Ultra Vires

An old legal concept of lack of authority to act, that has never entirely departed in many jurisdictions. In essence, when an act or agreement is held to be ultra vires it is because either:

(a) the person agreeing to the action on behalf of another, for example signing a contract on behalf of a company, did not have the power to do so; or

(b) the party that was to be bound, for example the company, did not have the legal right to enter into such a contract or carry out the action.

In general, where an action is ultra vires it is regarded as a legal nullity. The problem of ultra vires tends particularly to arise with respect to companies and trusts. In many systems a company has to be established for certain purposes and the shareholders grant management certain powers to act in pursuit of those purposes—actions outside the purposes and powers are in principle ultra vires (trusts are almost invariable established for limited purposes.) This problem can also sometimes arise with national or state-owned corporations formed under state-charters or legislation. Although most systems have broadened the scope of management powers in their corporate law, the problem of ultra vires remains in many legal codes for companies—and is ever-present in trusts.

Often agreements between companies, especially strategically important agreements will also limit the persons who can agree to amendments or changes to senior officers of the business, to avoid more junior personnel being trapped into agreeing to concessions whose legal or commercial impact they do not understand. Although this is primarily an issue of contract law, someone acting in breach of such an authority limiting provision might also colloquially be described as acting ultra vires – or on a frolic of his or her own.

A person acting in a manner that is ultra vires may be personally liable to someone who relied on that action, for example, someone who, ultra vires, signed a contract on behalf of a company, may be personally liable to the other party to the contract. Obviously such a liability may be of little value to a claimant, since the individual almost certainly lacks ‘pockets deep enough‘ to pay damages. An exception has grown up in most jurisdictions to the principle of ultra vires, known as apparent authority, where a counterparty was reasonable in its belief that the other party had the power to enter the contract. In order to more assuredly avail of this exception, it is standard practice in international contract drafting to include a representation and warranty of powers and rights to enter into a contract or agreement.

In the past a company’s directors and managers (often also shareholders) could be held directly liable for any ultra vires acts, largely defeating the principle of limited liability. Since former company law principles held that a company could only do the purposes which its registration specifically stated that it was empowered to do, this used to lead, particularly in England, Ireland and India, to bizarrely long and extensive boiler plate lists of company purposes in the memorandum and articles of association of businesses, covering every conceivable business activity – leading more modern readers to sometimes wonder what the company had to do with the sale of shellfish, the operation of docks and harbours, making of whips and harnesses, etc. Most countries that adopted an English style “companies act” have amended that act to provide that a company can be incorporated to engage in any lawful business or trade, obviating the need for such huge lists, while many extant entities have amended their registrations accordingly.