does that forbid that those who live outside
may not be also supplied from the main plant, and, if necessary, by
such extensions, not inconsistent with the primary object, as may
prove desirable as suburbs grow up around the city?
These powers were supplemented by the charter of 1897. Under §
27 of that charter, it was given, among other things,
"power to appropriate any waterworks system, plant, or property
already constructed, to supply the city and the inhabitants thereof
with water, or any part thereof, whether lying within said city or
in part without the city, and within ten miles from the corporate
limits of such city, including all real estate, buildings,
Page 218 U. S. 200
machinery, pipes, mains, hydrants, basins, reservoirs, and all
appurtenances reasonably necessary thereto, and a part of or
connected with said system, plant, or property, and franchises to
own and operate the same, if any."
This was again supplemented by the act of 1903, chapter 12,
providing a method of procedure for acquiring municipal water
plants and the creation of a water board for their control and
management, being the act under which the city was required to take
steps to acquire its own water plant system. Again, by the act of
1907, chapter 12
a, it is among other things, provided by §
242, that the water board may contract with any municipality
adjacent to said city to supply such municipality with water for
domestic, mechanical, public, or fire purposes -- a provision
plainly contemplating just such a condition as would ensue if the
city should acquire the existing system of works with a
distributing system extending to villages adjacent. The review of
the legislation touching the power of the city, and the conclusion
of the circuit court of appeals from that legislation, that the
city had the power to acquire the system as it existed, and has the
power to operate so much of it as is intended to supply the
suburban towns adjacent which may be acquired, is full and
satisfactory, and meets our approval.
We are also satisfied with the conclusion of the circuit court
of appeals that the acquisition of the system as it existed at the
time the city made its election to purchase was within the
contemplation of both the city and the water company, and that the
valuation of the system as an entirety was the matter which the
appraisers were required to do. What we shall say upon this point
will support our conclusion as to the power of the city, for the
legislation upon that matter must be read in the light of the
subject matter and of all the known local conditions. The most
weighty fact in this connection is that the system was one single
system, having a common source
Page 218 U. S. 201
of supply and common main connections therewith. Its
dismemberment is not to be thought of unless it is clear that the
ordinance exercising the option is so plainly limited to the
purchase of only so much of the distributing system as lay wholly
within the corporate limits as to admit of no other meaning. A
presumption against dismemberment is not overthrown even if the
city had no power to sell water to people or municipalities beyond
its limits. If these outside distributing pipes could not be
lawfully used by the city for the purpose for which the water
company had used them, it does not follow that a contract to buy
would be thereby any the less a contract to buy the plant as a
unitary system. Aside from contract obligation which may pass with
the plant, the city might cut off the supply of water to such
outlying environs, if it saw fit, whether it could or could not
legally supply water through the distributing pipes which had
theretofore reached them. Certain it is that as the several towns
adjacent had no source of supply, no pumping station of their own,
disintegration would leave the water company with no means of
supplying them with water. The distributing pipes under ground
would, separated from the ownership of the pumping station,
reservoir, filling or settling basins, necessarily lose much of the
value which attached to them as a part of a going plant.
The reservation in the ordinance under which the works were
constructed should be read and interpreted in the light of the
almost certain extension of the plant as the expansion and growth
of the city might demand. The city, at the time the ordinance was
passed, had some 30,000 people. When the election to buy the plant
was made, it had, approximately, four times as many. As is usual in
respect of growing cities, there had grown up around it groups of
population which, in some cases, expanded into semi-dependent
municipalities. Connected
Page 218 U. S. 202
by continuous streets and car lines, they made one large
community, and constituted greater Omaha. The water company, as was
obviously expected from the beginning, expanded with Omaha, and met
the public necessities by including these outside populations
within its distributing system.
The appraisers, in making their estimate of valuation, included
$562,712.45 for the "going value." This separation of an element
contributing to the value of each tangible part was done because
required to be done under an order made in the circuit court in a
suit in which the water board of the City of Omaha was complainant
and the members of the board of appraisers and the water company
were defendants. The object of that suit was to instruct the
appraisers in respect to the mode and manner in which they should
proceed. An order resulted which required the board to report the
separate elements making up the aggregate value of the plant.
