CHAPTER III

CORPORATE POWERS

Section

1. Scope of Corporate Powers.

2. Ultra Vires Contracts.

SECTION 1.-SCOPE OF CORPORATE POWERS There are two main questions relating to corporate powers: (1) What transaction may be entered into by a corporation, such that the resulting legal relations will be the same as those produced by the same kind of transaction when entered into by individuals? (2) What is the abnormal effect produced upon the relations of the parties when the corporation has entered into some transaction which admittedly lies outside its powers? The case following deals with the second of these questions. No cases have been inserted which raise individual problems involving the first question. With respect to this question the general principle is fairly clear. The corporation will possess only such power as has been conferred upon it. The source of this power, in the first instance, is the state incorporating it. Other states in which the corporation may engage in business may also affect transactions which are governed by the laws of that state. Where a corporation is incorporated by special act the source and extent of its power is the statute which created the corporate entity. Where the corporation is incorporated under the provisions of an incorporation law, the source and extent of corporate powers is the statute or statutes under which the corporation was organized.

In determining the scope of power of a particular corporation statutes other than the incorporation law itself must be taken into consideration. Statutes enacted under the police power of the states, either prior to or subsequent to incorporation will operate as limitations upon corporate powers. Limitations will be found not only in the actual text of the statutes but will rest in the nature of the corporate organization itself, as, for example, the question as to whether a corporation may purchase its own stock; the English rule and the rule in some of the states of the United States being that such a purchase cannot be made, while the majority rule is that a corporation may purchase its own stock when made in good faith and the rights of creditors are not prejudiced thereby. The powers of a corporation may not be as extensive as the statutes of the state of incorporation permit. Such a situation as this arises when the articles of incorporation place limitations upon corporate activities in addition to those found in legislative acts. In its broader aspects, therefore, the problem of determining the extent of corporate powers is a problem of interpreting the various

statutes of the state and of the articles of incorporation in the light of transactions which have in fact been entered into. The determination of these questions will vary according to the kind of corporation which is concerned with the transaction under examination. It might be held in one case that a particular corporation did not have power to enter into a contract of suretyship, but such rule would obviously not apply to surety companies. The powers of banking corporations, manufacturing companies, railroad companies, and religious corporations could not be coextensive. In the process of reasoning the ascertainment of the scope of a corporation's power is not essentially different from that involved in determining the scope of an agent's power.

SECTION 2.-ULTRA VIRES CONTRACTS

APPLETON v. CITIZENS' CENTRAL NATIONAL BANK OF NEW YORK. (Court of Appeals of New York, 1908. 190 N. Y. 417, 83 N. E. 470, 32 L. R. A. [N. S.] 543.)

CULLEN, C. J. This action is brought by the plaintiff as receiver of a dissolved bank against the defendant, who is the successor of the Central National Bank of the city of New York. * * * The plaintiff has been defeated on the theory that the execution of the guaranty by the defendant bank was ultra vires, and not binding upon it, and upon this ground the judgments below are sought to be sustained. Had the guaranty been limited to the amount which the bank, under its agreement with Samuels, was to receive out of the loan, we should be entirely clear that it was within the legitimate powers of the bank under the decisions of the Supreme Court of the United States.

We think, however, that the defendant's power to guarantee was limited by the extent of its interest in the subject-matter of the guaranty. To allow a bank to guarantee the payment by one of its debtors of a larger sum in order that the bank might receive or retrieve a lesser sum would be to permit it to enter upon very hazardous speculation, and authorize very wild and unsafe banking. *** We may assume that the contract was ultra vires. We may further assume that in transactions by national banks we should adopt the law of ultra vires as it prevails in the Federal courts, and not the local law on the subject. Yet the defendant, in our opinion, became plainly liable for the amount which it received under the ultra vires contract. The law which obtains in this state and in several other jurisdictions is that, where one party has received the full benefit of an ultra vires contract, he cannot plead the invalidity of the contract to defeat an action upon it by the other party.

