1. The powers of a corporation organized under a legislative
charter are only such as the statute confers, and the enumeration
of them implies the exclusion of all others.
2. A lease by a railroad company of all its road, rolling stock,
and franchises for which no authority is given in its charter is
ultra vires and void.
3. The ordinary clause in the charter authorizing such a company
to contract with other transportation companies for the mutual
transfer of goods and passengers over each other's roads confers no
authority to lease its road and franchises.
4. The franchises and powers of such a company are in a large
measure designed to be exercised for the public good, and this
exercise of them is the consideration for granting them. A contract
by which the company renders itself incapable of performing its
duties to the public or attempts to absolve itself from its
obligation without the consent of the state violates its charter
and is forbidden by public policy. It is therefore void.
5. The fact that the legislature, after such a lease was made,
passes a statute forbidding the directors of the company, its
lessees or agents, from collecting more than a fixed amount of
compensation for carrying passengers and freight is not a
ratification of the lease or an acknowledgment of its validity.
6. Where a lease of this kind for twenty years was made, and the
lessors resumed possession at the end of five years, and the
accounts for that period were adjusted and paid, a condition in the
lease to pay the value of the unexpired term is void, the case not
coming within the principle that executed contracts originally
ultra vires shall stand good fur the protection of rights
acquired under a completed transaction.
Page 101 U. S. 72
This was an action of covenant by George W. Thomas, Alfred S.
Porter, and Nathaniel F. Chew, against the West Jersey Railroad
Company, and they, to maintain the issue on their part, offered to
prove the following facts:
On the eighth day of October, 1863, the Millville and Glassboro
Railroad Company, a corporation incorporated by the Legislature of
New Jersey, March 9, 1859, entered into an agreement with them
whereby it was stipulated that the company should, and did thereby,
lease its road, buildings, and rolling stock to them for twenty
years from the 1st of August, 1863, for the consideration of
one-half of the gross sum collected from the operation of the road
by the plaintiffs during that period; that the company might at any
time terminate the contract and retake possession of the railroad,
and that in such case, if the plaintiffs so desired, the company
would appoint an arbitrator, who, with one appointed by them,
should decide upon the value of the contract to them, and the loss
and damage incurred by, and justly and equitably due to them by
reason of such termination thereof; that in the event of a
difference of opinion between the arbitrators, they were to choose
a third, and the decision of a majority was to be final,
conclusive, and binding upon the parties.
On the 10th of April, 1867, the Legislature of New Jersey passed
an act entitled "A supplement to the act entitled
An Act to
incorporate the Millville and Glassboro Railroad Company.'" It was
therein enacted that it should be unlawful for the directors,
lessees, or agents of said railroad to charge more than the sums
therein named for passengers and freight, respectively. The
plaintiffs claim that at the date of the passage of this act, it
was well known that they were acting under the said agreement of
8th October, 1863.
On the 12th of October, 1867, articles of agreement were entered
into between the Millville and Glassboro Railroad Company and the
West Jersey Railroad Company, the defendant, whereby it was agreed
that the former should be merged into and consolidated with the
latter.
In November, 1867, a written notice was served by the
Millville
Page 101 U. S. 73
and Glassboro Railroad Company upon the plaintiffs putting an
end to the contract and to all the rights thereby granted and
notifying them that the company would retake possession of the
railroad on the first day of April, 1868.
On the 18th of March, 1868, the Legislature of New Jersey passed
an act whereby it was enacted that upon the fulfillment of certain
preliminaries, the Millville and Glassboro Railroad Company should
be consolidated with the West Jersey Railroad Company, "subject to
all the debts, liabilities, and obligations of both of said
companies." The conditions required by that act were fulfilled, and
the railroad was duly delivered by the plaintiffs to the West
Jersey Railroad Company on the 1st of April, 1868.
On April 13, 1868, and again on May 22 of the same year, notices
to arbitrate according to the terms of the agreement were served by
the plaintiffs upon the Millville and Glassboro Railroad Company,
and immediately thereafter upon the West Jersey Railroad Company.
