Camden & Atlantic Railroad v. May's Landing & Egg Harbor City Railroad

48 N.J.L. 530 | N.J. | 1886

Lead Opinion

Van Syckel, J.

This was an action of debt brought in the Supreme Court, to recover the rent alleged to be due from February, 1881, to June 1st, 1882, on a lease of its road executed in 1873 by the defendant in error to the plaintiff in ■error, for the term of nine hundred and ninety-nine years. The Mays Landing and Egg Harbor road was built under a •charter obtained in 1871, and since its completion in 1872 it has been in the possession of the Camden and Atlantic Company as lessee, until February, 1881, at which time the latter ■company ceased to operate it, and refused to recognize the validity of the lease.

The defence to the action is rested upon the want of power in the lessee company to execute the lease.

The Camden and Atlantic Railroad was completed from ■Camden to Atlantic City in the early part of 1862, under a ■charter granted in 1852. This road I will hereafter, for brevity, style the main line, and the Mays Landing and Egg Harbor road, the branch road.

The branch road rests its own authority to make a lease, .and the authority of the main line to accept a lease, upon the .seventeenth section of the charter of the.branch, which provides that the said branch road is authorized to lease its railroad to, or consolidate with, any other railroad company, which is thereby authorized to take such lease and operate the same for such time or times, and on such terms, as the said parties may- agree upon. This language is unquestionably broad enough to confer upon both companies the power requisite to enter into a valid contract for a lease, and no doubt could arise in this case if the powers of one railroad company can be amplified by provisions in the charter of another.

The title of the act incorporating the branch road is: “An act to incorporate the Mays Landing and Egg Harbor City Eailroad Company.” Under that clause of our state constitution which provides that “to avoid improper influences which may result in intermixing in one and the same act such things as have no proper relation to each other, every law shall embrace but one object, and that shall be expressed in the title,” can the seventeenth section of the branch road charter be upheld so far as it purports to confer additional franchises upon other railroads ? It seems to me to be very clear that this question must be answered in the negative.

This charter manifestly embraces two distinct objects: it confers power upon the branch road to construct its line and to lease it, and attempts to enlarge the authority of all other railroad corporations by permitting them to accept a lease. There is no indication in the title that such legislation was contemplated. The constitutional restraint could not be invoked for a more salutary purpose than to suppress a scheme to amplify corporate powers in a way which effectually conceals the intention to do so. Jersey City v. Elmendorf, 18 Vroom 283.

So far as the grant of authority to the main line is concerned, the seventeenth section is unconstitutional. The necessary power to the main line, if it exists, must be sought for in its own charter.

The Camden and Atlantic road had authority, under its charter, to build the branch road from Mays,Landing to Egg Harbor City, but, as before stated, did not exercise that right, the branch road having been constructed under a charter subsequently granted in 1871.

In Branch v. Jessup, 106 U. S. 468, Mr. Justice Bradley held that the power granted to a railroad company to construct a particular line of railroad carried with it by implication the right to purchase such line of railroad subsequently built by another corporation. The doctrine, I think, is sound, and the right to lease for nine hundred and ninety-nine years would co-exist with the right to purchase. This would establish the power of the main line to enter into the lease if the right to construct the branch had survived until the lease was executed. But by reference to the seventeenth section of the charter of the main line, (Pamph. L. 1852, p. 271,) it will be observed that its power in this respect expired by limitation on the 1st day of August, 1862. The section reads as follows : ■ “ That if the said railroad shall not be completed and in use at the expiration of ten years from the 1st day of August next ensuing, that then and in that case this act shall be void.” .

Under the rules which apply to the construction of legislative grants of power, the only interpretation which this language will reasonably bear is that the authority derived through the charter must be exercised within ten years from August 1st, 1852, and that such portion of the road as should not then be constructed could not thereafter be built under the granted authority.

In Morris and Essex R. R. Co. v. Central R. R. Co., 2 Vroom, 205, it was expressly adjudged that the power of a corporation to take the land of an individual is determined by the expiration of the term limited for its exercise, after which the right of eminent domain derived from its charter no longer exists in the company.

The branch road was not constructed until the year 1871, nine years after the expiration of the time limited to the main line for the enjoyment and exercise of its granted powers. At that time the main line, having no longer the right of eminent domain, was without the power to build the branch road, and consequently in the loss of that authority is involved the deprivation of all. power which would flow from it. It must therefore be conceded that the execution of the lease on the part of the Camden and Atlantic road was ultra vires.

The rule is well settled, both in England and in this country, that an executory contract, ultra vires, cannot be validated by the acquiescence of every stockholder of the company. It is also generally conceded that an ultra vires contract fully executed cannot be receded from. Field on Corp., §§ 263, 264; Green’s Brice’s Ultra Vires 371, 372, 373; 1 Wood on Railroads, §§ 171, 172, 173; Thomas v. Railroad Co., 101 U. S. 71.

The courts have differed upon the question whether the plea of ultra vires is available by a corporation in an action brought against it for not performing its side of the contract, where the transaction is complete, and nothing remains to be done by the party seeking relief.

Ashbury Railway Co. v. Riche, 7 H. of L. 653, is the leading English case.

The company, by its directors, entered into an agreement with Riche to give him the construction of a railway from Antwerp to Tournay. After Riche had entered upon the work, and executed it in part, the company repudiated the contract as one ultra vires.

Riche then brought an action to recover damages for breach of contract.

