Case Name: Robert H. McCarter, attorney-general, appellant, v. Firemen's Insurance Company et al., respondents
Court: New Jersey Court of Errors and Appeals
Jurisdiction: New Jersey
Decision Date: 1909-06-14
Citations: 74 N.J. Eq. 372
Docket Number: 
Parties: Robert H. McCarter, attorney-general, appellant, v. Firemen's Insurance Company et al., respondents.
Judges: For affirmance — The Chief-Justice, Swayze, Reed, Bergen — 4.
Reporter: New Jersey Equity Reports
Volume: 74
Pages: 372–412

Head Matter:
Robert H. McCarter, attorney-general, appellant, v. Firemen's Insurance Company et al., respondents.
[Argued November 26th, 1907.
Decided June 14th, 1909. ]
1. If a corporation engaged in a business that is affected with a public, interest contracts to enter upon a line of conduct in respect to such business that tends to affect such public interest injuriously, and is contrary to public policy, such contract is ultra vires such corporation, and may be restrained in equity at the suit of the attorney-general without regard to. whether or not actual injury has resulted to the public.
2. The business of fire insurance as it is carried on in this state by corporations created, licensed and regulated by the state, is a business affected with a public interest within the meaning of this rule.
3. Q-wasi-public corporations, i. e., those “affected with a public interest” defined.
4. The case of Mann v. Illinois, 9J¡ Ü. 8. 118, applied.
5. A contract in restraint of trade entered into by fire insurance companies, the necessary effect and the actual result of which are to control' such business within a certain area, and within such area to fix and', regulate prices and to limit or eliminate competition to the injury of the public, is contrary to public policy, and ultra vires such corporations- and may be restrained in equity at the suit of the attorney-general.
6. The rule in equity that contracts in restraint of trade are merely unenforceable does not require that the parties so contracting be deemed to be immune from ordinary equitable remedies when their -violation of' public policy is directed at and actually works a public injury.
On appeal from a decree advised by Vice-Chancellor Stevens,, whose opinion is reported in 70 N. J. Eq. (4 Robb.) 291.
The decree of the court of chancery dismissed an information filed by the attorney-general against eight domestic fire insurance companies and one hundred and thirteen foreign fire insurance companies praying for a decree adjudging a certain agreement in writing entered into by the defendants to be void as an ultra vires act injurious to the public, and that the said companies be enjoined from continuing to act under such agreement..
The contract in question which was annexed to the hill and occupies twenty-two closely printed pages constitutes the subscribing companies, members of “The Newark Eire Insurance Exchange,” and’covers apparently every detail necessary to vest in such exchange the fixing of the premium rates to be charged for insurance by the constituent companies and to render it as far as possible impractible to obtain fire insurance within the area covered by the exchange otherwise than from its constituent companies and upon the rates fixed by it. The area thus covered includes the city of Newark and certain outlying and adjacent districts in Essex and Hudson counties. The salient features of this contract pertinent to this appeal are — first, that the premium rates to be charged by the constituent companies shall be fixed by a central association through an executive committee of five of its members, such central association being composed of a single representative of each constituent company and such executive committee including uniformly one member representing all of the domestic companies; second, that no member of the exchange shall write policies at any other rate than that fixed by the exchange; third, that the only brokers to whom members of the exchange shall pay brokerage for business obtained through them shall be those holding a broker’s certificate from the exchange, in order to obtain which such broker must pledge himself not to place any insurance with any insurance company that is not a member of the exchange, unless, after giving preference to the members of the exchange, sufficient insurance canno.t be obtained. Hpon receipt of a broker’s certificate the broker must agree, in writing, to observe the rules of the exchange that forbid rebating and “to act only as the agent of the assured in placing contracts for insurance.”
The information charged that this contract rendered it practically impossible to obtain fire insurance within the covered territory save from the companies that had subscribed to such contract and at the premium rates fixed in accordance with its. terms, and that the rates so fixed are sixty per' cent, higher than the rates that prevailed in the same territory prior to the making of this contract and that now prevail in the immediately adja cent territory not covered by the contract. The relief prayed by the information was that the defendants be enjoined from continuing or doing any act under said contract that tended to fix the rates to be charged for fire insurance or to prescribe the persons through whom insurance may be placed or the mode of payment therefor.
