LEGAL VIEWPOINT: The Ultra Vires Doctrine by Dr AbdelGadir Warsama Ghalib, Legal Counsel, Bahrain

Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel, Bahrain

Each company\corporation gets its legal powers from the laws in the Country in which it has been incorporated, particularly the Company law. Normally the powers, given the company, come from the Company law, court decisions related to such issues and the articles of incorporation/association. Simultaneously, at the same time, there are limitations imposed on the powers of the company and likewise its management. Such constraints generally arise in certain laws, articles of association and by-laws of the company.

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For many years Courts took the view that acts done by corporations that were beyond the authority given by either the law of incorporation or articles of association were void and of no effect. A transaction that was beyond the company powers was said to be ultra vires or out of jurisdiction. The competent authority, a shareholder or the company itself, could prevent the enforcement of an ultra vires contract. This view, as seen by many, was often used by the company to avoid a contract that later looked unattractive because of a change of conditions, unfairness of the other party of the contract or for other reasons. Courts were not of the same view while looking in such cases. Most of them have refused to enforce wholly executory contracts but have let stand contracts that had been performed by both parties. Contracts that had been partially executed represent the most difficult for the courts. Majority of the courts held that such a contract is enforceable if one of the parties has received a benefit.

There are views, to eliminate the use of ultra vires as a defense to the enforcement of a contract. However, they permit a shareholder to seek a court injunction to stop a company from carrying out a proposed action beyond its powers. Also, they permit the company itself, a shareholder or a receiver in bankruptcy to bring suit for damages to the company against officers and directors who performed an ultra vires act. Competent authorities are also permitted to enjoin the company from performing unauthorized transactions.

This, among other things, is needed to protect the company itself and its shareholders from certain acts that could be dangerous for them and could harm the existence of the company.

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