The case was referred to a barrister to state a special case, and the question of ultra vires was that on which the decision was to depend. ' The court was to be at liberty to draw inferences of fact. In the Court of Exchequer two of the three judges were of opinion that the plaintiff should have judgment, and when the case came before the Exchequer Chamber it was heard before six judges, who, being equally divided in opinion, the judgment was affirmed. On appeal to the house of lords, the judgment was reversed, pronouncing the contract ultra vires, and declaring that it was without the power of the shareholders to validate it by their acquiescence. Mr. Justice Folger, in 78 N. Y. 187, distinguishes the English case on the ground that the contract with Riche was prohibited by an act of parliament. Although the court did not rest its decision on that ground, Lord Chelmsford adverted to that fact to distinguish the cases of Spachman v. Evans and Evans v. Smallcomb, where the act of the directors was not prohibited by statute, but was merely not warranted by the deed of •settlement of the company. In affirming the judgment now under review it is not necessary to dissent from the conclusion reached in this case. The agreement with Eiche was not fully ■executed on either side, and it was one in which payment to him of the money he had expended in behalf of the company under the agreement, would have done complete justice. The suit being for damages for breach of the contract, would have ■embraced profits which might have resulted from its execution. If the suit had been maintained it would have given the plaintiff a measure of relief greater than was necessary to restore him to the status he occupied before the contract was made.

In Parish v. Wheeler, 22 N. Y 494, Chief Justice Com-stock, in delivering the opinion of the court, said that a corporation cannot defend itself against a claim for money paid at its request to one who advanced the price of a steamboat purchased for it, on the ground that the purchase was ultra vires, although the plaintiff, when he paid the money, knew .all the facts. He declared that corporations, like individuals, in dealing with other parties, must live up to the rules of common honesty.

In the previous case of Bissell v. Michigan Southern R. R. Co., 22 N. Y. 258, the same learned judge expressed the view that where a corporation has received the consideration of its unauthorized contract, and restitution will not do complete justice, the other party may sue directly on the contract.

He said that the plea of ultra vires, according to its just .meaning, imports, not that the corporation could not make the unauthorized contract, but that it ought not to have been made. Such a defence therefore rests upon the violation of trust or duty towards the shareholders, and is not entertained where its allowance will do a greater wrong to innocent third parties. The acquiescence of the shareholders in the abuse will prevent the interposition of such a plea. This case was decided without an expression of opinion by a majority of the court on this point, but in the later case of Kent v. Quicksilver Mining Co., 78 N. Y. 159, Judge Folger delivered the opinion, in which the entire court concurred, giving the fullest approval to the views of Chief Justice Comstock, in the cases cited. The case was one in which the directors had done an act which the company had no power to do, and in which there was not full execution on both sides. It was not of that class of cases where an authorized act was executed in an' unauthorized manner. The transaction was clearly ultra vires, and in that aspect it was dealt with by the court. The English and American cases were cited, and the cause was ably and elaborately argued.

The propositions maintained by the court were that acts of a corporation, which are not, per se, illegal, or malum prohibitum, or contrary to public policy, but which are ultra vires, affecting only the interests of stockholders, may be made good by the assent of shareholders, so that strangers to them, dealing in good faith with the corporation, will be protected in reliance on those acts.

That it needed not that there be an express assent upon the-part of shareholders to work an equitable estoppel upon them. "When they neglect to promptly and actively condemn the unauthorized act, and to seek judicial relief after knowledge of' it, their acquiescence will be presumed.

That when the public is concerned to restrain a corporation within the- limit of the power given to it by its charter, an assent of the stockholders to the use of unauthorized power will be of no avail.

In Whitney Arms Co. v. Barlow, 63 N. Y 62, the Court of Appeals of New York enforced the ultra vires contract against the other party where it had been performed on the part of the corporation. In addition to the estoppel, which in that case applied to the person dealing with the company, it is true that none of his rights were infringed by the fact that the transaction was ultra vires the company, and he could not, for that reason also, interpose that defence. But where shareholders are chargeable with consenting to an undertaking which they have permitted to be executed, they waive their pre-existing rights, which would be affected by the unauthorized act, and became equally subject to the estoppel.

Chief Justice Ruger, in Woodruff v. Erie Railway Co., 93 N. Y. 609, in an opinion from which there was no dissent, gave his full approval to the previous cases, and held that under an ultra vires lease the lessee is estopped from questioning its validity in an action to recover the stipulated rent.

In Bradley v. Ballard, 55 Ill. 413, Chief Justice Lawrence said that when the contract is executed the doctrine of estoppel is applied for the purpose of compelling corporations to be honest, in the simplest and commonest sense of honesty, and •after whatever mischief may belong to the performance of the ultra vires act has been accomplished. The case was one in which money was borrowed and notes given by a corporation, to enable it to prosecute a business which the lender knew it had no right to undertake.

In Terry v. Eagle Look Co., 47 Conn. 141, the Eagle Lock 'Company entered into an unauthorized agreement with another company to purchase its stock and run it as a separate company. The Connecticut court held that after the contract had been executed and the defendant company had been permitted for five years to transact business under the arrangement, it would not be interfered with.

In McCutcheon v. Steamboat Co., 13 Penna. 13, a foreign corporation had taken a lease of real estate without authority in its charter, and in an action for the rent, the court enforced the contract.

In Darst v. Gale, 83 Ill. 137, the Peoria Marine and Eire Insurance Company executed a deed of trust to secure payment of certain bonds upon which the company had received the ¡money. The bill was filed to enjoin the trustee from selling the premises, and to declare the deed of trust void. The court refused to allow the plea of ultra vires to prevail, on the ground that a private corporation cannot be heard in such a defence where the contract has been performed by the other party and the corporation has had the benefit of the contract and the performance. The language of Chief Justice Lawrence in Bradley v. Ballard was cited with approbation: “That-it would be pressing the doctrine of ultra vires to an extent that can never be tolerated, even though the lender knew that the corporation was transacting a business beyond its corporate powers, provided the business itself was free from any intrinsic immorality or illegality.”

These views were re-affirmed in Ward v. Johnson, 95 Ill. 215, and in Peoria Road v. Thompson, 103 Ill. 187.

Id Amerman v. Niles, 9 C. E. Green 13, the Chancellor refused to entertain the defence of ultra vires to a mortgage executed by a corporation to secure a debt to the defendants.

