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governing negotiable instruments, unless the instrument in its nature was without the scope of the corporation's power.
Directors as Trustees. The board of directors is also restricted in another way; while the directors are not strictly a board of trustees, their position has much of the same fiduciary quality. They hold a position of trust for the stockholders, not for a majority of stockholders. It has sometimes been held that the directors as a board cannot contract with one of their members as an individual. The prevailing rule is not as strict as that; but any such transaction must be clear and aboveboard and, in case a question is raised, the burden of proof is on the director to show that the contract was fair. It is quite clear that no member of the board may derive any secret profit from his position; any such secret profit can be recovered for the benefit of the corporation. Some years ago the president of a large express company bought for himself a small tributary company and sold it to the larger company at a profit; it was held to be an illegal sale. On the contrary a stockholder may contract freely with the board, and is not restricted in voting because he has an interest in the matter voted; nevertheless, a stockholder with a controlling interest, thus with power to elect directors, must exercise his power in such manner as not to work fraud on the corporation.
Liability of Directors. While the directors are liable for any abuse of trust, for gross negligence and the like, they are not liable for errors of judgment; they are required to exercise ordinary care, skill, and prudence, and to act with honest purpose.
Nevertheless, if officers act in excess of authority, whether ultra vires or beyond the authority lodged in them personally, they may be held liable to the corporation, and also to those with whom they deal. Few cases occur, however, where action is taken against an official. Directors, being restricted as to contracting with themselves, are not entitled to payment for their services except as provided in the by-laws or statute, or as voted by the stockholders. Ordinarily there is some such provision, so that they are paid for attending directors' meetings.
Executive Committee. The by-laws often provide for an executive committee as a sub-committee of the board, with important powers, and also authorize the appointment of necessary officers and agents of the corporation. The statute sometimes makes such provision, although the corporation doubtless in the absence of such express provision has inherent power to appoint the officers and agents necessary to the exercise of its functions. It has already been stated that the directors act as a board and not as individuals. If action is taken at any time as the result of personal interviews or after telephone conversations, such action ought to be taken anew, or ratified, at the next meeting of the board. Action taken after conference by one member with all the others, whether legal or not, is bad business practice and often results in action which would not be possible in an open meeting of the board.
Powers of State over Corporations. While the charter is a contract which the State may not set aside, yet the State may exercise certain powers, not expressed in the charter, over corporations as well as over individuals. For example, it may exercise police powers for the protection of the public in matters of health, safety, comfort, morals, or property. As a matter of Common Law, it is contrary to public policy for the State to relinquish this power. It may thus enforce the rights of the public against a common carrier, to be described in a later chapter, and thus regulate railroad rates unless it has restricted itself in the charter, and even regulate wages paid to employees; it may also prescribe safety appliances for railroads or for manufactories. It has the power to tax corporations in any manner not in violation of either the State or the United States Constitution. If the charter provides for some special method of taxation, the corporation having accepted the charter cannot afterwards object. The State has the power to tax the franchise of the corporation for the right or privilege of doing business.
Definition. Municipal corporations are mainly, cities, towns, and counties. They are political units; they are physical units into which a State is geographically divided; but they are also business corporations, and it is from this standpoint that they are of interest here.
How Organized. Small cities, counties, and towns may be organized and may act under general statutes; but large cities are huge business corporations whose administration involves the most difficult problems connected with democratic government; such corporations require careful regulation by the State, and their needs cannot well be met except by special charters which even then need amendment from time to time to cure defects as they become evident.
In many States cities are created by special charter, while in others general statutes control; sometimes the State constitution requires the latter. In such cases it is common to classify cities according to population, with a code of laws for each class. In Illinois, cities are incorporated under general statutes in this way; but as there are no other cities in the same class as Chicago, the statute is in effect a special charter for that city. For other cities in the State, uniformity of treatment secured under general laws seems to have advantages.
City a Business Corporation. It is important that the large city should be recognized to be a great business corporation, and a public ser
vice corporation. Other large corporations, railroad, telephone, lighting, insurance, and others, have long been under State regulation, and some commission is usually appointed to observe and perhaps control their action and to protect the interests of the public. The State, in its charter for cities, in a similar way not only grants powers, but also imposes restrictions for the purpose of insuring honest and efficient handling of the business of the city.
Acceptance of Charter. The municipal corporation serves as the agent of the State and is thus a convenient means to properly perform its functions with its citizens. It does not seem necessary that the citizens, members of the local corporation, should formally accept the charter, and frequently this is not required; the charter then does not take on the character of a contract, and its repeal is at any time possible. It is quite common, however, for a statute to provide that a new or an amended charter shall have the approval of the citizens before becoming operative. This is ordinarily accomplished by a referendum at the next city election.
General Powers. The powers of a municipal corporation have been well stated to be:
1. Those expressly granted. 2. Those necessarily or fairly implied or incident to those expressly
granted. 3. Those essential to the declared object and purposes, and not simply
convenient, but indispensable. The powers are closely confined and may not be extended by by-laws or municipal ordinances.
