The word Ultra Vires is derived from the Latin phrase ‘beyond the powers of.‘ Ultra vires refer to any transaction or conduct that goes beyond the limits of the company or the power granted to the custodian of the company.
Origin of the doctrine
In the classic case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, the House of Lords established the concept of ultra-vires for the first time. In this case, the company and M/s. Riche agreed to fund the construction of a railway line under the terms of a contract. The contract was later annulled by the board of directors because it was ultra-vires of the company’s memorandum. Riche initiated a lawsuit against the company, claiming damages. According to Riche, the word “generic contracts” in the company’s objectives clause indicated any sort of contract. The company, according to Riche, has all of the essential authority and authorization to enter into and carry out such transactions.
The contract was later confirmed by the majority of the company’s shareholders. However, the company’s directors refused to carry out the contract, claiming that the conduct was ultra-vires and that the company’s shareholders could not approve an ultra-vires act.
When the case reached the House of Lords, it was determined that the contract was ultra-vires the company’s memorandum, and so null and invalid. The term “generic contracts” was construed in light of the previous words mechanical engineers, and it was determined that this term exclusively referred to contracts involving mechanical engineers, not all contracts.
They further stated that even if every business shareholder had accepted the act, it would have been null and void since it was ultra-vires the company’s memorandum. Any ultra-vires act cannot be ratified, and the company’s memorandum cannot be altered retrospectively.
The House of Lords remarked in the following significant case, Attorney-General v Great Eastern Railway Co, that the concept of ultra vires, as stated in the Ashbury case, should be preserved. However, it must be interpreted and used in a reasonable and not unreasonable manner, and everything that is reasonably considered incidental to the allowed goals should not be considered ultra vires unless expressly prohibited.
As a result, a corporation may perform any conduct that is essential or incidental to the achievement of its objectives, or that is otherwise permitted under the Act.
Purpose of Doctrine of Ultra Vires
The Ultra Vires Doctrine was intended to safeguard the company’s creditors and investors. The concept of ultra vires forbids the company from using money from investors who are not listed in the memorandum’s object clause. As a result, both the investors and the firm must have confidence that their money will not be used for objects or activities that they did not indicate while investing in the company.
Effects of the Ultra Vires Doctrine
The four effects of the ultra vires doctrine are as follows:
The company’s members might issue an injunction against it to prevent it from engaging in any illegal activities.
2. Ultra Vires Contract
An ultra vires contract, as we all know, is invalid from the start, which means it cannot be granted legal effect by ratification or estoppel. The issue here is not the validity of the contract, but the company’s competence and authority to manage it.
3. Liability of The Company :
There are no standards governing the company’s liability for damages caused by the ultra vires conduct. Tortious liability may emerge, however, if it can be demonstrated with a credible explanation that the activity during which the ultra vires act or tort happened fits within the scope of the Memorandum of Association.
4. Breach of Warranty :
The directors, as the business’s agent, are likewise barred from undertaking the activities that a corporation cannot conduct as specified in the Memorandum of Association. As a result, contracts deemed ultra vires the company will be null and invalid. The directors must operate within the limits of the company’s authority, or they may face personal liability for breach of warranty.