A mass of testimony substantiating on the one hand the averments of the information and justifying on the other hand the propriety of the rates fixed and the methods employed by the exchange was taken and the case thus made -brought to final hearing before the vice-chancellor, who advised that the information be dismissed, not because its charges and averments had not been proven, but because, assuming that they had been proved, the contract in question, while one that a court of equity would not aid a party to such contract in enforcing against another party to it, was not one that a court of equity, at the instance of the state, would restrain the defendants from entering into or continuing to the public injury. Precisely what was decided is thus abstracted in the headnotes to the vice-chancellor’s opinion: “1. The common law does not treat agreements in restraint of trade as being illegal in the ordinary sense of the word but merely as being unenforceable. 2. In the absence of a statute authorizing it, the attorney-general may not maintain a suit to enjoin insurers against carrying out an agreement regulating ’rates, though against public policy, as in restraint of trade, and the fact that the insurers are corporations makes no difference.”
Upon the ground thus stated the information of the attorney-general was dismissed, and from the decree to that effect this appeal was taken and argued, after which a reargument was ordered and had covering certain further matters upon which the court desired to hear the views of counsel.
Mr. Robert H. McCarter, attorney-general, and Mr. Malcolm MacLear, for the appellant.
Mr. Bennet Van Bychel and Mr. Richard V. Undabury, for the respondents.

Opinion:
The opinion of the court was delivered by
Garrison, J.
The learned vice-chancellor, who advised'that the information filed by the attorney-general be dismissed on the ground that the court of chancery could not give relief in such a suit, said at the conclusion of his opinion : "If those corporations were public or gtiosi-public bodies, and if the attorney-general were here asking to enjoin them from doing ultra vires acts to the public injury as in Attorney-General v. Central Railroad Co., 50 N. J. Eq. (5 Dick.) 52, the case would be different."
We agree with the learned vice-chancellor as to the class of corporations and of corporate acts to which the rule of Attorney-General v. Central Railroad Co. applies, but we do not agree with him that the defendants are not within such class. The pertinent language of Chancellor-McGill in Attorney-General v. Central Railroad Co. is: "Where a corporate excess of power tends to the public injury or to defeat public policy, it may be restrained in equity at the suit of the attorney-general." The case of Attorney-General v. Central Railroad Co., which clid not itself come to this court, has since its decision by Chancellor McGill in 1892 been followed in the court of chancer}', and has been approved and acted upon by this court, notably in the recent case of Attorney-General v. Vineland Light and Power Co., 73 N. J. Eq. (3 Buch.) 703, where the decree that was affirmed had been advised by Vice-Chancellor Learning, as to this point, upon the express authority of Attorney-General v. Central Railroad Co., 50 N. J. Eq. (5 Dick.) 52.
In the case of Attorney-General v. American Tobacco Co., 55 N. J. Eq. (10 Dick.) 352, Vice-Chancellor Reed said: "It may be conceded that if this corporation had entered into an agreement with other manufacturers of these goods, whether those manufactures were individuals or corporations, by which agreement prices were to be fixed and competition paralyzed, such an agreement would be a subject of equitable cognizance. Such was the ease of Stockton, Attorney-General, v. Central Railroad Co., 50 N. J. Eq. (5 Dick.) 52." This opinion was adopted by this court.
In Attorney-General v. Delaware and Bound Brook Railroad Co., 27 N. J. Eq. (12 C. E. Gr.) 631, Mr. Justice Dixon, speaking for this court, said: "In equity as in the law court the attornej'-general has- the right in cases where the property, of the sovereign or the interests of the public are directly concerned to institute suit by what may be called civil information for their protection."
Professor Pomeroy (section 1093) states the rule thus: "When the managing body are doing or about to do an ultra vires act of such a nature as to produce public mischief, the attorney-general, as the representative of the people and of the government, may maintain an equitable suit for preventative relief."
In England the same rale prevails. Attorney-General v. Cockermouth Local Board, L. R. 18 Eq. Cas. 172; Attorney-General v. Shrewsbury Bridge Co., L. R. 21 Ch. Div. 752; Attorney-General v. London and N. W. Ry. Co., 1 Q. B. (1900) 78.
The rule of the American courts to the same effect as that laid down by Chancellor McGill is epitomized in 20 Am. & Eng. Encycl. L. 850, under the title, "Monopolies and Trusts," where numerous cases are cited in the notes. A complete collection of such cases will also be found in the two volumes of Lewson's Monopoly and Trade Restraint Cases, which work is, in effect, a collection -of the syllabi of the opinions delivered by American courts upon this topic.