A contrary rule obtains in the Supreme Court of the United States. There it is held that the execution of an ultra vires contract by one party cannot confer upon it validity or authorize the other party to sue on its obligations (Central Transportation Co. v. Pullman's Palace Car Co., 139 U. S. 24, 11 Sup. Ct. 478, 35 L. Ed. 55); but at the

same time it is also held that a party cannot retain money or property received by it under an ultra vires contract when it refuses to perform that contract (Logan County Bank v. Townsend, 139 U. S. 67, 11 Sup. Ct. 496,35 L. Ed. 107). It was there said by Judge Harlan: "The bank, in this case insisting that it obtained the bonds of the plaintiff in violation of the act of Congress, is bound, upon being made whole, to return them to him. No exemption or immunity from this principle of right and duty is given by the national banking act. The obligation to do justice,' this court said in Marsh v. Fulton County, 10 Wall. (U. S.) 676, 684, 19 L. Ed. 1040, 'rests upon all persons, natural and artificial, and if a county obtains the money or property of others without authority, the law, independently of any statute, will compel restitution or compensation.'" In a great many cases the difference between the law prevailing in the federal courts and that in our own would lead to great difference in results. In this case, however, as the plaintiff disclaims any right to recover beyond the amount actually received by the defendant, the result is exactly the same whether we adopt one rule or the other. Whatever the difference of view there may be as to the effect of ultra vires on corporate contracts, in no jurisdiction can a party retain what it has received under such a contract, and refuse to perform the contract. * *

*

Nor is there any force in the suggestion that this action is not brought in disaffirmance of the contract for money had and received, but on the contract of guaranty. All the facts are set forth in the complaint, and if these facts entitle the plaintiff to relief on any theory, then the complaint states a good cause of action.

The judgments of the Appellate Division and Special Term should be reversed, and judgment rendered for plaintiff on demurrer.

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HARRIS et al. v. INDEPENDENCE GAS CO. et al.

(Supreme Court of Kansas, 1907. 76 Kan. 750, 92 Pac. 1123, 13 L. R. A. [N. S.] 1171.)

MASON, J. Cornelius Carr and his wife executed to the Independence Gas Company an oil and gas lease-that is, an instrument granting the right to explore a tract of land for oil or gas, and to appropriate either if found. The company is a Kansas corporation, and, at the time of the execution of the lease, the only purpose mentioned in its charter was "to dig or mine for natural gas, and sell the same for heat and lighting purposes." Later, an amendment was made adding thereto the mining and selling of oil. What are called the "gas rights' under the lease have been transferred to another gas company, and no point is raised with regard to them. The Carrs, claiming that the lease so far as it related to oil was void, because at the time it was executed the lessee had no authority to engage in the oil business, undertook to grant the oil privileges anew to C. C. Harris, who, upon. that ground, brought an action against the Independence Company to cancel all of its contract excepting that portion relating to gasjoining his grantors as coplaintiffs. The trial court sustained a demurrer to a petition setting out substantially these facts, and this proceeding is brought to review that ruling.

B. & B.BUS.LAW-89

The defendant maintains: (1) That it had the implied power to produce and market oil as an incident to the express power granted to it to produce and market gas; (2) that if it originally lacked such power the defect was supplied by the charter amendment; and (3) that even if it had no authority to enter into the contract the plaintiffs cannot take advantage of the fact. It will only be necessary to consider the questions involved in the third proposition.

Although the decisions relating to the doctrine of ultra vires are characterized by some confusion, as well as by much conflict, they admit of classification into fairly well-defined groups, and exhibit a development in the direction of restricting the scope of its operation. Those courts which accord it the most favorable treatment-allow it the largest field of action-proceed upon the conception that a corporation, being the creature of the state, possesses no power whatever beyond that granted in its charter, and cannot directly or indirectly acquire rights, or incur liabilities, under any contract not thereby authorized. They refuse, under any circumstances, to enforce or give effect to an unauthorized contract as such, but, where it has been acted upon, will protect the parties against hardship and injustice, by allowing whatever relief may be suited to the facts of the case-for instance, by permitting either party to recover money or property which has been parted with in the transaction, or to have compensation therefor. * * *

The theory is consistent and logical, but its practical effect is so to circumscribe the power of the court as to make the relief furnished at times inadequate to the occasion. In a larger number of jurisdictions, although the same conception of corporate capacity is adopted, its effect is greatly changed by the application of another principle. Here the courts concede that a corporation has no power to make a contract except such as is conferred by its charter, expressly, or by necessary implication. But they hold that as it must have some discretion in the manner of carrying out the purposes of its creation-some freedom of action-it is amenable to the same rules of conduct as a natural person, and may estop itself to question the validity of an agreement it has assumed to make or may acquire the right to invoke a similar estoppel in its own behalf. Where this theory is accepted, recovery may be had upon a contract which is in fact void, simply because its validity cannot be put in issue.

