Chapter: 6.2 Doctrine of Ultra Vires

Doctrine of Ultra Vires

Company cannot do anything beyond the powers expressly or implicitly conferred upon it by the memorandum and anything done beyond such powers as provided in memorandum will be ultra vires. Such an act is not binding upon the company. This doctrine was first decided by the House of Lords in the

Ashbury Railway Carriage & Iron Co. vs. Riche.

A company was formed to manufacture railway wagons and all kinds of railway plants and fittings and to carry on business of mechanical engineers and general contractors, etc. the director of the company was entrusted into contract with Riche for financing the construction of railway line in Belgium and there was evidence that the agreement has been verified by all the members. The company repudiated the agreement and was sued for breach of contract. the other party brought an action for the damages with the contention that (1) the contract in question comes well within the meaning of the words 'general contract' and was therefore within the powers of the company; and (2) that the contract was ratified by the majority of shareholders.

The court held that the term 'general contractors' must be taken to indicate the malting generally of such contact as were connected with the business of mechanical engineers. If the term 'general contractors' was not so interpreted, it would authorized the making of any kind of contract such as fire, marine insurance etc. and memorandum in place of specifying the particular kind of business of any kind whatsoever and would therefore be altogether unmeaningful. Hence the contract was beyond the object of the memorandum of association. The said case laid down 2 important principles:
i)    the act of the company which is beyond its object is ultra vires. Such an act being void cannot bind the company.
ii)    The company can not ratify such act.

Effect of Ultra vires Act:
The company is not bound by any act, which is ultra- vires to its object. The contracts entered into are void contracts and company cannot be held liable fir the breach of such contracts. Director can personally be held liable for such act.