Thomas v. Railroad Co., 101 U. S. 71, is relied upon by the plaintiff in error. In that case the lease was held to be-ultra vires, and therefore void.

Mr. Justice Miller, for the court, referred to the English cases, and said that although the American cases were conflicting, the preponderance of authority was that an extra virescontract, but partly executed, could not be enforced. He, however, held .the lease there to be contrary to public policy, for the reason that the lessor company had no power to make-the lease, and that thereby it disabled itself to perform the duties which it had undertaken in accepting its charter from the state, and he therefore treated the contract as one forbidden by the law. He did not question that the lessee would be-liable for the rental for the period during which it had enjoyed the term.

It is to be observed in this case that by the surrender of the lease the lessor was left in his former position, and the rental being paid, no apparent injustice was done.

In the case of the Mutual Life and Fire Insurance Co. v. McKelway, 1 Beas. 133, the defendant was unsuccessful in his attempt to recede from his contract, but it was not a 'suit by one ’ of the parties to the unauthorized contract to enforce it against the other. The proceeding was instituted in behalf of corporators as to whom, the learned jurist who decided the case was careful to observe, that it did not appear that they insured upon the faith of the ultra vires contract, or that they became corporators after the contract was entered into, or in' consequence of it.

In the conflict of judicial decision on this subject, this court may adopt and should adopt the rule which will produce the best results in the administration of justice. In my judgment the true rule is that when the transaction is complete, and the party seeking relief has performed on his part, the plea of ultra vires by the corporation which has acquiesced in it, is inadmissible in an action brought against it for not performing its side of the contract, in all those instances where the party who has performed cannot, upon rescission, be restored to his former status.

In the cases maintaining the contrary doctrine the reasoning of the courts has been:

1. That corporators might, by ratifying corporate acts by their acquiescence, indefinitely extend and amplify their granted powers.

2. That consent on the part of those who do an act which they have no power to do cannot make it legal.

3. That to hold that an act performed in executing a void contract makes all its parts valid, is to say that the more that is done under an unauthorized contract, the stronger is the claim to its enforcement by the courts.

To the first objection a sufficient answer is that the state may interpose its authority at any time and compel an abandonment of the act in excess of power, and, if need be, revoke the charter of the company for its usurpation.

When the state challenges the legality of the transaction, the paramount and only question is whether it has bestowed upon the company the requisite authority to engage in it.' When the question arises between the company and the other party to the contract, other legal principles apply in determining whether the contract shall be observed. It will be admitted that where there is an absence of authority on the part of a corporation to do an act, the requisite power cannot be imported into the transaction, either by the consent of stockholders or by the execution of the contract by the other party to the agreement. The contract must necessarily continue to be ultra vires. No such effect has been attributed in any of the cases to acquiescence or unilateral performance. The basis upon which the enforcement of the contract in such cases rests is that the company is estopped from setting up its own unauthorized act, and its own incapacity, to evade performance on its part, after receiving the fruits of the bargain. The power of the company is not amplified, the agreement is none the more legal, in the sense that there was authority to execute it; the court simply refuses to entertain the defence, which common honesty forbids the company to make. A man may become bound by the act of an unauthorized agent, and be held liable to the contract made for him, not on the ground that the agent in fact had any authority, but for some conduct on the part of the alleged principal which precludes him from raising the question of authority.

No reason is perceived why the rules of fair dealing, which are so rigorously applied to natural persons, shall not pertain as strictly to private corporations. No instance is known where a natural person can set up in his own behalf, and for his own advantage, his want of authority to do an act for which he has received the consideration from the other party. Transactions which are immoral, illegal, forbidden by statute, or contrary to public policy, are not embraced in this discussion ; they cannot furnish the basis for a legal cause of action.

Why is it that extra vires contracts are recognized as unassailable, and are permitted to stand as the foundation of rights acquired under them, after they have been executed on both sides ?. Such execution imparts no additional power to the corporate body. It does not transmute the negative into the positive. The absence of power is as apparent after as before performance. Why is it that corporations are compelled to pay money borrowed in excess of authority, and to pay the stipulated rent for premises unlawfully leased, for the period of occupation ?

The law does not imply a contract to pay the bondholders the money thus received. It is illogical to say that the law will imply a contract by the company which it has no power to make for itself. A contract cannot be implied where an express contract cannot be made. The law recognizes the obligation ; it precludes or estops the attempt to evade it. Apply to it what legal phrase you may, the underlying principle is that the corporation cannot set up its own infirmity when it is unconscionable to do so. The law forbids the defence on account of the flagrant injustice which would otherwise be done. The question of corporate power is not entertained.

To enable recompense to be had to this extent, the contracts are respected, not that they rest in authority, but because good conscience requires it.

How then can recognition of the estoppel be denied where the contract has been executed on the one side, and the party performing cannot, upon rescission, be restored to his former 4status?

"Why should the corporate body be permitted to plead its own wrongful act, and set up its own infirmity as a bar to the recovery by the other party of what it should in right and justice be accorded ?

It is true that a person cannot, by his own act, acquire a right against another; the other must, in some way, bind himself. The acquiescence in the contract, in virtue of which the other party performs, and the acceptance of its benefits, constitute the binding acts, and raise the estoppel. I am unable to see how, upon a just conception of the legal principles involved, a different rule can be applied where the corporation has acquiesced in the contract, and the other party, by performance on his part, has been led into a position from which he cannot be extricated.

Misconception arises from failing to distinguish between those rights which parties acquire as between themselves, and the rule by which corporate authority must be measured and limited when the state interposes to assert its prerogative.

Nor does the liability of the company rest upon the doctrine of ratification.

In its ordinary legal acceptation ratification applies to such. contracts as a party lias authority to make. Bepeated affirmations of a contract by one who has no authority to enter into it, cannot supply the requisite authority.

