International Railway Company vs Niagara Parks Commission

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1937 Supreme(SC) 41

Privy Council At Ontario
Macmillan, Lords Blanesburgh , Justice Viscount Sankey , JJ.
International Railway Company -Appellant
Versus
Niagara Parks Commission -Resopndent
Appeal No. 89 of 1936
Decided On : 15-04-1937

Important Points

Compensation for a public utility transferred to a public authority upon franchise expiry, where franchise value is excluded, must be based on the physical structure's reconstruction cost less depreciation, regardless of the undertaking's profitability or obsolescence.

Subject

Administrative Law - Public Utility Compensation

Act Referred

Statutes of 1885 (48 Vict. C. 21)
Statutes of 1887 (50 Vict. C. 13)
Act of the Ontario Legislature, 1892 (55 Vict. C. 96): S.4, S.18, S.27
Revised Statute of Canada respecting Arbitrations and References: S.4

Headnote

(A) Statutory Agreement and Confirming Act - Compensation for transfer of public utility - Valuation of physical assets upon expiry of franchise - Where a private company is required to transfer a railway and its equipment to a statutory body upon the expiry of a limited franchise, the compensation must be based on the reconstruction cost less depreciation, rather than the scrap or break-up value of the component parts. (Paras 26, 29)

(B) Franchise Value - Where an agreement stipulates that compensation shall not be paid in respect of franchises for holding or operating the utility, such a provision excludes any allowance for past or future profits or losses. The compensation is for the physical structure created, and the financial success or failure of the enterprise during the franchise period is irrelevant to the valuation of said structure.

(C) Arbitration - Arbitrators whose mandate is limited to ascertaining the actual value of certain property at a specific time have no power to include interest in their assessment of value.

Facts of the case:
A private company operated an electric railway under a limited franchise granted by a statutory body. Upon the expiry of the franchise, the railway and its equipment were to be transferred to the statutory body subject to compensation. Due to the advent of motor transport, the railway became obsolete and suffered significant financial losses. The majority of arbitrators fixed compensation based on the scrap value of component parts, reasoning that the railway had no value as a going concern to either party. The company contended that compensation should be based on reconstruction cost less depreciation.

Findings of Court:
The company was legally bound to hand over a complete, functioning railway as a going concern, not a collection of dismantled materials. The financial failure of the enterprise does not affect the interpretation of the terms of transfer. Since the right to make profits and the liability to incur losses terminate with the franchise, the compensation must be for the physical assets created, independent of the business's profitability.

Issues: Whether the proper basis for computing compensation for a public utility transferred at the end of a franchise is the scrap value of its components or the cost of reconstruction less depreciation.

Ratio Decidendi: When a private undertaker transfers a public utility to a public authority upon the expiry of a limited franchise, and the value of the franchise is explicitly excluded, the compensation is for the physical structure. The appropriate measure is reconstruction cost less depreciation. To base compensation on profits or losses would be to assume a right to the franchise beyond its expiration. The obsolescence of the railway as a profit-making venture is not a relevant consideration in assessing the value of the physical entity handed over.

Result: Appeal allowed.

Legal Category Hierarchy

Advocates Appeared:
Gard Lyell and Co., Charles Russell and Co., W. Barton, F.W. Griffiths , A.G. Slaight, D.L. McCarthy, W. Tilley

Lord Macmillan:-

The main question to be determined in this appeal relates to the basis on which the appellants are entitled to be compensated on the transfer to the respondents of an electric railway constructed by the appellants on the Canadian Bank of the Niagara River. There are also subsidiary questions (1) as to whether certain items of property should be included in computing the compensation, (2) as to the allowance of interest, and (3) as to costs. The respondents, the Niagara Parks Commission, formerly known as the Commissioners for the Queen Victoria Niagara Falls Park, are a statutory body which controls for the Government of Ontario a large area of land on the bank of the Niagara River above and below the Falls which has been developed as a public park under Statutes of 1885 (48 Vict. C. 21) and 1887 (50 Vict.C.13). The appellants are the successors of the Niagara Falls Park and River Railway Company which was incorporated in 1892 by a statute of the Ontario Legislature (55 Vict. C.96). By that statute an agreement dated 4th December 1891, entered into between the promoters of the railway in question and the Parks Commissioners was ratified and confirmed.

The agreement narrated that the promotors (who, and the company thereafter to be incorporated, are designated "the company") desired to construct and operate an electric railway along the top of the west bank of the Niagara River from the village of Queenston in the County of Lincoln, to the village of Chippawa in the County of Welland; that they intended to apply to the Legislature for a charter of incorporation to enable them to construct and operate the railway; and that the Parks Commissioners had agreed to grant on terms the requisite rights of way through the park lands, and other lands belonging to them or over which they had rights. The Parks Commissioners by the first article of the agreement licensed and permitted the company to construct a first-class electric railway in and through the park and their other lands and by the second article the company undertook to construct, equip and operate the railway. By the third article the railway was required to be constructed of material and according to plans and specifications to be approved by the Parks Commissioners and by the Commissioner of Public Works of the Province. By other articles it was provided that the company should make payment to the Parks Commissioners of a sum of $10,000 for the right of way over a strip of land along the river bank known as the chain reserve and for the benefit of certain contracts made by the Parks Commissioners with various landowners; that the company should have the right to construct and operate inclined railways and elevators and to acquire those already existing on terms to be agreed or fixed by arbitration; and that the Parks Commissioners would not grant to any other persons any right to construct or operate a railway or tramway within the limits of the park and, so long as the agreement was in force, would not them, selves engage in any such construction or operation. The Parks Commissioners further agreed to assent to the company arranging with the municipal corporation of Niagara Falls for a supply of power for working the railway and, if a satisfactory arrangement could not be made with the municipality, undertook themselves to grant to the company such necessary rights as would enable them to procure the requisite power from the waters above the falls. Art. 16 of the agreement provides that the right to operate the railway shall begin on the first day of September next or so soon (before or after that date) as the said railway or any section thereof has been constructed and shall extend to a period of fort, years from the said first day of September one thousand eight hundred and ninety two and shall be renewable on the request by the company for a further period of twenty years as hereinafter provided.

By Art. 17 it was provided that if at the end of the 40 yea