In theory a contract void for want of contractual capacity is a legal nullity. It follows that full performance by one party will not make the contract enforceable against the other. A prohibited contract, on the other hand, may not be totally inoperative. In each case the effect of the prohibition is a question of construction. And in cases of ultra vires contracts of corporations it has generally been held that full performance by one party will make the contract enforceable against the other, the theory being that the policy of forbidding contracts not reasonably incidental to the objects of incorporation is outweighed by the more important policy of preventing one who has enjoyed the benefit of a contract not malum in se from escaping its obligation.
As a result of the distinction just pointed out, the doctrine of special capacity necessitates a more frequent resort to the quasi contractual theory of obligation than does the doctrine of general capacity. Under the former doctrine, whether one has enjoyed the benefit of full or of partial performance of an ultra vires contract by the other party, his only obligation is to make restitution. Under the latter, if one has enjoyed the benefit of full performance by the other party he may be held contractually, and it is only where there has been partial performance on one side and full performance on neither that it is necessary to resort to quasi contract.
Sec. 156. The illegality of ultra vires contracts peculiar: Do general rules apply ? - It must not be forgotten that, whichever doctrine of capacity obtains, the making of an ultra vires contract is a violation of statutory prohibition, either express or implied, and that consequently one who seeks a remedy in quasi contract is always, in a sense, in the position of a party to an unlawful transaction. Is the right to recover in quasi contract, then, determined by the same rules as govern quasi contractual rights arising from other illegal contracts ?, In some cases the rule of par delictum has been recognized and the right to recover has been based ostensibly upon the conclusion that the plaintiff was not in pari delicto with the defendant corporation.1 But in one important case a recovery was allowed although the court expressly declared that the plaintiff was as much in fault as the defendant.2 And in a large number of cases - both of express and implied prohibitions - there is no reference whatever either to par delictum or to locus poeniten-tioe? This indicates that the illegality of ultra vires contracts is generally regarded as of a peculiar and comparatively mild sort, not calling for the application of the rule of public policy which ordinarily prevents a quasi contractual recovery. The only reason that has been adduced in support of this view is that ultra vires contracts are contrary to public policy, not because of the nature of their subject matter, but because of the corporate character of one of the parties.1 This has been thought a sufficient reason, however, by eminent authority:
1 White v. Franklin Bank, 1839, 22 Pick. (Mass.) 181. See also Parkersburgh v. Brown, 1882, 106 U. S. 487; 1 S. Ct. 442, (implied prohibition); Morville v. Am. Tract Society, 1877, 123 Mass. 129; 25 Am. Rep. 40, (implied prohibition).
2 Pullman's Car Co. v. Central Transp. Co., 1897, 171 U. S. 138 ; 18 S. Ct. 808, (express prohibition). And see Jenson v. Toltec Ranch Co., 1909, 174 Fed. 86; 98 C. C. A. 60, (Sanborn, Circuit Judge, at p. 92: "It is no defense, to a suit to enforce a contract that has been performed by the promisee to repay money loaned to or paid for another and to foreclose a mortgage to secure that repayment, that the lender or the payor knew that the borrower intended to use, or was using, the money for an illegal purpose, or a purpose beyond its corporate powers, where the lender or payor did not combine or conspire with the borrower to induce such a use and did not share in the benefits thereof.").
3 See Louisiana v. Wood, 1880, 102 U. S. 294, (express prohibition); Logan Co. Nat. Bank v. Townsend, 1891, 139 U. S. 67; 11 S. Ct. 496, (implied prohibition); New Castle, etc., R. Co. v. Simpson, 1884, 21 Fed. 533, (express prohibition); Emmerling v. First Nat. Bank, 1889, 97 Fed. 739; 38 C. C. A. 399, (implied prohibition); Richmond Guano Co. v. Farmers' Cotton, etc., Co., 1903,126 Fed. 712; 61 C. C. A. 630, (implied prohibition).
Machen, "Corporations," Sec. 1020: "But although the making of ultra vires contracts by a corporation is undoubtedly prohibited by law, yet the illegality is of a very peculiar kind, and hence one should not hastily conclude that such contracts must necessarily be governed by the same rules as other illegal contracts - contracts, for example, that are mala in se. The illegality of ultra vires contracts depends upon no policy of the law as to the subject matter to which they relate, but solely upon the fact that they are not within the company's powers as defined in its act of incorporation or incorporation paper. To apply to them precisely the same rules that have been deemed necessary in order to discourage illegal contracts in general and to relieve the courts from the disagreeable task of nicely adjusting equities between various parties all of whom have been acting contrary to good morals or to the policy of the law, would be both illogical and unjust. If, therefore, ultra vires contracts be conceded to be illegal, they should be governed by rules which as applied to this peculiar kind of illegality are best adapted to promote the policy of the law and the ends of justice."
Whatever view may be taken as to the effect of the ordinary implied prohibition, it seems clear that the legislature in expressly prohibiting certain contracts may so plainly indicate an intention to make a violation of the prohibition a serious offense against public policy as to call for the application of the rules governing other illegal contracts.2
1 "Although the unauthorized contract may be neither malum in se, nor malum prohibitum, but, on the contrary, may be for some benevolent or worthy object, as to build an alsmhouse or a college, or to purchase and distribute tracts or books of instruction, yet, if it is a violation of public policy for corporations to exercise powers which have never been granted to them, such contracts, notwithstanding their praiseworthy nature, are illegal and void." - Sheldon, J., in Bissel v. R. Co., 1860, 22 N. Y. 258, 285. See also Peoria Star Co. v. Cutright, 1904, 115 111. App. 492, 495; Franklin Co. v. Savings Bank, 1877, 68 Me. 43, 48.
2 See Machen, "Corporations," Sec. 1065.