1. Where a municipality, with express power from the
legislature, enters into a contract whereby, in consideration of
the construction, maintenance, and operation of a water system by a
water company, it grants the company the exclusive right to
maintain and operate for a specified period and agrees to extend
the term when it expires or to purchase the entire plant at a price
to be determined by capitalizing the net earnings of the year
preceding the purchase, the rights acquired by the company are
rights of property which are not subject, under the Constitution,
to be impaired by subsequent legislation attempting to substitute
for the company's franchises an "indeterminate permit" to continue
in force until the municipality shall elect to purchase upon terms
to be fixed by a state commission. P.
263 U. S.
135.
Page 263 U. S. 126
2. A power to alter or repeal incorporation acts, reserved by
state constitution, will not be held applicable to property rights
of a corporation acquired by contract with a city when not clearly
so construed by state decision antedating the contract.
Id.
174 Wis. 257; 176
id. 626, reversed.
Error to a judgment of the Supreme Court of Wisconsin for the
city in a suit by the Water Company to restrain the city from
condemning the company's plant, and praying specific performance of
the city's contract to purchase it or extend the company's
franchise.
MR. JUSTICE McREYNOLDS delivered the opinion of the Court.
Since 1848 the Constitution of Wisconsin has contained the
following clause:
"Article XI, § 1: Corporations without banking powers or
privileges may be formed under general laws, but shall not be
created by special act, except for municipal purposes and in cases
where, in the judgment of the legislature, the objects of the
corporation cannot be attained under general laws. All general laws
or special acts enacted under the provisions of this section may be
altered or repealed by the legislature at any time after their
passage."
Chapter 359, Private and Local Laws of Wisconsin of 1866,
incorporated plaintiff in error's predecessor, the Superior Water
Works Company, and empowered it to make
"any agreements, contracts, grants, and leases for the sale,
use, and distribution of water as may be agreed upon between said
company and any person or persons, associations and
Page 263 U. S. 127
corporations, and with the Town of Superior, or neighboring
towns, or the said company itself may take and use the surplus
water for manufacturing or other purposes, which said agreements,
contracts, grants, and leases shall be valid and effectual in
law."
On October 15, 1887, in order to provide fire protection and
secure pure and wholesome water and in consideration of benefits to
accrue therefrom, the Village of Superior, a municipal corporation,
by ordinance, granted to Superior Water Works Company, its
successors and assigns, for a period of 30 years, the privilege of
establishing, maintaining, and operating a complete system of
waterworks. The ordinance specified the duties and obligations of
the parties, and, among other things, provided that the village
would abstain for 30 years from granting the right to lay water
pipes in its streets to any other party, and that the main source
of water should be Superior Bay; but if the village, at its
expense, should secure an indefeasible right to lay pipes across
Minnesota Point in the state of Minnesota, etc., the company would
take water from Lake Superior, and further that,
"at the expiration of the said thirty years, should the said
village refuse to grant to the said Superior Waterworks Company,
its successors or assigns, the right to continue and maintain said
system of water works for another term of thirty years upon the
said terms and conditions as may exist between the said village or
city and the said Superior Waterworks Company at the expiration of
the first thirty years in and upon the public grounds and streets
of the said village, and to supply the said village and the
inhabitants thereof with water on reasonable terms, then and in
such case the village shall purchase from said Superior Waterworks
Company, its successors or assigns, said system of water works and
the property connected therewith at a fair valuation as provided
for in § XIII. "
Page 263 U. S. 128
Section XIII provided for arbitrators to determine the actual
value of the plant, exclusive of privileges granted by the village,
not to exceed what it would cost to construct the same, etc.
Section XIV:
"Within thirty days after the passage of this ordinance, said
Superior Waterworks Company may file with the village clerk its
acceptance thereof, duly acknowledged before some authorized
officer, and, from and after the filing of said acceptance, this
ordinance shall have the effect of and be a contract between the
Village of Superior and the Superior Waterworks Company, and shall
be the measure of the rights and liabilities of said village as
well as of said company, and, in case such acceptance is not so
made and filed within thirty days after the passage of this
ordinance, the village board shall have the right to repeal the
same."
