Ultra vires

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Wilmington, Delaware is the incorporation capital of the United States. Delaware has largely abolished ultra vires in relation to corporations under the Delaware General Corporation Law. Wilmington Delaware skyline.jpg
Wilmington, Delaware is the incorporation capital of the United States. Delaware has largely abolished ultra vires in relation to corporations under the Delaware General Corporation Law.

Ultra vires is a Latin phrase meaning "beyond the powers". If an act requires legal authority and it is done with such authority, it is characterised in law as intra vires ("within the powers"). If it is done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed "valid" and those that are ultra vires "invalid".

Latin Indo-European language of the Italic family

Latin is a classical language belonging to the Italic branch of the Indo-European languages. The Latin alphabet is derived from the Etruscan and Greek alphabets and ultimately from the Phoenician alphabet.

Contents

Legal issues relating to ultra vires can arise in a variety of contexts:

A company, abbreviated as co., is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. Company members share a common purpose, and unite to focus their various talents and organize their collectively available skills or resources to achieve specific, declared goals. Companies take various forms, such as:

A legal person is any human or non-human entity, in other words, any human being, firm, or government agency that is recognized as having privileges and obligations, such as having the ability to enter into contracts, to sue, and to be sued.

Capacity (law) the quality of natural and juridical persons necessary for their actions to have legal effect

The capacity of natural and juridical persons in general, determines whether they may make binding amendments to their rights, duties and obligations, such as getting married or merging, entering into contracts, making gifts, or writing a valid will. Capacity is an aspect of status and both are defined by a person's personal law:

Corporate law

In corporate law, ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation's objects clause, articles of incorporation or in a clause in its Bylaws, in the laws authorizing a corporation's formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable.

An objects clause is a provision in a company's constitution stating the purpose and range of activities for which the company is carried on. In UK company law, until reforms enacted in the Companies Act 1989 and the Companies Act 2006, an objects clause circumscribed the capacity, or power, of a company to act. To avoid problems, long and unwieldy 'catch-all' objects clauses were often drafted to include as much potential activity as possible, and thus avoid dealings being found to be ultra vires: the legal position was that any contract entered into beyond the power, or ultra vires, would be deemed void ab initio.

Articles of incorporation charter that establishes the existence of a corporation

Articles of incorporation, also referred to as the certificate of incorporation or the corporate charter, are a document or charter that establishes the existence of a corporation in the United States and Canada. They generally are filed with the Secretary of State or other company registrar.

In law, void means of no legal effect. An action, document, or transaction which is void is of no legal effect whatsoever: an absolute nullity — the law treats it as if it had never existed or happened. The term void ab initio, which means "to be treated as invalid from the outset," comes from adding the Latin phrase ab initio as a qualifier. For example, in many jurisdictions where a person signs a contract under duress, that contract is treated as being void ab initio. The frequent combination "null [Latin origin] and void [Germanic origin]" is a legal doublet.

  1. An ultra vires transaction cannot be ratified by shareholders, even if they wish it to be ratified.
  2. The doctrine of estoppel usually precluded reliance on the defense of ultra vires where the transaction was fully performed by one party.
  3. A fortiori , a transaction which was fully performed by both parties could not be attacked.
  4. If the contract was fully executory, the defense of ultra vires might be raised by either party.
  5. If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into play, a suit for quasi-contract for recovery of benefits conferred was available.
  6. If an agent of the corporation committed a tort within the scope of his or her employment, the corporation could not defend on the ground the act was ultra vires.

Several modern developments relating to corporate formation have limited the probability that ultra vires acts will occur. Except in the case of non-profit corporations (including municipal corporations), this legal doctrine is obsolescent; within recent years, almost all business corporations are chartered to allow them to transact any lawful business. The Model Business Corporation Act of the United States states that: "The validity of corporate action may not be challenged on the ground that the corporation lacks or lacked power to act." The doctrine still has some life among non-profit corporations or state-created corporate bodies established for a specific public purpose, such as universities or charities.

