The ultra vires rule.

Welcome back!

A short while after Joseph left, Becky put in a bid to a fairly large consumer product company called Maximus Inc. for a print and outdoor marketing campaign to launch their new product. Along with the bid, she was required to submit a copy of her company’s Certificate of Incorporation and Memorandum and Articles of Association (MEMART).

The bidding process was quite tough with a lot of lobbying but Becky’s company (BeWise Digital Limited) eventually won the bid and was chosen to execute the contract. Becky put in a lot of time and resources to make sure the quality of her work was of international standard.

The payment terms of the contract between Maximus Inc. and BeWise Digital Limited indicated that a 50% mobilization fee be paid on commencement, while the balance was to be paid upon completion of the project. Becky’s company successfully completed the project and delivered as promised. The product launch was a huge success.

Then things got ugly. 6 months after Becky sent in her invoice, she was yet to receive the remaining 50 per cent payment. She made several calls to the agents of the company but still the money was not forth coming. At this point, she started to worry because execution of the contract had cost her a lot, and staff salaries had to be paid.

After a year of non-payment, she had to engage her lawyer to send a formal demand letter and threaten legal action. Maximus Inc. still did not make payment and the case went to court after 18 months.

It looked like a cut and dried case for Becky. Maximus Inc. had their backs to the wall until a smart lawyer in their defense team took a second look at BeWise Digital Limited’s MEMART and realized that the business objects listed therein were purely for digital marketing while the contract executed for Maximus Inc. was non-digital (i.e. print and outdoor). They presented this is court and argued that BeWise Digital Limited could not legally demand payment for a business they were not lawfully registered to engage in. Guess what? The judge ruled in favor of Maximus Inc. and they won!

Becky was distraught. She had to get her lawyer to amend her MEMART to fully reflect all business lines her company was engaged in or had the competence to possibly execute in the future. However, the damage had already been done.

Case Analysis

In law, there is a rule called the ultra vires rule. For an action to be ultra vires, it means it falls “beyond the scope or in excess of legal power or authority”. According to this rule, a company is not allowed to carry on any business that is not expressly stated in its MEMART.

Why was this rule created?

It was created to protect creditors and investors by ensuring that they are fully aware of the nature of business they are investing in. According to Professor Gower, the rule is “to ensure that an investor in a gold-mining company did not find himself holding shares in a fried-fish shop”.

How can I avoid this rule?

To avoid being caught up by this rule, make sure that your MEMART and all incorporation documents are prepared by a competent legal practitioner, who would ensure that your company is protected from such technical errors as there are many of them.

Thanks for reading through to the end… you’re awesome! Any questions?


Published by Ronke Omorodion

I am a Legal Practitioner/Consultant. I inform entrepreneurs of the legal implications of doing business and help them build a structured legally sound business.

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