The latter company refused to comply with the terms of either
notice, but subsequently, on the 21st of December, 1868, an
agreement of submission was entered into between the plaintiffs and
the latter company, whereby H. F. Kenney and Matthew Baird were
appointed arbitrators, with power to choose a third, to settle the
controversy between the parties. These arbitrators, disagreeing,
called in a third, who joined with said Baird in an award, by which
the value of the unexpired term of the lease, and the loss
sustained by reason of the termination thereof to and by the
plaintiffs, was adjudged to be the sum of $159,437.07, and the West
Jersey Railroad Company was ordered to pay that sum to the
plaintiffs. This award was subsequently set aside in a suit in
equity brought in New Jersey.
The plaintiffs further offered to prove their compliance in all
respects with the terms of the lease, its value, and the loss and
damage they had sustained by reason of its termination as
aforesaid. The court excluded the offered testimony on the ground
that the lease by the Millville and Glassboro Railroad Company to
the plaintiffs was
ultra vires, and directed the jury to
return a verdict for the defendant. The plaintiffs duly excepted
and sued out this writ.
Page 101 U. S. 74
They assign for error that the court below erred --
1. In excluding from the consideration of the jury the offered
evidence of the said agreement between the Millville and Glassboro
Railroad Company and the plaintiffs; of the acts of assembly of New
Jersey, one an act to incorporate the Millville and Glassboro
Railroad Company, approved the 9th of March, 1859, and another an
act entitled "A supplement to the act entitled
An Act to
incorporate the Millville and Glassboro Railroad Company,' passed
the tenth day of April, 1867," and the acts referred to therein; of
the fact that it was well known at the date of the last-named act
that the plaintiffs were lessees acting under the said contract and
agreement, and of all the other acts of the Legislature of the
State of New Jersey relating to the West Jersey Railroad Company,
and to the Millville and Glassboro Railroad Company.
2. In directing the jury that their verdict must be for the
defendant.
3. In entering judgment upon the verdict for the defendant.
Page 101 U. S. 78
MR. JUSTICE MILLER, after stating the case, delivered the
opinion of the Court.
The ground on which the court held the contract to be void and
on which the ruling is supported in argument here is that the
contract amounted to a lease by which the railroad, rolling stock,
and franchises of the corporation were transferred to plaintiffs,
and that such a contract was
ultra vires of the
company.
It is denied by the plaintiffs that the contract can be fairly
called a lease.
But we know of no element of a lease which is wanting in this
instrument.
"A lease for years is a contract between lessor and lessee, for
possession of lands, &c., on the one side, and
Page 101 U. S. 79
a recompense by rent or other consideration on the other."
4 Bac.Abr. 632.
"Anything corporeal or incorporeal lying in livery or in grant
may be the subject matter of a lease, and therefore not only lands
and houses, but commons, ways, fisheries, franchises, estovers,
annuities, rent charges, and all other incorporeal hereditaments
are included in the common law rule."
Bouv.L.D., "Lease;" 1 Wash.Real Prop. 310
The railroad and all its appurtenances and franchises, including
the right to do the business of a railroad and collect the proper
tolls, are for a period of twenty years leased by the company to
the plaintiffs, from whom in return it receives as rent one-half of
all the gross earnings of the road. The usual provision for a right
of reentry on the failure to perform covenants in addition to the
special right to terminate the lease on notice, and the usual
covenant for repairs and proper running of the road, equivalent to
good husbandry on a farm, are inserted in the instrument.
The provision for the complete possession, control, and use of
the property of the company and its franchises by the lessees is
perfect. Nothing is left in the lessor but the right to receive
rent. No power of control in the management of the road and in the
exercise of the franchises of the company is reserved. A solitary
exception to this statement, of no value in the actual control of
affairs, is found in the sixth clause of the lease, which covenants
that the lessees will discharge anyone in their service on the
request of the corporation, evidenced by a resolution of the board
of directors.
But while we are satisfied that the contract is both technically
and in its essential character a lease, we do not see that the
decision of that point either way affects the question on which we
are to pass. That question is whether the railroad company exceeded
its powers in making the contract, by whatever name it may be
called, so that it is void.
It is perhaps as well to consider this question in the order of
its presentation by the learned counsel for plaintiffs, upon whom
the burden of showing the error of the circuit court devolved the
duty of proving one of the following propositions:
Page 101 U. S. 80
1. The contract was within the powers granted to the railroad
company by the act of the New Jersey Legislature under which it was
organized.
2. That if this be not established, the lease was afterwards
ratified and approved by another act of that legislature.