The rule illustrated by all of those cases and the one that we should adopt, if we have not already done so, is that if a corporation, engaged in a business that is affected with a public interest, contracts to enter upon a line of conduct in respect to such business that tends to affect such public interest injuriously and is contrary to public policy, such contract is ultra vires such corporation, and may be restrained in equity at the suit of the attorney-general without regard to whether or not actual injury has " resulted to the public. The expression "corporation affected with a public interest" is to be preferred to the term "gwosi-public corporation" as tending, in some measure at least, to characterize the class of corporations indicated, whereas the term "quasi-public" is characterized only by its unmeaning vagueness. In the discussion, and still more in the application of this rule, it will, of course, be necessary to amplify the expression "affected with a public interest" to the extent of stating just what is meant by that term, and also to discriminate between acts that are ultra vires a corporation and those that are merely illegal, and also to make clear what "tends" to public injury, for it is upon the concurrence of these three factors that the applicability of "the rule in question depends.
TTpon this branch of the present inquiry, therefore, the pertinent questions are:
First. Are the defendants engaged in a business affected with a public interest ?
Second. Is the contract into which they have entered one that Is ultra vires such corporations ? and
Third. Does such contract tend to affect such public interest injuriously ?
The first question, and that upon the answer to which this branch of the case virtually turns, is whether or not the business of fire insurance as carried on in this state is a business affected with a public interest within the meaning of the rule enunciated in Attorney-General v. Central Railroad Co. The answer to this -question does not depend, as. counsel for the respondents argue, upon whether the defendants were expressly created as public •-agents, or whether the state has expressly charged them with the performance of a public duty or has to that end clothed them with monopolistic privileges or granted to them its right of eminent domain or required that they insure the property of all citizens alike. These are indicia by which the existence of "a public interest" may be readily discerned, but, so far from "the public Interest" arising out of these incidents, the fundamental fact is. that they arise out of such public interest. In natural course the public interest first arose, and afterwards, and because of such interest, all of these incidents were added unto it. In their in-, ception all public callings were private ones whose history has consisted in the evolution of a public character and of the inci•dents that they now possess. "First the blade, then the ear, after that the full corn in the ear."
Such at the common law was the course by which common carriers and all of the callings now recognized as affected with a public interest to be juris privaii -only and became matters of public concern. More than two centuries ago Lord Chief-Justice Hale, in his treatise De Portibus Maris, said that when private property is "affected with a public interest it ceases to be juris privaii only" (1 Harg. Law Tr. 78), illustrating this by the case of a man who sets up on his land a crane that in due course ceases to be juris privati and becomes subject to public regulation. This statement of Lord Hale was cited with approval and applied by Lord Kenyon a century later in Bolt v. Stennett, 8 T. R. 606, "and has," said Chief-Justice Waite, speaking for the supreme court of the Hnited States still a hundred years later, 'Teen accepted without objection as the law of property ever since." Munn v. Illinois, 94. U. S. 113.
"Property," Chief-Justice Waite continues, "does become clothed with a public interest when used in a manner to make it of public consequence and affect the community at large. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good to the extent of the interest he has thus created."
One significance of this statement of the law of property is that it speaks in the present tense, viz., "property does become clothed with a public interest," not did become so clothed once upon a time; another is its recognition of the fundamental law that public interest arises essentially from the uses to which a man puts his property and not from a force ab extra; and yet another is that, knowing this to be the law, men engage in certain callings knowing that the business they so embark in will, if success attend it, become affected with a public interest. "They entered upon their business and provided the means to carry it on subject to this condition," he says; and speaking to the point, that it was of no moment that a direct precedent could not be found, Chief-Justice Waite says: "It is conceded that the business is one of recent origin, that its growth has been rapid and that it is already of great importance," and reaching the conclusion that the public interest was affected he adds: "It presents, therefore, a ease for the application of a long-known and well-established principle in social science. There is no attempt to compel these owners to grant the public an interest in their property, but to declare their obligations if they use it in this particular manner."
