City of Madison v. American Sanitary Engineering Co.

95 N.W. 1097, 118 Wis. 480, 1903 Wisc. LEXIS 72

• Court: Wisconsin Supreme Court
• Decided: July 3, 1903
• Status: Published

Opinion

Winslow, J.

The first serious question debated by the parties is whether the sum named in the bond in suit is a penalty, or whether it is liquidated damages. The plaintiff claims that it must be treated as liquidated damages, while the defendants maintain that it is strictly a penalty, and that although substantial breaches may have been shown the plaintiff cannot recover, because it has not shown the amount of damages resulting from such breaches.

It is well understood that the words “penal sum” in that part of a contract or bond providing for the consequences of a breach thereof are ordinarily to be construed strictly, and as meaning a penalty and nothing more, and that in such case actual damage must be shown, and it is also understood that this ordinary import may be overborne by other parts of the contract which demonstrate that the words were used as meaning “liquidated damages.” Yenner v. Hammond, 36 Wis. 277. So, also, if the sum be denominated “liquidated. damages,” this fact will not be conclusive upon the courts; but if-the sum fined be largely in excess of actual damages, or it appear that the sum was fixed to evade usury laws or to cloak oppression, the courts will construe it as a penalty. Berrinkott v. Traphagen, 39 Wis. 219; Seeman v. Biemann, 106 Wis. 365, 84 N. W. 490. It is also said that where the sum fixed is excessive, and the damages are wholly uncertain and incapable of ascertainment by any known rule, the courts will consider the sum named as liquidated damages. See cases cited above; also Walsh v. Fisher, 102 Wis. 172, 78 N. W. 437; J. G. Wagner Co. v. Cawker, 112 Wis. 532, 88 N. W. 599.

Tested by these general principles, we are convinced that the sum named in the bond in the present case must be regarded as a penalty. In the first place, it is named as a “penal sum,” which is the appropriate language for the designation of a penalty, and this fact has considerable significance when the agreement or bond is drawn and scrutinized by lawyers before acceptance, as in the present case. In the second place the bond is given to insure the performance of “all the covenants, conditions, warranties, and agreements” contained in the principal contract, which are quite numerous, and some of which are trivial in their nature. It is very manifest that, in the absence of language to that effect, the penal sum named cannot be construed as liquidated damages for the breach of one covenant or agreement and a penalty only for the breach of others. The agreement provides that the company shall save the city harmless f ram all claims or injury or damages growing out of the same, also that before final payment the company shall satisfy all claims for labor, damages, or materials, also to furnish all ferozone for the operation of the plant for a year at cost,'and that the cost of fei’ozone thereafter shall not exceed a certain amount. Suppose that any one or all of these agreements be breached, the damages suffered would be readily ascertainable, and if such damages only amounted to a few hundred or even a few thousand dollars could it be reasonably argued for a. moment that the entire penal sum of the bond must be recovered ? Plainly not, yet such must be the result if the damages are liquidated. Another fact seems very significant, if not controlling, upon the question of the intent of the parties. The agreement provides that if the plant be not completed within the time fixed (or the timers extended in writing) the company shall forfeit the sum of $25 per day as liquidated damages for such default. This demonstrates that the parties had in mind the difference between liquidated damages and penalty, and presumably used both terms advisedly. -Had the bond been given simply to insure the furnishing of a plant which would treat the city sewage with certain results, the argument that the sum named was intended as liquidated damages would have far greater force because the damages for breach of that agreement might be quite difficult of ascertainment, but given, as it was, to insure the performance of many different covenants and conditions, some of which are in their nature unimportant, and whose breach would inflict only trifling loss, we are compelled to construe the sum named in the bond as a penalty and 'nothing more.