3. That if both these propositions are found to be untenable,
the contract became an executed agreement under which the rights
acquired by plaintiffs should be legally respected.
The authority to make this lease is placed by counsel primarily
in the following language of the thirteenth section of the
company's charter:
"That it shall be lawful for the said company, at any time
during the continuance of its charter, to make contracts and
engagements with any other corporation or with individuals for the
transporting or conveying any kinds of goods, produce, merchandise,
freight, or passengers, and to enforce the fulfillment of such
contracts."
This is no more than saying
"you may do the business of carrying goods and passengers, and
may make contracts for doing that business. Such contracts you may
make with any other corporation or with individuals."
No doubt a contract by which the goods received from railroad or
other carrying companies should be carried over the road of this
company, or by which goods or passengers from this road should be
carried by other railroads, whether connecting immediately with
them or not, are within this power and are probably the main object
of the clause. But it is impossible, under any sound rule of
construction, to find in the language used a permission to sell,
lease, or transfer to others the entire road and the rights and
franchises of the corporation. To do so is to deprive the company
of the power of making those contracts which this clause confers
and of performing the duties which it implies.
In
The Ashbury Railway Carriage & Iron Co. v.
Riche, decided in the House of Lords in 1875, Law Rep. 7 H.L.
653, the memorandum of association, which, as Lord Cairns said,
stands under the act of 1862 in place of a legislative charter,
thus described the business which the company was authorized to
conduct:
"The objects for which this company is established are to make,
sell, or lend on hire, railway carriages and
Page 101 U. S. 81
engines, and all kinds of railway plant, fittings, machinery,
and rolling stock; and to carry on the business of mechanical
engineers and general contractors; to purchase and sell as
merchants, timber, coal, metals, or other materials; and to buy and
sell any such materials on commission or as agents."
This company purchased a concession for a railroad in Belgium,
and entered into a contract for its construction, on which it paid
large sums of money. The company was sued afterwards on its
agreement with Riche, the contractor, and the contract was held
valid in the Exchequer Chamber by a majority of the judges on the
ground that while it was in excess of the power conferred on the
directors by the memorandum, it had been made valid by ratification
of the shareholders, to whom it had been submitted.
The House of Lords reversed this judgment, holding unanimously
that the contract was beyond the powers conferred by the memorandum
above recited, and, being beyond the powers of the association, no
vote of the shareholders whatever could make it valid. The case is
otherwise important in its relation to the one before us, but it is
cited here for its parallelism in the construction of the clause
defining the powers of the company.
If a memorandum which describes the parties as engaging in
furnishing nearly all the materials, machinery, and rolling stock
which enter into the construction of a railroad and its equipments,
and then empowers then to carry on the business of mechanical
engineers and general contractors, cannot authorize a contract to
build a railroad, surely the authority to build a railroad and to
contract for carrying passengers and goods over it and other roads
is no authority to lease it and with the lease to part with all its
powers to another company or to individuals. We do not think there
is anything in the language of the charter which authorized the
making of this agreement.
It is next insisted, in the language of counsel, that though
this may be so,
"a corporate body may (as at common law) do any act which is not
either expressly or impliedly prohibited by its charter, although
where the act is unauthorized by the charter a shareholder may
enjoin its execution, and the State may, by proper process, forfeit
the charter. "
Page 101 U. S. 82
We do not concur in this proposition. We take the general
doctrine to be in this country, though there may be exceptional
cases and some authorities to the contrary, that the powers of
corporations organized under legislative statutes are such and such
only as those statutes confer. Conceding the rule applicable to all
statutes that what is fairly implied is as much granted as what is
expressed, it remains that the charter of a corporation is the
measure of its powers, and that the enumeration of these powers
implies the exclusion of all others.
This class of subjects has received much consideration of late
years in the English courts, and counsel have relied largely on the
decisions of those courts. Among the cases cited by both sides is
The East Anglian Railways Co. v. The Eastern Counties Railway
Co., 11 C.B. 775.
In that case, the Eastern Counties Railway Company had made a
contract in which, among other things, it covenanted to take a
lease of several other railroads whose companies had introduced
into Parliament a bill for consolidation under the name of East
Anglian Railways Company, and to assume the payment of the
parliamentary expenses of this act of consolidation.
