Appeal from Judgment on Report of Referee.
Action by Michael Callanan, suing individually and in behalf of the other stockholders of defendant railroad company, similarly situated, against the Keeseville, Ausable Chasm & Lake Champlain Railroad Company and others. From a judgment on a referee's report in favor of plaintiff, defendants appeal. Modified and affirmed.
[115 N.Y.S. 781] The action is one to rescind a contract made between the Keeseville, Ausable Chasm & Lake Champlain Railroad Company and Joseph A. Powers and Walter H. Mansfield as contractors. The contract is as follows:
" Exhibit A.
" Agreement made this 10th day of June, 1903, between the Keeseville, Ausable Chasm and Lake Champlain Railroad Co., hereinafter called the ‘ Company,’ and Joseph A. Powers and Walter H. Mansfield, hereinafter called the ‘ Contractors,’ in consideration of one dollar hereby receipted or mutually and other good consideration.
" Witnesseth: The company agrees to transfer to the contractors and deliver the same within ten days after the completion of the agreement hereinafter mentioned on their part for the operation of the road by electricity, seventy-five per cent. of the issued capital stock of said company, and to at once place the same in escrow, with the Keeseville National Bank for said purpose; and agrees to deliver to said contractors all the unissued capital stock of said company, and agrees to appoint an executive committee of three to be named by the said contractors and with powers satisfactory to them. The company agrees to mortgage its property, franchises and equipments by executing and filing a consolidated mortgage in the sum of $175,000, the bonds to be issued thereunder to be six per cent. twenty-year gold bonds, with interest payable semi-annually on July 1st and January 1st. Said bonds to be callable and payable at ten per cent. premium and accrued interest at any time. Sufficient of said bonds to be held in escrow to retire the present outstanding bonds of the company and the balance of said bonds to be issued to said contractors for the work and material hereinafter specified, as soon as practicable, and procure the necessary consents of stockholders thereto.
" The contractors agree to reconstruct the company's railroad into a first-class modern third rail electric railroad, to furnish an electric locomotive of sufficient capacity for the company's business and storage battery, dynamo, switchboard and appurtenances sufficient for the company's use and business; and to furnish sufficient and proper cars for the business of the company. Said contractors agree to purchase and deliver to the company the dock property at Port Kent on Lake Champlain, and to connect the company's railroad therewith by suitable tracks; also to extend the company's railroad westerly on both sides of the Ausable river to the upper bridge in the village of Keeseville as soon as possible.
" Said railroad when reconstructed shall at all times be operated with as good service to the villages of Keeseville and Ausable Chasm as heretofore had and there shall be no increase of rate for freight or passengers.
" The company is to procure an exclusive contract for traffic from and to the Ausable Chasm, from the Ausable Chasm Co. if possible.
" The company is to procure and the contractors pay for proper water power to operate said electric road, at a price mutually agreed upon.
" The contractors agree to commence the said work of reconstruction at once and carry the same to completion as rapidly as possible, and both parties are to use their best endeavors to accomplish the same.
" This contract is made upon the mutual understanding that said electric [115 N.Y.S. 782] railroad is to be extended through the Ausable Valley to Lake Placid as soon as practicable and work to be begun within not longer than three years."
This road was at this time a steam railroad about six miles in length, running from Keeseville to Port Kent, a station on the Delaware & Hudson Railroad. It was organized by the business men and citizens of Keeseville in 1889, and was mostly run by the stockholders and directors in person. The company was capitalized to the amount of $60,000; 6,000 shares of $10 each, of which 3,071 shares had been issued, and 2,929 shares remained in the treasury at the time of the execution of the contract. It was also bonded to the amount of $30.000. Immediately after the execution of the contract Powers and Mansfield entered upon its performance. They purchased the dock property at Port Kent for the sum of $7,000, and conveyed it to the railroad company in June, 1903. During the summer of 1903 they purchased coverings required for the protection of the third rail, and also the poles that were required in the electrification of the road. This action was begun in March, 1905. At that time no substantial effort had been made to extend the road to Lake Placid, and no substantial progress in transforming of the road into an electric road. The reasons will be discussed in the opinion. After the action was commenced, the contractors proceeded in transforming the road into an electric road, so that at the time of the judgment such transformation had been very nearly completed.
