Cherryvale Water Co. v. City of Cherryvale , 65 Kan. 219 ( 1902 )

The opinion of the court was delivered by

Smith, J.:

When ordinance No. 13 was passed by the city council, approved by the mayor, and its terms accepted by the water company, the city had power, which power still exists, to purchase or condemn land' for water-works purposes and to provide the city with water. (Gen. Stat. 1901, §1001; Waterworks Co. v. City of Columbus, 48 Kan. 99, 28 Pac. 1097, 15 L. R. A. 354.)

In the making of such contract the city exercised g-ucm'-private power and was governed by the rules applicable to an individual or a private corporation. ( The State v. Water Co., 61 Kan. 547, 561, 60 Pac. 337 ; Hubbell v. South Hutchinson, 64 id. 645, 68 Pac. 52.)

A large part of the voluminous record in this case is taken up by the testimony of witnesses introduced by the plaintiff below, showing that the water supplied from the lake was unfit for domestic purposes and dangerous to the public health, and by testimony on the other side contradictory thereto. We are not, however, concerned with such controversy. That question became immaterial after the city had recognized the lake as a source of water-supply by ordinances passed in 1889 and 1895, referred to in the statement, followed by the election of the city to purchase the plant, February 9, 1900. When it passed these ordinances and elected to buy the property, it did so with notice that the water-supply to the residents of the town did not conform to the requirements' of’ the. contract. With full knowledge of this, it proceeded in the most solemn manner to declare its election to purchase. Afterward it could not make the unsanitary condition of the water the basis for a suit in equity to oust the company from exercising franchises or rights given it by the city., (Water Co. v. Grand Junction, 14 Colo. App. 424, 60 Pac. 196; Studer v. Bleistein et al., 115 N. Y. 316, 22 N. E. 243, 5 L.R.A. 702; Benj. Sales, 7th ed., §705, and note.)

During the years when it was shown by testimony introduced on behalf of the city that the water was so bad as to be unfit for domestic use, it continued without objection for that reason to pay hydrant rental. [The protection of the rights of private consumers was !confided by law to its charge. No citizen could com- ! pel the water company to perform its contract with ; the city. (City of Winfield v. Water Co., 51 Kan. 70, 84, 32 Pac. 663.)

In Water-works Co. v. City of Burlington, 43 Kan. 725, 730, 23 Pac. 1068, 1070, where on the trial the city asserted that the water supplied to it and its inhabitants was not of the quality called for in the contract, but had used the water for a year without objection, the court said:

“It seems strange, however, if the water furnished by the company was really as bad as the city now claims that it was, that the city did not then complain, and then, if the company still persisted in furnishing bad water, declare a forfeiture of the company’s franchise.”

In National Water-works Co. v. Kansas City, 62 Fed. (C. C. A.) 853, 27 L. R. A. 827, 838, Mr. Justice Brewer said:

“In its cross-bill the city has made claim for damages, and insisted that the water-works system does not come up, in efficiency and completeness, to the requirements of the contract. We. agree with the circuit court, after reviewing carefully the testimony, that the city is not entitled to maintain this claim. It has for many years recognized and accepted this water-works system as having been constructed in full compliance with the demands of the contract, and it is now too late to repudiate such recognition.”

There is no distinct claim or demand for specific performance of the contract contained in the answer and cross-petition of the water company. Counsel for the company, however, in his brief contends that the acceptance by the city of the option to purchase gives the water company a right to have the conditions o,* ordinance No. 13 specifically enforced. The argument is that the city must do equity ; that, having accepted the conditions of the contract,'it cannot now repudiate such conditions and invoke equitable relief against the water company; that a right to specific performance of the agreement by the plaintiff in error must necessarily defeat the city in its efforts to cancel and annul-the contract in an equitable suit. We agree with counsel in this claim.

When the city granted this franchise by ordinance No. 13, on June 25, 1885, it was stipulated in one of the sections that it should be a contract “binding upon all parties with equal force.” When the water company accepted the conditions of the ordinance, it was agreed that the city might purchase the works at the expiration of ten years, and, failing at that time, then at the expiration of every five years thereafter, at the appraised valuation of three disinterested persons. It did elect to take the plant at the end of the second period. The water company bound itself in advance to sell. When- the city elected by giving the notice, a binding contract of purchase was consummated. (Rockport Water Co. v. Rockport, 161 Mass. 279, 37 N. E. 168; Cooper v. Lansing Wheel Co., 94 Mich. 272, 54 N. W. 39, 34 Am. St. Rep. 341; Caldwell v. Frazier, ante, p. 24, 68 Pac. 1076 ; Chadsey v. Condley, 62 Kan. 853, 62 Pac. 663.) The contract was mutual and based on a valuable consideration.