Starting from this basis, the question presented is whether the plaintiff proved without dispute that it suffered damage to the amount of $25,000. The plaintiff proved without dispute that the sewage disposal plant erected by the engineering company not only technically, but substantially, failed to comply with the terms of its contract. Neither the company nor the city was ever able to operate the plant so that it would treat the city’s sewage and obtain the guarantied results, or even an approximation of such results. The proof was conclusive and undisputed that the plant completely failed to dispose of the sewage of the city with the results contracted for. It was admitted that the city had paid the company $25,000 during the progress of the work. If, as claimed by the respondent, there has been an entire failure to perform, and tbe city bas in legal contemplation received nothing for its money, then damages to the extent of $25,000 .have been proven; otherwise not. This is really the main question in the case, and the decisive question so far as the defendant engineering company is concerned. The. appellants contend that the evidence shows that the plant was of some value, though some of the warranties may have been breached; that the proof also shows that the engineers were satisfied with the working of the plant October 16, 1899, and that it was then incumbent on the city under the contract to take the plant and give it nine months’ trial; that the city had no right under the contract to take possession of the plant in January, 1900, and operate it for nearly a year; that such use was outside of the contract entirely; and that the city has thus received some benefit from the plant by use thereof as well as from its permanent retention.

The contention that the engineers were satisfied with the plant October 16, 1899, and that it was then the duty of the city under the contract to take the plant and operate it, requires examination and construction of the terms of the contract. The contract, after providing that the work shall be completed in strict compliance with the plans and specifications, further provides that the engineering company shall operate the works for three months after the date of their completion, at their own expense, and if at the expiration of that time the plant is working “to the satisfaction of the said city engineers” the city shall assume control and shall operate the same for nine months before accepting the same. The contract then proceeds to specify the degree of purification which the company contracts to produce when the plant is working to its full capacity.

The appellants contend that the contract does not mean that the plant should be doing the full work guarantied at the end of the three months in order to justify the engineers in pronouncing it satisfactory, but simply that tbe engineers should think it “good enough to try” at that time. In effect, the claim is that if it was mechanically satisfactory, and if the sewage was going through it in some shape, the engineers were entitled to pronounce it satisfactory for the purpose of the nine-months trial, and that they did in fact so pronounce it. We cannot agree with these contentions. The mechanical workings of the plant were of course important, but every wheel might turn with the regularity of clockwork, and every valve and other device do its work with precision, and yet the sewage might come out of the operation as impure as it went in. The city was contracting for a plant to purify its sewage, not a mechanically correct piece of machinery. The contract shows the great anxiety felt to reach this end. It is not reasonable to suppose that in view of this important and overshadowing purpose that it was intended that the engineers should simply look over the mechanical operation of the various devices, and if this was satisfactory should then proclaim that the plant was working to their satisfaction, notwithstanding the effluent might be loaded with impurities, nor do we think that the words will bear that construction. A purification plant which does not purify cannot be a satisfactory plant. While it may be that slight irregularities or defects ordinarily incident to the operation of newly installed machinery and devices, or a trifling failure to come up to the full standard of excellence required, would not prevent the engineers from deciding that it was working to their satisfaction, we cannot subscribe to the idea that they had any power to make that declaration if there was a substantial failure of the plant to do the work as guarantied. This would mean that the city was to take an imperfect plant and experiment with it, and try to remedy its defects, and itself do what the contractors had agreed to do and failed. The city authorities contracted to receive a perfect and completed plant, and to operate it for nine months, in order to satisfy themselves that it was perfect and substantially in accordance with tbeir contract. They did not agree to allow alleged experts to try an experiment upon the city with new and strange devices, and take that experiment off from tbe bands of the experts before it was successful, and themselves enter the field of experiment and attempt to remedy defects. This being our construction of the contract, it is plain that the engineers had no power under the contract to declare themselves satisfied with a plant that was not substantially purifying the sewage of the city in the manner guarantied. The analyses which were made of the effluent produced abundantly show that the plant never at any time accomplished the guarantied results in the way of purification of sewage nor anything approximating those results. The report of the engineers dated October 17, 1899, affirmatively states that the guarantied results were not then reached, and all the evidence bears out the statement. Therefore whatever may have been the opinion of the engineers as to their powers or duties it is certain that the time never arrived when the plant operated to the satisfaction of the engineers within the meaning of the contract. Thus we reach the conclusion that the city was not compelled to take control of the plant at the end of the three-months period, and lost no right by refusing so to do.