But acquiescence in it, upon which the other party acts, may, and does, upon settled legal principles, preclude the parties from starting the question of power as between themselves. There is, in fact, a subsisting contract, actually executed in due and legal form, which, under the rule stated, is unimpeachable, except at the instance of the state. It is thus, in legal contemplation, impressed with the vigor and incidents of a valid contract as between the parties, and there is no-difficulty in enforcing it in a suit at law.

It is like the case of one who makes, in legal form, a conveyance of real estate which he has no power to convey, and not like the case where the true owner fails to do some act which- may operate as an equitable estoppel to his setting up his title against the person who has been misled by his conduct. In the former case the grantee could maintain an action at law against the grantor to recover possession of the premises granted. In the latter case the relief must be sought in a court of equity.

But whether the rule which I have formulated shall be applied to this case or not, the judgment below should, in my opinion, be affirmed, upon the ground that the lease in this case must be regarded as substantially a contract as fully executed on both sides as those unauthorized contracts in which money-has been loaned to or work done for a corporation, for which it has issued its bonds to the creditor.

The agreement was entered into November 3d, 1871, between the Camden and Atlantic Bailroad Company, and the Mays Landing and Egg Harbor City Bailroad Company, in and by which it was agreed that if the latter company would construct the branch road in a specified manner, on or before the 1st day of July, 1872, the former company would guarantee the bonds of the latter company to the amount of $37,500, to be used in the construction of the said road, and take a lease for the same, when completed, for nine hundred and ninety-nine years at a specified rental.

In pursuance of this agreement the bonds were issued by the branch road, and guaranteed by the main line. The road was built under the direction of the main line, and the lease executed.

Every term of this agreement on both sides has been fulfilled, and the agreement, in all respects, substantially executed.

The annual report of the directors of the main line to the stockholders for the year ending December 31st, 1871, recited the terms of this agreement in detail.

' Annually thereafter, until 1879, the existence of the lease, and the income and disbursements incident to the operation of the branch were duly reported to the stockholders of the main line, during all which time no attempt was made to avoid the lease.

We must impute to the stockholders of the main line utter neglect of their affairs, if we say that they did not have notice of the agreement to build the branch road, and of the lease executed in pursuance thereof.

The only reasonable inference from the circumstances proven is that they had knowledge of the transaction, and that it was engaged in and consummated with their approval and acquiescence. This case presents all the features which have led the judicial mind, in the cases cited, to establish the .distinction between executory and executed contracts, in which respect it essentially differs from the Thomas case, in 101 U. S. This was not, as in the case in the federal court, the mere leasing of a road owned by the lessor, where the repudiation of its terms would restore both parties to their former status.

Here the lessor built the road, not for itself, but at the instance of and for the lessee, with the proceeds of bonds guaranteéd by the lessee to promote and effect the scheme. ■The branch road was a mere instrument in the hands of the main line to consummate the undertaking.

By the clearly expressed contract of the parties the road was to be the road of the lessee, the lessor to have only the fixed rentals.

The lessor has fulfilled every term of its agreement, and put the lessee in possession of all that it stipulated for. Nothing remains on the part of the lessor to be done. We must look at the substance of things in applying legal principles. The lease for nine hundred and ninety-nine years is practically an absolute transfer of the road to the lessee, and the rental a mere mode of paying the lessor for the work done and money expended in constructing the road for the lessee, instead of paying a fixed principal sum. The case does not, in effect and substance, differ from what it would have been if the main line had employed the branch road to construct the branch at a stipulated price, and had issued its bonds in payment, after completion and acceptance of the work.

All the cases concede that under such circumstances the contract must be treated as executed.

If the contract had been to compensate the branch road for the work, by the bonds of the main line securing the payment of an annuity for nine hundred and ninety-nine years, and those bonds had been delivered, would it be asserted that it was, in substance, the less an executed agreement ?It is the merest verbiage and form, whether it is termed a lease securing a rental for nine hundred and ninety-nine years, or a bond securing an annuity for a like term.

The injustice and inadmissibility of permitting the main line to repudiate its bonds after it has been in occupancy of the road for more than seven years, because the road proved to be unprofitable, would not be more glaring than the inequity of the defence interposed here to the payment of the rental. The work undertaken to be done was fully executed by the branch road, and the manner in which it is to be paid for is immaterial, so far as the principle involved is concerned. There is no consideration of justice and fair dealing, which, in the cases referred to, led to the rejection of the offer by the corporations to set up their own incapacity in avoidance of their just obligations, which is not most forcibly presented by this case. It cannot, in the application of legal principles, be dissociated from executed contracts without disregarding the reasons which lie at the foundation of the rule. If the lease is subject to the defence of ultra vires, the guarantee of the bonds is also incapable of enforcement, and thus loss will likewise fall upon those who advanced money, upon the faith of the guaranty, to be used under the direction of the lessee, and for its purposes.

If such a doctrine is established, who can answer for the solvency of our insurance companies, savings banks and moneyed institutions ?

It is a matter of common knowledge that corporate bodies, in many instances, through misconception of their powers, or otherwise, have exceeded the legal limits of their authority.

An action to enforce against the main line its guaranty of these bonds could not be classed with those cases in which companies have been required to return the money they had received on ultra vires contracts, or to pay rentals for the period of occupancy.

If the invalidity of the contract and the right to repudiate it be conceded, the law cannot raise an implied obligation on the ruins of the contract upon which to found a recovery. The liability of the defendant upon the bonds must rest, if it exists at all, upon the contract of guaranty.

The money was not paid to the main line, but to the obligor of the bonds, and no obligation can be implied on the part of the defendant to repay it. The validity of the guaranty contract must be affirmed, or no action can lie against the defendant.

In the destruction of the contract there must be an entire absence of legal liability.

The legal doctrine, which must be invoked to maintain an action by the bondholders on the guaranty, will support the judgment ip this case.