This covenant was held void as beyond the power conferred by the
charter. "They cannot," said the court,
"engage in a new trade, because they are incorporated only for
the purpose of making and maintaining the Eastern Counties Railway.
What additional power do they acquire from the fact that the
undertaking may in some way benefit their line? Whatever be their
object or prospect of success, they are still but a corporation for
the purpose only of making and maintaining the Eastern Counties
Railway, and if they cannot embark in new trades because they have
only a limited authority, for the same reason they can do nothing
not authorized by their act and not within the scope of their
authority."
This case, decided in 1851, was afterwards cited with approval
by the Lord Chancellor in 1857 in delivering the opinion of the
House of Lords in
Eastern Counties Railway Co. v. Hawkes,
5 H.L.Cas. 331, and it is there stated that it was also acted on
and recognized in the Exchequer Chamber in
McGregor v. The Deal
& Dover Railway Co., 22 Law J.N.S.Q.B. 69;
Page 101 U. S. 83
18 Q.B. 618. Both these cases are cited approvingly in the
opinion of Lord Cairns in the Ashbury Company, on appeal in the
House of Lords.
This latter case, as decided in the Exchequer Chamber, Law Rep.
9 Exch. 224, is much relied on by counsel for plaintiffs here as
showing that, though the contract may be
ultra vires when
made by the directors, it may be enforced if afterwards ratified by
the shareholders or if party executed.
But in the House of Lords, where the case came on appeal, this
principle was overruled unanimously in opinions delivered by Lord
Chancellor Cairns, Lords Selborn, Chelmsford, Hatherly, and
O'Hagan, and the broad doctrine established that a contract not
within the scope of the powers conferred on the corporation cannot
be made valid by the assent of every one of the shareholders, nor
can it by any partial performance become the foundation of a right
of action.
It would be a waste of time to attempt to examine the American
cases on the subject, which are more or less conflicting, but we
think we are warranted in saying that this latest decision of the
House of Lords represents the decided preponderance of authority,
both in this country and in England, and is based upon sound
principle.
There is another principle of equal importance and equally
conclusive against the validity of this contract which, if not
coming exactly within the doctrine of
ultra vires as we
have just discussed it, shows very clearly that the railroad
company was without the power to make such a contract.
That principle is that where a corporation, like a railroad
company, has granted to it by charter a franchise intended in large
measure to be exercised for the public good, the due performance of
those functions being the consideration of the public grant, any
contract which disables the corporation from performing those
functions which undertakes, without the consent of the state, to
transfer to others the rights and powers conferred by the charter,
and to relieve the grantees of the burden which it imposes, is a
violation of the contract with the state and is void as against
public policy. This doctrine is asserted with remarkable clearness
in the opinion of this Court, delivered by Mr. Justice Campbell, in
The York
&
Page 101 U. S. 84
Maryland Line Railroad Co. v. Winans, 17 How 30. The
corporation in that case was chartered to build and maintain a
railroad in Pennsylvania by the legislature of that state. The
stock in it was taken by a Maryland corporation, called the
Baltimore and Susquehanna Railroad Company, and the entire
management of the road was committed to the Maryland company, which
appointed all the officers and agents upon it and furnished the
rolling stock. In reference to this state of things and its effect
upon the liability of the Pennsylvania corporation for infringing a
patent of the defendant in error, Winans, this Court said:
"This conclusion [argument] implies that the duties imposed upon
the plaintiff by the charter are fulfilled by the construction of
the road, and that, by alienating its right to use and its powers
of control and supervision, it may avoid further responsibility.
But those acts involve an overturn of the relations which the
charter has arranged between the corporation and the community.
Important franchises were conferred upon the corporation to enable
it to provide facilities for communication and intercourse,
required for the public convenience. Corporate management and
control over these were prescribed, and corporate responsibility
for their insufficiency provided as a remuneration to the community
for their grant. The corporation cannot absolve itself from the
performance of its obligations without the consent of the
legislature.
Beman v. Rufford, 1 Sim.N.S. 550;
Winch
v. B. & L. Railway Co., 13 L. & Eq. 506."
And in the case of
Black v. Delaware & Raritan Canal
Co., 22 N.J.Eq. 130, Chancellor Zabriskie says:
"It may be considered as settled that a corporation cannot lease
or alien any franchise, or any property necessary to perform its
obligations and duties to the State, without legislative
authority."