The option to purchase excluded any value on account of
unexpired franchise; but it did not limit the value to the bare
bones of the plant, its physical properties, such as its lands, its
machinery, its water pipes or settling reservoirs, nor to what it
would take to reproduce each of its physical features. The value,
in equity and justice, must include whatever is contributed by the
fact of the connection of the items making a complete and operating
plant. The difference between a dead plant and a live one is a real
value, and is independent of any franchise to go on, or any mere
goodwill as between such a plant and its customers. That kind of
goodwill, as suggested in
Willcox v. Consolidated Gas Co.,
212 U. S. 19, is of
little or no commercial value when the business is, as here, a
natural monopoly, with which the customer must deal, whether he
will or no. That there is a difference between even the cost of
duplication, less depreciation, of the elements making up the water
company plant, and the
Page 218 U. S. 203
commercial value of the business as a going concern, is evident.
Such an allowance was upheld in
National Waterworks Co. v.
Kansas City, 62 F. 853, where the opinion was by Mr. Justice
Brewer. We can add nothing to the reasoning of the learned Justice,
and shall not try to. That case has been approved and followed in
Gloucester Water Supply Co. v. Gloucester, 179 Mass. 365,
and
Norwich Gas & Electric Co. v. Norwich, 76 Conn.
565. No such question was considered in either
Knoxville v.
Knoxville Water Co., 212 U. S. 1, or in
Willcox v. Consolidated Gas Co. supra. Both cases were
rate cases, and did not concern the ascertainment of value under
contracts of sale.
Aside from the errors pointed out in the petition for the writ
of certiorari, counsel have suggested certain difficulties before a
final decree, which are not disposed of in the opinion or decree of
the circuit court of appeals. The circuit court had dismissed the
bill. The circuit court of appeals considered and decided all of
the large questions which were involved under the bill, but did not
direct the precise form of the decree which the circuit court
should enter, and remanded the case with directions to reverse the
decree dismissing the bill, and to proceed in accordance with the
opinion. Referring to certain matters left open, the court, in its
opinion, said:
"In a transaction of this magnitude, there will always be
encountered minor obstacles that will readily yield to business
methods. What the parties cannot agree upon, the trial court has
full power to determine according to principles of right and
justice. We refer here to such contentions as that there are two or
three properties in the City of Omaha belonging to the company, but
not needed in the business, and also that there are supposed
defects in its title to other properties. The latter are not of
great importance in comparison with the magnitude of the entire
system. The property not needed was
Page 218 U. S. 204
appraised separately, and it can be excluded from the sale, and
the trial court can determine whether the title to other properties
is defective. It is not necessary that the title of the company to
all the lands upon which its works are built or through which its
pipes are laid should be a fee simple, perfect in every particular
and subject to no criticism. An irrevocable license, for instance,
would be sufficient, or a title based upon prescription. If,
however, there should be found substantial defects, opportunity
should be given the company to remedy them, and if it is unable to
do so, the parts of the property so circumstanced can be valued and
the purchase price abated accordingly. It would be expressing too
narrow a view to say that an appraisal of a great system of
waterworks under a contract of purchase must fail because the title
to a small part, not vital to the integrity of the system, was
afterwards found to be defective. That the deed tendered by the
company was not such as the city was required to take is
immaterial. It is sufficient that the company was able, ready, and
willing to do what might lawfully fully be required of it. At some
time during the progress of the cause in the trial court, the
trustees of the mortgages should be made parties, to the end that
the precise amount of outstanding bonds may be ascertained and
paid, and the liens discharged concurrently with payment by the
city of the purchase price. Doubtless the company will have to use
the proceeds of sale in paying its mortgage indebtedness. Or, if an
arrangement is desired, such as was made in the Kansas City case,
whereby the mortgages are assumed by the city, and the company
released from liability, the presence in the case of the trustees
would facilitate it."
"The decree is reversed and the cause is remanded with direction
to proceed to decree in accordance with the views expressed in this
opinion."
We do not feel ourselves under any obligation to do
Page 218 U. S. 205
more than to hold that we find no error in the decree of the
circuit court of appeals, and to remand the case to the circuit
court, to be proceeded with accordingly.
Affirmed.