The force and significance of these statements of the highest court in our land is enhanced by the fact that the property owners, with respect to which they were made, were private individuals, and the business concerned that of storing grain in private warehouses. The fact that the question in Munn v. Illinois was the right of the public through its legislature' to deal with a use of private property as affected with a public interest rather than with the right of the public so to deal with it in the courts, is of no significance upon the point for which the language of the decision is now cited. Upon the underlying proposition that a business, private at its inception, may become affected with a public interest, it is immaterial that the question of its public character arose in a case where its restraint had been legislatively rather than judicially determined. Upon this point, Munn v. Illinois, as was said by Chief-Justice Waite, introduced no novel doctrine. What it did was to call attention to the fundamental relation that exists between the use of private property and the creation of a public interest in such use and its chief value as a contribution to jurisprudence, was that it pointed out clearly that in the determination of such a relation the underlying question was not what the state had done to impress a public interest upon a business, but what the owners and operators of such business had done to draw to and thus clothe themselves with a public interest; for in Munn v. Illinois the state liad done absolutely nothing. The vast importance of the maintenance of this point of view by the courts of this country must be conceded when we consider that to an unprecedented extent business enterprises are launched the success of which depends upon the extent to which the public can be attracted to them and constrained to lean upon them. Public support of this character is essential to the success of these enterprises, and hence, is from their inception the desideratum of their promoters. When, therefore, success along these lines has been attained, it brings with it duties to the public, whose interests are involved, oí precisely the same nature as if such duties had been imposed by public law upon such enterprises at their inception. This is the principle that was recognized and applied in Munn v. Illinois, and if it be sound, as applied to individuals, it must, a fortiori, be sound as regards corporations. To the eye of the law and in the interest of the public, it is one and the same thing whether a corporation be created to subserve a public interest or whether such corporation achieve success of such a nature that the duty of regarding the interest of the public is thrust upon it. Aptly the words of the great dramatist may be paraphrased, viz., that some corporations are born to serve the public, some achieve that end and some have it thrust upon them; and (as in the state of man) the last two conditions are so correlated that when the interest of the public has been woven into a business as a sine qua non of its success, the success thus achieved thrusts upon such business a co-ordinate duty that clothes it to that extent with a public interest. It is in accordance with this principle that the entire class of callings we are considering have come into existence. Railways, ferries, inns, warehouses, or what not, have in their day had this same origin and history. When the first waterman held out to his neighbors a means of ferriage other than in their separate boats, and when the first teamster undertook to carry families and their produce to the market town, the foundation of the modem law of common carriage was laid, and, as success attended these undertakings by their successful appeal to the public, a public interest in them arose which in time was recognized and acted upon by legislatures and by courts alike, the power of eminent domain and other privileges being- granted in order that such public interest might be the better served, the duty of serving all alike and of refraining from excessive charges by combination or otherwise being imposed that such public interest might be the better safeguarded. To confuse, therefore, these incidents and indicia, with the fundamental relation out of which they arose, or to say that such fundamental relation between the use of private property and the public interest therein, is a thing of the past, and that such relation is not just as sound and fruitful now as then, is to take a totally illogical position the acceptance of which would disarm the courts of to-day of defensive weapons of which the public stands in more need now than it did then. It is, therefore, a shallow argument to say that a court cannot restrain corporations from ultra vires acts injurious to the public because such corporations have not been given the right of eminent domain or because they have not been compelled to insure all of the property of all of the people. When the public interest will be furthered by such power or by such duty they will come into existence but not otherwise. What, for instance, would a fire insurance company do with the power of eminent domain, or how would law-abiding insurers be benefited by requiring these companies to insure the property of incendiaries? The same law, both as to the attainment of a public interest and as to the incidents that shall attach to it, is operative now as in the past,. and the same history still repeats itself whenever a business ox calling that was either unknown to the common law, or of no t public import then, insinuates itself into modern business methods so that it becomes a matter in which the public is vitally concerned. Of this there can be no more apt an example than the business of fire insurance as carried on by these defendants under modern conditions and under the laws of this state. If such business were still in the hands of individual underwriters, unaffected by state regulation and confined to the writing of policies on the dwellings of prudent householders and on the stores of careful merchants, a great deal might be said in favor of the view that no public interest had attached to the making of these private contracts. We cannot, however, close our eyes to the fact that by the enormous extension of this business, by its concentration in the hands of immense corporations, by state regulations that amount to privileges and by its practically universal employment as a collateral security for debts, the business has become one in which the interest of the public is directly involved, certainly as much so as it is in the warehousing of grain. The collateral security of mortgage debts would alone suffice to attach a public interest to the business in question since it vitally concerns credit as a factor in modern business.
