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.
Other jurisdictions, led by the Supreme Court of the United States, hold that no liability exists on the contract, since it is a contract exectuory as to the unauthorized act; but that an action in quantum meruit will lie, to recover a reasonable compensation for the benefits received by the corporation under the contract.1 It is well settled that the corporation cannot retain what it has received under the contract without incurring any liability therefor.2 So if a corporation sues in equity to have an ultra vires mortgage cancelled, it must offer to restore to the mortgagee the amount received by the corporation and remaining unpaid.3 The same rule applies if it seeks to avoid its contract.4 The liability is said to exist "irrespective of the invalid agreement."5 Where a land company and a street rail-
1 "Whatever doubts may have been once entertained as to the power of corporations to set up the defense of ultra vires to defeat a recovery upon an executed contract, the rule is now well settled at least in this court, that where the action is brought upon the illegal contract, it is a good defense that the corporation was prohibited by statute from entering into such contract, although in an action upon a quantum meruit it may be compelled to respond for the benefit actually received." De La Vergne, etc., Co. v. Savings Institution, 175 U. S. 40, 58. Citing Pearce v. R. R., 21 How. (U. S.) 441. So as to leases ultra vires of a corporation. Thomas v. R. R. Co., 101 U. S. 71; Pittsburgh, etc., Ry. v. Bridge Co., 131 U. S. 371; McCormick v. Bank, 165 U. S. 538; California Bank v. Kennedy, 167 U. S. 362; Central, etc., Co. v. Car Co., 171 U. S. 138. Also citing Buckeye Marble Co. v. Harvey, 92 Tenn. 115; 36 Am. St. Rep. 71; 18 L. R. A. 252; 20 S. W. 427. See on this point, Hitcock v. Galveston, 96
U. S. 341; Dickerman v. Trust Co., 176 U. S. 181; Emmerling v. Bank, 97 Fed. 739; 38 C. C. A. 399; Whitney v. Peay, 24 Ark. 22; In re Assignment Mutual, etc., Ins. Co., 107 Ia. 143; 70 Am. St. Rep. 149; 77 N. W. 868 (prohibition by statute) ; Brunswick Gas Light Co. v. Gas, etc., Co., 85 Me. 532; 35 Am. St. Rep. 385; 27 Atl. 525; Moore v. Tanning Co., 60 Vt. 459; 15 Atl. 114; Northwestern, etc., Co. v. Shaw, 37 Wis. 655; 19 Am. Rep. 781.
2 Great Northwestern Ry. v. Char-lebois (1899), A. C. 114; Louisiana, etc., Ry. v. Levee District, 87 Fed. 594; 31 C. C. A. 121.
3 Southern, etc., Association v. Stable Co., 128 Ala. 624; 29 So. 654.
4 Louisiana, etc., Ry. v. Board, etc., of Levee District, 87 Fed. 594; 31 C. C. A. 121.
5 Manchester, etc., R. R. Co. v. R. R. Co., 66 N. H. 100, 132; 49 Am. St. Rep. 582; 9 L. R. A. 689; 20 Atl. 383; see Davis v. R. R., 131 Mass. 258; 41 Am. St. Rep. 221; way company issued bonds together and divided the money thus obtained, each company was held liable to pay the proportion of the bonds equal to the proportion of the money received by it.6 This view has been carried in some jurisdictions to the logical conclusion that even if the corporation does not seek to avoid the transaction, the party who has performed may ignore the contract and recover a reasonable value for what he has parted with. Thus a corporation in consideration of a loan of twenty thousand dollars agreed to repay it in preferred stock. When the contract was entered into it was ultra vires, as the corporation had no power to issue preferred stock. Subsequently the legislature gave to such corporation the power to issue preferred stock, and it was willing to deliver the proper amount to the creditor. It was held that such contract had no consideration, and that the creditor might ignore the contract and recover the amount of the loan.7 An ultra vires contract for the purchase of certain goods for speculation had been made by a manufacturing company. The vendor delivered part of the goods, repudiated the contract and sued for the value of the goods delivered; and recovery was allowed.8 In some cases it is held that the corporation is not liable on the contract, but no opinion is given as to its liability in any other theory.9 Thus a manufacturing corporation which had been exceeding its authority in operating a store for its employees, was allowed to use ultra vires as a defense in an action for goods sold and delivered.10 Thus it has been held that a corporation to manufacture and sell cotton-seed products, including fertilizers made therefrom, is not liable on a note given by it for another kind of fertilizer which it intends to resell at a profit.11
Morville v. Tract Society, 123 Mass. 129; 25 Am. Rep. 40; White v. Bank, 22 Pick. (Mass.) 181; Dill v. Wareham, 7 Met. (Mass.) 438; Greenville, etc., Co. v. Warehouse Co., 70 Miss. 669; 35 Am. St. Rep. 681; National Trust Co. v. Miller, 33 N. J. Eq. 155; Tennessee Ice Co. v. Raine, 107 Tenn. 151; 64 S. W. 21;. Miller v. Ins. Co., 92 Tenn. 167; 20 L. R. A. 765; 21 S. W. 39. 6 Northside Ry. Co. v. Worthington, 88 Tex. 562; 53 Am. St. Rep. 778; 30 S. W. 1055.
7 Anthony v. Sewing Machine Co., 16 R. I. 571; 5 L. R. A. 575; 18 Atl. 176.
8 Day v. Buggy Co., 57 Mich. 146; 58 Am. Rep. 352; 23 N. W. 628.
9 Sherwood v. Alvis, 83 Ala. 115; 3 Am. St. Rep. 695; 3 So. 307.
10 Chewacla, etc., Works v. Dis-mukes, 87 Ala. 344; 5 L. R. A. 100; 6 So. 122.