Ultratra Vires Case Study

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6. ULTRA VIRES CONTRACTS

A contract of company which is ultra vires, i.e., outside the objective clause as defined by memorandum of association is wholly void and is of no legal effect. The objection to an ultra vires contract is, not merely that the company ought not to have made it, but that it could not make it. The main issue is not as to the legality of the contract; but the issue is as to the competency and authority of the company to make it. An ultra vires contract which has the effect of void- ab- initio, cannot become intra vires by any reason of estoppels, lapse of time, ratification, acquiescence or delay. Any kind of performance on any side of the party can give the illegal contract any legality or be the basis of any right of
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They do not have any legal effect so as to cause any adversity to innocent persons who are not aware with the ability of the company to enter into such contract. The observation made by the court in the landmark case of Ashbury Railway Carriage & Iron Co. V Riche , laid down that an ultra vires contract is void- ab-initio which cannot turn into intra vires by any reason of estoppels, lapse of time, delay or acquiescence.
The inability of the company to make any contract has sometimes caused great injustice and hardships to the people who had no knowledge of such incapacity of the company. In the case of Beauforte (Jon) London, Ltd. Re : Jon Beauforte Ltd., company, by its memorandum of association was authorized to practice the business of costumes, gown, robe, dress and mantle makers, tailors and other activities of similar nature. But later on the directors of the company decided to practice on the business of manufacturing veneered panels, which was clearly ultra vires the objective clause of the company. For the said purpose the company established a factory. Different firm of builders who actually constructed the factory brought a suit of action claiming 2078 pounds; another firm brought suit of 1011
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In India the principle has been discussed in the following case. A company bought and operated a rice mill which was beyond their authority. The rice was consigned to certain specific persons who had already paid the price. Due to bad quality of the rice being produced the consignees had to sell it at a considerable loss. The company promised to pay them back for the loss incurred by them by giving them drafts as guarantee. As the company was winding up the question about the enforceability of those drafts arose. The court observed that operating in rice was an operation that was ultra vires the company; the directors, therefore, it cannot bind the company, and the consignees did not have rights and power to recover back from the

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