Whatever concerns business credit ex necessitate touches a matter in which the public is directly interested. The impairment or embarrassment of business credit affects immediately not only the demand for money and the volume of business transacted, but also the inauguration of new enterprises, tln^ employment of people and the payment of the wages they would otherwise receive and spend and thus ramifies in its effects from the greatest banking houses, through the homes of the unemployed or the badly paid, to the smallest retail shops. By the introduction and perfection of title insurance a practically new commercial utility has been imparted to real propert}', which, under such new conditions performs a recognized service in the immediate obtaining of credit for commercial needs or in business emergencies. The collateral indemnification of credit thus obtained has become one of the chief, if not the chief business of modern fire insurance, and I doubt whether, within twenty, years past, a mortgage on improved property has been given that did not covenant for such insurance and for its maintenance under the penalty of immediate foreclosure. The public, greatly to the benefit of the insurance business, has become educated to this system and to lean upon it and to shape their business ventures in reliance upon it. Such education and such reliance, which were, of course, beneficial and properly so to the insurance companies, have so entered into the woof and warp of general public business that nothing that can be conceived of would produce greater disturbance or profounder catastrophe than the cancellation of such policies or the withholding of such insurance. It seems to me that it is impossible to say that by its very growth and success the business of fire insurance lias not become affected with a public interest within the principle of Munn v. Illinois. That it is deemed for legislative purposes to be so affected is evident from the voluminous code enacted in this state for its regulation in the interest of the public. P. L. 1902 pp. 407-447. It is pertinent, at this point, to ask why the state should enact a regulative code for the protection of a public interest that does not exist. Moreover, some of the provisions of this code, while in form regulations imposed upon insurance companies, amount practically to privileges accorded to them. Indeed, it is by rea son of the privileges thus enjoyed by foreign companies that the present combination is rendered feasible. In such case, i. e., where foreign corporations that have been accorded the privilege of transacting tlieir legitimate business in this state use such privilege to engage with our domestic companies in a compact inimical to the interests of the people, it would be a salutary and, I am inclined to think, a sound rule of law that would estop such foreign corporations to deny that they were enjoying such a privilege from the state as made them amenable in the premises to its court of equity. A state that had granted such a privilege should, it seems to me, be entitled, with a reasonable expectation of being heard, to apply to its own'courts for preventive relief based upon the abuse of the privilege it had granted. Be this as it may, we think that it is impossible for the unbiased mind to reach the conclusion that the business of fire insurance as now conducted in this state, by corporations created, licensed and regulated by the state, is not a business affected with a public interest, but that the storage of grain by private individuals is so affected. Yet such is the conclusion we reach, unless, so far as in us lies, we overturn the decision of the supreme federal court in Munn v. Illinois, a decision that has been followed in cases so numerous that their citation from state reports would be superfluous and of which Mr. Justice Harlan, speaking at a later period, said: "The doctrines of Munn v. Illinois have never been modified by this court," i. e.j the supreme court of the United States. Civil Rights Cases, 109 U. S. 62.
The conclusion we reach from tírese considerations is that the business of the defendants is in point of fact one that directly affects the interests of the public, and that such public interest, has been recognized as a subsisting one by the legislature of this state, and that, in point of law, the business of the defendants is affected with a public interest.
Second. We have next, therefore, to consider whether or not the contract by which the defendants .have agreed, that their several corporations shall be bound is ultra vires such corporations. In this regard, the eight domestic companies stand in one respect in a position different from the hundred and odd foreign defendants. These domestic companies received their charters-from this state in order that they might transact legitimately a business in which, as we have seen, the public is interested. To this end all general provisions essential to the lawful government of corporations are deemed to be written into their respective charters. Among these general provisions is that "the-business of every corporation shall be managed by its directors" either by force of the express mandate of section 12 of the General Corporation act of 1896 or because such is an imperative implication of the law of corporations. We cannot agree with the views of the respondents' counsel as expressed in their brief,, viz., that
"the provision that the company shall be managed by a board of directors, is simply intended to show where the powers which may be exercised by the company shall, as between the shareholders and those who deal with the company, reside,"
or that
"the provision in section 12 of the act of 1S9G was not intended for the-protection of the general public, and failure on the part of the directors, to perform their duty in the management of the affairs of the company concerns only the shareholders and the policyholders."
