San Diego Water Co. v. San Diego Flume Co.

41 P. 495, 108 Cal. 549, 1895 Cal. LEXIS 890

• Court: California Supreme Court
• Decided: August 26, 1895
• Docket: No. 19446
• Status: Published

Opinion

Haynes, C.

Defendant’s demurrer to the complaint was sustained, and, the plaintiff declining to amend, judgment of dismissal was entered, from which judgment it appeals. The only questions to be considered, therefore, are those presented by the demurrer. The complaint alleges, in substance, that both the parties to this action are corporations organized and existing under the laws of this state for the purpose of distributing, selling, and furnishing water to consumers in the county and city of San Diego; that the plaintiff is the owner of a complete distributing plant for furnishing water to the city of San Diego and its inhabitants; that the defendant is the owner of water rights, reservoirs, and a supply of water outside of said city, from which the water is conducted by flumes and pipes to the city boundary, where, during all the times mentioned in the complaint, they were and are connected with the water mains and pipes of the plaintiff; that the defendant was not, and is not, the owner of any w7ater pipes within the city, and was unable to distribute or furnish its water to the city or its inhabitants.

Under these circumstances the parties to this action executed two written agreements, both bearing date November 6, 1890, which are referred to as exhibits A and B respectively, but which constitute one contract. By the first, the flume company appoints the water company its sole' agent for the exclusive sale of its water within the corporate limits of the city as then or thereafter established, excepting the peninsula of San Diego; but all sales made by the water company “ shall be subject to the approval of the party of the first part (the flume company), and no sales shall be made without the consent of the party of the first part.” It was further provided that said appointment should continue and be in force during the continuance of the other contract of the same date, namely, twenty years.

The other contract—exhibit B—is very long, but for the purpose of disposing of the questions made upon this appeal may be greatly condensed. By this agreement, E. S. Babcock and J. W. Sefton, the former the president of the plaintiff corporation and the latter the president of the defendant, were appointed trustees, to whom were given the control of the properties of these corporations, respectively, “ so far as the same may be confined to the corporate limits of the city of San Diego,” to operate and control the same for the use and benefit of the respective parties thereto. These trustees were selected and named, one by each corporation, and each was to hold said office of trustee at the pleasure of the party naming him, who should also appoint his successor, and the compensation of each should be fixed and paid by the party appointing him; that “the use, operation, and control of these properties by the said trustees shall be for the purpose of furnishing the water supply to the city of San Diego and its inhabitants—the profits arising therefrom to be subject to the control and use of the parties hereto, as hereinafter mentioned; said parties hereto agreeing to combine their joint endeavor for the advancement of their respective interests under this trust, subject to the conditions as hereinafter mentioned.”

The water company agreed to furnish its entire plant, and the flume company agreed to deliver at the city limits a sufficient quantity of good water for the supply of the city and its inhabitants, to be used by the trustees for that exclusive purpose.

The trustees were to keep three separate accounts, one designated as the “operating account,” another as “first division account,” and the third as “second division account.” The second and third accounts were for the purpose of distributing the profits between the respective corporations. The agreement stated in a general way what should be charged to operating expenses, and, except as provided, and excluding certain specified matters, the trustees were empowered to determine what should constitute a proper charge to that account.

It was also provided that the flume company might use the water company’s system of pipes for conducting water to parties outside the city limits, the compensation therefor to be fixed by the trustees.

The complaint further alleged that the parties thereto entered upon the performance of said agreement; that the plaintiff, in all things, carried out and performed the same on its part; that plaintiff and defendant and their said trustees failed to agree as to the proper basis of division of the accounts between them, and especially as to the amount to be expended for the extension of plaintiff’s plant, and have been unable to agree upon a settlement of their said accounts; alleged plaintiff’s willingness to settle and adjust the same, but that defendant made said differences an excuse for not furnishing the water required by the contract, and had wholly failed, since May 2, 1892, to comply with said contract, though plaintiff had demanded in writing such performance; alleged that upon a true and just accounting there was due to it from defendant the sum of about fifty thousand dollars, but that if the court should find otherwise, and that it was indebted to the defendant, it thereby offered to pay the same; that by the defendant’s failure to comply with its said contract plaintiff had been damaged in the sum of one hundred thousand dollars; that acting under said contract plaintiff contracted with the city of San Diego to supply it with water for the term of twenty years at a reasonable profit, but that defendant, after furnishing water for said purpose for about a year, failed and refused to longer furnish the same, whereby plaintiff sustained special damage in the sum of one hundred thousand dollars.

The prayer is for an accounting, for damages, and for a specific performance of the contract, and for general relief.

