In the case of Knoxville Water Company v. Knoxville in 1902, the U.S Supreme Court was tasked with deciding on a dispute between a city and its water company over rates for public fire protection services. The City of Knoxville had contracted with the water company to provide these services at an agreed-upon rate but later passed an ordinance reducing this rate significantly without renegotiating terms with the water company. The court ruled in favor of the water company, stating that such unilateral changes by one party were not permissible under contract law principles. This decision established that municipalities could not unilaterally alter contracts they have entered into without consent from all parties involved, reinforcing fundamental principles about contractual obligations and fairness in dealings between entities.

In the dissenting opinion for Knoxville Water Company v. Knoxville, Justice Harlan argued that the city of Knoxville had no right to arbitrarily set water rates without considering the company's investment and potential profit. He believed that while a municipality has power over public utilities, it should not be allowed to exercise this power in such a way as to destroy or diminish property rights without just compensation. The justice contended that if a utility is forced by law to provide services at prices which do not allow it reasonable returns on its investments, then it amounts to confiscation of property contrary to constitutional principles protecting private property from being taken for public use without just compensation. Therefore, he disagreed with majority’s decision upholding the city’s authority in setting water rates unilaterally.