The statute says all that counsel say it means, but it also says more, and we take it that a statute means all that it says. We do not concede or believe that the sole object of section 12 was to •" inform stockholders of what they already know, viz., that the business of their corporation was to be managed by the officers selected bj them for that purpose rather than by somebod}' else. Neither do we believe that a corporation affected with a public interest could insert in its certificate of incorporation a frank avowal that its business was not to be managed by its own directors and then successfully set up as against the state the argument now advanced in justification of the respondents' construction of the statute. Counsel confuses, it seems to us, the force to be given to the statute with the occasions upon which such force is to be given to it. Where the question cannot be raised the meaning of the statute is immaterial. It is, for in stance, immaterial to the public and to the state representing the public whether the business of a company organized to manufacture bicycles or to make wall paper is managed by its directors or by its office boys. That is not the case here. These domestic companies were chartered to insure the property of citizens of this state under legitimate conditions. One of the most important and responsible duties that devolved upon the managers of these companies was, therefore, the fixing of the rates'to be charged the citizens therefor. A contract by which tlie directors of such corporations in conclusive form abdicate their duty of management in this respect and turn it over to an alien body is in direct violation of the words and meaning of the statute and is as typical an instance of an ultra vires act as can well be imagined. To do so in a given instance would be an illegal act, but the act of binding the corporation by contract to a settled policy of illegal acts is beyond the power of the corporation, i. e., is ultra vires. That this is no academic criticism appears ele,arly from the fact that the Central association erected by the contract by which, through a sub-committee of five, rates are fixed consists of but one representative of each constituent company. Hence in a body of one hundred and twenty-one the New Jersey companies have but eight votes, and in the sub-committee they have but one vote to four cast by foreign corporations. It is inevitable, therefore, that the influences affecting such foreign corporations, the losses they may have sustained, the expenses they have incurred, the salaries they design to pay, the dividends they desire to declare, will all be reflected and asserted in the fixing of the rates to be charged for insurance to thé citizens of this state. These rates, and these only, the New Jersey companies by the contract in question bind themselves to charge, although such rates may be greatly in excess of anything required or justified by local conditions or by the business of' such domestic companies if managed by their own directors. Pro tanto this amounts to a merger of corporate management accomplished by means other than those sanctioned by law. It also places it out of the power of the domestic companies to manage an important feature of their business with respect to the public interest with which it is affected. While these considerations apply directly to the New Jersey companies only, they apply indirectly to the foreign companies also which have used their privilege to do business in this state to render feasible a contract scheme that is ultra vires the New Jersey companies. Foreign corporations are permitted to do business .in states other than that of their incorporation by comity, not of right. It is fundamental that such corporations have no other or greater powers than do corporations organized under the laws of such state. It would be, therefore, a total subversion of law and reason to hold that a foreign corporation had in this state the power to make with corporations of this state a contract affecting a matter of public interest that such corporations of this state had not themselves the power to make. Comity does not extend to a permission to combine with domestic corporations in a way that tends to public injury. A court of equity would be short-sighted indeed that did not see this, and short-armed if it could not reach out to prevent it. We have, therefore, no hesitation in concluding that the ulira vires quality of the corporate contract by which the Newark Fire Insurance Exchange was brought into existence is attributable to all of the corporations that subscribed to such contract, the foreign as well as the domestic.
It is said that a court of equity will not take notice of the ulira vires nature of the contract into which these defendants have entered, for the reason that such contract being in restraint of trade is one that they cannot be forced to observe and this had conclusive weight with the court below. For present purposes the plenary answer is that the test of ulira vires is the power of a corporation to make a contract, not its power to break it.
Third. Upon the question whether the contract that resulted from these ultra vires acts tends to affect the public interest injuriously, little remains to be said, and that little can be better said under the second branch of this appeal, which we shall now proceed to consider. Upon the -first branch our conclusion is that because the business of the defendants is affected with a public interest a court of equity should restrain their ultra vires -acts at the instance of the attorney-general, if such acts tend to public injury, without regard to whether public injury had in fact resulted, and that the contract in question does so tend.
2. Under the second branch of the case we shall assume that the business of the defendants is not, in the general sense, affected with a public interest and that the attorney-general must show that actual public injury has resulted from an unlawful combination in restraint of trade and is therefore ultra vires the contracting companies.
As this was the point of view from which the learned vice-chancellor regarded the case in advising that the information be dismissed, it is necessary at this stage to determine whether the reasoning that led the court below to apply to the attorney-general, seeking to avoid a contract repugnant to public policy, the same rule that obtains in that court when a party to such contract is seeking to enforce it, is sound.
Upon this point the court below laid down two propositions — - first, that the attorney-general could not maintain a suit to enjoin parties to an agreement regulating rates though against public policy as in restraint ofl trade, and second, that the fact that the parties to such agreement were corporations made no difference.
As to the first of these propositions, it is, perhaps, only necessary that we should withhold our assent, but as to the second, we must record our express dissent.
Before leaving the first of these propositions, however, we should say that the fault we find with the vice-chancellor's conclusion is not in the soundness of the rule of mere unenforceability as applied to the class of cases in which it properly obtains, but in- the extension of such rule to a subject not properly or at all within its purview, viz., the right of the state to preventive relief in aid of public policy. There is something startling, not to say appalling, in the proposition that the state is to be met in its courts with a denial of its right to relief upon the ground that the rule of non-intervention that is applied to the violators of such public policy must also be applied to the public that is injured by such violation.
The rule in question is itself an application of the maxim in pari delicto, &c., and hence is in strict analogy with the judicial policy by force of which courts decline to aid in the distribution of plundered property, but it is quite illogical to say to the man who has been despoiled, "Because we refused our aid to those who despoiled you, therefore we must decline to aid you." Yet this or something very like it is what we are asked to say.