The doctrine of estoppel by acquiescence, in cases which present the characteristics which appear here, can work no inequity, for it may safely be presumed that the parties to be affected by an engagement are competent to determine what will best promote their own interest, and for any error in judgment they, and not others, should suffer.

The contrary doctrine, affording so easy an escape from the consequences of their acts, invites them to overstep the boundaries of their authority.

There can be no dissent from the assertion that good faith and honest dealing unite in forbidding that the defence here set up shall be successfully interposed. In my opinion, the law is against it, and the judgment below should be affirmed.

Dixox, J.

I vote to affirm, upon the ground that the Camden and Atlantic Railroad Company cannot set up that its own charter has become void under section 17, so long as it continues to exercise the powers granted by the charter, and that unless the charter is considered as avoided under section 17, the power to build the branch road continued when this lease was made, and consequently, according to Branch v. Jessup, 106 U. S. 468, the power to lease then existed.

What would be the result if some one besides the corporation itself were alleging the invalidity of the charter, need not now be considered.

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Dissenting Opinion

Deptte, J.

(dissenting.) I agree with the opinion of Mr. Justice Van Syckel that the Camden and Atlantic Railroad Company had no power, at the time the lease was made, to construct the line of railroad in question under its charter, and that the acceptance of the lease by that company was ultra vires. But I dissent from the result that is reached.

The expression ultra vires is used in different senses—to express either that the act of the directors or officers is in excess of their authority as agents of the corporation, or that the act of the majority of the stockholders is in violation of the rights of the minority, or that the act has not been done in conformity with requirements of the charter, or that the act is one that the corporation itself has not the capacity to do, as being in excess of its corporate powers.

The indiscriminate use of this expression, with respect to eases different in their nature and principles, has led to considerable confusion, if not misapprehension. Where the act done by directors or officers is simply beyond the powers of the executive department of the corporation as the agency by which the corporation exercises its functions, and not of the corporation itself, it may be made valid and binding by the action of the board of directors, or by the approval of the stockholders. Where the act done by stockholders is not in excess of the powers of the corporation itself, but is simply an infringement upon the rights of other stockholders, it may be made binding upon the latter by ratification or by consent implied from acquiescence. Where the infirmity of the act does not consist in a want of corporate power to do it, but in the disregard of formalities prescribed, it may or may not be valid as to third persons dealing bona fide with the corporation, according to the nature of the formality not observed, or the consequences the legislature has imposed upon non-observance. These are all cases depending upon legal principles, not peculiarly applicable to corporations, and the use of the phrase ultra vires tends to confusion and misapprehension. In its legitimate use, the expression ultra vires should be applied only to such acts as are beyond the powers of the corporation itself. In this sense it is to be applied in this case.

In the discussion of this subject a distinction is sometimes taken between the acts of a corporation, which it is not expressly, or by necessary implication, empowered to do, and ■acts expressly forbidden to it, treating the latter as incapable of being endowed with any validity, and the former as susceptible -of ratification, and capable of obtaining validity from •equitable estoppel. The distinction, if well founded, is obliterated by the third section-of the General Corporation act, which provides that in addition to the powers enumerated in the first section of the act, (which are the usual powers of all •corporations,) and those expressly given by the charter, no corporation shall possess or exercise any corporate powers, except such as shall be necessary to the exercise of the powers so enumerated and given. Rev., p. 177. This court has held that this section is a prohibition of acts not within the scope of the powers granted, and that contracts in contravention of it are illegal. Moms and Essex R. R. Co. v. Sussex R. R. Co., 5 C. E. Green 542. The statutory prohibition and disability extend to stockholders as well as to the corporation. Except for the purposes of organization and action, the corporation consists of the body of its stockholders, and they cannot exercise or authorize any corporate powers which are denied to the corporation itself.

The suit is upon the covenant for payment of the rent reserved, for rent accruing after the defendant abandoned possession and gave notice of its renunciation of the lease. The cause of action, therefore, rests wholly upon the validity of the covenant in the lease.

The defendant, at the time the lease was taken, had powers appropriate to the construction and operation of its main line. It had no power to construct or operate a railroad on the route of the leased line. By force of the statute referred to, a leasing by the defendant of that line of railroad was prohibited, and the contract of leasing was illegal. The defendant’s charter was a public act, and expressed with precision the exact powers granted to it. The statute prohibiting the exercise, by any corporation, of any powers beyond those granted in its charter and the powers enumerated, was also a public statute. The lease was made by the plaintiff to the defendant, with full knowledge of the corporate powers of the latter, and of its incapacity to take the lease. Fraud or imposition is out of the question. The proposition for consideration is the legal principle by which a contract of leasing, which is under the ban of the statute, and illegal, may be made a legal and enforceable contract.

The lease could not acquire validity from the fact that the plaintiff was induced to construct its railroad by the defendant’s agreement to take a lease. The preliminary contract was also invalid. Nor could it obtain validity from the subsequent ratification, even though it was ratified by all the stockholders. The doctrine of validating a contract by subsequent ratification presupposes capacity to contract, and the defendant’s incapacity attached, as well to the contract, which should arise from ratification, as to the original contract. In Ashbury Railway Carriage and Iron Co. v. Riche, L. R., 9 Exch. 224, 262, Mr. Justice Blackburn, in the Court of Exchequer Chamber, expressed himself thus: “I do not entertain any doubt that if, on the true construction of a statute creating a corporation, it appears to be the intention of the legislature, expressed or implied, that the corporation shall not enter into a particular contract, every- court, whether of law or equity, is bound to treat a contract entered into contrary to the enactment as illegal, and therefore wholly void, and to hold that a contract wholly void cannot be ratified.” This language is quoted with approval in the same case in the House of Lords. Lord Chancellor Cairns declared that it summed up and exhausted the whole case. Lord Selborne said “that where there could be no mandate there cannot be any ratification, and that the assent of all the shareholders can make no difference when a stranger to the corporation is suing the company itself in its corporate name upon a contract under the common seal. No agreement of shareholders can make that a contract of the corporation which the law says cannot and shall not be so.” L. R., 7 Eng. & Ir. App. 653, 695.

