Story Case

The Chicago-Peoria Railroad Company was a corporation organized under the laws of the state of Illinois for the purpose of operating a railroad between Chicago and Peoria. The charter of the corporation gave it no power other than to own and operate this railroad. Several years later, the directors of the company decided to purchase and operate a pleasure boat on Lake Michigan. They negotiated with the Goodwin Steamship Company and agreed to purchase from that company, a boat. Several days, thereafter, the directors of the railroad company decided that they would not take the boat. When the steamship company offered to deliver the boat, in accordance with their agreement, and demanded the purchase price, which had been agreed upon, the railroad company refused to accept, or pay a purchase price. The steamship company then brought this action against the railroad company. It was contended, by the railroad company, that it had no power to purchase a steamboat for any purpose, and that, therefore, the contract was void and unenforcible against it. What should be the decision of the Court in the foregoing case!

Ruling Court Case. Jemison Vs. Citizens' Savings Bank, Volume 122 New York, Page 135; Volume 9 Lawyers' Reports Annotated, Page 708

Jemison was a commission merchant and a member of the Cotton Exchange of the city of New York. The Citizens' Savings Bank was a banking and trust corporation, organized under the laws of the state of Texas. The cashier of the bank, in 1879, wrote Jemison, asking him the amount of margin and commission he required for the purchase of cotton futures. Jemison answered, giving the amount. A few days later, the cashier replied by telegraph, directing Jemison to buy one hundred bales for June delivery. Other orders followed this; the final result of the several transactions was a large loss. This action was brought by Jemison against the bank to recover the loss.

The defense consisted in the fact that the bank, as a savings and trust corporation, had no power or authority to deal in the purchase and sale of cotton for future delivery; and that, such being the case, they were not liable for any loss which accrued.

Decision

By an "ultra vires" act of a corporation is meant an act beyond the power of the corporation. So long as an ultra vires contract remains executory, as to the corporation, the other party can not enforce the contract against it. In this case, the Court was of the opinion that the contract for the purchase of the cotton was executory and, therefore, the bank was not liable for the loss which resulted from the several transactions.

Mr. Justice Haight, who delivered the opinion of the Court, said in part: "Whilst the buying and selling of cotton, to be delivered in the future, may not ordinarily be immoral, or prohibited by any statute, it is not included in the powers given to the defendant by its charter. The transaction in question was prejudicial to its stockholders, and tended to endanger and destroy the safeguards provided for the depositors. The stockholders and depositors had the right to have their funds invested in accordance with the provisions of the charter and the constitution and laws of the state, and, in so far as this right was violated by the transaction in question, it was a misappropriation of the funds and immoral. * * * "We, consequently, are of the opinion that, under the circumstances of this case, the defense of ultra vires is still available to the defendant."

Judgment was given for the Citizens' Savings Bank.

Ruling Law. Story Case Answer

A corporation is an artificial creation of the legislature, having only such powers as are conferred upon it by law. If the corporation goes beyond the powers conferred upon it, and attempts to make some contract, such a contract is termed an "ultra vires" contract. That is, it is a contract beyond the power of the corporation. The making of an ultra vires contract, by a corporation, is regarded as an illegal act; and the courts will assist neither in enforcing the illegal act. So long as it remains executory, unperformed, it is enforcible by neither party. In the Story Case, it was beyond the power of the corporation to make the contract in question; the contract was still executory, and the Court will not enforce it at the suit, either of the corporation, or at the suit of the steamship company.