CHAPTER VIII
ULTRA VIRES ACTS

Sec. 68. In general. Any acts of a corporation which are be-
yond the authority given to it by the state are said to be ultra vires
acts. No liability attaches to the corporation upon contracts out-
side the scope of its corporate powers, because the corporation has
capacity only to do those things expressly authorized within its
charter or which are incidental thereto. 1 This does not mean, how-
ever, that the corporation is free from liability for wrongful acts,
such as torts and criminal liability, simply because such acts would
be outside the scope of its authority. Like natural persons, a cor-
poration has power to do wrong, and is liable therefor. There are
certain exceptions to the above rules as to liability of the corpora-
tion, depending upon the nature of the acts and whether the con-
tracts involved are partially executed or executory.

Sec. 69. Who may object to them. If a corporation performs
acts or enters into contracts to perform acts which are ultra vires,
the state creating such corporation may forfeit its charter for mis-
use of its corporate authority. The extent of the misuse is con-
trolling in determining whether the state will take away its fran-
chise or merely enjoin the corporation from carrying out the ultra
vires acts. A third party has no right to object to the ultra vires
acts of a corporation. A stockholder or member, however, may
enjoin a corporation from performing an ultra vires act. In ad-
dition, the corporation may recover from the directors who are
responsible for the ultra vires contracts any losses or damages sus-
tained because of the ultra vires venture. When they exceed cor-
porate powers, they become personally liable for resulting losses.

Sec. 70. Effect of an ultra vires contract. The courts are
somewhat in conflict concerning the rights arising out of an ultra
vires contract. In general, however, the following rules are ap-
plicable:

1. Since a corporation has only that authority expressly con-
ferred upon it by the state, any contracts made in excess of such
authority are ultra vires and in essence illegal.

2. An ultra vires contract which is purely executory cannot be
enforced by either party to the agreement. 2

Home Savings Bank, 1889,
2 Nassau Bank v.


3. A contract in excess of charter powers, which is fully executed
by both parties, will not be disturbed by the courts.

4. If an ultra vires contract has been fully performed by one of
the parties thereto, so that it becomes inequitable and unjust for
the other party to retain such performance and to refuse to perform
on its part, the majority of the courts will enforce the ultra vires
contract. The federal courts and a strong minority of the state
courts refuse to enforce the contract even in such cases. They do,
however, compel the other party to the agreement to pay the rea-
sonable value of what he has received or to. return it. The only
essential difference between these two views is that the majority of
the courts enforce the agreement, while the minority allow recovery
for the reasonable value of the benefit received unless the benefit
is returned.

The statutes, in providing for the procedure for creating a cor-
poration, require that its charter be filed, for the purpose of giving
public notice of its object and purpose and limitation of powers.
Persons dealing with a corporation, therefore) are charged with no-
tice of the extent of its corporate powers, and cannot set up a de-
fense that they had no knowledge that the corporation entered into
contracts in excess of such power. However, if persons enter into
a contract with a corporation, which is in excess of its corporate
powers, under circumstances in which it would be impossible for
such persons to have knowledge of the limitations of the corpora-
tion, the corporation may be held liable. 3 In other words, if the
contract involves a subject matter which may fall within the scope
of the business, but, because of the improper use to be made of it
in this particular instance, is outside the corporate powers, the con-
tract is unenforceable unless the other party had knowledge of the
intended use. A corporation may purchase such real estate as is
needed in its business but has no right to purchase it for other pur-
poses. A contract to purchase real estate for speculative purposes
is ultra vires, but such a contract would be binding unless the seller
knew of the improper use to be made of it. A corporation has
power to take title to real estate in excess of its needs, and, once
acquired, the corporation's title may not be questioned. Although
it may not have the right to purchase and sell real estate, it has the
power to do so until it has been enjoined.

Those few states which have adopted the Uniform Business Cor-
poration Act provide that all ultra vires contracts are enforceable.
Neither party to such a contract may use ultra vires as a defense.
In these states ultra vires conduct on the part of the corporation
may be enjoined by the state or any stockholder, but contracts pre-

9 J. P, Morgan & Co. v, Hall & Lyon Co., 1912, 34 R.I. 273, 83 Atl. 113; p. 699.



ULTRA VIRES ACTS 275

viously made are binding whether they be wholly executory, par-
tially executed, or fully performed. In such cases, the directors are
liable for losses suffered as a result of engaging in ultra vires ac-
tivities.