The contention is that the lease, though invalid in its inception, was given validity by acquiescence, and that therefrom an estoppel arose, which concludes the defendant from setting up its invalidity. Kent v. Quicksilver Mining Co., 78 N. Y. 159, was mainly relied on. By its charter power was given to the company to issue certificates of stock representing the value of its property, in such form and subject to such regulations as it might by its by-laws prescribe, without any limitation upon its power to issue stock. By a by-law the company provided that certificates of stock amounting to $10,000,000 should represent the value of its property. Under this by-law certificates of stock were issued. The holders of these certificates were on an equality in participation in the profits of the business. Subsequently, the company feeing in need of money, a new by-law was adopted, authorizing the issue of preferred stock, on which a bonus of f 5 per share should be paid. The by-law provided that the preferred stock should be entitled to interest at the rate of seven per cent, per annum, to be paid annually out of the net earnings of the company, and that the surplus of the earnings, after payment of seven per cent, interest on the preferred stock, should be divided pro rata among the holders of preferred and common stock. It also provided that preferred stock should be issued only to holders of the common stock, and that on the issue of preferred stock common stock should be surrendered, share for share. Under this last by-law preferred stock was issued, but for each share of preferred stock a share of common stock was surrendered—the number of shares and the nominal value of each share being still the same. The controversy was between holders of common stock, issued under the original by-law, and the holders of preferred stock, and the proposition presented for decision, as appears by the opinion of the court on page 183 of the report, was the power of the corporate body, or of the majority of the stockholders, to provide for the creation of a preferred stock, so as to bind a minority of the stockholders not assenting thereto.

In the case just cited there was no overissue of stock. Uor was the power of the company to classify its stock and give one class of stockholders a preference over the other involved. The learned judge who delivered the opinion (page 178) declared that there was “ nothing in the constitution or the law that inhibits a corporation from beginning its corporate action by classifying the shares in its capital stock with peculiar privileges to one share over another, and thus offering its stock to the public for subscription thereto.” And (on page 187) he distinguished the case before the court from Ashbury Railway Co. v. Riche in the fact that in the latter case the act was expressly prohibited. The ground of decision was that the original by-law, which admitted the holders of stock to an •equality in rights, “ entered into the compact between the corporation and the taker of every share;” that the certificate of stock was “ a muniment of the stockholder’s title, and evidence of his right,” and expressed “the contract between the corporation and his co-stockholders and himself—a right as inviolable as' is any other right in property which could not be taken away or lessened against the will of the owner; ” and that the repeal of the by-law under which the stock was originally subscribed impaired the right acquired by the subscription. The act of the corporation in issuing preferred stock was not condemned as being in excess of its powers under its charter, and the doctrine of ultra vires in its proper sense was not presented by the case. Indeed, in its opinion the court carefully distinguishes between acts of a corporation which are .malum prohibitum—and every act in contravention of a statutory prohibition is malum prohibitum—and acts which, though unlawful, are merely injurious to the rights of others. The former the court declared that no assent of stockholders could validate; to the latter the doctrine of equitable estoppel by ■ acquiescence was applied, for the reason that such acts are unlawful only when done without the consent of the persons injuriously affected thereby. The doctrine of ultra vires did not arise except as it arises in the most comprehensive and indefinite sense in every ease where the right of a party to break his contract arises. The decision is distinguished from the ■case in hand in the fact that the act of the company was not one that was in excess of its corporate powers, whereas in this ■case the lease was undeniably beyond the corporate powers of the defendant, and is also distinguishable, as the court distinguished the Ashbury Railway case, in the fact that the act of the defendant in taking the control of the plaintiff’s road and exercising its franchises was expressly prohibited by the statute.

I have already referred to Ashbury Railway. Co. v. Riche, decided in the House of Lords and reported in L. R., 7 Eng. & Ir. App. 653. In that case the company was created a corporation by articles of association under the Companies act, (25 and 26 Vic., c. 89,) which defined the objects for which the company was established to be “ to make and sell or lend on hire railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock, to carry on the business of mechanical engineers and general contractors, to purchase and sell, as merchants, timber, coal, metals and other materials, and to buy and sell any such materials on commission or as agents.” The company purchased a concession for making a line of railway in Belgium, and gave a contract for its construction to Riche. Riche began, and for some time continued the work for the construction of the line, and for some time-the company paid to Riche the money earned by' the contract. In an unfinished condition of the work the company repudiated its contract with Riche, and the latter brought an action for damages. The House of Lords held that the action could not be maintained; that the contract, being in its inception void, as being beyond the provisions of the statute, could not be ratified, even by the whole body.

In the Ashbury Railway Company case the corporation was organized under a general act, which allowed the shareholders, by the memorandum of association, to determine the purposes for which the company should be organized, and there was plausibility in the argument that shareholders, having an option in determining the scope of the company’s power, a contract with an innocent third person, having the sanction of all the shareholders, should be binding, but the contract was nevertheless held to be void upon principles of public policy, for the reason, as was said by Lord Hatherly, that the legislature, in requiring the objects of the association .to be expressed in the memorandum filed, “ had in view distinctly the protection of outside dealers and contractors from the funds of the company being applied, or from a contract being entered into by the company, for any other object than those specified in the memorandum, which the legislature thought should remain forever unchanged.” Much more clearly does the principle apply to a corporation created by a special charter granted by the legislature, which has prescribed the corporate powers to be exercised without any volition on the part of the corporators. The latest cases on this subject in the House of Lords hold the principle to apply to corporations with special charters granted by act of parliament. Attorney-General v. Great Eastern Railway Co., 5 App. Cas. 473; Wenlock v. River Dee Co., 10 Id. 354. Still more clearly does the principle apply where the legislature has not left its policy to be ascertained by inference, but by a general statute applicable to all corporations has expressly enacted that no corporation shall exercise any corporate powers, except such as shall be necessary to the exercise of the powers enumerated and given.

