Cities and Towns--exclusive private water service--void as
against public policy
The trial court did not err by declaring unenforceable
plaintiff's exclusive water service agreement for the Town of
Pine Knoll Shores where the family who developed the tract that
became the town entered into an exclusive agreement with
plaintiff's predecessor in 1966; the agreement was recorded in
the subdivision's covenants; the town has grown and plaintiff
has expanded its facilities to serve the entire town; the Town
decided to build its own municipal water system; plaintiff
brought suit to enjoin the Town from establishing a municipal
water system; and the Town counterclaimed to have the 1966
agreement declared unenforceable. The Legislature has the power
to create public policy and has given broad, ultimate authority
to municipalities to provide water to their citizens. The
agreement is void as against public policy because it is
exclusive, extends indefinitely into the future, and cannot be
enforced without preventing the Town from exercising its
statutory powers.
Hunton and Williams, by Edward S. Finley, Jr., and Smith,
Helms, Mulliss, and Moore, L.L.P., by James G. Exum, Jr., for
plaintiff-appellant and intervenor-appellant.
Poyner and Spruill, L.L.P., by Nancy Bentson Essex, and
Kirkman, Whitford, and Brady, P.A., by Neil B. Whitford, for
defendant-appellees and intervenor-appellees.
Andrew L. Romanet, Jr. and John M. Phelps, II, for North Carolina League of Municipalities,
amicus curiae.
William E. Grantmyre, for Carolinas Chapter of the National
Association of Water Companies, amicus curiae.
HUDSON, Judge.
Carolina Water Service filed this suit seeking to enjoin the
Town of Pine Knoll Shores from establishing a municipal water
system and to enforce exclusive water service provisions in its
favor. The trial court declared unenforceable the exclusive water
service provisions in favor of Carolina Water, denied an injunction
against the Town, and permanently enjoined Carolina Water from
using the provisions to interfere with the Town's right to build
its own water system. We agree that the exclusive rights
provisions contravene public policy which favors municipalities and
which prohibits private monopolies and perpetuities. We affirm the
order of the trial court.
Facts helpful to an understanding of this case are as follows:
in 1966, members of the Roosevelt family began plans to develop a
379-acre tract of land (the Tract) in what is now part of Pine
Knoll Shores in Carteret County, North Carolina. The Roosevelts
entered into an agreement (the 1966 Agreement) with Southern Gulf,
South Carolina Utilities Division, Inc. (Southern Gulf) giving
Southern Gulf the exclusive right to construct and operate a
central water facility to serve the Tract. By the terms of the
agreement, all owners and occupants within the Tract were to
purchase their water only from Southern Gulf and were prevented
from allowing other water providers to construct water service
facilities within the Tract. The 1966 Agreement described thesepromises as "covenant[s] running with the land," binding upon
subsequent purchasers of land within the tract and benefitting
future successors of Southern Gulf.
In the 1966 Agreement, the Roosevelts also promised to include
the covenants in favor of Southern Gulf in the general subdivision
restrictions. From 1967 until 1971, the Roosevelts developed the
Tract and conveyed lots. As promised, the covenants were recorded
in the subdivision's Declarations of Covenants and Restrictions
(Declarations) which were filed with the Carteret County Register
of Deeds. Conveyances to lot owners were made subject to the
Declarations and the easements and restrictive covenants they
created. In turn, Southern Gulf constructed water supply and
distribution facilities to serve the subdivision.
Carolina Water Service (Carolina Water) acquired title to the
water facilities in 1972, and the Town of Pine Knoll Shores (the
Town) incorporated in 1973. In 1974, the Roosevelts executed a
deed conveying the streets in Pine Knoll Shores to the Town,
“subject to the easements heretofore granted for utilities.” The
Town now includes approximately 1,120 acres in addition to the 379
acre tract and is home to an estimated 2,000 water customers.
Carolina Water has expanded its water facilities to serve the
entire Pine Knoll Shores city limits.
In 1995, the Town informed Carolina Water that it wanted to
build its own municipal water system. Carolina Water insisted that
the exclusive rights provisions in the 1966 Agreement and the 1967-
71 Declarations barred the Town from constructing a water system.
On 20 September 1995, the Town filed a complaint seeking an orderauthorizing the Town to construct its own water system and to
provide water service to its citizens. The trial court entered
judgment for the Town, but this Court vacated that judgment on 6
January 1998, finding no actual controversy and no jurisdiction.
See Town of Pine Knoll Shores v. Carolina Water Service, 128 N.C.
App. 321, 494 S.E.2d 618 (1998).
The Town began construction of its own system in 1999 by
laying approximately 2000 feet of pipe within the Tract. When the
system is completed, the Town intends to offer water service to all
residents and property owners within the Tract and to charge a $10
per month availability fee to all owners who choose to continue
receiving service from Carolina Water.
In April 1999, Carolina Water brought suit to enjoin the Town
from establishing a municipal water system within the Tract. In
its counterclaim, the Town again sought to have the 1966 Agreement
and 1967-71 Declarations declared unenforceable. In its judgment
for the Town, the trial court concluded in pertinent part: (1) the
exclusive rights provisions of the 1966 Agreement are contrary to
public policy; (2) the description of the Tract in the 1966
Agreement is void for vagueness; and (3) the water service
provisions are unlawful restraints of trade. Therefore, the trial
court declared the exclusive rights provisions unenforceable,
denied the injunction sought by Carolina Water, and permanently
enjoined Carolina Water from using the provisions to interfere with
the rights of the Town to construct a municipal water system. From
the trial court's order, Carolina Water appeals.