Sec. 71. Ratification of ultra vires contracts by officers and
stockholders. An ultra vires contract cannot be ratified by the
stockholders of a corporation. However, some courts hold that all
the stockholders may ratify the ultra vires acts of the corporation,
where the rights of the public in general or the rights of creditors
are not involved.

Sec. 72. Liability for tort. A corporation, being an artificial
person and impersonal, cannot personally commit a tort. But a
corporation is liable for the torts of its agents committed in the
pursuit of the corporate business, under the laws applicable to prin-
cipal and agent. Although a corporation has no authority to act
outside of the statute creating it or its charter, it has the capacity
through its agents to do acts which may cause injury to others;
therefore, it is liable for every wrong committed, even though the
injury arises out of an act which is ultra vires. 4 A few courts hold,
however, that a corporation is not liable for the torts of its em-
ployees in ultra vires transactions, even if it has authorized the ul-
tra vires act but the weight of authority is otherwise. A corpo-
ration is liable for fraud committed by its officers or agents within
the scope of their authority. It is also liable if the act is appar-
ently within the general authority of the agents. Corporations are
not only liable for acts committed by their agents in the pursuit of
the corporate business, but they are likewise liable for injury caused
by their agent's omitting to perform duties of the corporation. A
corporation is liable for the negligence of an agent in failing to keep
its property in safe condition.

Sec. 73. Liability for crimes. A corporation cannot commit
crimes which involve intent or personal violence. However, a cor-
poration may be criminally liable for the violation of a law which
imposes a duty upon the corporation to do, or not to do, an act.
For example, a corporation may be fined for failure to comply with
some statute which specifies certain things to be done by the cor-
poration such as supplying protection for employees and making
reports and for the violation of regulatory statutes under the po-
lice power of the state.

A corporation may be indicted for improperly performing an act
which it may lawfully do. For example, a corporation may be in-
dicted for conducting a perfectly legal business in such a manner as

4 Chamberlain v. Southern California Edison Company, 1914, 167 Cal. 500, 140 Pac.
25; p. 700.



276 BUSINESS ORGANIZATIONS CORPORATIONS

to be guilty of maintaining a nuisance. Corporations cannot be
held liable for criminal acts involving personal violence, but may
be held criminally responsible for failure to comply with statutes
which have prohibited certain acts. Corporations have been crim-
inally liable for unlawful conspiracies to restrain trade, for know-
ingly and fraudulently concealing property under the Bankruptcy
Act, and for giving rebates to shippers in violation of federal stat-
utes. 5 Corporations may also be held for contempt of court by rea-
son of acts or omissions of their agents, where they have violated
an injunction. The court may punish such corporations by the
levy of a fine, the same as against a natural person.

Review Questions and Problems

1. What is meant by an ultra vires act? Is the commission of a tort
or a crime an ultra vires act?

2. The X Company had no power under its charter to purchase land.
It did upon one occasion purchase a small tract of land, but later sold it.
May the state cause a forfeiture of the charter of the X Company?
What are the rights of stockholders where ultra vires acts are being com-
mitted?

3. The X Company purchases real estate in excess of its needs, but ob-
tains title thereto. Assuming the purchase to be ultra vires, may the
grantor have the transaction set aside?

4. A corporation received, under an ultra vires contract, property
which it is unable to return. May the unpaid vendor of such property
recover for the property sold? On what theory, if any?

5. May ultra vires acts be ratified by the stockholders?

6. Is a corporation liable for torts committed by its agents? May a
corporation commit a crime?

7. X Company was by its charter authorized to sell fire insurance.
Without amendment of its charter, it accepted the premium and issued a
policy of hail insurance to A. After a loss from hail, A sued X Company
and was met with the defense of ultra vires. Will A be able to recover
from X Company?

8. A Company was incorporated for the purpose of manufacturing and
selling ice cream. B Company was chartered to buy and sell milk at re-
tail and wholesale. B Company, without altering its charter, began to
manufacture and sell ice cream. A Company started an injunction suit
against B Company, requesting the court to enjoin the latter from man-
ufacturing and selling ice cream. Should the injunction be issued?