In law, desuetude is a doctrine that causes statutes, similar legislation, or legal principles to lapse and become unenforceable by a long habit of non-enforcement or lapse of time. It is what happens to laws that are not repealed when they become obsolete. It is the legal doctrine that long and continued non-use of a law renders it invalid, at least in the sense that courts will no longer tolerate punishing its transgressors.

The Model Business Corporation Act (MBCA) is a model set of law prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and is followed by twenty-four states. It has been influential in shaping standards for United States corporate law.

United States

According to American laws, the concept of ultra vires can still arise in the following kinds of activities in some states:

  1. Charitable or political contributions
  2. Guaranty of indebtedness of another
  3. Loans to officers or directors
  4. Pensions, bonuses, stock option plans, job severance payments, and other fringe benefits
  5. The power to acquire shares of other corporations
  6. The power to enter into a partnership

United Kingdom

Historically all companies in the United Kingdom were subject to the doctrine of ultra vires and any act which was outside of the objects specified in a company's memorandum of association would be ultra vires and void. [3] That result was commercially unpalatable, and led to companies being formed with extremely wide and generic objects clauses permitting a company to engage in all manner of commercial activities. [7]

The memorandum of association of a company is an important corporate document in certain jurisdictions. It is often simply referred to as the memorandum. In the UK, it has to be filed with the Registrar of Companies during the process of incorporating a company. It is the document that regulates the company’s external affairs, and complements the articles of association which cover the company's internal constitution. It contains the fundamental conditions under which the company is allowed to operate. Until recently it had to include the "objects clause" which let the shareholders, creditors and those dealing with the company know what is its permitted range of operation, although this was usually drafted very broadly. It also shows the company's initial capital. It is one of the documents required to incorporate a company in India, the United Kingdom, Ireland, Canada, Nigeria, Nepal, Bangladesh, Pakistan, Afghanistan, Sri Lanka, and Tanzania and is also used in many of the common law jurisdictions of the Commonwealth.

The position was changed by statute by the Companies Act 1985 which largely abolished the doctrine in relation to commercial companies. The position is now regulated by the Companies Act 2006, sections 31 and 39, which similarly greatly reduces the applicability of ultra vires in corporate law, although it can still apply in relation to charities and a shareholder may apply for an injunction, in advance only, to prevent an act which is claimed to be ultra vires.

The Companies Act 1985 (c.6) is an Act of the Parliament of the United Kingdom of Great Britain and Northern Ireland, enacted in 1985, which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries. It has largely been superseded by the Companies Act 2006.

Companies Act 2006 British statute

The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest Act in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since been surpassed, in that respect, by the Corporation Tax Act 2009.

Injunction a legal order to stop doing something

An injunction is a legal and equitable remedy in the form of a special court order that compels a party to do or refrain from specific acts. "When a court employs the extraordinary remedy of injunction, it directs the conduct of a party, and does so with the backing of its full coercive powers." A party that fails to comply with an injunction faces criminal or civil penalties, including possible monetary sanctions and even imprisonment. They can also be charged with contempt of court. Counterinjunctions are injunctions that stop or reverse the enforcement of another injunction.

In many jurisdictions, such as Australia, legislation provides that a corporation has all the powers of a natural person [8] plus others; also, the validity of acts which are made ultra vires is preserved. [9]

Constitutional law

Under constitutional law, particularly in Canada and the United States, constitutions give federal and provincial or state governments various powers. To go outside those powers would be ultra vires; for example, although the court did not use the term in striking down a federal law in United States v. Lopez on the grounds that it exceeded the Constitutional authority of Congress, the Supreme Court still declared the law to be ultra vires. [10]

According to Article 15.2 of the Irish constitution, the Oireachtas (parliament) is the sole lawmaking body in the Republic of Ireland. In the case of CityView Press v AnCo , however, the Irish Supreme Court held that the Oireachtas may delegate certain powers to subordinate bodies through primary legislation, so long as these delegated powers allow the delegatee only to further the principles and policies laid down by the Oireachtas in primary legislation and not craft new principles or policies themselves. Any piece of primary legislation that grants the power to make public policy to a body other than the Oireachtas is unconstitutional; however, as there is a presumption in Irish constitutional law that the Oireachtas acts within the confines of the Constitution, any legislation passed by the Oireachtas must be interpreted in such a way as to be constitutionally valid where possible.

