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Introduction/Scenario:

Suppose an organization—charitable, for-profit or of any other category—solicits some product or service from a provider or manufacturer. Work is done by the provider, but the organization then notices or decides that the solicitation was unmandated, and even forbidden: an official made a mistake, or misused their authority. Suppose also that the product, or service, has not been rendered. The organization notifies the provider of the situation—but the provider demands some or all of the payment.

Now,

  • on the one hand, the organization is required to expend money on this service or product, so how can it be legitimate for it to make that expenditure after discovering that the solicitation was forbidden?
  • on the other hand, the provider did expend effort, and probably has a written obligation to pay, and (let's assume) it acted in good faith, not having reason to believe anything was wrong with providing the service or product; so why should it not be remunerated for its efforts? And if it is—who is to pay it, other than the organization?

Actual Question:

What are the different approaches (assuming there is more than one) to resolving this dilemma? What principles determine whether, and to what extent, the organization would be liable to pay in this situation?

Notes:

  • I'm interested in answers from different legal systems, but particularly continental/civil law and common law systems. Answers from legal-philosophical sources rather than actual legal systems are also relevant.
  • IANAL, sort of. I have some legal experience but not in this domain, so I might be asking something simple and mundane using awkward terms.
terdon
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einpoklum
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2 Answers2

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The answer will depend on a close read of the jurisdiction's judicial treatment of corporate powers and any statutes under which the organization is created.

The typical modern approach: disallowed actions are still valid

As just one typical example, in , companies and societies have the capacity, rights, powers, and privileges of an individual of full capacity, and no act of a company or society is invalid merely because the act contravenes its memorandum or articles or bylaws: Business Corporations Act, ss. 30, 33; Societies Act, ss. 6, 7.

Therefore, the provider can rely on the contract, and the organization (company or society) is obligated to pay.

However, the director or officer that improperly entered the contract could be liable to the corporation.

The historical alternative: the ultra vires doctrine

The contrary approach, applicable historically at common law and in some other specific statutory schemes is that when a corporation acts beyond its powers, those actions are ultra vires and invalid. See e.g. Communites Economic Development Fund v. Canadian Pickles Corp., [1991] 3 S.C.R. 388:

The presumption at common law is that corporations created by or under a statute have only those powers which are expressly or impliedly granted to them. To the extent that a corporation acts beyond its powers, its actions are ultra vires and invalid.

...

The doctrine of ultra vires has been abolished by statute for corporations incorporated under the business corporations legislation in most Canadian jurisdictions.

The Court noted that the ultra vires doctrine is a "protection to no one and a trap for the unwary."

Regardless, for certain specially created organizations, especially when created by a special act for public purposes, the ultra vires doctrine lives on.

Any ultra vires contract is invalid and neither party has obligations under it. However, if some benefit had already been provided to the organization, the provider could have a claim in unjust enrichment for that value. But the provider would not have a contractual remedy to anything like expectation value for foregone other work, or sunk costs on their side, etc. Estoppel may preclude the corporation from denying the obligation, but this is an underdeveloped area of the law and varies across the common law as to whether this can be advanced by a plaintiff.

Jen
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There are two legal bases on which a person can make binding contracts on the behalf of an organization:

  • Procuration (nimenkirjoitusoikeus): Legally registered in the government business information system, from which the service provider can check it. Typically held by board members and high level executives, possibly with clauses such as "two jointly".
  • Apparent authority (asemavaltuutus): Reasonable assumption of their authorization based on employee status and function in the company. For example, you can assume that a store employee has right to sell the products, or that any employee can order a small amount of basic office supplies.

The service provider would typically require a written contract with verified procuration if the contract has a high value and the products or services cannot easily be refunded. If they did not, it would be up to the courts to decide whether it was reasonable for them to expect that the person was authorized to commit to the agreement on behalf of the organization.

In the extreme case, the person might not even have any official status in the organization. The provider could sue the person for fraud, but would not have a case against the organization.

In any case, the person may be liable to both the provider and the organization for any damages incurred. This requires that they have in fact acted against the law or against the rules they have agreed to as part of their employment.

jpa
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