* * *

These cases have been criticised for the use they make of the word "estoppel," as descriptive of the principle upon which they are based. It is argued that, as a a corporation must know the terms of its own charter, and as one dealing with it is charged with like knowledge, neither party to an ultra vires contract can be misled in that respect, and therefore there must always be lacking an essential element of what could, with technical accuracy, be called estoppel. This, however, is a mere question of terminology. The requirement that one shall be consistent in conduct-shall not occupy contradictory positions, shall not retain the advantages of a transaction, and reject its burdens-is often spoken of as a form of estoppel. The term is convenient, and, if inaccurate, is not misleading. This rule of estoppel affords a good working hypothesis to accomplish just results. If it fails to accomplish all that might be desired in a practical way, it is because it is not made sufficiently far-reaching. It is generally held to be inapplicable to purely executory contracts, one reason stated being that, "Where

neither party has acted upon the contract, the only injustice, caused by a refusal to enforce it, is the loss to the parties of prospective profits, and this is too slight a consideration to weigh against the reasons. of public policy for declaring it void and not enforceable." 29 A. & E. Encycl. of L. 49, 50.

It might seem reasonable that a system which attempts not only to protect a party to an ultra vires contract from actual loss, but, where equity requires it, to insure to him the actual fruits of his bargain, ought, for the sake of completeness and symmetry, to enable him to insist upon the performance even of a purely executory contract. It certainly seems against conscience that one who has entered into a contract in the expectation of deriving a profit from it, may, upon discovering the probability of a loss, repudiate it, and escape responsibility by raising the question of want of corporate capacity. Parties to a contract, who deal with each other upon the assumption that one of them is a corporation, are ordinarily precluded from questioning the validity of its organization.

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A large majority of the adjudications on the subject of ultra vires fall into one or the other of the two groups already referred to. The conception of corporate power, upon which they depend, has been styled that of "special capacities," in distinction from that of "general capacities." * * * The conception, designated by the latter term, is, in brief, that while a corporation has no right to exceed the limits of its charter it has the power to do so. The theory was elaborated in the opinion of Chief Justice Comstock, in the celebrated case. of Bissell v. Mich. So. & Nor. Ind. R. Cos., 22 N. Y. 258, where it was said: "Like natural persons, they (corporations) can overleap the legal and moral restraints imposed upon them; in other words, they are capable of doing wrong. * The distinction between power and right is no more to be lost sight of in respect to artificial than in respect to natural persons. * * * Why, it may be asked, does the law provide the remedy of quo warranto against corporations for usurpation and abuse of power? Is it not the very foundation of that proceeding, that corporations can, and do, perform acts, and usurp franchises beyond the rightful authority conferred by their charters? Most assuredly this is so. The sovereign power of the state interposes, alleges the excess of abuse, and, on that ground, demands from the courts a sentence of forfeiture." * * *

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This theory, logically followed out, would obviously make all corporate contracts, executory as well as executed, enforceable between the parties. It has not, however, met with any large acceptance, at least in the form stated. * * * But a recent tendency has been developed to reach substantially the same result by a somewhat different course of reasoning, resulting in a doctrine which is thus stated. ́in 10 Cyc. 1164: "A most important doctrine connected with this subject, and one which arises above the mere principle of estoppel, is that, whether a corporation has acted without authority conferred on it by the Legislature, or has acted in contravention to an act of the Legislature, cannot be set up collaterally, by individuals who deal with it, or by third persons, but can be set up only by the state in a direct proceeding to forfeit its charter, to oust it of some particular franchise, or to subject it to punishment; or where the question is otherwise. litigated between the state and the corporation."

The cases applying or discussing the doctrine are collected in notes