This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
When it is once ascertained that a given contract is in excess of corporate power, only the first step has been taken to determine its legal effect. As with contracts of infants and insane persons, rights and liabilities may grow out of contracts made by corporations which have not the legal capacity to bind themselves thereby fully and completely.
The rules determining the legal effect of such contracts are grouped under the general head of the doctrine of ultra vires. This term means "beyond the powers" of the corporation; that the contract in question is beyond and outside of the scope of the powers conferred by its founders.1 The use of the technical Latin phrase has probably helped to obscure the real meaning of the doctrine. Rules have been formulated as to the effect of ultra vires contracts which could scarcely have been applied had the subject been discussed under its English name.2 The real difficulty of this topic is that there was practically no foundation for it at Common Law, since no business corporations existed; and that, without such foundation and without opportunity to observe the practical working of the rules that they were laying down, the courts were forced, by reason of the sudden growth of manufacturing, trading and transportation corporations, to develop new rules, and to elaborate a subject whose fundamental principles were not understood. Early precedents, hastily decided, present difficulties in many jurisdictions, as they do not harmonize with the modern trend of judicial decision; and the courts, unwilling to overrule them, follow them blindly, or distinguish them in cases often indistinguishable. The modern cases are therefore in hopeless confusion. There are conflicting views, not only upon isolated rules, but upon the whole theory of the subject; upon the question of what facts are operative as well as upon the question of what decision is to be rendered upon the facts given. No general statement can therefore be made of the present scope of the doctrine of ultra vires, except that ultra vires contracts do not, under some circumstances, have the validity of contracts entered into within the limits of corporate power. In its early form, the doctrine of ultra vires was severely simple. Contracts which were ultra vires were void.3 Thus where an insurance company engaged in the banking business and discounted notes, it could not recover upon such notes, though it might on the loan.4 This rule proved so disastrous in its effects on modern business that it was promptly "barnacled over with exceptions, and muzzled by estoppels,"5 and practically discarded in many jurisdictions.6
1 Citizens' Savings Bank v. Hawkins, 71 Fed. 369; 18 C. C. A. 78; Miners' Ditch Co. v. Zellerbach, 37 Cal. 543; 99 Am. Dec. 300.
2 National Bank v. Porter, 125 Mass. 333; 28 Am. Rep. 235.