Railroad v. Railroad , 66 N.H. 100 ( 1889 )

This proceeding is a bill in equity for a discovery and an accounting of the defendants' dealings with the plaintiffs' railroad properties from December 1, 1856, to July 1, 1887, under various contracts and leases; for the delivery of certain books, records, and papers alleged to belong to the plaintiffs; for the return to them of rolling stock and equipments of the appraised value of $147,592, which went into the defendants' possession at the time they took the plaintiffs' road, and which they still retain; and for the determination and adjustment of the respective rights of the parties in and to certain lands, depots, and tracks, situate in Manchester.

In bar of the plaintiffs' right to a recovery the defendants file three special pleas, and as to the matters in the bill not covered by the pleas, they demur. The plaintiffs demur to the pleas.

The first plea avers that the contracts between the parties, under which the defendants went into and retained the possession and management of the plaintiffs' road for more than thirty years, "were wholly beyond the corporate power" of either party to make or to ratify, and that therefore the defendants should be hence dismissed with their costs and charges. In other words, not denying that they have received the full benefit of the performance of the contract by the plaintiffs, the defendants say that they should be permitted to retain the benefit and property so acquired, and be dismissed with costs, because they were not empowered by their charter to perform what they promised the plaintiffs in return.

The demurrer to this plea is sustained. The defence set up is so repugnant to the natural sense of justice, so contrary to good faith and fair dealing, and so opposed to the weight of modern authority, that it need only be said that in equity, at least, neither party to a transaction ultra vires simply is heard to allege its invalidity while retaining its fruits. However the contractual power of the defendants may be limited under their charter, there is no limitation of their power to make restitution to the other party whose money or property they have obtained through an unauthorized contract; nor, as a corporation, are they exempted from the common obligation to do justice which binds individuals, for this duty rests upon all persons alike, whether natural or artificial.

The second plea avers, and the demurrer admits, that at the time of the making of the contracts between the parties, and of the dealings thereunder, their respective roads "were rival and competing railroads, by the competition of which the prices of transportation thereon were, and but for said supposed contracts, dealings, transactions, operations, and business would have continued to be, materially reduced, and said alleged contracts, dealings, transactions, and business were made and had for the purpose of destroying and preventing such competition, and did destroy and prevent it."

It will be noticed that there is no averment in the plea that the purpose of the contracts was to raise the prices of transportation above a reasonable standard, or that they did have this effect, or that the public were prejudiced by their operation in any manner; and the naked question presented then is, whether all contracts between rival railway corporations which prevent competition are necessarily contrary to public policy, and therefore mala prohibita and illegal in themselves.

To state this question is to answer it in the negative, because it is obvious that the answer depends upon circumstances. While, without doubt, contracts which have a direct tendency to prevent a healthy competition are detrimental to the public and consequently against public policy, it is equally free from doubt that when such contracts prevent an unhealthy competition and yet furnish the public with adequate facilities at fixed and reasonable rates, they are beneficial and in accord with sound principles of public policy. For the lessons of experience, as well as the deductions of reason, amply demonstrate that the public interest is not subserved by competition which reduces the rate of transportation below the standard of fair compensation; and the theory which formerly obtained, that the public is benefited by unrestricted competition between railroads, has been so emphatically disproved by the results which have generally followed its adoption in practice, that the hope of any permanent relief from excessive rates through the competition of a parallel or rival road may, as a rule, be justly characterized as illusory and fallacious.

