This section is from the book "A Commentary On The Law Of Contracts", by Francis Wharton. Also available from Amazon: A Commentary On The Law Of Contracts.
In the United States, under the shelter of the constitutional provision prohibiting laws impairing the obligation of contracts, corporations, unless the power of amending them be reserved in the charter, possess an immunity from legislative control not enjoyed by them in England ; and in view of the fact that charters convey such high prerogatives, we would suppose that they would be subjected to a construction at least as strict as that placed on charters in England. Such, no doubt, is the rule with us in all cases involving a contest between the state granting the charter, and the corporation chartered.1 Contentions, however, as to chartered limits arise generally between the corporation itself and third parties; and in this relation the tendency of our decisions, so far at least as concerns bona fide purchasers without notice, has been to allow corporate action a wider range than in England. This may be attributed to several causes. In England, in the first place, charters of corporations are comparatively rare, are subjected to severe scrutiny before they are passed, and are as cautious and artificial in their limitations as are deeds of settlement between private parties. They may be regarded, therefore, as special powers of attorney, conveying only the authority they specifically describe. In this country, on the other hand, private charters are usually drawn by the representatives of the corporation to be chartered, and are often passed in the terms which these representatives propose. These comprehensive charters create a public sentiment in accordance with which all corporations are supposed to possess are expressly conferred on them by the act of incorporation, and such implied powers as are necessary to enable them to perform their prescribed duties. Fertilizer Company v. Hyde Park, 97 U. S. 659 ; Salomons v. Laing, 12Beav. 339 ; Eastern Counties R. Co. v. Hawkes, 5 H. L. Cas. 348.
Distinctive practice in this country.
"And it is well settled that a corporation has no implied power to change the amount of its capital as prescribed in its charter, and that all attempts to do so are void. Mechanic's Bank v. New York & N. H. R. Co., 13 N. Y. 599 ; New York and New Haven R. Co. v. Schuyler, 34 id. 30; Railway Co. v. Allerton, 18 Wall. 233 ; Stace & Worth's case, L. R. 4 Ch. 685, note." Woods, J., Scoville v. Thayer, Sup. Ct. U. S. 1882.
1 See Morawetz on Corp. sec 642; People v. Turnpike Co., 23 Wend. 193.
An important distinction is to be noticed between the usurpation by a corporation of powers not conferred on it by charter, and a misuse of powers which the charter confers; between, in other words, "the exercise by a corporation of a power not conferred upon it, varying from the objects of its creation as declared in the law of its organization, of which all persons dealing with it are bound to take notice; and the abuse of a general power, or the failure to comply with prescribed formalities or regulations, in a particular instance, when such abuse or failure is not known to the other contracting parties."3 In the former case the corporation is not bound by its agents' contracts; in the latter case it is so bound.4-If a general power to exercise a specific franchise Distinction between usurpation of power and misuse of power.
1 Union Nat. Bank v. Matthews, 98 U. S. 621; Whitney Arms Co. v. Barlow, 63 N. Y. 62 ; Oil Creek R. R. v. Penn. Trans. Co., 83 Penn. St. 160; Culver v. Reno Real Est. Co., 91 Penn. St. 367 ; Hays v. Galion, 29 Ohio St. 330; State Board of Agr. v. R. R., 47 Ind. 407; St. Joseph's Ins. Co. v. Hauck, 71 Mo. 465.
2 Thomas v. R. R., 101 U. S. 71; Bissell v. R. R., 22 N. Y. 285 ; Black v. Canal Co., 22 N. J. Eq. 130. That action of a corporation ultra vires may be cured by subsequent legislation, see Morawetz on Corp. sec 31. In Mahoney Mining Co. v. Bank, Sup. Ct. U. S. 1882 (21 Am. Law Reg. 101), it was held that, where a mining corporation, by its charter, had power to raise money for use in its corporate business, and in the ordinary course of its business overdrew through its officers its account in bank, it will be presumed that these officers had power to make an overdraft, and that in making it, not only they did not exceed their authority, but the moneys thus obtained were paid over to or received by the company.
3 Gray, C. J., Davis v. R. R., S. C. Mass. 1881.
4 Coleman v. R. R., 10 Beav. 1; Bag-shaw v. R. R., 7 Hare, 114; East Anglian R. R., 11 C. B. 775. The recent cases are thus grouped by Gray, C. J., in Davis v. R. R., S. Ct. Mass. 1881 :-.
"In Ashbury Railway Carriage and Iron Co. v. Riche, L. R. 7 H. L. 653, and L. R. 9 Ex. 224, the objects for which a company, registered under the is given, this, such is the prevalent view, implies a power to do all acts incidental to a proper exercise of such franchise.
English joint stock companies act of 1862, was created, were stated in its memorandum of association to be, ' to make and sell or lend on hire railway carriages and wagons, and all kinds of railway plant, fittings, machinery, and rolling stock ; to carry on the business of mechanical engineers and general contractors ; to purchase, lease, work, and sell mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any such materials on commission or as agents.' The directors agreed to purchase a concession for making a railway in a foreign country, and afterwards (on account of difficulties existing by the law of the country) agreed to assign the concession to an association formed there, which was to supply the materials for the construction of the railway, and to receive periodical payments from the English company. In an action at law brought by the foreign associates against the English company upon this agreement, it was held ill the lower courts, as well as in the House of Lords, to be ultra vires. The judges below were divided upon the question whether it had been ratified by the stockholders so as to bind the company. But in the House of Lords it was unanimously held, by Lord Chancellor Cairns and Lords Chelmsford, Hatherley, O'Hagen, and Sel-borne, that the contract was not within the scope of the memorandum of association, and was, therefore, void and incapable of being ratified, and the action could not be maintained. Lord Selborne said : 'The action in this case is brought upon a contract, not directly or indirectly to execute any works, but to find capital for a foreign railway company, in exchange for shares and bonds of that company. Such a contract, in my opinion, was not authorized by the memorandum of association of the Ashbury Company. All your lordships, and all the judges in the courts below, appear to be, so far, agreed. But this, in my judgment, is really decisive of the whole case. I only repeat what Lord Cranworth, in Hawkes 9. Eastern Counties Railway Company (when moving the judgment of this house), stated to be settled law, when I say that a statutory corporation, created by act of parliament for a particular purpose, is limited, as to all its powers, by the purposes of its incorporation as defined in that act. The present and all other companies, incorporated by virtue of the companies act of 1862, appear to me to be statutory corporations within this principle. The memorandum of association is under that act their fundamental, and (except in certain specified particulars) their unalterable law ; and they are incorporated only for the objects and purposes expressed in that memorandum. The object and policy of those provisions of the statute which prescribe the conditions to be expressed in the memorandum, and make these conditions (except in certain points) unalterable, would be liable to be defeated if a contract under the common seal, which on the face of it transgresses the fundamental law, were not held to be void, and ultra vires of the company, as well as beyond the power delegated to its directors or administrators. It was so held in the case of East Anglian Railway Company, and in other cases upon railway acts, which cases were approved by this house in Hawkes' case ; and I am unable to see grant of a franchise, or of a political prerogative, is to be construed as giving only the powers the words themselves convey.
 
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