Liability of the Corporation

Question 1

When are corporations liable on contracts?

Answer 1

• when contracts are made by officers and agents with express, implied, or apparent authority
• when an unauthorized contract is ratified by the board

Question 2

What is an “ultra vires” act?

Answer 2

An ultra vires act is a corporate act outside the authority of the state’s statute or the corporation’s articles or bylaws.

Question 3

When can the ultra vires defense be asserted?

Answer 3

when a shareholder is seeking to enjoin or set aside the unauthorized act

Question 4

How does an unauthorized act implicate third parties?

Answer 4

Third parties cannot avoid a contract with a corporation on the basis that the corporation lacked authority to enter it.

Question 5

How does an unauthorized contract impact the corporation’s defenses in a contract dispute?

Answer 5

The corporation may not assert as a defense that the contract was unauthorized, unless the third party had knowledge of the restriction in the articles of incorporation.