Upon authority, also, arrangements and contracts between competing railroads, by which unrestrained competition is prevented, do not contravene public policy. Hare v. Railway Co., 2 Johns. H. 80, is directly in point. In that case a bill in chancery had been brought by a stockholder in the defendant company to annul an agreement between two railway companies to divide the profits of the traffic in fixed proportions; and it was admitted there, as it is here, that the purpose of the agreement was to prevent competition. In dismissing the bill, Vice-Chancellor Wood said, p. 103, — "With regard to the argument against the validity of the agreement, I may clear the ground of one objection by saying that I see nothing in the alleged injury to the public arising from the prevention of competition. . . . It is a mistaken notion that the public is benefited by pitting two railway companies against each other till one is ruined, the result being at last to raise the fares to the highest possible standard." So, also, in 1 Red. R. R., s. 146, 2, it is said, — "There is no principle of public policy which renders void a traffic arrangement between two lines of railway for the purpose of avoiding competition." And Mr. Morawetz says, in his admirable treatise on corporations, — "Public policy clearly does not demand that railroad companies operating competing lines shall engage in strife causing their financial ruin; and, so far as agreements among companies are designed to effect this result, their purpose is not injurious to the public, or illegal. Moreover, such agreements are positively beneficial to the public, so far as they prevent the fluctuation of rates and unjust discriminations among shippers, which invariably attend the unrestricted competition of rival companies. It is therefore impossible to support the proposition that all agreements among railroad companies which restrict competition are condemned by law. Some such agreements may be contrary to public policy, and unlawful; but if an agreement of this character is a reasonable business arrangement to protect the shareholders and creditors of the companies from loss, and does not cause unreasonably high charges or violate any duty which the companies owe to the public, it should be sustained and enforced by the courts." Mor. Corp. (2d ed.) s. 1131. In the same section, in speaking of contracts in restraint of trade (to which many of the authorities and much of the argument for the defendants relate), he says, — "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 against 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 to charge more than reasonable rates. It should be observed, also, that competition among railroad companies has not the same safeguards as competition in trade. Persons will ordinarily do business only when they think they see a fair chance of profit; and if press of competition renders a particular trade unprofitable, those engaged in that trade will suspend or reduce their operations, and apply their capital and labor to other uses, until a reasonable margin of profit has been reached. But the capital invested in the construction of a railroad cannot be withdrawn when competition renders the operation of the road unprofitable. A railroad is of no use except for railroad purposes, and if the operation of the road were stopped, the capital invested in its construction would be wholly lost. Hence it is for the interest of a railroad company to operate its road, though the earnings are barely sufficient to pay the operating expenses. The ownership of the road may pass from the shareholders to the bondholders, and be of no benefit to the latter but the struggle for traffic will continue so long as the means of paying operating expenses can be raised. Unrestricted competition will thus render the competitive traffic wholly unremunerative, and will cause the ultimate bankruptcy of the companie unless the portion of their traffic which is not the subject of competition, can be made to bear the entire burden of the interest and fixed charges."

The application of these principles to the plea under consideration is patent and decisive. The geographical location and relative resources of the two roads were such as to render it obvious that the plaintiffs could not reasonably hope successfully to compete with their more powerful rival. The alternatives presented, it may be safely assumed, were combination or ruinous competition. They accepted the former; and as the combination did not, so far as appears by the pleadings, raise the rate of transportation above the standard of fair compensation, or violate any duty that is owing to the public from roads which are non-competing, there is nothing averred in the plea which bars the right of the plaintiff's to an accounting with the defendants.

Numerous cases have been cited in behalf of the defendants in support of their proposition that the combination between the parties must be regarded as void at common law because against public policy. It is quite impossible, without extending this opinion beyond all reasonable limits, to go through and comment upon these cases in detail, as has been done in the last brief for the plaintiffs; but it is sufficient to say, in general terms, as is there said, that they are cases of contracts in restraint of mercantile business; or cases of contracts which attempt to derogate from the right of eminent domain inherent in the state; or cases where contracts between railroad companies were held contrary to public policy because one of the parties attempted to bind itself not to perform duties incident to the legal character of common carriers or public servants; or cases where contracts between railroad companies were held contrary to public policy because one of the parties agreed not to build, or to cease to operate, a road which they were chartered to build or operate; or cases where contracts between railroad companies have been held illegal merely on the ground that they were ultra vires: in short, they do not establish a rule which fairly includes a case like the one at bar. The demurrer to the second plea is sustained.

The averment in the third plea is, "that during all the time from said December 1, 1856, until July 1, 1887, the roads of the plaintiffs and defendants each constituted a part of the different lines of route for public travel and transportation between cities and towns within and without this state, forming rival and competing lines of route between such points."

This plea is understood to be based upon the statute of July 5, 1867, entitled "An act to prevent railroad monopolies," and providing, among other things, that "two or more railroad corporations chartered by the legislature of this state, constituting the whole or parts of different lines of route for public travel and transportation between any two cities or towns, or between any city and town, either within or without this state, forming rival and competing lines of route between such points, shall not he allowed to consolidate such roads or lines; and neither of said lines, or any road or roads composing the same, shall be run or operated by any such rival and competing line, or any road or roads, portion thereof, under any business contract, lease, or other arrangement, but each and every railroad corporation so situated shall be run, managed, and operated separately by its own officers and agents, and be dependent for its support on its own earnings from its local and through business in connection with other roads, and the facilities and accommodations it shall afford the public for travel and transportation under fair and open competition, unless such lease, contract, or arrangement be first authorized by the legislature, and approved by the governor and council."

When this act was passed the contract in force between the parties, and under which the roads were then being operated, was that of December 27, 1860; and the claim of the defendants is, that whatever may be said with reference to the prior contracts and to the operation of the roads under them up to the time of the passage of the act of 1867, that act rendered the further execution of the contract of December 27 illegal, and prohibited it.