The corporation accepted the ordinance, constructed the plant,
and many extensions, spent large sums in connection therewith, and
long continued to operate it.
In March, 1889, the territory constituting the Village of
Superior was incorporated as the City of Superior. The charter
declared that
"all franchises heretofore granted, or contracts entered into,
by the Village of Superior shall continue and remain in force in
accordance with the terms thereof as if the same had been granted
or entered into by said City of Superior."
C. 152, p. 432, Laws 1889. It further empowered the city
"to provide for the purchase, construction, maintenance, and
operation of waterworks for the supply of water to the inhabitants
of the city, and to supply such city with water for fire protection
and other purposes, and to secure the erection of waterworks, said
city may by contract or ordinance, grant to any person, persons,
company, or corporation the full right and privilege to build and
own such waterworks, and to maintain, operate, and regulate the
same, and, in doing so, to use the streets, alleys and bridges of
the city in laying and maintaining the necessary pipelines and
hydrants for such term of years and on such conditions as may be
prescribed
Page 263 U. S. 129
by such ordinance or contract, and may also, by contract or
ordinance, provide for supplying from such waterworks the city with
water for fire protection and for other purposes, and also the
inhabitants thereof with water for such term of years, for such
price, in such manner, and subject to such limitations as may be
fixed by said contract or ordinance."
October 1, 1889, with the express assent of the Superior
Waterworks Company and in consideration of the waiver of certain
rights by the latter, the City of Superior amended § XIII
Ordinance of October 15, 1887, so as to provide that, if purchased,
the price to be paid for the waterworks plant should be ascertained
by capitalizing the net earnings of the preceding year at 5
percentum. [
Footnote 1]
Sections II and III of this ordinance follow.
Page 263 U. S. 130
"Section II. This ordinance is passed upon the consideration to
the City of Superior that the said city is hereby released and
relieved from the duty, cost, and expense of procuring for said
Superior Waterworks Company the valid and indefeasible right to
extend and lay its pipes across the bay of Superior and across
Minnesota Point to the shores of and into Lake Superior, as
provided in § II of said ordinance number one of the General
Ordinances of the Village of Superior, and that all that part of
said section No. II, commencing with the word 'provided' in the
twentieth line thereof, down to and including the word 'completed'
in the sixty-second line thereof,
Page 263 U. S. 131
is hereby repealed. And this said ordinance is passed upon the
further consideration to the City of Superior that, by the
acceptance hereof, the said Superior Waterworks Company binds
itself, its successors and assigns, to obtain at its own expense an
adequate supply of good and wholesome water for domestic and public
purposes from said Lake Superior and to furnish the same to the
inhabitants of said city and to said city as provided in said
ordinance number one as hereby amended within two years from the
acceptance of this ordinance by said Superior Waterworks
Company."
"Section III. This ordinance is passed with the consent of the
Superior Waterworks Company and upon filing a written acceptance by
it with the city clerk of the said City of Superior, the said
ordinance, with all other ordinances of said city or the Village of
Superior granting to the said Superior Waterworks Company any
rights or franchises shall be and become, and is hereby made, a
binding contract as so amended and modified."
In compliance with the foregoing ordinance and agreement, the
supply lines of the water system were extended across Minnesota
Point, in the state of Minnesota, and into Lake Superior. The
company also acquired a parcel of land on that point, and there
installed wells, machinery and equipment which became an essential
part of the system.
On November 1, 1889, the Superior Waterworks Company sold and
transferred its plant, with all appurtenant rights and privileges,
to plaintiff in error, the Superior Water, Light & Power
Company. Three ordinances amended the grant of 1887 (in ways not
now necessary to detail) in 1889, 1896, and 1899. Two of these
provided for and received express acceptance by plaintiff in
error.
In 1907, the Wisconsin Legislature enacted the Public Utility
Law (c. 499, Laws 1907; Sections 1797m-1 to 1797m-109, Wis.Stats.),
which created the Railroad Commission,
Page 263 U. S. 132
a regulatory body, and authorized public utilities to surrender
existing franchises and accept in lieu thereof "indeterminate
permits." Chapter 596, Laws 1911, repealed the optional feature of
the statute of 1907 and directed that every license, permit, or
franchise granted by the state or by any town, village, or city to
any corporation authorizing the latter to operate a plant for
furnishing heat, light, water or power, etc.