The city did, however, assume control of the plant January 12, 1900, and operated it for nearly a year, and the question of the effect of these acts is still to be considered. It appears without dispute that this action was taken because of the abandonment of the plant by the company, and with the distinct statement that it was not accepted by the city. Thus the act seems plainly to be brought within that part of the contract which distinctly provides that in case the plant shall fail to operate as agreed the city shall have the use of the plant free of cost for one year after its refusal to accept the same. Irrespective of this provision, however, it would seem extremely doubtful whether the city’s rights would be in any way affected by the fact. The situation was extraordinary. By the construction of intercepting sewers, all of the city sewage was being taken to the plant. The sewerage system of a city must of necessity operate continuously. The city, it would seem, bad no choice in- the matter.. Its sewage must move on. It must move through the plant, or it must be discharged in a raw state into the Tabarra river, and thence into Lake Monona, with the result of creating a nuisance, and subjecting the city to lawsuits, and its citizens to danger of disease and malaria.

To say that the acts of the city in thus assuming control of the works, and using them for a time, until other means of disposing of the sewage could be provided, constituted a waiver of any rights under the contract or an acceptance of the plant, is to torture acceptance and consent from acts done practically under duress. The works were on the city’s own land. They were abandoned by the contractors while still absolutely inadequate and incomplete. There may doubtless be a voluntary acceptance of an incomplete building upon one’s own land, but mere use thereof under circumstances of necessity such as are present here does not constitute acceptance or -waiver of the terms of the contract. Malbon v. Birney, 11 Wis. 107.

The question whether the evidence showed the plant to be of no value, so that there was a total failure of consideration for the sums paid by the city, is now to be considered. The evidence tended to show that the settling tanks were sufficient in size and performed their work fairly well, but that the biter beds were entirely ineffective and insufficient in size, and continually became clogged, whether operated by the company or by the city, and they were bnally abandoned as practically useless. From these facts the argument is that there was something of value in the tanks, at least, which might and ought to have been utilized by the city in reduction of damages, and thus that it cannot be said that the consideration has wholly failed.

Were this an action by the engineering company against the city for the contract price, there could be no recovering notwithstanding the fact that the tanks might be in accordance with the contract and of some value, for the reason that the contract is entire, and there'has not been complete performance. This rule, however, is not necessarily applicable to this case. We clo not understand that money paid to a contractor during the progress of the work can be recovered back merely because the contractor fails to complete the entire work. In order to recover such money bade, there must be either an agreement to that effect or an entire failure of the consideration.

The rule is familiar that where personal property is sold under a warranty which is breached, and the property is retained by the vendee, and is of value for any purpose, that value may still be recovered, and if a comparatively small outlay will remedy the defect the vendee’s duty is required to make that outlay, and the expense of making such remedy will be the proper measure of the vendee’s damages. J. I. Case P. Works v. Niles & S. Co. 107 Wis. 9, 82 N. W. 568. The reason of this rule is evidently that the vendee has the right and power to return the artide if he chooses, and that his failure to exercise that right constitutes an election by the vendee to appropriate to his own use whatever real value there is in it.

Is this rule or anything analogous to it appropriate in the present case ? We think not. In case of permanent erections on real estate like the present, there can be no return of the property, especially where the vendor abandons it, and refuses to have anything more to do with it, on the claim that it fulfills the contract. So the fundamental reason of the rule is lacking. But there are other most persuasive considerations. The city contracted for a complete sewage disposal plant, not for precipitation tanks or for filter beds separately. In order to discharge its duty to its citizens, it must have a complete plant. It made a contract with alleged experts to obtain suck a plant, and the plant was to consist of patented devices and operate by patented processes, of which the engineering company claimed that it had exclusive control. It was constructed, but failed to operate. Suppose some part of the machinery was perfect and adapted to the purpose, or was of some value as scrap iron, was the city compelled to spend perhaps large sums of money in endeavoring to obtain other appliances or devise other means to supplement the few perfect parts ? While the continual stream of sewage was pouring through its main intercepting sewer at the rate of 600,000 gallons ór more a day, demanding disposal, must the city, in order to preserve its rights, enter the unknown field of experiment, and try to patch up a sewage disposal plant, and thereby run the risk not only of complete failure at the endj but also of infringement of patents, and consequent litigation, and of spreading sickness and disease among its citizens ? These questions seem to us to admit of but one answer, and that in the negative, and we have no hesitation in so holding. This answer necessarily results in the conclusion that the plant in question was proved to be worthless when it was proven beyond contradiction that it did not dispose of sewage with the results guarantied or approximately those results. The city was entitled to treat it as a complete failure of consideration, notwithstanding some parts performed their work satisfactorily. Nothing could be done with it but to abandon it entirely, as was done. These considerations practically dispose of the case so far as the engineering company is concerned. It is true that a claim was made that the evidence of the various analyses should be stricken out, because it appeared that the effluent was taken at times when sewage was being wasted, and was not all passing through the filter beds. We find, However, that the samples of effluent were taken from the proper place at times when the plant was in regular operation, and the sewage was passing through in regular course, and thus the samples fairly showed the results reached by the plant.