The demurrer was upon several grounds, viz: 1. For want of facts sufficient to constitute a cause of action; 2. That two alleged causes of action for damages are joined with an alleged cause of action for specific performance, without separately stating said several causes of action; 3. For defect of parties, in that Babcock and Sefton, the trustees, are not made parties; and 4. That the complaint is uncertain in that several causes of action are joined without being separately stated and numbered.

The second and fourth grounds of demurrer go to the joinder of several causes of action without being separately stated. Different causes of action are not stated, however. Both legal and equitable relief is sought, but the right to such, relief is based upon the same facts. (Pomeroy’s Code Remedies, sec. 452.)

ISTor is the third ground of demurrer well taken. The trustees were simply the agents or instruments of the parties to the contract, and had no interest in the controversy in any legal sense.

Whether the complaint states facts sufficient to constitute a cause of action is the principal question in the case.

Respondent contends “that enough appears upon the face of the complaint to show that said contracts were void, because beyond the powers of the respective corporations and against the public policy of the state.”

The questions here presented were discussed by counsel in another action between the same parties, but that case went off upon another point, and no opinion was expressed upon them. (San Diego Water Co. v. San Diego Flume Co., 100 Cal. 43.)

It is contended that the contract in question was ultra vires, because under it the management of the affairs of the two corporations were taken from their respective boards of directors and transferred to two trustees, each of whom is a stranger to the corporation appointing the other.

This statement of the effect of the contract is too broad. When analyzed, the powers of the trustees are very limited. By that part of the contract called “ exhibit A,” the plaintiff, as a corporation, was appointed the agent of the defendant corporation for the sale of water within the city of San Diego; but all sales were subject to the approval of the defendant, and no sales could be made without its consent. The trustees were not given any power or authority over the sale of the water. They were given the general charge of operating the works of the plaintiff in distributing the water furnished by the defendant, and of keeping the accounts of receipts and expenses, with a limited power of determining what should be charged to the account of operating expenses, and, with that exception, their whole powers and duties were executory, and such as could not be discharged by any board of directors otherwise than through an agent; nor is it material whether these agents were or were not connected with either corporation. They derived their authority from the agreement, and, as they were named in the agreement, each corporation acted upon and consented to the appointment of both.

It is not contended that two corporations may not enter into contracts with each other. Their power to do so depends, however, upon the character of the contract examined in the light of their charters and of public policy.

So far as the subject matter of the contract is concerned, it relates to the sale and distribution of water, and to that extent, at least, it relates to the very purpose of the organization of each of these corporations, and is therefore presumably within their power.

It is contended, however, in support of the demurrer “ that under the power conferred by subdivisions 5 and 8 of section 353 of the Civil Code, the defendant, by its board of directors, was only authorized to appoint such agents and enter into such contracts as were essential to the transaction of its ordinary affairs; and that any attempt to make the plaintiff its exclusive agent for the sale of water was illegal and beyond the powers of the corporation.”

The statement that plaintiff is made “ the exclusive agent ” of the defendant for the sale of water is too broad; such agency is confined to the corporate limits of the city of San Diego, within which the plaintiff alone had the means of distributing water to consumers. The agency, however, while exclusive, was not unlimited or unrestricted'; but all sales of water were to be subject to the approval of the defendant, and no sales could be made without its consent. It is not suggested that the plaintiff corporation could not legally become an agent as to matters consistent with or in furtherance of the objects of its organization, nor that the defendant, within similar limitations, could not appoint an agent; but the real question involved lies back of and beyond these objections, which go only to the instrumentalities used to carry out the ultimate purpose of the parties in making the contract in question, viz., that the contract is against public policy, and therefore void.

It is urged that “both corporations were formed for the purpose, among other things, of furnishing water to the city of San Diego and its inhabitants, and are, therefore, quasi public corporations”; and that “ the agreement is contrary to public policy, for the reason that it is a combination between the parties for the purpose of creating a monopoly for the sale of water to the city of San Diego and its inhabitants.”

That the contract is consistent with the purpose of the organization of each of these corporations, viz., “to furnish the city of San Diego and its inhabitants with water,” is too clear for discussion. The question is therefore narrowed down to this: Does the agreement create a monopoly, or in any manner injuriously affect the interests of the city or its inhabitants?

Monopoly signifies the sole power of dealing in a particular thing or doing a particular thing, either generally or in a particular place. A monopoly is usually, though not necessarily, harmful or injurious to public interests, though as that term is generally used injury to the public is implied, and competition is therefore regarded as favorable to the public interest. But there is a competition which tends to monopoly by driving out all but the stronger competitor, when prices are again increased so as not only to yield a profit upon the original investment, but to recoup the losses incurred in breaking down competitors; or, where the competitors are of equal strength and tenacity of purpose, it may result in the destruction of the public service by the collapse of all of them.