The case of Mogul Steamship Co. v. McGregor, 23 Q. B. D. 598, cited by the vice-chancellor and relied upon by counsel for respondents, is not in point. There a court of law decided that a contract in restraint of trade, made by one set of shipowners, did not give another set of shipowners a legal cause of action against them for damages. The case has no bearing whatsoever upon the attitude of a Court of equity when a suit is brought on behalf of the state in the interest of the public.
That the reasoning of Mogul Steamship Co. v. McGregor, even within the lines of its decision, is not likely to commend itself to jurisprudence generally is pointed out in an instructive article on "The Case of the Monopolies," by Sidney T. Miller, Esq., in the Michigan Law Review, for November, 1907. Upon the point we are considering, the case has no bearing whatsoever.
This digression should not, however, be further extended as the same ground is necessarily covered in expressing our dissent from the second proposition on which the court below based its dismissal of the attorney-general's information, viz., that the fact that the defendants were corporations made no difference as to the right of the attorney-general to maintain such suit.
Laying aside, therefore, the .rule applicable to individuals who have entered into an agreement contrary to public policy, in that it is in restraint of trade, and taking up a question that could by no possibility be involved in or decided in such a case, viz., the corporate power to enter into or continue under such an agreement, we perceive at once that such question lies entirely outside of the rule that was deemed in the court below conclusively to foreclose it. That such contracts are contrary to public policy is admitted upon all sides, in fact, it is precisely because of their contravention of public policy that the courts refuse to countenance them. In the creation of its corporations no state, I suppose, confers upon them in express terms the power to make contracts that violate its public policy. Where such a power is not expressly given, it will certainly not be deemed by a court of equity to exist by implication. A contract that a corporation has neither the express nor the implied power to make is one that is beyond its power to make, i. e., ultra vires.
The circumstance that a corporation makes such a contract, relying upon-the non-intervention of the courts, does not clothe the corporation with the needed power that it lacked to make such contract; it merely shows the inducement to make it, and how such violator of public policy will, under such rule, be protected from public redress by the very agreement by which the public is injured. The rule of mere unenforceability thus relied upon makes, however, an exception even as to the parties in pari delicto, which is thus stated by Judge Story: "In cases where the agreements or other transactions are repudiated on account of their being against public policy, the circumstance that the relief is asked by a party -\yho is particeps criminis, is not in equity material. The reason is, that the public interest requires that relief should be given; and it is given to the public through the party." 1 Story Eq. § 298; Cone v. Russell, 48 N. J. Eq. (3 Dick.) 217.
It would seem, therefore, that the rule enforced by the learned vice-chancellor applies to actions based on the repudiated contract, but not to those in which its repudiation may be assumed by the court, whether as fact or as fiction.
The fiction of acting for the public by which relief is granted to a party m pari delicto, must a fortiori apply to the public itself when actually acting in its own interests. The fundamental principle recognized by this line of cases is that one who has entered into a contract that contravenes public policy owes to the public the continuous duty of withdrawing from such contract. A duty thus owing to the public is, upon familiar principles, presumed by courts to be performed, and such presumption should be indulged in by the courts whenever necessary to give to the public, acting through its official representative, the same standing that the actual performance of such duty gives to one in pari delicto to act for the public.
It -would be inconceivably absurd that the defendants, in rebuttal of this presumption, should be heard to say that because to their original violation of public policy they had superadded a violation of another public duty they were immune from ordinary judicial control. Yet such is the state of our jurisprudence under the rule enunciated in the court below unless such presumption or legal fiction is invoked in aid of violated public policy. Speaking for myself, the extension of the rule of non-enforceability, based as it is upon the maxim in pari delicto, to the case of the state seeking to prevent public injury, seems to be without the slightest foundation in sound logic or justification in right reasoning. Be this as it may, the fact is that, if upon neither of these grounds preventive relief may be had by the state, no combination can be so hostile to the public interests or so flagrant in its defiance of public policy but that it may effectively shield itself from such interference on behalf of the public by the simple device of casting its proposed violation of public policy in the form of a contract for a self-imposed restraint of trade. I cannot believe that this is the actual state of our jurisprudence on this vitally important subject.