This point is well taken. Whatever may now be the sentiment of New Hampshire in respect to the operation of railroads since the results attendant upon consolidation have been sufficiently demonstrated to remove any intelligent fear of extortion in rates or deterioration of service, there can be no doubt that in 1867 its sentiment was in favor of independent and competing lines, and that the purpose of the legislature was to make the act in question an effective instrumentality against the consolidation of competing roads through contracts or arrangements between them, by means of which competition is removed. Currier v. Railroad, 48 N.H. 321; Fisher v. Railroad, 50 N.H. 208. The act, of course, had no ex post facto application, and was, therefore, of no effect as to anything which had already been done by the parties under the contract of December 27, but it did prohibit them from further operating the roads under that contract (unreported opinion of Bellows, J., in Currier v. Railroad, Dec. Law term, 1871), and so far rendered it void as to deprive either party of the right of recovering expressly for its subsequent breach. Nevertheless, we do not think the defendants are entitled to retain the money or other property so acquired, and for which they have rendered no corresponding equivalent to the plaintiffs in return, but, on the contrary, we are of opinion that it is their duty to make equitable compensation and restitution, and that the duty may be enforced in this proceeding.

It is true that, in general, where parties are concerned in illegal agreements or other transactions, whether they are mala prohibita or mala in se, courts of equity do not interpose to grant relief; but this is so only when the parties stand upon equal footing, for the doctrine everywhere running through the books is, that relief will be granted when both parties are in delicto, provided they do not stand in pari delicto. See Sto. Eq. Jur. (12th ed.) ss. 298, 300. These parties do not so stand, for however guilty the plaintiffs may have been in permitting, or in concurring in, the illegal operation of their road by the defendants after the act of July 5, their guilt must fairly be regarded as far less in degree than that of their associate in the offence. And that the legislature regarded the defendants as the greater offenders is made plain by the fact that the only penalty prescribed by the act of July 5 for the violation of its provisions is imposed upon the road which operates another road, and not upon the load which is operated; for the reading of the second section is, that "In all cases where any road, its directors, officers, or agents, shall hereafter enforce, or attempt to enforce or exercise, any authority over any other road, situated as provided in said first section, or do any act in conflict with said first section, such officers or agents shall severally be subject to a fine or liability not exceeding five hundred dollars for each offence, to be recovered by action of debt, or by information or indictment, for the use of the county within which such suit shall be instituted."

These considerations, as well as others of a kindred character which need not be adverted to, bring the case fully within the exception to the general rule that equity does not grant relief to parties concerned in illegal transactions; and if this be so, it is the end of the case as regards the questions raised by the pleas, because, if the transactions between the parties were of the character which the defendants now ascribe to them, the plaintiffs, not being in pari delicto, are entitled to participate in the property accumulated or its proceeds, which, as between the parties, will be divided according to equity.

There is, however, another ground of relief which should be briefly mentioned. The contracts have been executed on the part of the plaintiffs: they were not immoral, and they were illegal only so far as they were prohibited by statute. Taking this to be so, and regarding the parties as truly in pari delicto, the case still falls within the general rule, that "if an agreement is legally void and unenforceable by reason of some statutory or common-law prohibition, either party to the agreement who has received anything from the other party and has failed to perform the agreement on his part must account to the latter for what has been so received. Under these circumstances, the courts will grant relief irrespective of the invalid agreement, unless it involves some positive immorality, or there are other reasons of public policy why the courts should refuse to grant relief in the case." Mor. Corp., s. 721. He adds, — "These doctrines have been applied repeatedly in suits arising out of contracts entered into by corporations, although prohibited by statute or by the common law; and although the contracts were held illegal and unenforceable in these cases, a recovery was allowed to the extent of the consideration received," — citing White v. Franklin Bank, 22 Pick. 181; Dill v. Wareham, 7 Met. 438; Episcopal C. Society v. Episcopal Church, 1 Pick. 372, 373; Whitney v. Peay, 24 Ark. 22; Phila. Loan Co. v. Towner,13 Conn. 249, Foulke v. Railroad, 51 Cal. 365; Farmers' Loan Trust Co. v. Railroad, 1 M'Crary 247; Madison Ave. Baptist Church v. Baptist Church,73 N.Y. 82; Tracy v. Talmage, 14 N.Y. 162; Sacketts Harbor Bank v. Codd,18 N.Y. 240; Oneida Bank v. Bank, 21 N.Y. 490, 496; Vanatta v. State Bank,9 Ohio St. 27; U.S. Express Co. v. Lucas, 36 Ind. 361; — see, also, in addition, Pratt v. Short, 79 N.Y. 437, 445; Owen v. Davis, 1 Bail. 315; Gilliam v. Brown, 43 Miss. 641, 644; W. U. Tel. Co. v. Railroad, 1 M'Crary 558, 562; Lewis v. Alexander, 51 Tex. 578; Brooks v. Martin, 2 Wall. 70 and cases cited; Planters' Bank v. Bank, 16 Wall. 483 and cases cited; Central Trust Co. v. Railroad, 23 Fed. Rep. 306; Parkersburg v. Brown, 106 U.S. 487,503.