Nor can this case be distinguished in the fact that in the Ashbury Eailway Company case the action was for damages. If the contract be a valid contract, the remedy for the breach <of it is determined by the circumstances of the particular case. Whether it be for unliquidated damages as compensation, or for debt upon a liquidated sum, cannot alter the validity of ■the agreement as a contract. The law furnishes the remedy upon contracts, and a contract cannot be made valid or invalid .-according as one form of remedy or another is resorted to. On that theory all of the covenants in the lease would be invalid, except those for the payment of rent, for all the other •covenants are such as that a breach would sound in damages.

Two cases in the United States Supreme Court are also in point. Thomas v. Railroad Co., 101 U. S. 71, and Pennsylvania R. R. Co. et al. v. St. Louis, Alton and Terre Haute R. R. Co., 118 Id. 290, 630; S. C., 24 Am. & Eng. R. R. Cas. 58. In the first of these cases a railroad company of this state had leased its road, franchises and property for a term of twenty years. The lease contained a covenant that the railroad company might, at any time, terminate the letting, and resume possession of its property, but that in that event it should pay the lessee the value of the lease for the unexpired term. The company exercised its option, and took possession of its road before the expiration of the term, and the lessee brought an action to recover on this covenant. In the second case the St. Louis, Alton and Terre Haute Railroad Company had? leased a portion of its railroad to the Indianapolis and St.. Louis Railway Company for a term of ninety-nine years, and the Pennsylvania Railroad Company and four other railroad companies had entered into a contract with the lessor to-guarantee the payment of the rent, and the performance by the lessee of the covenants in the lease. The suit was by bill in equity by the lessor against the lessee and the guarantors for the payment of the rent, and the specific performance of the covenants.

In the first case the lessee was a natural person, with no-disability to contract, but he was held to have no remedy on his contract because it was not binding on the other party for want of a similar power to contract. In the second case, the lessor had capacity, by legislative authority, to make the lease, and the incapacity was in the lessee to take the lease- and in the guarantors to make the guaranty. In both cases the incapacity was in the party setting up its want of power to make the contract. The defence was sustained in each case on the ground that the contract, being beyond the power of the corporation to make and forbidden by public policy, was void.

In the Thomas case, acquiescence and delay in rescinding the contract was relied on to support the action. In response-to the contention that the company, having entered into the-agreement, it was its duty to rescind or abandon it at the-earliest moment, Mr. Justice Miller said: “ 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 both to stockholders and to the public give to the-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 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.”

. In Pennsylvania R. R. Co. v. St. Louis, Alton and Terre Haute R. R. Co., equitable estoppel was a prominent feature. The defendants were railroad companies whose traffic was east of Indianapolis, and being desirous of having a connection for the purpose of reaching St. Louis with their business, agreed with the complainants that the Indianapolis and Terre. Haute Railroad Company should lease, for a term of ninety-nine years, a part of the complainant’s road between St. Louis and Indianapolis, and thus make a continuous line between St. Louis and Terre Haute; and that the defendants should guarantee the payment of the rent and the performance of the other obligations of the latter company; and that if the St. Louis and Terre Haute Company should refuse to execute this operating contract, the defendants might procure some other company to build the seventy miles of road from Indianapolis to Terre Haute, and that in like manner they would guarantee the performance of its obligations in the lease. The Terre Haute and Indianapolis Company having refused to execute the lease, another corporation, called the Indianapolis and St. Louis Company, was organized, under the influence and control of the guaranteeing companies, to build the road necessary to complete the desired connection. This company executed a lease with the complainant, and at the same time all the guaranteeing companies except the Pennsylvania Company executed a new guaranty as a substitute for the former—the liability of the Pennsylvania Company being rested upon the original contract of guaranty and the averment that the new company which executed the lease was in reality the creature of that company. The lessee took possession of the road, in 1867 and operated it for ten years. The bill charged that the lessee was in default in the payment of rent; that it was insolvent and had allowed the road and equipment to run down and be depreciated, and that the traffic over it had been largely diminished by the construction of a road by the lessee and the other defendants, nearly parallel to-the complainant’s road and not far from it, and that for these reasons the complainant’s contract with the defendants was more valuable than would be the resumption of the possession of the road in its depreciaated condition. The prayer for relief was that the lessee should specifically perform its obligations in all the respects mentioned, and that in default thereof the guaranteeing defendants be required to do so.