"is so altered and amended as to constitute and to be an
'indeterminate permit' within the terms and meaning of §§
1797m-1 to 1797m-108, inclusive of the statutes, . . . and subject
to all the terms, provisions, conditions, and limitations of said
§§ 1797m-1 to 1797m-108, inclusive, and shall have the
same force and effect as a license, permit, or franchise granted
after July 11, 1907, to any public utility embraced in and subject
to the provisions of said §§ 1797m-1 to 1797m-108,
inclusive, except as provided by § 1797m-80."
One of the provisions to which reference is made gives the
municipality the right to purchase upon terms to be fixed by the
state Railroad Commission.
The statute (§ 1797m-1) declares the term
"'indeterminate permit' . . . shall mean and embrace every
grant, directly or indirectly, from the state, to any corporation,
company, individual, association of individuals, their lessees,
trustees, or receivers appointed by any court whatsoever, of power,
right or privilege to own, operate, manage or control any plant or
equipment or any part of a plant or equipment within this state for
the production, transmission, delivery, or furnishing of heat,
light, water, or power, either directly or indirectly, to or for
the public, which shall continue in force until such time as the
municipality shall exercise its option to purchase as provided in
§§ 1797m-1 to 1797m-109, inclusive, or until it shall be
otherwise terminated according to law."
Plaintiff in error has not voluntarily submitted to the Public
Utility Law.
Page 263 U. S. 133
On October 15, 1917, the prescribed 30-year limitation expired,
and plaintiff in error requested the City of Superior either to
grant further right to maintain the system of water works or to
purchase the same as provided by the ordinance of 1887 as amended
in 1889. The city failed to make the grant, denied its obligation
to purchase, and took steps under provisions of §§
1797m-1 to 1797m-109, Wisconsin Statutes, to condemn the entire
plant. Thereupon plaintiff in error instituted the present cause
against the city, its mayor, and councilmen. The complaint sets out
the foregoing facts, alleges repudiation of the obligation to
purchase and the steps taken for condemnation, and asks a decree
requiring the city specifically to perform its agreement, for an
injunction restraining further efforts to condemn and for general
relief.
The trial court overruled a general demurrer, but this action
was reversed by the Supreme Court, 174 Wis. 257, which held that
the Act of 1907 (c. 499), as amended in 1911, was permissible under
the reserved power to alter, amend or repeal acts providing for
formation or creation of corporations, and that it had substituted
an "indeterminate permit" for the rights granted to the plaintiff
in error by the municipality.
"A new franchise was therefore granted to the defendant in lieu
of its original franchise by the enactment of c. 596, Laws 1911.
Thereafter, its franchise was that of the indeterminate permit, and
it was subject to the provisions of the Public Utility Law. This
also was its franchise on October 1, 1917, when it is claimed its
original franchise expired. The Public Utility Law had superseded
everything of a franchise nature embodied in the original ordinance
granted to it by the Village of Superior and the subsequent and
succeeding amendments thereto."
And also that it was immaterial whether or not a contract
between the city and the water company resulted from the clause of
the original
Page 263 U. S. 134
ordinance providing for extension of the grant or purchase after
thirty years, because, "even though it be considered as a contract,
we think it gives rise to no obligation on the part of the city to
purchase the plant according to its terms."
The court further said:
"The manifest purpose of the provision was to assure the water
company one of two things: either a renewal of its franchise for
another period of thirty years or a sale of its property in case
such franchise be not renewed. The franchise called for was one
having 'the same terms and conditions as may exist between the said
village or city and the said Superior Waterworks Company at the
expiration of the first thirty years.' The franchise which it had
at that date was the indeterminate permit. That was either its
franchise or it had none. That was a continuing franchise. It was
indeterminate as to time. It was not limited to thirty years or any
other period. Consequently there was no occasion for the city to
'grant to the said Superior Waterworks Company, its successors or
assigns, the right to continue and maintain said system of
waterworks.' It already had that right. There was therefore no
breach of this part of the alleged contract on the part of the
city. Until there was a breach of this provision of the contract,
no obligation on the part of the city to purchase according to the
terms of the contract arose. It seems plain that the position of
the water company is not helped by construing this provision of the
ordinance as a contract made by the city in its proprietary
capacity. The conditions precedent to an obligation on the part of
the city to buy under the terms of the contract have not come to
pass, and the city has in no manner become obligated to carry out
the feature of the contract which is sought to be enforced in this
action."
