Lewis, Carton and Mintz. The opinion of the court was delivered by Carton, J.A.D.
The narrow issue posed on this appeal is whether a municipality has the power to increase water rates retroactively.
The mayor and council of defendant Borough of Oakland in 1967 adopted an ordinance creating a water department, which it charged with responsibility for the operation of its municipal water supply system. This ordinance, adopted pursuant to N.J.S.A. 40:62-47 et seq. , provided for the sale of water to persons within and outside the borough on conditions and according to a schedule of fees set forth in the ordinance.
There was an increase in the cost of operation of the water utility during the early part of 1970, accompanied by a decrease in the estimated income for prior years, and, as a result of various public meetings, it became evident to the borough officials that the rates would have to be increased. The borough attorney was authorized in April to prepare an amendatory ordinance for introduction to raise the rates as of July 1. Nevertheless, the mayor and council delayed introduction of the ordinance in the hope that increased use of
lawn sprinklers during the hot summer months might bring in revenue and thus negate the necessity for any rate increase. The anticipated increase in revenues failed to materialize, however, and in September 1970 the ordinance here challenged was adopted increasing the water charges retroactively to cover the period beginning July 1.
Plaintiffs, for themselves and as representatives of all consumers of water in the borough, brought this action to declare the ordinance illegal. It was undisputed that plaintiffs were residents and purchasers of water at all times pertinent to this case. It was also stipulated that there were some residents of the town after the ordinance was adopted who had not resided there previously, and that premises of those residents could be affected by liens for unpaid water charges.
Plaintiffs moved for a partial summary judgment. However, the court, 119 N.J. Super. 235, holding that the retroactive provision of the ordinance did not constitute an impairment of contractual obligation, upheld the validity of the ordinance and granted summary judgment in favor of defendant municipality. We believe this determination to be erroneous and that the ordinance, insofar as it mandated retroactive operation, was invalid. In other respects the validity of the ordinance is not here involved.
When the borough adopted the original ordinance in 1967 creating a water department and providing for the sale and distribution of water to its inhabitants for domestic and commercial use, it established the machinery for engaging in a private or proprietary function. Reid Development Corp. v. Parsippany-Troy Hills Tp. , 10 N.J. 229 (1952). The business nature of this function differed in no substantial degree from similar functions carried on by public utilities.
Charges by a municipality for water furnished to its customers involve a sale and arise from a contractual relationship between it and the customer. As the court stated in Lehigh Valley R.R. Co. v. Jersey City , 103 N.J.L. 574, 576 (Sup. Ct. 1927), aff'd 104 N.J.L. 437 (E. & A. 1927):
Our conclusion is that a charge for water furnished by a municipality to an owner or occupant of lands is not a tax, but is the subject of a contract, the sale of a commodity, creating the relationship of seller and ...