P. 399. For this he cites some ten or twelve decided cases in
England and in this country.
This brings us to the proposition that the Legislature of New
Jersey has given her consent by an act which amounts to a
ratification of this lease.
That act is entitled "A supplement to the act entitled
An
Act to incorporate the Millville and Glassboro Railroad Company,'"
approved April 10, 1867, and its only purpose was to
Page 101 U. S.
85
regulate the rates at which freight and passengers should be
carried. It reads as follows:
"That it shall be unlawful for the directors, lessees, or agents
of said railroad to charge more than three and a half cents per
mile for the carrying of passengers, and six cents per ton per mile
for the carrying of freight or merchandise of any description,
unless a single package, weighing less than one hundred pounds; nor
shall more than one-half of the above rate be charged for carrying
any fertilizing materials, either in their own cars or cars of
other companies running over said railroad,
provided that
nothing contained in this act shall deprive the said railroad
company or its lessees of the benefits of the provisions of an act
entitled 'An Act relative to freights and fares on railways in the
state,' approved March 4, 1858, and applicable to all other
railroads in this state."
It may be fairly inferred that the legislature knew at the time
the statute was passed that plaintiffs were running the road and
claiming to do so as lessees of the corporation. It was not
important for the purpose of the act to decide whether this was
done under a lawful contract or not. No inquiry was probably made
as to the terms of that lease, as no information on that subject
was needed.
The legislature was determined that whoever did run the road and
exercise the franchises conferred on the company, and under
whatever claim of right this was done, should be bound by the rates
of fare established by the act. Hence, without undertaking to
decide in whom was the right to the control of the road, language
was used which included the directors, lessees, and agents of the
railroad.
The mention of the lessees no more implies a ratification of the
contract of lease than the word "directors" would imply a
disapproval of the contract. It is not by such an incidental use of
the word "lessees" in an effort to make sure that all who collected
fares should be bound by the law that a contract unauthorized by
the charter and forbidden by public policy is to be made valid and
ratified by the state.
It remains to consider the suggestion that the contract, having
been executed, the doctrine of
ultra vires is inapplicable
to the case. There can be no question that in many instances
Page 101 U. S. 86
where an invalid contract, which the party to it might have
avoided or refused to perform, has been fully performed on both
sides whereby money has been paid or property changed hands, the
courts have refused to sustain an action for the recovery of the
property or the money so transferred.
In regard to corporations, the rule has been well laid down by
Comstock, C.J., in
Parish v. Wheeler, 22 N.Y. 494, that
the executed dealings of corporations must be allowed to stand for
and against both parties when the plainest rules of good faith
require it.
But what is sought in the case before us is the enforcement of
the unexecuted part of this agreement. So far as it has been
executed -- namely, the four or five years of action under it --
the accounts have been adjusted and each party has received what he
was entitled to by its terms. There remains unperformed the
covenant to arbitrate with regard to the value of the contract. It
is the damages provided for in that clause of the contract that are
sued for in this action. Damages for a material part of the
contract never performed; damages for the value of a contract which
was void. It is not a case of a contract fully executed. The very
nature of the suit is to recover damages for its nonperformance. As
to this, it is not an executed contract.
Not only so, but it is a contract forbidden by public policy and
beyond the power of the defendants to make. Having entered into the
agreement, it was the duty of the company to rescind or abandon it
at the earliest moment. This duty was independent of the clause in
the contract which gave them the right to do it. Though they
delayed its performance for several years, it was nevertheless a
rightful act when it was done. Can this performance of a legal
duty, a duty both to stockholders of the company and to the public,
give to plaintiffs a right of action? Can they found such a right
on an agreement void for want of corporate authority and forbidden
by the policy of the law? To hold that they can is, in our opinion,
to hold that any act performed in executing a void contract makes
all its parts valid, and that the more that is done under a
contract forbidden by law, the stronger is the claim to its
enforcement by the courts
Page 101 U. S. 87
We cannot see that the present case comes within the principle
that requires that contracts which, though invalid for want of
corporate power, have been fully executed shall remain as the
foundation of rights acquired by the transaction.
We have given this case our best consideration on account of the
importance of the principles involved in its decision, and after a
full examination of the authorities, we can see no error in the
action of the circuit court.
Judgment affirmed.
