Strict Construction of Charters

Strict Construction of Charters, Tax Exemptions.—Long, however, before the cases last cited were decided, the principle that they illustrate had come to be powerfully reinforced by two others, the first of which is that all charter privileges and immunities are to be strictly construed as against the claims of the State, or as it is otherwise often phrased, “nothing passes by implication in a public grant.”

The leading case was that of the Charles River Bridge v. Warren Bridge,²⁰¹⁶ which was decided shortly after Chief Justice Marshall’s death by a substantially new Court. The question at issue was whether the charter of the complaining company, which authorized it to operate a toll bridge, stood in the way of the State’s permitting another company of later date to operate a free bridge in the immediate vicinity. Inasmuch as the first company could point to no clause in its charter specifically vesting it with an exclusive right, the Court held the charter of the second company to be valid on the principle just stated. Justice Story, presented a vigorous dissent, in which he argued cogently, but unavailingly, that the monopoly claimed by the Charles River Bridge Company was fully as reasonable an implication from the terms of its charter and the circumstances surrounding its concession as perpetuity had been from the terms of the Dartmouth College charter and the ensuing transaction.

The Court was in fact making new law, because it was looking at things from a new point of view. This was the period when judicial recognition of the Police Power began to take on a doctrinal character. It was also the period when the railroad business was just beginning. Chief Justice Taney’s opinion evinces the influence of both these developments. The power of the State to provide for its own internal happiness and prosperity was not, he asserted, to be pared away by mere legal intendments, nor was its ability to avail itself of the lights of modern science to be frustrated by obsolete interests such as those of the old turnpike companies, the charter privileges of which, he apprehended, might easily become a bar to the development of transportation along new lines.²⁰¹⁷

The rule of strict construction has been reiterated by the Court many times. In the Court’s opinion in Blair v. City of Chicago,²⁰¹⁸

decided nearly seventy years after the Charles River Bridge case, it said: “Legislative grants of this character should be in such unequivocal form of expression that the legislative mind may be distinctly impressed with their character and import, in order that the privilege may be intelligently granted or purposely withheld. It is a matter of common knowledge that grants of this character are usually prepared by those interested in them, and submitted to the legislature with a view to obtain from such bodies the most liberal grant of privileges which they are willing to give. This is one among many reasons why they are to be strictly construed.... The principle is this, that all rights which are asserted against the State must be clearly defined, and not raised by inference or presumption; and if the charter is silent about a power, it does not exist. If, on a fair reading of the instrument, reasonable doubts arise as to the proper interpretation to be given to it, those doubts are to be solved in favor of the State; and where it is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to be adopted which works the least harm to the State.’”²⁰¹⁹

An excellent illustration of the operation of the rule in relation to tax exemptions was furnished by the derivative doctrine that an immunity of this character must be deemed as intended solely for the benefit of the corporation receiving it and hence, in the absence of express permission by the State, may not be passed on to a successor.²⁰²⁰ Thus, where two companies, each exempt from taxation, were permitted by the legislature to consolidate, the new corporation was held to be subject to taxation.²⁰²¹ Again, a statute which granted a corporation all “the rights and privileges” of an earlier corporation was held not to confer the latter’s “immunity” from taxation.²⁰²² Yet again, a legislative authorization of the transfer by one corporation to another of the former’s “estate, property, right, privileges, and franchises” was held not to clothe the later company with the earlier one’s exemption from taxation.²⁰²³

Furthermore, an exemption from taxation is to be strictly construed even in the hands of one clearly entitled to it. So the exemption conferred by its charter on a railway company was held not to extend to branch roads constructed by it under a later statute.²⁰²⁴ Also, a general exemption of the property of a corporation from taxation was held to refer only to the property actually employed in its business.²⁰²⁵ Also, the charter exemption of the capital stock of a railroad from taxation “for ten years after completion of the said road” was held not to become operative until the completion of the road.²⁰²⁶ So also the exemption of the campus and endowment fund of a college was held to leave other lands of the college, though a part of its endowment, subject to taxation.²⁰²⁷ Provisions in a statute that bonds of the State and its political subdivisions were not to be taxed and should not be taxed were held not to exempt interest on them from taxation as income of the owners.²⁰²⁸

Strict Construction and the Police Power.—The police power, too, has frequently benefitted from the doctrine of strict construction, although this recourse is today seldom, if ever, necessary in this connection. Some of the more striking cases may be briefly summarized. The provision in the charter of a railway company permitting it to set reasonable charges still left the legislature free to determine what charges were reasonable.²⁰²⁹ On the other hand, when a railway agreed to accept certain rates for a specified period, it thereby foreclosed the question of the reasonableness of such rates.²⁰³⁰ The grant to a company of the right to supply a city with water for twenty-five years was held not to prevent a similar concession to another company by the same city.²⁰³¹ The promise by a city in the charter of a water company not to make a similar grant to any other person or corporation was held not to prevent the city itself from engaging in the business.²⁰³² A municipal concession to a water company to run for thirty years, and accompanied by the provision that the “said company shall charge the following rates,” was held not to prevent the city from reducing such rates.²⁰³³ But more broadly, the grant to a municipality of the power to regulate the charges of public service companies was held not to bestow the right to contract away this power.²⁰³⁴ Indeed, any claim by a private corporation that it received the rate-making power from a municipality must survive a two-fold challenge: first, as to the right of the municipality under its charter to make such a grant, secondly, as to whether it has actually done so, and in both respects an affirmative answer must be based on express words and not on implication.²⁰³⁵

