Invalid Contracts

Ultra vires Contracts

Companies legislation has removed the ultra vires rule for most companies as and from December 2016. Dedicated Activity Companies remain subject to the rules. There were significant exceptions and protections for third parties dealing with the company. The protections have been updated and restated for DACs.

The fact that a company or corporation cannot enforce an ultra vires contract does not preclude it from obtaining restitution of benefits and payments made under it. Accordingly, a local authority which paid monies under a “swap” contract made outside of its statutory powers was able to recover the net sums paid. By the same principle, payments made in advance of counter-performance on foot of an ultra vires contract may be recovered under restitutionary principles.

It is arguable that the principle also applies to a fully performed contract. Counter restitution will be required. The Companies Act policy relating to company powers is to protect the assets of companies for the benefit of shareholders and creditors. This policy is not frustrated by recovery on the part of the company.

Monies paid to a corporation under an ultra vires contract is generally irrecoverable. Upheld in Re PMPA Garage and Westdeutsche Landesbank Girozentrale v. Islington LBC. This overrules Sinclair v. Brougham. It appears not to matter that the contract has run its course. In another swaps case where the third-party had received no consideration, there was a total failure of consideration regarding the third-party and recovery was allowed on restitutionary principles.

Void Contracts

The effect of invalidity is a matter of interpretation of the purpose of the legal requirement in the context of the circumstances.  In the case of protective legislation,  the court is more likely to hold the weaker party, whose protection is the subject of the legislation is protected against recovery of sums paid.

The fact that contracts are void for lack of formality does not preclude restitutionContractsts for the sale of land and sale of goods require a memorandum be enforceable. Deposits paid under a lands sale contract not evidenced in writing, are recoverable where the seller does not perform and transfer title.

The principle applies equally to services and goods provided. Although the person who has provided the service may not be able to recover the contractual payment, he is entitled to reasonable payment for what he has done.

Failure of Contract

There need not necessarily be a contract. Where a person pays money to another with the intention that other use it for a specific purpose, (for example, on marriage or to purchase a property, then if that marriage or purchase does not take place), then the money may  be recovered based on failure of expectation, even though the agreement or understanding is binding in honour only.

Some courts have had regard to the circumstances in which negotiations broke down. If it is the fault of the other party, recovery may be allowed. However, there are difficulties of principle. Contracts are always subject to not proceeding and are not final until concluded. There are may be practical difficulties in distinguishing between fault and no fault, in this context. Work that is preparatory in nature is unlikely to be the subject of restitution. The claimant takes the risk that the matter might not proceed.

Where the payment is made in respect of improvements or additions to property, the courts may hold in some cases hold that the person is a constructive trustee, where there is an expectation that they will have an interest in the property concerned. If a party undertakes expenditure in a circumstances where it is implicit that he takes the risk of losing it where there is no contract, the loss is likely to fall with him.