Considering the opinions of this Court, it seems clear enough
that a valid contract resulted from the dealings
Page 263 U. S. 135
between the City of Superior and plaintiff in error whereby each
became obligated to do certain specified things. The company agreed
to construct, maintain, and operate an adequate waterworks system.
The city obligated itself to recognize the company's exclusive
right to maintain and operate the system for a definite period, 30
years, and also to purchase the entire plant at a price fixed in
the manner specified if at the conclusion of such period it should
refuse to grant an extension. The rights so acquired by plaintiff
in error were property.
Pearsall v. Great Northern Ry.,
161 U. S. 646;
Detroit v. Detroit Citizens' St. Ry. Co., 184 U.
S. 368,
184 U. S. 384;
Cleveland v. Cleveland City Ry. Co., 194 U.
S. 517,
194 U. S. 536;
Vicksburg v. Vicksburg Waterworks Co., 206 U.
S. 496;
Louisville v. Cumberland Telephone Co.,
224 U. S. 649,
224 U. S. 664;
Grand Trunk Western Ry. Co. v. South Bend, 227 U.
S. 544,
227 U. S. 556;
Owensboro v. Cumberland Telephone Co., 230 U. S.
58,
230 U. S. 73;
Old Colony Trust Co. v. Omaha, 230 U.
S. 100,
230 U. S. 117;
Detroit United Ry. v. Michigan, 242 U.
S. 238,
242 U. S. 253;
Northern Ohio Trac. Co. v. Ohio, 245 U.
S. 574,
245 U. S. 585;
Columbus Ry. & Power Co. v. Columbus, 249 U.
S. 399,
249 U. S.
407.
Concerning the relation between the parties, the court below
declared:
"the franchise of the water company, which enables it to pursue
its business of supplying water to the City of Superior and its
inhabitants, is a contract between it and the state."
But it held the legislature had power to change this contract
under the reservation permitting alterations, in § 1, Art. XI,
of the state constitution, and that the Act of 1911 did modify the
contract by substituting for rights thereby secured an
"indeterminate permit."
Through its contract with the city, the water company acquired
valuable property rights. They were not directly created by any
statute enacted under § 1, Art. XI, of the state constitution,
but were the outcome of agreement
Page 263 U. S. 136
with a fully empowered corporation. They did not arise from the
mere exercise of a governmental function legislative in character,
but from contract expressly authorized by the legislature. None of
the decisions of the Supreme Court of Wisconsin prior to 1889 to
which we have been referred [
Footnote 2] construes the reservation in the state
constitution as having the extraordinary scope accorded to it
below, and certainly, in the absence of some very clear and
definite pronouncement, we cannot accept the view that it then had
the meaning now attributed to it.
As late as 1909, in
State ex rel. Northern Pacific Ry. Co.
v. Railroad Commission, 140 Wis. 145, 157, that court
announced:
"The right to alter or repeal existing charters is not without
limitation when the question of vested property rights under the
charter is involved. The power is one of regulation and control,
and does not authorize interference with property rights vested
under the power granted. . . . The reserve power stops short of the
power to divest vested property rights, and is embodied in the
state constitution for the purpose of enabling the state to retain
control over corporations, and must be construed in connection with
the other provision of the Constitution to the effect that private
property shall not be taken for public use without compensation. It
follows, therefore,"
"that where, under power in a charter, rights have been acquired
and become vested, no amendment or alteration of the charter can
take away the property or rights which have become vested under a
legitimate exercise of the
Page 263 U. S. 137
powers granted."
"
Comm'n v. Essex Co., 13 Gray, 239."
See also Water Power Cases, 148 Wis. 124, 136.