At and before the date of the contract in question the plaintiff was the owner of a pumping plant, and of a system of mains and pipes, for the distribution of water to the city of San Diego and its inhabitants, and was engaged in supplying them with water. The defendant was the owner of a reservoir supplied with water, together with flumes and pipes by which the water was conveyed to the borders of the city; but it owned no distributing plant by which it could dispose of its water within the city. To enable it to do so it must either purchase plaintiff’s distributing plant, or construct a distributing system of mains and pipes of its own, or sell its water within the city by or through the plaintiff under some agreement for that purpose. It is not suggesfced that one distributing plant is not sufficient for all the wants of the .city and its inhabitants, and certainly we cannot assume that it is not. Some agreement of the character here in question which would effectuate the evident intention of the parties would appear to be to the best interest of both corporations; and if the city and its inhabitants can be properly served through one distributing system, at reasonable rates, it is obviously to its best interest that its streets should not be subjected to the burden of laying and keeping in repair an additional system of mains and pipes. So far as the parties to this contract are concerned the restraint is only partial. It is confined to the city of San Diego, or rather to that part of it which did not include the peninsula; and this we think was upon a sufficient consideration, and not an unreasonable rest-fiction as between the parties. (See Mitchell v. Reynolds, 1 Smith’s Lead. Cas., 8th ed., 417.)

Nor does it injuriously affect the city or its inhabitants. Our constitution provides that: “The use of all water now appropriated, or that may hereafter be appropriated, for sale, rental, or distribution, is hereby declared to be a public use, and subject to the regulation and control of the state, in the manner to be prescribed by law,” and it further provides that the rate of com. ' pensation to be collected for the use of water supplied to any city or town or its inhabitants shall be fixed annually by the governing body of the city and county, or city or town; and any person or corporation collecting water rates “ otherwise than as so established” shall forfeit the franchises and waterworks of such person or corporation to the city, etc. (Const., art. XIV, sec. 1.)

In Spring Valley Water Works v. San Francisco, 82 Cal. 286, 16 Am. St. Rep. 116, it was held that when the constitution provides for the fixing of rates, or compensation for the use of water, it means reasonable rates and just compensation; that the power of regulating rates is not a power of confiscation, or to take the property of the water company without just compensation.

Under the constitution, and the construction thus given its provisions, we fail to perceive how the agreement in question can create a monopoly, or in any manner increase the rate or compensation to be paid by the-; city or its inhabitants for the water supplied. Indeed,, it is evident that water can be supplied more cheaply through one distributing plant than through two; and' the governing body of the city, in whom is vested the-power to fix the water rates, is bound to take that fact, into consideration as well as all other facts which will enable it to fix “reasonable rates,” and award a “jusi, compensation.”

In Morawetz on Private Corporations, at section 1129}. it is said that the same rule which applies to traffic arrangements between competing railroads applies also to telegraph, water, and gas companies; and in relation to traffic arrangements between competing roads it is said, at section 1131: “It is certainly not true that all agreements or combinations restricting competition are illegal at common law.....Even if there were such a rule as has been claimed applicable to competition in trade, the principle and policy of the rule would not be applicable to traffic arrangements designed merely to prevent, ruinous competition and ‘ wars’ among railroad companies. The main objection which has been urged agáinst combinations restraining competition in trade,, namely, that such combinations tend to produce monopolies and cause extortion, has no application to combinations among railroad companies, for railroad companies are prohibited by law, irrespective of any combination,, to charge more than reasonable rates.....Public policy clearly does not demand that railroad companies-operating competing lines shall engage in strife causing; their financial ruin.”

With even greater force may it be said in this caser that public policy does not condemn'nor prohibit an arrangement intended to prevent a competition between these corporations which would inevitably result in the? financial ruin of one or both of them, and which could not in any event benefit the city or its inhabitants.

The contention that the agreement in question creates a partnership between these corporations is without force. It does not appear that it covers all of the business of either party, though the whole of the business of each relates to the sale of water. In a partnership each partner has authority to represent all the partners, and to bind them by his acts so far as they relate to the partnership business. Here the agency is not of that character, but is expressly limited. It simply provides a mode of determining the compensation the defendant shall receive for the water furnished by it to the plaintiff—an arrangement made necessary by the fact that meither of the parties, nor both combined, could deter•mine the rate at which the water could be sold to con-sumers, nor accurately fix the cost of distribution, nor the quantity of water required.

The judgment should be reversed, with directions to 'overrule the demurrer to the complaint.

Vanclief, 0., and Belcher, 0., concurred.

For the reasons given in the foregoing opinion the judgment appealed from is reversed, with directions to overrule the demurrer to the complaint.

GrAROUTTE, J., HARRISON, J., VAN FLEET, J.