Story Case

The Citizens' Gas Light Company, organized under the laws of the state of Wisconsin, and was given power to manufacture and sell gas in the city of Madison, for lighting and heating purposes, for a period of twenty-five years. After having engaged in the business for four years, the directors of the company leased all the property, and franchises of the corporation, to the Madison Electric Light Company for twenty-one years, at an annual rental of $75,000. The electric company took over the property of the gas company and began to conduct its business. For three years it used this property, without having paid the rental therefor. The directors of the gas company then brought an action upon the contract, suing for $225,000, then due and unpaid. The electric company then contended that it was not liable for this amount, because the gas company had no power to lease away its property for this period of time. Is this defense effective?

Ruling Court Case. Central Transportation Company Vs. Pullman's Palace Car Company, Volume 139 United States Reports, Page 24

The Central Transportation Company was originally organized under the general laws of the state of Pennsylvania for the purpose of transporting passengers in railroad cars constructed and owned by the company. Subsequently, the legislature passed a special act which empowered the company to make contracts with other corporations, for the leasing and hire to such other corporations, of their railway cars and other personal property. Thereafter, the Central Transportation Company entered into a contract with the Pullman Company, whereby the former leased to the latter all its property for a period of ninety-nine years, and agreed that it would not re-engage in the same kind of business again during that term. The Pullman Company agreed to pay, for the use of this property, the sum of $264,000 annually. When a certain annual installment was left unpaid, this action was brought by the Central Transportation Company to recover the amount then due.

It was contended by the Pullman Company that the Central company had no power to make a contract, whereby it leased all its property for such a long term, and agreed not to re-engage in the same business for the same term. Accordingly, the contract was ultra vires as to the Central Transportation Company. Therefore, the Central company could not recover on the contract.

It was insisted, on the other hand, by the Central Transportation Company that the contract was executed, that the Pullman Company had had the benefit of the property for the time stated, and should be compelled to pay for the use of it, even though the contract was ultra vires.

Decision

An ultra vires contract, that is, a contract beyond the power of the corporation, is void, and no action can be brought thereon, whether the contract be executed or executory. The Central Transportation Company had no power to contract away its corporate existence for so long a period, and agree not to re-engage in the same kind of business for that period. Even though the Pullman Company has had the benefit of the property, yet the Central Company cannot sue upon the contract for the use thereof.

Mr. Justice Ray delivered the opinion of the Court: "The necessary conclusion from these premises is, that the contract sued on was unlawful and void, because it was beyond the powers conferred upon the plaintiff by the legislature, and because it involved an abandonment by the plaintiff of its duty to the public. • • • "

"A contract of a corporation which is ultra vires, in the proper sense, that is to say, outside the object of its creation as defined in the law of its organization, and therefore beyond the powers conferred upon it by the legislature, is not voidable only, but wholly void, and of no legal effect. The objection to the contract is, not merely that the corporation ought not to have made it, but that it could not make it. The contract cannot be ratified by either party, because it could not have been authorized by either. No performance on either side can give the unlawful contract any validity, or be the foundation of any right of action upon it." Judgment was given for the Pullman company.

Ruling Law. Story Case Answer

An ultra vires contract of a corporation is said to be illegal, that is, it is unauthorized, and, therefore, is considered illegal, although no moral turpitude attaches to its making. The Courts have reached the conclusion that such a contract is void, not only because the corporation should not have made the contract, but also because the corporation had no power to make it. Every person dealing with the corporation is bound to know its powers. The stockholders have a right to see that the corporate property shall not be subjected to risks to which they have not consented. The state has a right to insist that the corporation shall remain within the powers conferred upon it. Consequently, no action may be maintained upon such an attempt at a contract. In the Story Case, the gas company had no power to lease away its property for this period of time; the contract is therefore void, and no action can be brought upon it.