There are several additional contentions raised on behalf of the surety company which require treatment.

1. It is said that the contract with the engineering company was void because the city charter requires that all work for the city shall be let to the lowest bidder, or, in the absence of competition, that a two-thirds vote of the council shall be necessary to authorize the work, and that it was proven in this case that neither course was adopted. Of the same nature is the objection that the contract was for the use of patented processes and articles, and that the city cannot contract for such use where the charter requires competition, and there is no definite price for the use of the patent for which it is offered to all. Ricketson v. Milwaukee, 105 Wis. 591, 81 N. W. 864.

Conceding that the facts are as claimed, there is a very plain misapprehension here of the application of the principles relied on. Taxpayers whose money is about to' be spent, or property owners whose land is about to be charged, may challenge the legality of municipal acts and contracts calling for such expenditures on the ground that the proper legal steps have not been taken, but persons who enter into a contract with the city stand in a different position. Such a person cannot even make the defense of ultra vires or total lack of power on the part of the corporation to make the contract. Security Nat. Bank v. St. Croix Power Co. 117 Wis. 211, 94 N. W. 74. If the defense of ultra vires cannot be made, it is very evident that the lesser claim of failure to execute a given power in the statutory way must also be ineffective. By the express terms of the bond the surety company has made the contract a part of the bond. They have contracted with the city, and cannot now be beard to say that the city bad no power to enter into the contract or did not make the contract in the required manner.

2. It is said that the surety company was released by the payments of money to the engineering company on the contract under the certificate of but one engineer when the certificate of both engineers was required by the contract. In Stephens v. Elver, 101 Wis. 392, 77 N. W. 737, and Cowdery v. Hahn, 105 Wis. 455, 81 N. W. 882, it was beld that the premature payment to contractors of the contract price of a building will be considered as materially altering the contract so as to release sureties, providing such premature payment be substantial, and not a mere trifling deviation from the contract. Tbe present case, however, is not a case of premature payment in the sense that the money bad not been earned, but simply a case where the payment was made without the full certificate required. It has been beld that such a payment will not release the surety “wben it is manifest that the provision was inserted in the contract for the benefit of the owner alone, and that the.payments so made were not greater in amount than they should have been if the certificate bad been exacted.” Smith v. Molleson, 148 N. Y. 241, 42 N. E. 669. These words were cited with approval by this court in Grafton v. Hinkley, 111 Wis. 46, 86 N. W. 859. All the elements above required were present in this case, and lienee the payments did not materially alter the contract nor affect the rights of the surety.

3. It is contended that the contract was materially altered by the second extension of time granted by the city, because the contract only provides for one extension of time. The contract says that the time for completion “may be extended only by the previous written consent of the mayor and city engineer for good cause shown.” This does not say that there can be but one extension either in direct terms or by implication. Sucb a construction is not warranted by tbe words, and is, in our judgment, unreasonably narrow.

4. It appears that the power for the operation of the machinery of the plant was to be furnished by the city. "When the contract was made the expectation was that this power should be water power obtained from a dam owned by the city at the bead of the Tabarra river, but the contract contains no stipulation to that effect. The only clause of the contract, even distantly referring to the question of power, is the clause that the cost of operating the plant “as the city now proposes to operate its plant shall not exceed” the sum of $3,600. It seems that the city authorities concluded that power could be furnished cheaper by gasoline engines than by utilizing the water power; hence they installed a gasoline engine for the purpose, and thereby produced the required power. There is no claim that it was inefficient or failed in any respect to furnish adequate power. The terms of the contract between the parties were plainly not affected in the least by the change of power.

This disposes of all of the separate contentions of the surety company which we find it necessary to discuss, and relieves us from the consideration of the effect of the indemnity bond which the surety company took from the engineering company.

By the Court. — Judgment affirmed.

Siebecker, J., took no part.