More Specific Powers. It thus has power to make ordinary contracts; to incur debts, but not to borrow money unless specifically authorized; to own property, and acquire it by gift; to indemnify officers; to compromise or arbitrate; to pay money when not legally liable.
It has police powers and in the interest of the public welfare it may exercise them to regulate occupations and amusements, health, nuisances, licenses, markets, fires, care of the indigent and infirm, as well as other matters not here specified. Among other things, it may regulate the running of trains. Another proper function is the regulation of the liquor traffic. To municipal, as to other corporations, the State may and does delegate some of its power, as the power to take lands by right of eminent domain, which is granted to cities and towns, as well as to railroads.
Legislation and Judicial Powers. To municipal corporations alone does the State delegate legislative power and judicial power. They thus have legislative power to pass ordinances; but these must conform to the charter and to the State Constitution, must not be contrary to public policy or other general policy of the State, and not be oppressive or un
reasonable. As to the judicial powers of a municipal corporation, its courts have some Common Law power as well as jurisdiction with relation to its ordinances, and it has been held that resident citizenship does not disqualify a judge from sitting in municipal cases.
While in a general way the municipality may not delegate its powers; while purely ministerial acts may be done under its authority by persons who act as agents; yet discretionary powers must be exercised directly by the municipality in the channels authorized by charter.
Direct Exercise of State Powers. As the State passes laws affecting its citizens so as to afford greater security to life and property, so also it provides restrictions and checks upon the action of municipal corporations. From this standpoint the Commonwealth of Massachusetts believes that the City of Boston is under better protection if the Police Commissioner is appointed by the State; and the commission which grants liquor licenses is appointed in the same way. In Michigan and in some other States the practice is different, for there the constitutional right of self-government is strongly asserted and certain State appointments of officers to serve the city of Detroit were actually set aside by the courts as illegal, unconstitutional. In most States, however, the Michigan rule does not prevail.
Mayor; Council; Aldermen. The charter specifies the governing body of the municipality, in Boston a Mayor, and a City Council now a single body, although formerly there were a Board of Aldermen and a larger Common Council; the terms of office are specified, as well as the powers granted to each. Like the directors of a business corporation, the members of the Council properly occupy a fiduciary position, although it is sometimes hard to believe it. In addition to the officials specified in the charter, there are others provided for in the ordinances.
Board of Public Work. An important department in that city of great interest to engineers is the Department of Public Works, under a Commissioner of Public Works, “who shall be a civil engineer of recognized standing in his profession"; "who shall construct all streets and sewers,"
," "shall have full charge of all engineering work ” “and of the laying out and construction of all public improvements,” with some specified exceptions.
Departments. The organization in other cities is often quite different. Whether under a Board (or Department) of Public Works, or under whatever names, there are in every city various departments such as street, water, wire, health, parks and public grounds, sewers and drains, bridges and ferries, and others.
Building Laws. The charter of Boston, in the interest of safety, provides building laws which must be consulted by engineers designing structural details; and these laws must be observed, not only in general terms,
but also with reference to specifications prescribing allowable stresses, for example, or the proportions of materials to be used in concrete; it provides for a Building Commissioner and for inspectors under him. The power of the city to issue licenses is such that little or nothing can be done in new building, or in repairs, or in opening the streets for water, sewer, or gas connections, or for any purpose, without a previous permit or license; the practice of any city at the particular time must be known if the engineer in charge of building construction is to avoid trouble. The requirements as to permits or licenses are prescribed by ordinance in some cases, but sometimes are department regulations only.
Civil Service Provisions. To avoid the evils of political patronage, civil service examinations are in many cases required by charter as a qualification for appointment to many classes of city employment.
Awarding Contracts. To minimize the opportunity for favoritism in awarding contracts for public work the following provision occurs in the charter for Boston:
Officers and boards shall, in their respective departments, make all necessary contracts for the employment of labor, the supply of materials and the construction, alteration and repair of all public works and buildings.
Every officer or board in charge of a department in said city, when authorized to erect a new building or to make structural changes therein, shall make contracts therefor, not exceeding five, each contract to be subject to the approval of the mayor; and when about to do any work or to make any purchase, the estimated cost of which amounts to or exceeds two thousand dollars, shall, unless the mayor gives a written authority to do otherwise, invite proposals therefor by advertisements.
Every proposal for doing such work or making such sale shall be accompanied by a suitable bond, certified check, or certificate of deposit, for the faithful performance of such proposal.
All contracts made by any department of the city of Boston shall, when the amount involved is two thousand dollars or more, be in writing, and no such contract shall be deemed to have been made or executed until the approval of the mayor in writing is affixed thereto. All such contracts shall be accompanied by a suitable bond or deposit of money or other security for the faithful performance of such contracts.
Most large cities have similar provisions; these are sometimes a part of the charter, sometimes they are only ordinances. A city ordinance of Boston further provides that no head of a department shall construct work until money has been appropriated.
Engineer to Know Formalities. Any contractor or contractor's engineer should know that all required formalities have been complied with before entering upon a contract for public work. If the work is performed without advertising when that is required, any citizen may bring action and prevent the city paying for the work done. In this case the city