involve the irregular exercise or abuse of granted powers.

$72. Ultra vires acts. A transaction is beyond the powers of a corporation: Ist. If it is forbidden by the charter or by some governing statute,—for example, a company authorized to act as trustee or executor may be prohibited from giving surety bonds. 2nd. The transaction may be forbidden by some statute or by some rule of public policy that is applicable to natural and to artificial persons alike; contracts for usurious interest and lobbying contracts are illegal, whether the person concerned is a corporation or an individual. 3rd. The transaction may be beyond the powers of the corporation simply because it is foreign to the purposes expressed or implied in the charter; it may involve the exercise of a power not forbidden but simply ungranted, as for example, where a railroad company undertakes to guarantee the expenses of a public festival. In the better usage, the term ultra vires is limited to acts of the latter class, and many of the courts make a distinction between transactions which are illegal because forbidden, and those which are simply in excess of the granted powers.* By other courts, particularly by the Supreme Court of the United States, this distinction is not taken, and all acts beyond the capacity of the corporation are indifferently called ultra vires or illegal. This confusion of terminology

1 Code 1911, Art. 23, sec. 381.

2 In Citizens Land Co. v. Uhler, 48 Md. 455, it is held that an act permitting building associations to charge more than six per cent. interest is class legislation and unconstitutional.

3 Davis v. Railroad Co., 131 Mass. 258.

4 Hospital v. Foreman, 29 Md. 31; Western Maryland Railroad Co. v. Blue Ridge Hotel Co., 102 Md. 326; Maryland Trust Co. v. Mechanics Bank, 102 Md. 614; Burke v. Smith, 111 Md. 624.

causes some difficulty, but it is only incidental to the greater difficulties which result from radical differences in the attitude of the courts toward unauthorized transactions generally, whether you call them illegal or ultra vires. The result is a conflict of opinion difficult to understand and more difficult to summarize. Taking for illustration two concrete cases: Suppose that a statute forbids any corporation not expressly chartered for banking purposes to exercise banking powers; and that, in violation of the statute, it exercises a banking power,-namely, the discounting of a note; and suppose further, that when sued upon the note the borrower sets up the defense of ultra vires. Suppose again, that its charter authorized a corporation to insure property against loss by fire and that in excess of its granted powers, it receives the premium and issues a policy against damage by hailstorms; and suppose further that in a suit on the policy, the company sets up the defense of ultra vires. In determining the legal consequences of these transactions, there are two extreme points of view which you may occupy. If you regard a corporation as endowed with special capacity only, then, theoretically, it can no more bind itself by a contract in excess of its powers, than an infant can bind himself by his contracts; and as there can be no estoppel against the disability of infancy, so there can be none where a corporate act is ultra vires. This conclusion is logical, just as it is logical to say that the act of a pretended corporation cannot be made good by ratification or estoppel. At the

1 As in German Bank v. Katz, 57 Md. 128; with which compare Black v. Bank, 96 Md. 429 and Western Maryland Railroad Co. v. Blue Ridge Hotel Co., 102 Md. 334.

2 As in Insurance Co. v. McClellan, 9 Colo. II.

same time, if you push the doctrine of special capacity to its legitimate conclusion and hold that an ultra vires contract must under all circumstances be treated as utterly void, you sometimes get results that are inconsistent with the principles of common honesty. Courts always try to do justice; but the various attempts to reconcile logic with the equities of particular cases have produced a most disorderly condition of the law. The argument in favor of the logical rule is that any other would be unjust to the shareholders, who have the right to assume that their money will not be diverted to an unauthorized use. And it is urged, that inasmuch as all charters are public records, every one dealing with a corporation is bound to know what its granted powers are. On the other hand it is said, with much common sense, that it is not reasonable to expect persons dealing with business corporations to make a prior examination of their charters; and that even judges may differ as to whether a particular transaction is within the chartered purposes. And it is further said, that since the stockholders have elected the directors, they should bear any loss resulting from an unauthorized contract made by their agents with innocent third parties.

These opposing views are embodied in what may for convenience be called respectively the strict and the estoppel doctrine. According to the former, the unauthorized contract, as such, is unenforceable always and everywhere; according to the latter, the party who has received benefits under the contract is estopped to deny its existence. But in neither theory are the outlines well defined or clearly drawn; and between them are decisions partaking of both views and marked by various degrees of inconsistency. An attempt will be made to summarize the contents of the respective

doctrines, and then an account will be given of the Maryland decisions; but by way of preface, it is important to note certain principles accepted with more or less unanimity by all the courts. Ist. The exercise of an ungranted power is an abuse of the corporate franchise and a ground for forfeiture proceedings on the part of the state.1 2nd. So long as the transaction is wholly executory, that is to say, if neither party has altered his position thereunder, the courts will sustain the defense of ultra vires to any action or proceeding based upon the contract. 3d. As between the corporation and a shareholder, the latter, though owning but a single share, may maintain his bill for an injunction to restrain the performance of an ultra vires transaction that is yet in the executory stage. 4th. Where both parties to a contract are corporations, the transaction is ultra vires if it is beyond the powers of either,-for example, the fact that a railroad company has, under its charter, the general power to purchase the property of any other road, does not make the sale valid if it is beyond the powers of the vendor.* 5th. To be available, the defense of ultra vires must be pleaded and proved by the person relying upon it.5 6th. The estop

3

1 Fraternal Alliance v. State, 86 Md. 560.

2 Bank v. Jones, 95 N. Y. 115,- —a leading case.

3 Du Puy v. Terminal Co., 82 Md. 408. In Tomkinson v. R. R. Co. L. R. 35 Ch. Div. 675, the defendant had agreed to make a donation of £1,000 to the Imperial Institute, and a resolution to that effect was approved by the vote of shareholders representing ninety-nine per cent. of the capital stock. The complainant notified the directors not to make the donation, and in reply was offered 13d., which would have been his proportion of the proposed contribution. His bill for an injunction was sustained.

4 State v. Consolidation Coal Co., 46 Md. 12.

55 Thompson Corporations, sec. 5967; 10 Cyc. 1156.

pel doctrine will not be applied in favor of any party who, at the time the contract was made, had actual knowledge that it was in excess of the corporate powers.1 7th. Where the transaction, in addition to being beyond the granted powers, is also illegal, that is to say, contrary to public policy or expressly forbidden by some statute, or even by the provision of a particular charter, the courts, which distinguish between ultra vires and illegal contracts, will deal with it according to the principles which govern illegal contracts between natural persons. Unless some statute expressly declares the transaction void, it will be enforced or not, according as public policy requires; and relief not based on the illegal contract may be afforded where the parties are not in pari delicto. 8th. Where a transaction is held void as in excess of corporate powers, the party setting up the defense must account for the net benefits received thereunder.3

$73. The strict doctrine. In the English view, hereafter noticed, a contract which a corporation has no power to make is no contract at all. And nothing that the parties may do or leave undone, no amount of ratification or estoppel, can give it vitality In the view now taken by

1 Thompson Corporations, sec. 6009.

2 Lester v. Bank, 33 Md. 562; Shoemaker v. Bank, 31 Md. 402. The fact that a general incorporation law forbids any corporation to exercise ungranted powers does not make all ultra vires contracts illegal. Curtis v. Leavitt, 15 N. Y. 9, cited in Hospital v. Foreman, 29 Md. 531. The federal rule, post, makes all ultra vires acts illegal. See: Maryland Trust Co. v. Mechanics Bank, 102 Md. 614, and Burke v. Smith, III Md. 624.

3 Western Maryland Railroad Co. v. Blue Ridge Hotel Co., 102 Md. 331.