THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as Truk Shipping Co. v. Chuuk,
7 FSM Intrm. 337 (Ck. S. Ct. Tr. 1995)

[7 FSM Intrm. 337]

TRUK SHIPPING CO. INC. et al.,
Plaintiffs,

vs.

CHUUK STATE,
Defendant.

CA No. 212-95

DECLARATORY JUDGMENT
 
Soukichi Fritz
Chief Justice

Decided:  December 13, 1995

APPEARANCES:
For the Plaintiffs:        Sabino Asor, Trial Counselor
                                     P.O. Box 99
                                     Weno, Chuuk FM 96942

For the Defendant:     Eriano Eram, Trial Counselor
                                     Assistant Attorney General
                                     Office of the Chuuk Attorney General
                                     P.O. Box 189
                                     Weno, Chuuk FM 96942

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HEADNOTES
Civil Procedure ) Declaratory Relief; Constitutional Law ) Chuuk ) Judicial Powers
     A party may seek declaratory relief from the Chuuk State Supreme Court even though it may have another available remedy, but there must be an actual controversy between the parties and the matter must be within the court's jurisdiction.  The court has discretion to entertain such actions if appropriate.  Truk Shipping Co. v. Chuuk, 7 FSM Intrm. 337, 339, 342 (Chk. S. Ct. Tr. 1995).

Contracts ) Illegality
     Contract provisions that exceed allowable interest rates, and are reached in violation of conflict

[7 FSM Intrm. 338]

of interest laws or the procedures prescribed by law, all concern possible violations of the law and may render the contract void as against public policy.  Any contract that violates the law when made is not enforceable in the courts with respect to the illegality.  Truk Shipping Co. v. Chuuk, 7 FSM Intrm. 337, 340 (Chk. S. Ct. Tr. 1995).

Constitutional Law ) Chuuk ) Interpretation
     In interpreting a provision of the Chuuk Constitution that is identical to the same provision in the United States Constitution it is appropriate, in the absence of any local precedent, to look to the law of the jurisdiction from which the provision was drawn.  Truk Shipping Co. v. Chuuk, 7 FSM Intrm. 337, 341 (Chk. S. Ct. Tr. 1995).

Constitutional Law ) Chuuk ) Impairment of Contracts; Contracts ) Illegality
     The prohibition against the impairment of contracts is not absolute.  The contract must be valid and enforceable when made.  A contract which is illegal when made is unenforceable because no obligation arises from an illegal contract, thus there is no obligation that may be impaired.  Truk Shipping Co. v. Chuuk, 7 FSM Intrm. 337, 341 (Chk. S. Ct. Tr. 1995).

Constitutional Law ) Chuuk ) Impairment of Contracts; Contracts
     No obligation may arise from an agreement that lacks consideration, since consideration is required for a valid contract to exist.  Therefore, the termination of a contract that lacks consideration does not violate the prohibition against impairment of the obligations of contracts.  Truk Shipping Co. v. Chuuk, 7 FSM Intrm. 337, 341 (Chk. S. Ct. Tr. 1995).

Constitutional Law ) Chuuk ) Impairment of Contracts
     When the State of Chuuk is a party to a contract there is a distinction between a breach of a contract by the state and impairment of the obligation of the contract. The distinction depends on the availability of a remedy in damages.  If the state's action does not preclude a damage remedy the contract has been breached and the non-breaching party can be made whole.  The state has the same power as an individual to break or terminate contracts.  As long as the private individual or company that is the other party has a remedy at law no impairment of the obligation of contracts occurs.  Truk Shipping Co. v. Chuuk, 7 FSM Intrm. 337, 341 (Chk. S. Ct. Tr. 1995).

Contracts
     A state as a party to a contract has the same rights as any party to a contract and may exercise all the rights that the parties have agreed upon in the contract itself. Truk Shipping Co. v. Chuuk, 7 FSM Intrm. 337, 342 (Chk. S. Ct. Tr. 1995).

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COURT'S OPINION
SOUKICHI FRITZ, Chief Justice:
     This matter came before the court on plaintiff's application for a Preliminary Injunction as part of plaintiff's complaint for a Declaratory Judgment.  This hearing was consolidated with the trial on the merits pursuant to Rule 65(a)(2).  The court has previously denied an application for a Temporary Restraining Order.  See Order (Nov. 2, 1995).  Appearing for the plaintiff was Mr. Sabino Asor and for the defendant, Mr. Eriano Eram of the Attorney General's Office.

     The plaintiff brought this action seeking a declaratory judgment that Chuuk State Law 3-95-4 which terminated a Vessel Agency Agreement between the plaintiff and the defendant violated Article

[7 FSM Intrm. 339]

III, Section 10 of the Chuuk State Constitution [impairment of the obligation of contracts clause].  The complaint also asked the court to declare the defendant to be indebted to plaintiff for past services and penalty charges under the agreement in the amount of $170,265.87.

