Incapacity & Void
Limited Powers
Traditionally, a company was limited by its objects. 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 (and remain for DACs) significant exceptions and protections for third parties dealing with the company. The protections have been updated and restated for DACs.
Governmental and most public sector bodies are subject to statutory limits on their powers. These may be specified or provided for by their founding statute.
Payments Outside Powers
Payments made by a company outside its powers may be recovered by it. Monies are recovered on the basis of a total failure of consideration. Credit must be given by way of counter-restitution.
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 / Lent to Corporate
There have been a number of cases where lending has taken place to companies and governmental corporations outside of their corporate powers and objects. In the case of companies, because the lender’s advisors had notice of the Memorandum and Articles of Association, they were deemed to have actual knowledge, notwithstanding certain protections that otherwise protect outsiders.
Monies paid to a corporation under an ultra vires contract are generally recoverable. This was upheld in Re PMPA Garage and Westdeutsche Landesbank Girozentrale v. Islington LBC, overruling 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. Recovery was allowed on restitutionary principles.
Recovery by Minors
Although contracts by minors are void or potentially void, recovery may be allowed, where there has been a total failure of consideration. The other party must receive nothing in return and must be able to return the benefits received if any.
Questions arise as to whether the minor can recover assets transferred if there has not been a total failure of consideration. The case law is contradictory. In a number of cases, the child’s receipt of benefits under the contract precluded recovery on the basis of restitution.
Recovery Against Minors
The courts have been reluctant to allow recovery against a minor, even on the basis of restitution. Where a minor had agreed to sell goods but failed to deliver them, an action for recovery of the price was disallowed, even where there was a total failure of consideration.
Claims against minors are largely unenforceable on a restitutionary basis. Otherwise, the minor protection legislation would be circumvented.
A number of principles limit the harshness of this position, at least to some extent.If the minor was guilty of fraud or still has the money or property, an equitable remedy might require its return. If he obtained the money or property by fraud and later sold it, the proceeds might be attachable by way of restitution.
The supplier of goods or services to a minor, under a contract which is terminated for breach by the minor, would appear not to be entitled to restitution, as it would give effect to the minor’s obligations contrary to the statute.
Criticism and Possible Reform
The cases in which the minor was not obliged to repay money received have been criticised. The requirement to repay monies received recoups what should not have been received.
It is not equivalent to making him liable for damages. It is argued that it is not necessary to preclude a restitutionary remedy in order to protect the minor.
The Law Reform Commission proposed in its 1985 paper on Minors Contracts, that the courts should have the discretion to allow restitutionary recovery. The Minors Contract Act 1987 in England permits the court discretion to order the minor to restore assets obtained under a contract, and the proceeds or substituted assets representing it, if the minor still has it.
Writing Required
Where statutes require a written form, the recovery of benefits paid without compliance will depend on the interpretation of the statute. In the case of the Consumer Credit Act, there are specific provisions regarding recovery.
In the case of other statutes requiring writing, there is likely to be restitution to prevent unjust enrichment, as in such cases, no effective consideration may be obtained by the party who lacks the written document.
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 restitution.Contractsts 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.