Concluding, as we do, that the line of reasoning that limits the court of chancery in all cases involving contracts in restraint of trade to the single policy of their non-enforcement is fundamentally at fault, and that the defendants have not by their violation of public policy effectually entrenched themselves outside the pale of preventive law, it remains to be considered whether certain facts that were merely assumed in the court below, viz., that the contract in question is one that fixes rates and stifles competition and is detrimental to the public, are sustained by the testimony. If they are, and if injury has thereby resulted to the public, the duty of a court of equity to enjoin the defendants from continuing to act under such ultra vires contract is clear. The contract, without question, fixes and maintains rates and so controls the placing of insurance and the channels through which that business flows that it inevitably reduces competition to the minimum if it does not absolutely eliminate it. This much appears from the contract itself and in the testimony. The remaining question, viz., that of injury to the public, is not so much one of disputed fact as of the sufficiency of a proffered justification of an established fact. The marked increase of cost to the insured, coincident with the going into effect of the contract, is a salient and palpable fact that, in the case of any other commodity of equal necessity, would carry its own irrefutable conclusion as to whether or not it was a public injury. The debatable questions are whether such increased price of insurance is not justified and rendered non-injurious to the public — first, as being merely incidental to the adoption of means and methods necessary to the proper conduct of the business of insurance, and second, whether such increase of premium rates, while immediately burdensome, is not ultimately beneficial to the insured by adding to the solvency of the insurers and swelling the fund out of which indemnity must come in case of loss. The first of these suggestions does not appeal to us for the reason that it is perfectly obvious that everything that is attained by this contract in the way of equipment for the proper conduct of the business of the defendants could be attained by them severally or acting in unison without involving their combination to regulate rates and stifle competition. The masterful way in which these reprobated features of the c'ontract are effectuated forbids us to treat them as mere incidents of a system for the gathering of statistics and the dissemination of data. The other suggestion by which the increase of price to the insured is justified as being ultimately beneficial to him is more persuasive and would probably be entirely so if any substantial warrant for such suggested benefit could be found in the contract. It cannot, however, be found there.
In order that the insuring public be ultimately or at all benefited by the increased cost of insurance it is required to pay, it is essential that such increase over and above the cost of the operation of a company should go not in dividends to its stockholders or in salaries to its officers but to a fund, by whatever name called, by which greater solvency would be given to the company and its increased ability to respond to losses assured. Eor this, however, there is no provision in the contract. In such cases, i. e., where an increase of earnings results from a contract made by the officers of a company acting for its stockholders, we must, in the absence of any suggestion to the contrary, deem that such contract was made for the benefit of such stockholders. If, contrary to this normal presumption, the intention in making such contract was that such increased earnings were to go. to some fund in which the insured would have an interest, it is so highly probable that a provision of such importance would be mentioned in such contract that the failure so to do forbids us to assume that such an intention existed; it is certain that this contract contains no such provision that the insured can lay hold of or by which the subscribing companies could be bound. We cannot avoid, therefore, the following conclusions: First, that the increase of price wrought by this combination of insurers has not been justified; second, that such increase works actual . injury to the public; third, that the contract by which such combination was effected is in restraint of trade and repugnant to public policy on that account, and fourth, that it is unreasonable in that it transcends the legitimate purposes for which the defendants were created or licensed and that such combination itself is characterized by all the evils that the common law by its rule against them placed under its condemnation. That the corporate acts by which such contract was' entered into and such combination effected and its continuance perpetrated are ultra vires the defendants needs no further argument; that the defendants should be enjoined from such continuance follows from what has already been said.
The notion that this conclusion runs counter to anything that was decided by this court in Raritan Railroad Co. v. Traction Co., 70 N. J. Law (41 Vr.) 743, can rest only upon a misunderstanding of that decision or arise from a failure to read the opinion delivered in that case. The contract there under consideration was one between a railroad company and a traction company by which the former agreed "not to lower its present rate of fare unless required by law." In his opinion, Mr. Justice Pitney (now chancellor) makes it perfectly clear that what, was decided was that section 15 of the General Railroad act in terms absolved a railroad company affected by it from the exercise of that judicial discretion respecting rates of fare that otherwise would bo addressed to it as an impartial arbiter be tween its stockholders ancl the public and vested in such railroad company an uncontrolled discretion, within the limits fixed by the legislature itself, to establish such rates as its own interests, without regard to the public, might require. Upon this point the opinion concludes w_ith this language: "Any construction of section 15 of the act that places the railroad company in the attitude of an impartial arbiter as between it and the public, being thus found to be inadmissible because it runs counter to fundamental principles, we have before us a statutory scheme which in terms confers upon the company an uncontrolled discretion to subserve its own interests in making and from time to time changing the rates of fare and of freight, subject only to the maximum rates prescribed and to further legislative action from time to time thereafter." It is clear, therefore, that what was decided was tire construction of a statute and its effect in absolving railroad companies from an attitude toward the public that otherwise would exist. The decision, therefore, instead of militating against our present conclusion is impliedly at least in its favor. The judges who dissented in the case cited did so because their construction of the statute differed from that of the majority of the court.
The result reached upon either branch of the present appeal is that the decree brought up by it should be reversed and the case remitted to the court of chancery to the end that an injunction may issue in accordance with the specific prayers of the information and the views herein expressed.