     The court after having reviewed the papers and pleadings on file, the evidence presented at the hearing and the arguments of counsel took this matter under advisement.  The following is the court's declaration of the rights and legal relations of the parties herein.

Declaratory Relief
     The court should first discuss actions for declaratory relief.  These actions are governed by Rule 57 of our Rules of Civil Procedure.  They are also authorized by the Judiciary Act.  Chk. S.L. 190-08, 16.  There are several requirements under the rule and the statute.

     First, there must be an actual controversy between the parties and the matter must be within the court's jurisdiction.  Chk. Civ. R. 57; Chk. S.L. 190-08, 16.  Any party may seek declaratory relief from the court even though it may have another available remedy.  The court has discretion to entertain such an action if it finds it appropriate to do so.

     The court finds that there is an actual controversy between the parties only as to the constitutional violation claimed.  The subject matter, contracts and the meaning of the constitution, is within the jurisdiction of the court as are the parties.  Therefore the requirements of the rule and statute are present.  Since this action poses an important question concerning the constitutional implication of contracts entered into by the State with private individuals, the court finds this to be an appropriate case in which to grant partial declaratory relief.

The Contract
     The agreement the subject of this dispute was first entered into by the State and the plaintiff in 1984.  The term of the agreement ran to December 31, 1990, and was to be renewed automatically for a like period unless prior notice was given.  This agreement was a Vessel Agency Agreement in which the State contracted with the plaintiff among other things to service the Micro vessels and their cargoes.  Although the original agreement had not expired1, the contract was rewritten in 1993 and signed by the current Governor2 with his own brother, the president of plaintiff company.  Pl.'s Ex. 2.  The new agreement superseded and canceled the previous agreement.  Id. para. 11.  The new contract doubled the commission to be paid to the plaintiff from ten (10%) percent to twenty (20%) percent and added a interest penalty of ten (10%) percent per day as a late charge on any balance due and owing after fifteen (15) working days.  Id.3  No other part of the contract was changed.4 The term was the same as the original contract that is the new agreement expired the last day of December, 2000.

[7 FSM Intrm. 340]

     An amendment was made in May of 1995 that reduced the commission to 12.5% and the late penalty to three (3%) per month5 on balances due and owing.

     Both the original and the rewritten contract contained a paragraph that stated that "(8) Notwithstanding anything in this agreement to the contrary, either party shall have the option to terminate for cause this agreement at any time upon giving thirty (30) days written notice of its intend [sic] to the other party."  These are the features of the contract that are most important to the resolution of this case.

The Statute
     Chuuk State Law (Chk. S.L.) 3-95-4 became law without the Governor's signature on September 4, 1995.  The statute, in Section 5, gave the plaintiff notice of termination for cause under Paragraph (8) of the contract.  Section 5 also contained language that stated: "The validity of monies owed to said private party [plaintiff] under the terms of said Agreement while said Agreements were still in force are to be determined jointly by the Directors of Transportation and Treasury, on behalf of the State, and Truk Shipping Co. management."  Chk. S.L. 3-95-4, 5. [explanation added].

     In Section 1 of the law, the legislature set forth the reasons it believed constituted cause to terminate the contract.  They are:  (1) The Director of the Department of Transportation was not consulted about the agreement [Chk. S.L. 3-95-4, 1(a)], (2) The Agreement was entered into without complying with the bidding procedures of the Public Contracts Act, Truk S.L. No. 5-83 [Chk. S.L. 3-95-4, 1(b)], (3) There are conflicts of interest for certain officials of the state that influenced the agreement [Chk. S.L. 3-95-4, 1(c)], (4) the penalty provision of 10% a day on unpaid bills is excessive [Chk. S.L. 3-95-4, 1(d)], (5) Truk Shipping has breached the contract [Chk. S.L. 3-95-4, 1(e)], (6) the superseding contract increased the commission paid without justification and this new contract was made before the original contract expired [Chk. S.L. 3-95-4, 1(f)&(g)] and (7) the manager of Truk Shipping refused to continue to supply provisions for the Micro vessels [Chk. S.L. 3-95-4, 1(h)].

     While the plaintiffs have not claimed the State has breached the contract by challenging the validity of the causes stated for termination, the court must review them to determine the constitutionally of the law.  The court notes that nothing in the statute prevents the plaintiff from suing the State for breach of contract, if the plaintiff believes the causes stated are insufficient to terminate the contract under Paragraph (8).

     The reasons stated in numbers 2, 3 and 4 all concern possible violations of the law and may render the contract void as against public policy.  Any contract that violates the law when made is not enforceable in the courts with respect to the illegality.