It may be stated as a rule of law which had its origin in the English cases that an agreement to submit to arbitration will not be specifically enforced in equity. (Milnes v. Gery, 14 Ves. Jr. 400.) This general rule, however, has not been applied with strictness in this country, and has been expressly denied as applicable to a state of 'facts substantially like those appearing in the case at bar, as will be presently shown.

The case of Bristol v. Bris. & Warren Water Wk’s, 19 R. I. 413, 34 Atl. 359, 32 L. R. A. 740, is quite similar in its facts to the present one.. The town of Bristol granted to a water company the right to use its public streets, squares and alleys for the purpose of laying down pipes, for a period of fifty years, or until the town should avail itself of the option of purchase reserved to it in the contract, the town agreeing to pay the company $3000 each year for the use'of hydrants and water required for fire purposes. The company agreed to complete its system of water-works and supply the town for domestic, manufacturing and other uses, to furnish hydrants, and to maintain at all times a head of water not less than 125 feet above high tide. It was conditioned that the city might purchase at any time after ten years and within fifteen years from the date of the contract, for a fair and reasonable price, to be a¡greed upon by the town on one part and the company oh the other, or fixed by a majority of arbitrators appointed for the purpose, one by the town, one by the water company, and the third by the two so chosen. After the expiration of ten years the town concluded to buy the plant of the' water company in accordance with the terms of the contract, and requested the company to agree upon a fair and reasonable price to be paid for the works, which it refused to do, and further refused to appoint an arbitrator to determine the same in accordance with the contract. On this state of facts, a bill was filed Ipy the city to compel a conveyance of the plant to it upon payment by the complainant of a fair and reasonable price. It was objectéd, upon demurrer, by the water company that the contract for the sale of the property at a price to be fixed by arbitrators could not be specifically enforced, one of the parties having refused to appoint an arbitrator, and that the court could not upon application of the other party either fix a price itself or appoint an arbitrator. Answering this objection, the court said :

"But, as well stated by complainant’s counsel, where the contract to sell does not stand alone, but is merely a subsidiary part of another contract for a more extensive purpose, the performance of which has already been entered upon, a different rule prevails. In such a case the courts hold that the manner of determining the price is a matter of form rather than of substance ; and if it becomes evident that it cannot be determined in the manner provided for in the contract, by reason of the refusal of one party to do what in equity he ought to do, the court will determine it upon the application of the other. Coles v. Peck, 96 Ind. 333, 49 Am. Rep. 161. In other words, if the parties have incurred obligations under the contract so that they cannot be. placed in statu- quo, the court will itself enforce the agreement. Tscheider v. Biddle, 4 Dill. 55; Herrman v. Babcock, 103 Ind. 461, 3 N. E. 142; Lowe v. Brown. 22 Ohio St. 463 ; Biddle v. Ramsey, 52 Mo. 153. See, also, Morse on Arbitration and Award, 94; Pomeroy on Specific Performance, sections 148-151; Waterman on Specific Performance, section 44.”

"Pomeroy on Specific Performance, section 151, states the law applicable to this class of contracts as follows: 'The second class embraces those contracts in which a mode for ascertaining the .price is mentioned, but from the language of the stipulation it is regarded as non-essential, and as something rather by way of suggestion, so that the agreement itself is virtually one to sell for a fair price. In such a case, if the means specified for fixing upon the price fail for any reason, the court does not treat the contract as fatally defective, but will, in the suit for a specific performance, direct a fair and reasonable price to be ascertained in some manner preliminary to the decree, either by referring the matter to a master or other officer, or by appointing a skilled person as a special valuer, or even by determining the amount itself ; it will pursue any such mode as the circumstances of the case show to be expedient. The tendency of the later English decisions is to consider these stipulations for a determination of the price by third persons rather as matters of form than of substance ; to construe them in such manner that they become incidental only to the main object of the agreement. The court will always look at the substance of the agreement, and disregard the mere forms which had been provided for effectuating it, and which cannot be made operative.’

*11 Equity regards not the form, but the real nature of the transaction.’ Thompsonv. Taylor, 12 R. I. 109, 111. The case before us is a typical one for the application of this doctrine. The agreement to sell is clearly a subsidiary part of a much more extensive contract— a contract by virtue of which the respondent has for nearly fifteen years enjoyed exclusive privileges in the highways of said town, and collected large sums of money from the town and its inhabitants, and by virtue of which it may continue, unless said sale can be consummated or other relief be granted, to enjoy the same exclusive and valuable franchise for the remainder of said term of years. Nor can the complainant by any possibility be put in the position in which it was before the contract was executed.”

