Trace Your Case

ASHBURY RAILWAY CARRIAGE AND IRON CO V. RICHE

Ashbury Rly. Carriage & Iron Company v. Riche (1875) LR 7 HL 653

ISSUE:

  • Whether the company can enter into a contract that is beyond the scope of the object clause in the MOA of the company?

RULE:

  • The Ashbury Railways case laid the foundation of the ultra vires rules and confined the acts of the company within the ambit of the object clause of the MOA. This was rendered moot to a great extent after the introduction of the changes in the Companies Act 2006 since section 17 of the Act does not mandate any company to have a MOA.

FACTS:

  • Ashbury Railway Carriage and Iron Co. Ltd., in the object clause of its MOA, had stated that the object of the incorporation of the company was ‘to make or sell, or lend, or hire, railway carriages and waggons, and all kinds of railway plants, fittings, machinery, and rolling stock; to carry on the business of the mechanical engineers and the general contractors; to purchase and sell, as merchants, timber, coal, metals, or other materials; and to buy and sell any such materials on commission, or as agents.’
  • The directors of the company entered into a contract with Riches, wherein a railway line was to be constructed in Belgium, and the contract was for the financing of the construction.
  • Clause 4 of the object clause specifically mentioned that beyond the scope of the above-mentioned clause, there was a need for a special resolution to indulge in any activity which was beyond the scope of this clause of the object clause in the MOA.
  • However, the company superseded this requirement and agreed to give Riches the loan and financing they needed to build the railway line.
  • The contract which was thus entered into by the company was ratified by all the members of the company.
  • However, later on, the company reneged on its side of the deal repudiating the contract that was entered into by the company and Riches. Riches sued the company for the breach of the contract and claimed damages.

HELD:

  • The House of Lords held that the objectives of the company as mentioned in the object clause of the company’s MOA were absolute.
  • House of Lords, in this case, applied this same principle and held that the contract which had been entered into by the company was beyond the scope of the object clause of the MOA of the company.
  • The House of Lords also held that by entering into the concerned contract with Riches, the company was in breach of the clauses that had been included in the constitution of the Company.
  • The clauses that were included in the MOA did not allow the company to make a contract. Keeping this in mind, the House of Lords held that the transaction concerned here was invalid, and thus, consequentially held that the contract shall have no legal effect for the company or the Riches.
  • The judgment resulted in a defeat for Riches to have the contract enforced since there could not be any breach. This was due to the fact that there could not have been any contract to be breached in the first place.