Thus, in a number of cases where bodies other than the Oireachtas were found to have used powers granted to them by primary legislation to make public policy, the impugned primary legislation was read in such a way that it would not have the effect of allowing a subordinate body to make public policy. In these cases, the primary legislation was held to be constitutional, but the subordinate or secondary legislation, which amounted to creation of public policy, was held to be ultra vires the primary legislation and was struck down.

In UK constitutional law, ultra vires describes patents, ordinances and the like enacted under the prerogative powers of the Crown that contradict statutes enacted by the Crown-in-Parliament. Almost unheard of in modern times, ultra vires acts by the Crown or its servants were previously a major threat to the rule of law.

Boddington v British Transport Police is an example of an appeal heard by House of Lords that contested that a bylaw was beyond the powers conferred to it under section 67 of the Transport Act 1962. [6]

Administrative law

In administrative law, an act may be judicially reviewable for ultra vires in a narrow or broad sense. Narrow ultra vires applies if an administrator did not have the substantive power to make a decision or it was wrought with procedural defects. Broad ultra vires applies if there is an abuse of power (e.g., Wednesbury unreasonableness or bad faith) or a failure to exercise an administrative discretion (e.g., acting at the behest of another or unlawfully applying a government policy) or application of discretionary powers in irrational and wrong way. [11] Either doctrine may entitle a claimant to various prerogative writs, equitable remedies or statutory orders if they are satisfied.

United Kingdom

In the seminal case of Anisminic v Foreign Compensation Commission , [12] Lord Reid is accredited with formulating the doctrine of ultra vires. However, ultra vires, together with unreasonableness, was mentioned much earlier by Lord Russell in the well known case, Kruse v Johnson , [13] regarding challenging by-laws and other rules. Anisminic is better known for not depriving courts of their jurisdiction to declare a decision a nullity, even if a statute expressly prevents the decision being subject to judicial review. Further cases such as Bromley LBC v Greater London Council [14] and Council of Civil Service Unions v Minister for the Civil Service [15] have sought to refine the doctrine.

In Hammersmith and Fulham London Borough Council v Hazell [16] the House of Lords held that interest rate swaps entered into by local authorities (a popular method of circumventing statutory restrictions on local authorities borrowing money at that time) were all ultra vires and void, sparking a raft of satellite litigation.

See also

Notes

  1. Evelina Munteanu (25 November 2014). "Top 5 US States For Company Formations". Inc Plan (USA). Retrieved 7 November 2017.
  2. Francis Pileggi (4 September 2012). "Abolishment of Ultra Vires Doctrine with Exceptions" . Retrieved 7 November 2017.
  3. 1 2 Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653
  4. Hazell v Hammersmith and Fulham LBC [1992] 2 AC 1
  5. Woolwich Equitable Building Society v IRC [1993] AC 70
  6. 1 2 Boddington v British Transport Police [1998] UKHL 13
  7. Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246
  8. Sn 124 Legal capacity and powers of a Company, Corporations Act 2001, Commonwealth Consolidated Acts
  9. Sn 125 Constitution may limit powers and set out objectives, Corporations Act 2001, Commonlwealth Consolidated Acts
  10. United States v. Lopez , 514 U.S. 549, 567 (1995).
  11. Örücü Esin, The Liability of administration in England and main principles applied in judicial review, in Onar Armagani, Fakulteler Matbaasi, Istanbul 1977, p.660
  12. [1969] 2 WLR 163
  13. [1898]
  14. [1983] AC 768 (see Lord Wilberforce's judgment)
  15. [1985] AC 374 (see Lord Diplock's judgment)
  16. [1992] 2 AC 1

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