     The 10% penalty provision [reason 4] appears to violate 33 TTC 251 which makes interest charges in excess of 1% per month, on unpaid balances of more than $300.00, illegal.6  Section 253 of that same law makes it a crime to charge such interest.  33 TTC 253.  The conflict of interest [reason 3] comes from the fact that the 1993 superseding agreement was signed in the name of the Governor at a time when the Governor's brother was the head of Truk Shipping.  This may be a violation of the penal code.  See Chk. S.L. 6-66, 706 [Acts Affecting Personal Financial Interest by
 
[7 FSM Intrm. 341]
 
Official of the State].  Then of course, the failure to put the contract up for bidding [reason 5] violates Truk S.L. No. 5-83.  All of these reasons have a bearing on the constitutionally of the legislative act.

Impairment of the Obligation of Contract
     The plaintiff has asserted that Chk. S.L. 3-95-4 violates Article III, Section 10 of the Chuuk State Constitution.  That provision reads in part:  "No . . . law impairing the obligation of contracts may be enacted."

     This is a case of first impression in this jurisdiction.  There are no local precedents that have been brought to the attention of the court.7  The parties have relied on legal precedents from the United States.  The provision of our constitution is identical to the same provision in the United States Constitution.  Compare U.S. Const. art. I, 10, cl. 1 with Chk. Const. art. III, 10.  Accordingly, in the absence of any local precedent, it is appropriate to look to the law of the jurisdiction from which our constitution was drawn.

     First, the court must point out that the prohibition against the impairment of contracts is not absolute.  El Paso v. Simmons, 379 U.S. 497, 85 S. Ct. 577, 13 L. Ed. 2d 446 (1965).  The contract must be valid and enforceable when made.  See Hudson County Water Co. v. McCarter, 209 U.S. 349, 357, 28 S. Ct. 529, 531-32, 52 L. Ed. 828, 832 (1908).  A contract which is illegal when made is unenforceable because no obligation arises from an illegal contract, thus there is no obligation that may be impaired.  Id.  Further, the termination of a contract that lacks consideration does not violate the prohibition against impairment of the obligations of contracts.  Pearsall v. Great N. Ry., 161 U.S. 646, 16 S. Ct. 705, 40 L. Ed. 838 (1896).  Again no obligation may arise from an agreement that lacks consideration, since consideration is required for a valid contract to exist.

     The United States Supreme Court has held that when a State is a party to a contract there is a distinction between a breach of a contract by the State and impairment of the obligation of the contract.  Hays v. Port of Seattle, 251 U.S. 233, 237, 40 S. Ct. 125, 126, 64 L. Ed. 243, 246 (1920).

The distinction depends on the availability of a remedy in damages in response to the state's . . . action.  If the action of the state does not preclude a damage remedy the contract has been breached and the non-breaching party can be made whole. If this happens there has been no law impairing the obligation of the contract.

E & E Hauling, Inc. v. Forest Preserve Dist., 613 F.2d 675, 679 (7th Cir. 1980).  In both of these cases, the state was a party to the contract under consideration.

     Thus it can be said that a state, or in this case the State of Chuuk, has the same power as an individual to break or terminate contracts and by doing so it does not necessarily violate the prohibition of impairing the obligations of contracts.  As long as the private individual or company that is the other party has a remedy at law no impairment of the obligation of contracts occurs.  In other words, just because the State is involved in a contract that does not mean it is constitutionally prohibited from terminating the contract in accordance with the terms of the agreement.  With the foregoing principles in mind the court now turns to the analysis of the case.

[7 FSM Intrm. 342]
 
Analysis
1. Constitutional Violation
     The State as a party to the contract has the same rights as any party to a contract and may exercise all the rights that the parties have agreed upon in the contract itself.  Paragraph (8) of the contract allows either party to terminate the contract upon 30 days notice for cause.  This is exactly what the legislature did when it passed the legislation in question.  They merely exercised a provision of the contract that allows either party to terminate the contract if that party believes there is cause to do so. There is apparently no limitation on what may constitute just cause to terminate the contract, but of course the State as the terminating party takes the risk that a breach of contract suit may result.  The reasons set forth by the legislature, if true, especially those in 5 and 7 would justify a private party in terminating the contract.  Reason 5 states that Truk Shipping breached the contract by not providing paid receipts when applying for payment from the State.  Reason 7 states that Truk Shipping refused to honor the contract to provision the Micro vessels.
 