Doctrine of Inalienability as Applied to Eminent Domain, Taxing, and Police Powers.—The second of the doctrines mentioned above, whereby the principle of the subordination of all persons, corporate and individual alike, to the legislative power of the State has been fortified, is the doctrine that certain of the State’s powers are inalienable, and that any attempt by a State to alienate them, upon any consideration whatsoever, is ipso facto void and hence incapable to producing a “contract” within the meaning of Article I, § 10. One of the earliest cases to assert this principle occurred in New York in 1826. The corporation of the City of New York, having conveyed certain lands for the purposes of a church and cemetery together with a covenant for quiet enjoyment, later passed a by-law forbidding their use as a cemetery. In denying an action against the city for breach of covenant, the state court said the defendants “had no power as a party, [to the covenant] to make a contract which should control or embarrass their legislative powers and duties.”²⁰³⁶

The Supreme Court first applied similar doctrine in 1848 in a case involving a grant of exclusive right to construct a bridge at a specified locality. Sustaining the right of the State of Vermont to make a new grant to a competing company, the Court held that the obligation of the earlier exclusive grant was sufficiently recognized in making just compensation for it; and that corporate franchises, like all other forms of property, are subject to the overruling power of eminent domain.²⁰³⁷ This reasoning was reinforced by an appeal to the theory of state sovereignty, which was held to involve the corollary of the inalienability of all the principal powers of a State.

The subordination of all charter rights and privileges to the power of eminent domain has been maintained by the Court ever since; not even an explicit agreement by the State to forego the exercise of the power will avail against it.²⁰³⁸ Conversely, the State may revoke an improvident grant of public property without recourse to the power of eminent domain, such a grant being inherently beyond the power of the State to make. So when the legislature of Illinois in 1869 devised to the Illinois Central Railroad Company, its successors and assigns, the State’s right and title to nearly a thousand acres of submerged land under Lake Michigan along the harbor front of Chicago, and four years later sought to repeal the grant, the Court, a four-to-three decision, sustained an action by the State to recover the lands in question. Said Justice Field, speaking for the majority: “Such abdication is not consistent with the exercise of that trust which requires the government of the State to preserve such waters for the use of public. The trust devolving upon the State for the public, and which can only be discharged by the management and control of property in which the public has an interest, cannot be relinquished by a transfer of the property.... Any grant of the kind is necessarily revocable, and the exercise of the trust by which the property was held by the State can be resumed at any time.”²⁰³⁹

On the other hand, repeated endeavors to subject tax exemptions to the doctrine of inalienability, though at times supported by powerful minorities on the Bench, have failed.²⁰⁴⁰ As recently as January, 1952, the Court ruled that the Georgia Railway Company was entitled to seek an injunction in the federal courts against an attempt by Georgia’s Revenue Commission to compel it to pay ad valorem taxes contrary to the terms of its special charter issued in 1833. In answer to the argument that this was a suit contrary to the Eleventh Amendment, the Court declared that the immunity from federal jurisdiction created by the Amendment “does not extend to individuals who act as officers without constitutional authority.”²⁰⁴¹

The leading case involving the police power is Stone v. Mississippi.²⁰⁴² In 1867, the legislature of Mississippi chartered a company to which it expressly granted the power to conduct a lottery. Two years later, the State adopted a new Constitution which contained a provision forbidding lotteries, and a year later the legislature passed an act to put this provision into effect. In upholding this act and the constitutional provision on which it was based, the Court said: “The power of governing is a trust committed by the people to the government, no part of which can be granted away. The people, in their sovereign capacity, have established their agencies for the preservation of the public health and the public morals, and the protection of public and private rights,” and these agencies can neither give away nor sell their discretion. All that one can get by a charter permitting the business of conducting a lottery “is suspension of certain governmental rights in his favor, subject to withdrawal at will.”²⁰⁴³

The Court shortly afterward applied the same reasoning in a case in which was challenged the right of Louisiana to invade the exclusive privilege of a corporation engaged in the slaughter of cattle in New Orleans by granting another company the right to engage in the same business. Although the State did not offer to compensate the older company for the lost monopoly, its action was sustained on the ground that it had been taken in the interest of the public health.²⁰⁴⁴ When, however, the City of New Orleans, in reliance on this precedent, sought to repeal an exclusive franchise which it had granted a company for fifty years to supply gas to its inhabitants, the Court interposed its veto, explaining that in this instance neither the public health, the public morals, nor the public safety was involved.²⁰⁴⁵

Later decisions, nonetheless, apply the principle of inalienability broadly. To quote from one: “It is settled that neither the ‘contract’ clause nor the ‘due process’ clause has the effect of overriding the power to the State to establish all regulations that are reasonably necessary to secure the health, safety, good order, comfort, or general welfare of the community; that this power can neither be abdicated nor bargained away, and is inalienable even by express grant; and all contract and property rights are held subject to its fair exercise.”²⁰⁴⁶

It would scarcely suffice today for a company to rely upon its charter privileges or upon special concessions from a State in resisting the application to it of measures alleged to have been enacted under the police power thereof; if this claim is sustained, the obligation of the contract clause will not avail, and if it is not, the due process of law clause of the Fourteenth Amendment will furnish a sufficient reliance. That is to say, the discrepancy that once existed between the Court’s theory of an overriding police power in these two adjoining fields of constitutional law is today apparently at an end. Indeed, there is usually no sound reason why rights based on public grant should be regarded as more sacrosanct than rights that involve the same subject matter but are of different provenience.

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Last modified: June 9, 2014