The integrity of contracts -- matter of high public concern --
is guaranteed against action like that here disclosed by § 10,
Art. I, of the federal Constitution, "No state shall . . . pass any
. . . law impairing the obligation of contracts." It was beyond the
competency of the legislature to substitute an "indeterminate
permit" for rights acquired under a very clear contract.
Vicksburg v. Vicksburg Waterworks Co., 206 U.
S. 496;
Detroit United Ry. v. Michigan,
242 U. S. 238,
242 U. S. 253.
The erroneous conclusion concerning this federal question led to
the decree below. Accordingly, it must be set aside, and the cause
remanded for further proceedings not inconsistent with this
opinion.
Reversed.
[
Footnote 1]
"Section. I. Ordinance No. 5 of the General Ordinances of the
Village (now City) of Superior, entitled 'A ordinance amending and
reenacting § XIII of an ordinance authorizing the Superior
Waterworks Company, its successors or assigns, to construct,
operate and maintain a system of water works in the Village of
Superior, Douglas County, Wisconsin, and contracting with said
company for a supply of water for the use of said village and the
inhabitants thereof, and defining their rights, privileges and
powers,' is hereby amended by striking out of said ordinance all of
said ordinance after the words 'section XIII,' where the said words
'section XIII' occur, in the thirteenth line thereof and inserting
in lieu thereof the following:"
" This ordinance is passed upon the express condition that, at
the expiration of twenty years after the date of the passage of
this ordinance and of every fifth year thereafter, the City of
Superior may at its option, purchase from the said Superior
Waterworks Company, its successors or assigns, the entire plant of
the said Superior Waterworks Company, its successors or assigns,
and including all franchises theretofore granted to said Superior
Waterworks Company, its successors or assigns, by the Village or
City of Superior by paying therefor, in cash, an amount of money,
of which the net earnings of said Superior Waterworks Company, for
the next year preceding the purchase thereof by said city shall be
five percentum. Such purchase shall be made in the following
manner, to-wit: the common council, at its first regular meeting
after the expiration of said twenty years, or of any fifth year
thereafter, may pass an ordinance declaring its intention to
purchase said plant and franchises appropriating the necessary
funds therefor and directing the city clerk of said city to serve
upon said Superior Waterworks Company, its successors or assigns, a
copy of said ordinance, together with a notice that, at the
expiration of one year from the date of the service of said notice,
the said city will pay to said Superior Waterworks Company, its
successors, or assigns, the price of said plant and franchises,
determined as by this ordinance provided, and will assume
possession of said plant and franchises. Commencing with the day
following the date of the service of such notice, the said Superior
Waterworks Company, its successors or assigns, shall keep an
accurate account of all receipts and disbursements of said company,
in a set of books kept expressly for that purpose and for no other,
which said books shall, at the expiration of each quarter-year
thereafter, be open to the inspection of the city comptroller of
said city. At the expiration of one year from the date of the
service of the notice above provided for, the said Superior
Waterworks Company, its successors or assigns, shall submit to the
comptroller of said city, the said books of account, and the price
to be paid for said plant and franchises shall be determined
therefrom, as hereinbefore provided, and, upon the payment in full
of said price, the said Superior Waterworks Company, its successors
or assigns, shall surrender to said city its plant and franchises
complete. The words 'net earnings,' as used in this ordinance,
shall mean the gross earnings of said waterworks less the actual
operating expenses thereof."
[
Footnote 2]
Madison, Watertown & Milwaukee Plankroad Co. v.
Reynolds, 3 Wis. *287;
Pratt v. Brown, 3 Wis. *603;
Nazro v. Merchants' Mutual Insurance Co., 14 Wis. *295;
Kenosha, Rockford & Rock Island R. Co. v. March, 17
Wis. *13;
Whiting v. Sheboygan & Fond du Lac R. Co.,
25 Wis. 167;
Wisconsin v. Milwaukee Gaslight Co., 29 Wis.
454;
West Wisconsin R. Co. v. Board of Supervisors of
Trempealeau County, 35 Wis. 257;
Attorney General v.
Railroad Co., 35 Wis. 425.