In the case cited the lessor had capacity to make the lease, but the lessee had no capacity to take the lease. The defence was that the lease and the contract of guaranty were ultra vires and void. In the facts, as well as in the relief prayed, this case is like the case now before the court; for the result of the affirmance of the judgment below will be to establish the liability of the defendant upon the lease for the full unexpired term—a judicial determination, in effect, that the defendants shall specifically perform the covenants in this lease continuously for the period for which it was made. The lease and the contract of guaranty were held to be void, and the bill was dismissed. The case presented impregnable grounds for upholding the contract, if a contract ultra vires and illegal could, under any circumstances, be validated by equitable estoppel. It was contended that though the contract of lease might be void so that no action could originally have been sustained upon it, there had been for ten years such performance of it, in the use, possession and control of plaintiff’s road and its franchises, by the defendants, that they could not now be permitted to repudiate or abandon it—that it now presented one of a class of cases which hold that where a void contract has been so far executed that property has passed under it, and rights have been acquired under it, the courts will not disturb the possession of such property, or compel restitution of money received under such a contract. The court disposed of this contention in these words : “ Undoubtedly there are such decisions of courts of high authority, and there is such a principle, very sound in its application to appropriate cases. But we understand the rule in such eases to stand upon the broad ground that the contract itself is void, and that neither what has been done under it, nor the action of the court, ,can infuse any vitality into it. Looking at the case as one where the parties have so far acted under such a contract that they cannot be restored to their original condition, the court inquires if relief can be given independently of the contract, or whether it will refuse to interfere as the matter stands. "We know of no well considered case where a corporation which is party to a continuing contract, which it had no power to make, seeks to retract and refuses to proceed further, it can be compelled to do so.” My examination of the cases confirms this statement. In Whitney Arms Co. v. Barlow, 63 N. Y. 62, the goods had been manufactured and delivered, and the suit was on notes given in payment. The court held that the defence of ultra vires was not maintainable, for the reason that the contract had been fully performed by the other party, and the corporation had the full benefit of the performance. In Woodruff v. Erie R. R. Co., 93 N. Y. 609, the suit was for rent. The lessee had used and occupied the railroad. The court held that the lessee was estopped from disputing the validity of the lease so far as it had been executed. In Parish v. Wheeler, 22 N. Y. 494; Rome Savings Bank v. Kramer, 32 Hun 270, and Bradley v. Ballard, 55 Ill. 417, the consideration had also been fully executed. It is with respect to this class of cases that the courts have said that the plea of ultra vires should not prevail where it would work a wrong. In Davis v. Old Colony R. R. Co., 131 Mass. 258, Chief Justice Gray discussed the whole subject in an opinion of consummate ability. He said that il a corporation may indeed be bound to refund to a person from whom it has received money or property for a purpose unauthorized by its charter, the value of which it has actually received ; for in such a case to maintain the action against the corporation is not to affirm, but to disaffirm the illegal contract.” In that case the suit was against a railroad corporation and a company incorporated for the manufacture of musical instruments, upon an agreement to guarantee the expenses of a musical festival, and it was held that no action could be maintained against either corporation, although the guaranty was made with the reasonable belief that the proposed festival would be of great pecuniary benefit to the guarantors by increasing their business, and the expenses had been incurred in reliance upon the guaranty. Other illustrations of the application and limitation of this principle may be found. For instance, contracts invalid under the statute of frauds for want of writings are not validated by part performance, and the party is restricted to remedy upon them to the extent to which they have been executed, either upon a quantum meruit or for use and occupation. Smith v. Smith, 4 Dutcher 208; McElroy v. Ludlum, 5 Stew. Eq. 828. In the St. Louis and Alton case Justices Bradley and Harlan dissented, but the ground of their dissent does not impugn the-doctrine held by the court—that the contract of a corporation,. ultra vires to the extent that it was unexecuted, was void. It may also be remarked that Bissell v. M. S. & N. I. R. R. Cos., 22 N. Y. 258, is inapplicable. The action was for a tort, and it is settled that a corporation cannot defend in an action for a tort done by it on the ground that the business in the prosecution of which the tort was done was ultra vires. New York, Lake Erie and Western R. R. Co. v. Haring, 18 Vroom 137; Buffett v. T. & B. R. R. Co., 40 N. Y. 168; National Bank v. Graham, 100 U. S. 699; Salt Lake City v. Hollister, 118 Id. 256.

. The cases I have cited are decisions upon principles of the common law too often recognized and acted upon by the courts of this state to be now disregarded. They are in harmony with the decisions of most of our sister states. To some extent in this country the doctrine of ultra vires, as enforced in the English courts, has been modified; but the fundamental doctrine that the unexecuted contracts of a corporation which are outside of the powers granted are void, has, in the courts of this country, been generally, if not universally adopted, and I think I hazard little in asserting that in no well considered case has it been departed from, except to the extent of allowing a recovery to the extent of the consideration actually received. I do not stop to discuss the question whether a lease is an unexecuted contract in respect of the unexpired part of the term, for it seems to me to be perfectly obvious that such a contract is a continuing contract, as well with respect to the payment of rent as to the occupation of the premises. It is on this theory that eviction is a defence to the recovery of rent, and a rightful surrender before the expiration of the term absolves a party from further payment of rent. If any authority be required for so obvious a principle, it is furnished by the cases cited from the federal court.

But, independent of the illegality of this contract under the statutory prohibition, which of itself would interdict its enforcement, there is present in this case none of the elements of an equitable estoppel. The plaintiff is chargeable with knowledge of the incapacity of the defendant to enter into the lease, and of the statutory prohibition of such a contract. "With such knowledge it accepted the risk that the defendant might, in the future, repudiate the lease and abandon the premises. The doctrine of equitable estoppel is designed for the protection only of innocent parties who have been misled. By the repudiation of the lease, and the surrender of its railroad to the plaintiff, it has restored to it all that it gave as the consideration of the contract. The plaintiff has been paid the stipulated rent for the period during which the defendant had the benefit of the use of the railroad, and it is not even pretended that the road, when surrendered, was of less value than it was w'hen originally built. The entire loss to the plaintiff is the profit it expected to have made by an advantageous contract in the continuance of a lease, which is worth more to it than the possession of its railroad. In a court of law the doctrine of estoppel in pais is never applied, except to-the extent of preventing a party who has been misled from being defeated in a recovery of indemnification. Our courts rejeot the notion that it can be used to enable such a party to recover the profits, which would be the fruits of the transaction if it had been carried into effect. Campbell v. Nichols, 4 Vroom 81; Phillipsburgh Bank v. Fulmer, 2 Id. 52. For these reasons I think the judgment should be reversed. Mr. Justice Knapp desires me to say that he concurs in this opinion.

For affirmance—The Chancellor, Dixon, Magie, Reed, Souddee, Van Syckel, Brown, Clement, Cole, McGregor, Whitaker. 11.

For reversal—Depue, Knapp, Paterson. 3.

Case Details

Case Name: Camden & Atlantic Railroad v. May's Landing & Egg Harbor City Railroad

Court Name: Supreme Court of New Jersey

Date Published: Jun 15, 1886

Citation: 48 N.J.L. 530

Court Abbreviation: N.J.