The leading case of Brooks v. Martin was a bill in equity for an account of profits between the parties under an executed partnership contract for the purchase and location of soldiers land warrants "confessedly against public policy" as well as in violation of the express provisions of an act of congress; but the court held that the partner in whose hands the profits were could not refuse to account for or divide them on the ground of the illegal character of the original contract, saying (Miller, J.), p. 80, — "It is to have an account of these funds, and a division of these proceeds, that this bill is filed. Does it lie in the mouth of the partner, who has by fraudulent means obtained possession and control of these funds, to refuse to do equity to his other partner, because of the wrong originally done or intended to the soldier? It is difficult to perceive how the statute, enacted for the benefit of the soldier, is to be rendered any more effective by leaving all this in the hands of Brooks, instead of requiring him to execute justice as between himself and his partner, or what rule of public morals will be weakened by compelling him to do so. . . . The transactions which were illegal have become accomplished facts, and cannot be affected by any action of the court in this case." We are aware that the doctrine of this case has been criticised, and perhaps denied, by some of the state courts, but it was reaffirmed in Planters' Bank v. Bank, supra, and it is not found to have been changed or modified in any subsequent decision.

It requires no words to apply the doctrine of Brooks v. Martin to the present case: it applies itself. Nor do we find that its application involves any immorality, or that it is forbidden by any other reasons of public policy. Doubtless a court of equity is not positively bound to interfere in cases of this description, and may exercise its discretion; but it is peculiarly the office of equity to do justice, and justice manifestly requires that the defendants should not keep any part of the plaintiffs' equitable share of the property they obtained from operating the plaintiffs' road, whether legally or illegally. Whatever the legislature may have intended to accomplish by the anti-monopoly act of 1867, there is no reason to suppose their intention was to reward the Concord Railroad for its violation. And however it may once have been, it is certainly now difficult to see how public policy is subserved by allowing the addition of a private wrong to a public wrong, which necessarily results when, without any equivalent in return, one party to an executed illegal transaction excludes the other from participating in the proceeds; and we entirely fail to appreciate the morality which denies in such cases any rights to the party whose money or other property has been thus appropriated by his associate, contrary to express agreement and every principle of fair dealing, and which in conscience the benefited party cannot retain. The demurrer to the third plea is also sustained.

Various causes of demurrer to the bill are assigned by the defendants, but at the argument only the one relating to discovery was insisted upon, or need be considered.

The bill prays "that the defendants be ordered to make a full, accurate, and true discovery and disclosure of all and singular the matters and things herein set forth." This is the usual prayer for a discovery, and no objection to its sufficiency is perceived. It is immaterial that the prayer concludes with a request that the "defendants be required, but not under oath, . . . to discover and state fully and with particularity" certain things specified; for if the word answer, which it is said was intended to be used, is substituted for "discover," the first objection of the defendants, that a prayer for a discovery not under oath cannot be granted, is readily obviated.

The second objection, that the policy of the law exempts the defendants and their officials from discovery, is based wholly upon the unfounded assumption that the plaintiffs' action is against public policy, and has already been sufficiently considered.

The third and last objection is, that the fundamental law does not require the defendants to discover. The argument in its support is, that the defendants are charged with the doing of that which was positively prohibited by the act of July 5, 1867; that if the charge is sustained, each of the defendants is liable to the penalty prescribed by the act; and that they are asked to make discovery of facts which in any event would tend to fix their penal liability under that act, contrary to the constitutional provision that "no subject shall be compelled to furnish evidence against himself."

This objection is unavailing. See Currier v. Railroad, 48 N.H. 321. The defendants are not obliged to discover any matters that may expose them to the penalty of the act of 1867; and they cannot do so, however willing they may be, because prosecution under that act is barred by the statute of limitations. The transactions between the parties as to which discovery is sought ended July 1, 1887, and s. 10, c. 266, Gen. Laws, provides that "all prosecutions founded upon any penal statute, which are wholly or in part for the use of the prosecutor, shall be brought within one year; and all other suits and prosecutions thereon within two years after the commission of the offence, unless otherwise specially provided."

The defendants' demurrer is overruled.

Case discharged.

SMITH, J., did not sit: the others concurred.