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.
Ultra vires contracts are, strictly speaking, only those which are defective solely because they are beyond the power of the corporation.1 Where the legislature has forbidden a corporation to engage in certain transactions, by statutes either declaratory of the Common Law, or modifying it, such transactions are in some respects decided on different principles from ultra vires contracts.2 Ultra vires is also loosely used by some authorities to cover two classes of contracts which do not belong to it. First: Contracts which the corporation might lawfully have made, but which the agents making them were not authorized to make, are not properly ultra vires contracts. Their validity turns on questions of agency as affected by the nature of the corporation.3 Second: If the contract is one which is treated as illegal if made by a natural person, it is as illegal if made by a corporation, but as a rule, no more so and no less. These contracts are treated elsewhere.4 An ultra vires contract in the proper sense, is "nothing criminal or against good morals."1 In many cases it is however said that an ultra vires contract is "unlawful and void."6 This is undoubtedly a loose use of the terms "unlawful" and "void." This confusion in terms often arises in cases, such as contracts tending to create monopolies,7 or transferring the performance of duties toward the public,8 where the contract is both ultra vires and illegal. If the contract is illegal as in violation of established principles of public policy it cannot, of course, be enforced.9
8 Colorado Springs Co. v. Publishing Co., 97 Fed. 843; 38 C. C. A. 433; Kennedy v. Bank, 101 Cal. 495; 40 Am. St. Rep. 69; 35 Pac. 1039; Miners' Ditch Co. v. Zeller-bach, 37 Cal. 543; 99 Am. Dec. 300; Monument National Bank v. Globe Works, 101 Mass. 57; 3 Am. Rep. 322; Bissell v. R. R., 22 N. Y. 258; Miller v. Ins. Co., 92 Tenn. 167; 20 L. R. A. 765; 21 S. W. 39; North Hudson, etc., Association v. Bank, 79 Wis. 31; 11 L. R. A. 845; 47 N. W. 300.
9 Tourtelot v. Whithed, 9 N. D. 407; 84 N. W. 8.
10 Humphrey v. Association, 50 Ia. 607; Auerbach v. Mill Co., 28 Minn. 291; 41 Am. Rep. 285; 9 N. W. 799; Ellsworth v. St. Louis, etc., Co., 98 N. Y. 553.
11 Cowell v. Springs Co., 100 U. S. 55; Thompson v. Lambert, 44 Ia. 239; Luttrell v. Martin, 112 N. C. 593; 17 S. E. 573.
1 Kadish v. Association, 151 111. 531; 42 Am. St. Rep. 256; 38 N. E. 236; Leslie v. Lorillard, 110 N. Y. 519; 1 L. R. A. 456; 18 N. E. 363.
2 See Sec. 327 et seq.
3 Kelley, etc., v. Varnish Co., 90 111. App. 287.
If the contract is not merely ultra vires but is also forbidden by statute, no action can be brought on such contract.10 Thus, if the statute provides an exclusive method of giving a mortgage, a mortgage executed in any other manner and under any other circumstances is void.11 So if the statute provides a limit to the rate of interest which a corporation may agree to pay, a contract for a higher rate is void.12 But the purpose of a statute restricting the exercise of corporate power must always be considered in construing it, and if intended to protect those dealing with the corporation, as where a corporation is forbidden to transact business until its stock subscription is made,13 or a foreign insurance company is forbidden to write policies until it complies with certain statutory provisions intended for the security of policy holders,14 such provisions will not make such contracts void. Nor can a statute as to the mode of pledging property, enacted for benefit of stockholders, be taken advantage of by creditors.15
4 See Ch. XV-XXXI.
5 Illinois, etc., Bank v. Ry. Co., 117 Cal. 332, 343; 49 Pac. 197; "ultra vires and illegality represent totally different and distinct ideas." Bissell v. R. R., 22 N. Y. 258, 269.
6 McCormick v. Bank, 165 U. S. 538, 549; quoted in California, etc., Bank v. Kennedy, 167 U. S. 362; 368.
7 People v. Gas Trust Co., 130 111. 268; 17 Am. St. Rep. 319; 8 L. R. A. 497; 22 X. E. 798; Harding v. Glucose Co., 182 111. 551; 74 Am. St. Rep. 189; 55 X. E. 577; Inter Ocean Publishing Co. v. Associated Press, 184 111. 438; 75 Am. St. Rep. 184; 48 L. R. A. 568; 56 N. E. 822. (Holding that the Associated Press cannot give a monopoly of its news to one paper.)
8 Central Transportation Co. v. Car Co., 139 U. S. 24; Oregon, etc., R. R. v. Oregonian, etc., R. R., 130 U. S. 1; Chicago, etc., Co. v. Gaslight Co., 121 111. 530; 2 Am. St. Rep. 124; 13 N. E. 169; Brunswick
Gas Light Co. v. Gas, etc., Co., 85 Me. 532; 35 Am. St. Rep. 385; 27 Atl. 525; Stockton v. R. R., 50 N. J. Eq. 52; 17 L. R. A. 97; 24 Atl. 964; Smith v. Cornelius, 41 W. Va. 59; 30 L. R. A. 747; 23 S. E. 599.
9 Contract by one insurance company to buy out another. McClure v. Levy, 147 N. Y. 215; 41 N. E. 492.
10 Visalia Gas Co. v. Sims, 104 Cal. 326; 43 Am. St. Rep. 105; 37 Pac. 1042; McNulta v. Bank, 164 111. 427; 56 Am. St. Rep. 203; 45 N. E. 954; In re Assignment Mutual, etc., Ins. Co., 107 Ia. 143; 70 Am. St. Rep. 149; 77 N. W. 143; Beecher v. Mill Co., 45 Mich. 103; 7 N. W. 695; New York, etc., Trust Co. v. Helmer, 77 . Y. 64. The United States Supreme Court cases cited in the next paragraph are many of them cases involving contracts forbidden by statute or invalid as against public policy. The court, however, places its decision on the broad ground of ultra vires.