In Coles et al. v. Peck, 96 Ind. 333, 339, 49 Am. Rep. 161, in commenting on the rule laid down in Milnes v. Gery, supra, it was said:

“The doctrine of that case has, however, generally been followed by the courts of the United States, only in a limited and restricted sense, and is mainly applied only to contracts for reference, in which, by the form and language of the stipulation, the mode of determining the price by values, on arbitration, is made an essential provision — in fact, condition — to the validity of the agreement, and to cases in which the parties can be easily placed in statu quo, or where an action for damages can be made to afford an adequate remedy.

“There is another recognized class of contracts providing a mode for ascertaining the price of property by arbitration or reference, in which the language used in the stipulation is treated as non-essential, and-as more in the nature of a suggestion, regarding the stipulation itself as virtually an agreement to sell the property at a fair price.”

Holding the opinion that the contract to purchase' may be specifically enforced, notwithstanding the arbitration clause, it follows that the city cannot call on a court of equity tó do that which is not equitable, and thus obtain its release from an obligation deliberately assumed with full knowledge of all the facts, and in no manner induced by fraud or deception of any kind.

The fact that the water-supply failed for a time after the three-months notice to buy had expired cannot affect the legal status of the parties under the contract fixed at the time the city elected to take the plant. An election once made binds the party. He cannot afterwards take the other alternative. (Bish. Cont. §784; Brown v. Royal Insurance Co., 1 Ell. & Ell. 853; Childs v. Stoddard, 130 Mass. 110.)

It will be observed that the three-months notice to purchase was given by the city to the water company on February 9 and expired May 9, 1900. The resolution passed by the city council rescinding the election tó purchase was .passed on June 5, 1900, and a copy of the same served on the water company the next day. There is no provision in ordinance No. 13 when the arbitrators shall be chosen, either before or after the expiration of the five-year period. It is contended by counsel for defendant in error >' r, there was no purchase of the property by the city when it served its notice of election. However this may be, there was a valid contract of purchase, made in acceptance of a continuing offer to sell, extende'd to the city by the water-works company by the terms of ordinance No. 13. The fact that the city could not get absolute title until June 25, 1900, did not affect the binding force of its agreement to purchase. There was nothing to be done after its election to buy except the fixing of the price to be paid.

Again, it is contended that at the time the contract was made the city had no power to issue obligations in payment of the price of the works, ás provided in section 9 of the contract. If this were true it could not avail the defendant in error. In Hitchcock v. Galveston, 96 U. S. 341, 24 L. Ed. 659, the city council had contracted to build certain sidewalks, to be paid for by city bonds. The work was partly performed, but the city council stopped the same and prevented its completion. It was urged, in an action for breach of contract, that the city had no power to make such agreement, in that it had no authority to issue bonds of the city. The court said:

“ It is enough for them (the plaintiffs) that the city council have power to enter into a contract for the improvement of the sidewalks ; that such contract was made with them ; that under it they have proceeded to furnish material and do work, as well as to assume liabilities ; that the city has received and now enjoys the benefit of what they have done and furnished; that for these things the city promised to pay; and that after receiving the benefit of the contract the city has broken it. It matters, not that the promise was to pay in a manner not authorized by law. If payment cannot be made in bonds because their issue is ultra vires, it would sanction rank injustice to hold that payment need not be made at all. Such is not the law. The contract between the parties is in force so far as it is lawful.” (See, also, The State Board, of Agriculture v. The Citizens’ Street R. W. Co., 47 Ind. 407, 17 Am. Rep. 702.)

The case of Hitchcock v. Galveston, supra, is quoted from approvingly in Water-works Co. v. City of Columbus, 48 Kan. 99, 114, 28 Pac. 1097, 15 L. R. A. 354.

There was no lack of power, however, to issue bonds in payment of the purchase-price of the works at the time the election to buy was made, for, by chapter 82, Laws of 1897, such power is expressly conferred. In fact, under the election proclamation of August 11, 1900, the city was proceeding to vote bonds for the erection of water-works, not exceeding $12,000 of the issue to be used in purchasing such part of the machinery, tools, pipes, etc., of the Cherryvale Water Company as might be needed.

The court below, in its decree, not only ousted the water company from the .exercise of its franchises under ordinance No. 13, but also refused to require payment of the city to it for hydrant rental then due. Cities are bound to the exercise of good faith in the fulfilment of contracts to the same extent that such obligations are imposed upon individuals, and in this case an approval of the judgment of the trial court would .work an inj ustice and the abrogation of solemn engagements not to be countenanced in a court of equity.

The judgment of the court bélow will be reversed, with directions to proceed further in accordance with the views expressed in this opinion.

All the Justices concurring.