     The law does not prevent Truk Shipping from collecting for any services rendered before the effective date of the termination.  In fact, it makes specific provision for Truk Shipping to claim compensation for all services and money owed by the State. The statute does not prevent the plaintiff from suing the State for breach of contract if it believes the causes stated in the statute are not sufficient for the State to terminate.  Accordingly, since the statute impairs no remedy, no impairment of the obligations of contract has taken place.  See Hays and E & E Hauling, supra.8

2. Damages
     The plaintiff has also asked the court to rule that the State owes the plaintiff substantial sums of money in damages.  The question of the amounts owed by the State to the plaintiff are not ready at this time for declaratory relief.  The reason the court must decline to rule on the amount owed is that there has been no meeting between the parties pursuant to Section 5 of the statute.  Chk. S.L. 3-95-4, 5.  For the court to issue a declaratory judgment there must be an actual controversy between the parties.  It may be that the State will agree to pay all that the plaintiff demands for past services.9  Until the parties meet and there is a decision on how much of the amount claimed by the plaintiff the State is willing to pay, there is no actual controversy between the parties.  Therefore this matter has not met the requirements of Rule 57 of the Rules of Civil Procedure or the requirements of Section 16 of the Judiciary Act which govern the issuance of declaratory relief.  Chk. S.L. 190-08, 16; Chk. Civ. R. 57.

3. The Extension by the Director of Transportation
     In accordance with the statute, the agreement ended on October 3, 1995.10  The plaintiff produced evidence that despite the statutory termination, the Director of Transportation indicated in a letter to the plaintiff that there would be a "transition" period needed.  Pl.'s Ex. 1.  The letter

[7 FSM Intrm. 343]

indicated that the transition period would commence on September 18 and end on October 18.  Based on this letter, the plaintiff claims the contract was extended to October 18, 1995.

     The plaintiff produced no evidence that the Director had any authority to extend the contract beyond October 3, 1995.  The court finds there was no authority on the part of the Director to extend the contract.  If the plaintiff incurred any expenses during the "transition" period as a result of its reliance on the letter then that again is a matter to be agreed on by the parties pursuant to Section 5 of the statute.

Conclusion
     In summary, Truk Shipping has failed to show a violation of the constitution.  The statute merely took advantage of a contract provision allowing for the termination for cause of the contract by either party.  The proper notice was provided in accordance with the provisions of the contract and the law provided a remedy for Truk Shipping to collect any money due and owing from the State.  The plaintiff also retains the remedy to sue the State for breach of contract.  Just because the State is a party to a contract and decides to terminate the agreement does not necessarily involve a violation of the constitution.  The State is entitled to act as any party to a contract may act including breaching the contract if they so desire . as long as the other party to the contract has a remedy no constitutional violation is involved.  Chk. S.L. 3-95-4, does not violate Article III, Section 10 of the Chuuk Constitution.

     The plaintiff's claim for damages has not risen to an actual controversy and therefore does not meet the requirement for declaratory relief.  The plaintiff has yet to ascertain the amount the State is willing to pay pursuant to Section 5 of the statute. The same applies to any amounts due and owing as a result any justifiable reliance on the "transition" period letter from the Director of Transportation.  Based on the foregoing the court enters its judgment as follows.

Declaratory Judgment
     It is ordered, adjudged and declared that Chk. S.L. 3-95-4, terminating the Vessel Agency Agreement with the plaintiff, does not violate Article III, Section 10 of the Chuuk Constitution.  It is further

     Declared that the amounts due and owing under the contract are not yet an actual controversy since there has been no determination by the individuals designated in Chk. S.L. 3-95-4, 5 how much the State will agree to pay of the amount claimed.  It is further

     Declared that the Director of Transportation had no authority to extend the agreement beyond the termination date of October 3, 1995.  It is further

     Declared that any amounts due the plaintiff in reliance on the "transition" letter of the Director of Transportation may be submitted under Section 5 of the statute for payment.

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Footnotes:
 
1.  The original agreement ended the last day of 1990, but had an automatic renewal provision that extended the contract to December 31, 2000.

2.  The amendment was signed by the Lt. Governor for the Governor.

3.  This late penalty is 3650% interest per annum.

4.  Since no additional duties were required of Truk Shipping in exchange for the increase in commissions and interest penalties the State gained nothing by the new agreement, i.e., there was no consideration received by the State.

5.  This represent an interest charge of 36% per annum.

6.  This amounts to 12% per annum as the statutory maximum.

7.  There is no comparable provision in the FSM Constitution.

8.  Additionally, the statute in Section 1 states reasons that if true would render the contract unenforceable for illegality or failure of consideration.

9.  The court notes that according to the evidence presented the major of the amounts claimed by the plaintiff are a result of the 10% interest penalty provision of the agreement.  Pl.'s Exs. 3-7.

10.  The statute that gave the 30 day notice pursuant to Paragraph (8) of the agreement was effective on September 3, 1995.  Therefore the termination of the agreement was effective on October 3, 1995.