City of New Britain v. New Britain Telephone Co.

The agreement and the bond here in question, for most purposes may fairly be regarded and construed as a single instrument. They were made at the same time, as part of the same transaction, and the one — the agreement — is by express reference made a part of the other, as much so as if it were written out in full therein. The bond thus contains the agreement and something more. In addition to this agreement and the usual conditions of defeasance, the condition of the bond contains, by clear implication, certain engagements not contained in the embodied agreement, which the defendant telephone company agrees to keep, and among them is the one described in the complaint for the breach of which this suit was brought. An enforceable agreement may be contained in that part of a bond called the condition. Tomlinson v. Ousatonic Water Co., 44 Conn. 99. By the bond, then, the defendant telephone company, among other things, agreed in substance that it would keep control of its property and business, and keep up its competition with its business rival, during the full contract period of twenty years. The defendant in its answer alleged that the agreement relating to competition was made "for the sole and exclusive purpose of creating, continuing, and securing" competition in the telephone business for the benefit of the general public. This was denied by the plaintiff, and that issue was found in its favor. The defendant then contended, and now contends, that it appears upon the face of the instruments themselves that the sole and exclusive purpose and object of the agreement relating to competition was to secure the continuance of such competition in favor of the general public. This contention cannot be sustained. By the first agreement the city, in exchange for certain rights and privileges granted by it to the defendant telephone company, obtained certain rights and privileges, presumably valuable, for itself as a corporation, and not for the general public; and among these was the right to have telephonic service in all the city departments at an agreed price per year for twenty years. The right of the parties to enter into this particular agreement does not appear to be questioned by any one, and so far as we are aware it cannot be successfully questioned. That agreement on its face thus shows that the city, by virtue of lawful rights acquired under it, was interested for itself, and not for the general public of New Britain or elsewhere, in having the defendant telephone company keep control of its telephone business and remain capable of performing its agreements. To secure, as far as could be done by agreement, such continuous control and capacity on the part of the defendant telephone company for the contract period, the bond was drawn. In it that company agrees in effect (1) not to sell its property, (2) not to transfer to others the control of its business, (3) not to cease to compete with the rival company. Such things, if done, would or might affect the performance of the first agreement, and the defendant agrees not to do them; in effect, these stipulations and the bond furnish, and appear to have been made for the sole purpose of furnishing, additional security for the performance of the first agreement. If the city could for its own benefit enter into the first or principal agreement, it is difficult to see why it could not also enter into the subsidiary agreement to secure the more effectual performance of the first. We think the parties had the right to make and enter into both of these agreements, and that upon the face of the instruments embodying these agreements there is nothing that appears to be ultra vires as to the parties, or against public policy.

The question, whether the present parties, without having entered into the first agreement, could make one like the second, for the sole purpose of securing competition between the rival telephone companies for the benefit of the general public, is not presented upon this record, and upon it we express no opinion.

Our conclusion is that the agreement for the breach of which this suit is brought, is a valid agreement, and that the trial court did not err in so holding.

For the breach of this agreement the trial court awarded as damages the full amount of the bond; and the next question is whether this was error. The bond in this case is one in the penal sum of $2,500, with a condition. The condition, in the first part of it, provides that the bond shall be in full force and effect if the obligor (1) shall fail to perform its part of the written agreement, or (2) shall sell its property, or (3) shall suffer the control of its affairs to pass into the hands of others, including the Southern New England Telephone Company, or (4) shall cease to compete in the telephone business with the last-named company. For a breach of the bond in respect to any of these things, the amount named in the bond is clearly, in the forepart of the condition, a penalty only. Then follows these words: "And in case of the said obligor ceasing its competition with or coming under the control of the Southern New England Telephone Company, or its assigns or successors, then, and in that event, said sum of $2,500 shall be considered as liquidated damages, and the full amount thereof shall be paid to the city."

The particular breach above specified is the one sued upon, and the question is whether the sum agreed to be paid as damages for such breach is liquidated damages or a penalty. As a general rule parties are allowed to make such contracts as they please, including contracts to liquidate fix and beforehand the amount to be paid as damages for a breach of such contracts; but the courts have always exercised a certain power of control over contracts to liquidate damages, so as to keep them in harmony with the fundamental general rule that compensation shall be commensurate with the extent of the injury. Thus, although parties in express and explicit terms provide that the sum agreed to be paid shall be liquidated damages and not a penalty, the courts have held, notwithstanding such an expression of intent, that the sum was a penalty. Kemble v. Farren, 6 Bing. 141; Lampman v. Cochran,16 N.Y. 275; Davis v. Freeman, 10 Mich. 188; Richardsonv. Woehler, 26 id. 90; Schrimpf v. Tennessee Mfg. Co.,86 Tenn. 219.

In determining whether a sum agreed to be paid on breach of a contract is a penalty or liquidated damages, the court will look at the entire agreement, its scope, purpose, and subject matter, and may consider the result of a breach thereof, and the reasonableness of the sum agreed to be paid therefor, under all the circumstances of the case. In the case at bar the city and one of the defendants entered into an agreement by which the city acquired certain rights, the chief of which appears to be the right to telephonic service for the city departments at an agreed price per year for twenty years. It was apparently to secure the performance of this principal agreement that the bond and the engagements therein were made. One of the engagements in the bond was that the defendant telephone company should not come under the control of or cease to compete with one of its rivals in the telephone business in New Britain. The parties must have deemed this engagement of some importance, or it would not have been made; and apparently they deemed it of great importance, for they agreed beforehand that for a breach of it alone a fixed sum should be paid as liquidated damages, and that the whole sum so agreed upon should be paid; and they had the right to make such an engagement and to guard against its breach in this way. Now it is evident that the damages upon a breach of such an engagement, in the absence of any agreement about them, would be very uncertain in amount, and would not be readily susceptible of proof if contested; and we find a rule of interpretation laid down in such cases to the effect that when the nature of the engagement is such that upon a breach of it the amount of damages would be uncertain or difficult of proof, and the parties have beforehand expressly agreed upon the amount of damages and that amount is not greatly disproportionate to the presumable loss, their expressed intent will be carried out. Bagley v. Peddie, 16 N.Y. 469;Monmouth Park Asso. v. Wallis Iron Works, 55 N.J.L. 132;Tennessee Mfg. Co. v. James, 91 Tenn. 154; Tingley v. Cutler,7 Conn. 291; Chase v. Allen, 13 Gray, 42; Tode v. Gross,127 N.Y. 480. We think the case presented by the record falls within this rule, and that the trial court did not err in so holding and rendering judgment for liquidated damages.

It remains to notice briefly two remaining questions in the case. The first relates to the ruling upon evidence. The rejected evidence was offered, apparently, to prove that the agreement as to competition was made "for the sole and exclusive purpose" of securing competition for the general public. It did not in any proper sense tend to prove that fact and was rightly rejected. The second relates to the defense set up in paragraph six of the answer. That alleged in substance that the plaintiff had broken the agreement with the defendant telephone company, in part, by cutting down some poles to the use of which that company was entitled under the agreement. This was set up as a defense to the action. For the reasons set forth in the demurrer^* to this defense, we think the court did not err in sustaining said demurrer, nor in holding that it furnished no defense to the action.

There is no error.

In this opinion the other judges concurred, except CASE, J., who dissented.