Carolina Water contends the trial court erred in concludingthat the exclusive rights provisions “are contrary
to public policy
to the extent they purport to prevent the Town of Pine Knoll Shores
or any other municipality from providing public water utility
service to any property located within municipal limits.” Carolina
Water argues that any authority the Town has to construct a
municipal water system neither supersedes valid restrictive
covenants nor requires provision of duplicative services. Carolina
Water insists that no statutory grounds exist to invalidate the
provisions as a matter of public policy. Because the statutes
allowing municipal water service do not address competition with
private suppliers, Carolina Water maintains that public policy does
not favor municipal systems. We disagree.
Our state legislature has the power to create public policy.
See Riegel v. Lyerly, 265 N.C. 204, 209, 143 S.E.2d 65, 68 (1965).
“[W]here the law-making power speaks on a particular subject over
which it has power to legislate, public policy in such cases is
what the law enacts.” Cauble v. Trexler, 227 N.C. 307, 311, 42
S.E.2d 77, 80 (1947). An agreement which cannot be performed
without violation of a statute is illegal and void. Id.
North Carolina's legislature has given municipalities the
authority to construct and operate their own water systems. See
N.C.G.S. §§ 160A-311 and 160A-312 (1999). It has granted to all
municipalities the power to fix and enforce rates and even to
require land owners to connect to their water systems or else pay
an availability fee. See N.C.G.S. §§ 160A-314 and 160A-317
(1999). In these provisions, the legislature made no exceptionsfor situations in which a private system exists or exclusive rights
have purportedly been granted to a private supplier. See G.S. §§
160A-311, 312, 314, and 317. Nor did it enact any statutory
provisions which permit a municipality to permanently convey or
contract away its statutory rights to provide water service.
Unless and until the legislature enacts such exceptions, the
authority of municipalities to construct and operate their own
water systems remains absolute.
Numerous United States Supreme Court cases, as well as cases
decided in North Carolina, pronounce public policy in favor of
broad discretion for municipalities regarding the construction and
operation of their own utilities. See, e.g., Knoxville Water Co.
v. Knoxville, 200 U.S. 22, 50 L. Ed. 353 (1906) (holding that a
city's covenant "not to grant [a water service franchise] to any
other person or corporation" did not bar the city from establishing
its own system); Lumbee River Electric Corp. v. City of
Fayetteville, 309 N.C. 726, 309 S.E.2d 209 (1983) (holding that a
municipality could provide electric service, even where the
Utilities Commission had assigned that area to an electric
cooperative, as long as service by the municipality was authorized
by Chapter 160A); Power Co. v. Elizabeth City, 188 N.C. 278, 124
S.E. 611 (1924) (holding that a franchise from the Utilities
Commission for a utility to operate in an area does not bar a
municipality from operating a competing system). A compelling
example is Carolina Water Service v. Town of Atlantic Beach, 121
N.C. App. 23, 464 S.E.2d 317 (1995), disc. review denied, 342 N.C.894, 467 S.E.2d 901 (1996), in which Carolina Water sued the Town
of Atlantic Beach when that town attempted to provide a water
system that would duplicate Carolina Water's service to Atlantic
Beach. Carolina Water argued that it had relied upon language in
annexation ordinances to the effect that it had an exclusive right
to provide water service within the annexed area. In affirming the
trial court's order in favor of Atlantic Beach, this Court
emphasized that "the Town has the authority under the public
enterprise statute to construct and administer its own water
system." Id. at 32, 464 S.E.2d at 323 (emphasis added). We
conclude that these cases plainly reveal public policy in favor of
municipalities' rights to construct and operate water systems, even
when private systems are already in operation.
Additionally, monopolizing or attempting to monopolize trade
or commerce in North Carolina is strictly prohibited. N.C.G.S. §
75-2.1 (1999) (“It is unlawful for any person to monopolize, or
attempt to monopolize, or combine or conspire with any other person
or persons to monopolize, any part of trade or commerce in the
State of North Carolina.”); see also N.C. Constitution. art. I, §
34 (“Perpetuities and monopolies are contrary to the genius of a
free state and shall not be allowed.”). The attempt by the
Roosevelts to give a private water supplier perpetual exclusive
rights to serve an area violates this prohibition. In addition,
under N.C.G.S. § 160A-322 (1999), cities can enter into contracts
for the supply of water for a period of no more than forty years.
We find it difficult to conceive how Southern Gulf and theRoosevelts, a group of private individuals, could be allowed to
bind other citizens in their choice of a water provider forever,
when a municipality cannot bind itself for more than forty years.
The provisions of the 1966 Agreement and the 1967-71 Declarations
that purport to give Carolina Water exclusive easements and
exclusive rights to supply water to Pine Knoll Shores for an
unlimited period of time cannot be enforced because they are in
violation of our state's public policy against monopolies and
perpetuities.
Our legislature has given broad, ultimate authority to
municipalities to provide water to their citizens. Because the
exclusive rights provisions in favor of Carolina Water cannot be
enforced without preventing the Town from exercising its statutory
powers regarding municipal water systems, and because they are
exclusive and extend indefinitely into the future, the provisions
are void as against public policy. Accordingly, we affirm the
trial court's judgment declaring the exclusive water service
provisions unenforceable, denying the permanent injunction sought
by Carolina Water, and permanently enjoining Carolina Water from
using the 1966 Agreement or the restrictive covenants to interfere
with the Town's right to construct a municipal water system and
supply water to its citizens.
Affirmed.
Judges HUNTER and SMITH concur.
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