The referee has directed a rescission of the contract upon various grounds, one of which was that the defendants had made no attempt in good faith to extend the road to Lake Placid, nor had they entered into the contract in good faith with the intention to construct that extension; another, that the contractors had unreasonably neglected and delayed to transform the road into an electric road as provided by the contract. The judgment directed was for a rescission of the contract, without allowance for moneys spent in the transformation of the road after the commencement of the action. Further facts will appear in the opinion.
Thomas O'Connor, Francis A. Martin, and Van Santvoord & Wellington (D. Cady Herrick, of counsel), for appellants.
Woods, Conway & Cotter (Thomas E. Conway and Frank E. Smith, of counsel), for respondent.
Argued before SMITH, P. J., and CHESTER, KELLOGG, COCHRANE, and SEWELL, JJ.
SMITH, P. J.
The facts in this case are so complicated that it is impossible in an opinion of reasonable length to set them forth fully. We are indebted to the counsel, both for the appellants and respondent, for a concise and admirable analysis of the facts presented in their briefs. Those facts only will be here discussed which seem to us controlling of the issues which we are required here to determine.
The plaintiff is now a large stockholder in the road, and was one of the directors at the time this contract was made. This action is brought in his behalf and in behalf of all others similarly situated. It is brought for the corporation upon the ground that the corporation itself is now under the control of directors named by these defendant contractors, and therefore disqualified from protecting the interest of the corporation as against the contractors. At the beginning of the trial it was stipulated:
" That the cause of action which plaintiff seeks to enforce, and the relief he seeks to obtain, are such as the corporation might have enforced and obtained on its own behalf and for its own benefit, had it chosen so to do."
[115 N.Y.S. 783] The most prominent issue raised before the referee was as to the provision in the contract in reference to the extension of this road to Lake Placid. The claim of the plaintiff is that this provision constitutes an obligation binding upon the contractors to so extend the road and to commence work within three years. While the three years had not elapsed at the time of the commencement of the action, they claim that the contractors have denied any obligation in reference thereto under the contract, and have openly asserted that they did not intend to build such a road. These facts they claim authorize a rescission of the contract at this time, with such restoration of the status quo as is, under all the circumstances, possible. The contention of the defendants, on the other hand, is that this provision of the contract has no binding force, that it was not inserted as a substantive part thereof, and that it is only an expression of a hope or perhaps an expectation that such an extension can be made within the three years named in the contract. The referee has found with the plaintiff, has given force to this provision of the contract as an imperative obligation, has found that the defendants entered into the contract without any intention to comply therewith, and for this, as one of the grounds, has decreed a rescission.
Upon the face of the contract, unaided by extraneous circumstances, we are of opinion that an obligation is therein assumed by the defendant contractors in relation to this extension. The other provisions of the contract all have reference to the transformation of the road into an electric road, and for a short extension upon the one end to the dock at Port Kent, upon the other end to the upper bridge in the village of Keeseville. The transfer to the contractors of the stock of the road and of the bonds are for this purpose only. No provision is made for financing any extension to Lake Placid, which extension would cost, as appears in the evidence, upwards of $1,000,000. All other obligations assumed by the contract are assumed in express terms of agreement, while the provision relating to the Lake Placid extension is stated only as an understanding. But the writing stating the understanding of the parties as to its acts thereafter to be done contains prima facie an agreement to do those acts. Jones v. Kent, 80 N.Y. 585.If such expression be here of doubtful interpretation, by reason of its relation in the paper writing to other express agreements, that doubt would seem to be dispelled by the specific provision that the work was to be begun " within not longer than three years." The expression of a mere hope or expectation is not usually qualified by an imperative limitation as to the time in which the act is to be done. The different phraseology in this part of the writing might easily be accounted for by the fact that Powers and Mansfield were not contracting themselves to perform the work, as is the nature of the other agreements made by them in the contract. In fact, it is doubtful if the contract is sufficiently definite so that a court of equity could enforce it specifically, or that damages for its breach could be measured and recovered. The dominant purpose, however, of these owners and directors of this road was confessedly to procure this extension. However incomplete this part of the contract may be, it contains [115 N.Y.S. 784] at least a stipulation on the part of these contractors to accomplish, if possible, this extension through the railroad which they control. This effort they have agreed to make in good faith, and the very fact that a breach of the defendants' agreement possibly cannot be measured in damages is all the more reason why the plaintiff should be protected by a court of equity, either in obtaining a conscientious fulfillment of the defendants' obligations, or a rescission of the contract for the willful breach thereof. This little road of six ...