What is the “ultra vires doctrine”?
The Latin expression ultra vires means “beyond powers”. It has been adopted in legal language to describe a situation in which someone (a person, an entity, a public authority) is acting beyond the prerogatives he, she, or it has. Used both in public and private legal discourses, in the corporate law context it typically refers to the limits of legal person’s capacity to act. The ultra vires doctrine (as developed in the common law tradition) restricts a corporation’s capacity to act contrary to the corporation’s purpose and declares the acts that go beyond such purpose as null and void (invalid). This resembles continental concepts of “statutory speciality” (French la spécialité statutaire), or “special legal capacity” (Polish specjalna zdolność prawna).
In practice, it is crucial to determine, whether the ultra vires doctrine applies in a particular jurisdiction to a particular type of legal person, so that third parties know, what legal actions are allowed for a particular entity, and what legal actions are beyond the entity’s powers. The mere lack of adoption of the name “ultra vires doctrine” does not itself determine the answer, as the same or a similar concept may be referred to by a different name.
In private foundation law this issue is particularly interesting – for two reasons. First, the purpose of a foundation is determined by the founder and remains the guiding principle for the foundation’s directors, or for the internal and external supervisory authorities. If the purpose bounds the foundation’s capacity to perform legal actions, some of them (including payments to the beneficiaries, sale of particular elements of the assets, or establishment of a sub-foundation) may turn out to be null not only while contrary to law or good morals, but also while violating or circumventing the foundation’s purpose set by the founder. Therefore, the validity of the same legal action performed by two private foundations (i.e. two entities established in the same legal form of a private foundation) may be assessed differently, depending on the purpose specified for each foundation. Secondly, several Central European jurisdictions prove to adopt various approaches to this issue. Three of them will be briefly shown in the following paragraphs.
Swiss version of the ultra vires doctrine
In Switzerland, the concept that may be described as ultra vires doctrine applies to companies, associations, and foundations. Representatives of such an entity may carry out, in its name, all legal acts that may serve its purpose. The Swiss jurisprudence and legal doctrine understand the word “serve” widely, making virtually any (even indirect) link between a legal action and the purpose as a sufficient justification for maintaining such an action valid. In practice, an action needs to be contrary to the foundation’s purpose, to be invalid based on this rule. As an example of a legal action contrary to a private foundation’s purpose, the literature names a situation in which a distribution is made free of charge to non-beneficiaries (as specifying beneficiaries is treated as an element of the private foundation’s purpose).
If a legal action is performed contrary to the foundation’s purpose, this action is invalid as contrary to law – precisely, contrary to the provision requiring that the representatives’ actions “serve the purpose”. The rules on falsus procurator do not apply. There is, therefore, no space for subsequent confirmation, even in case of contracts.
A limited ultra vires doctrine in Liechtenstein
In Liechtenstein, only selected elements of the ultra vires doctrine apply to foundations. First and foremost, there is no default principle of invalidity of foundation’s legal actions lying beyond its purpose. In turn, it is the founder’s option to include such a provision in the foundation’s charter. Only if expressly included in this document, law recognises such a provision and guarantees its effect towards third parties.
However, the “invalidity” that results from such cases is limited in several ways. It can operate only in favour of the foundation, not the other party (foundation’s obligations towards other parties may be invalid, but other party’s obligations towards a foundation remain valid, even if somehow not complying to the foundation’s purpose). The “invalidity” is not the traditional, absolute “full invalidity” (Ger. Nichtigkeit, Pol. nieważność). Rather, it is relative: only a party concerned may be affected by it (no erga omnes effect), and only if this party was aware, or should have been aware, that the legal action concluded with the foundation lied beyond the powers of the foundation’s representatives.
A comparable approach is represented in German foundation law (although the rule may operate both ways: also in favour of the other party, not only in favour of the foundation). However, German jurisprudence explicitly rejects naming it ultra vires doctrine.
No ultra vires doctrine in Poland
As opposed to the examples given above, Polish law on family foundations (which is the name used for private foundations in Poland) does not recognise the ultra vires doctrine at all. If a family foundation’s representatives perform a legal action not complying with the foundation’s purpose, there is neither a general, default rule of law that results in invalidity of such an action, nor a possibility for a particular founder to include such a rule in the foundation’s charter with an effect vis-à-vis third parties. The family foundation’s capacity to perform legal actions is general, not restricted by the purpose; similarly, the power of the family foundation’s directors to represent it is general as well.
As the family foundation’s purpose is an element of the charter, a legal action contrary to the purpose is at the same time contrary to the charter. This does not result, however, in the invalidity. Internal decisions of family foundation’s organs that contradict the charter may be annulled by court, if a founder, a beneficiary, or an organ member applies for it. Even then, however, only the internal decision of the organ in question loses its legal effect. If such a decision was a base for an external legal transaction, the latter remains valid and binding for its parties, unless proved invalid for other reasons. No ultra vires effect is present in Polish foundation law.
A similar approach (i.e., a lack of an ultra vires doctrine) can be found in other European countries’ regulation of private foundations. A prominent example is Austria, where the Act on Private Foundation (Privatstiftungsgesetz) also does not limit the entity’s capacity to act beyond its purpose.
European legislation influence
Worth mentioning is the influence of the European legislation on this matter. The Directive (EU) 2017/1132 (and before, the Directives 68/151/EEC and 2009/101/EC) requires companies within its scope to be bound by its organs’ actions, even if these actions exceed the scope of the company’s activities. This requirement excludes the ultra vires doctrine (with exceptions for its certain elements).
This does not apply to other legal persons. However, many countries regulate this issue jointly for all companies or all legal persons. Therefore, indirectly, this piece of legislation has influenced areas beyond the Directive’s scope. E.g., in Liechtenstein (not an EU-member, but a member of the European Economic Area), the national ultra vires regulation used to be based on the Swiss one but it has been changed (in a way described before) in order to meet the European law’s standard. This change affected all legal person types regulated in the Act on Persons and Companies (Personen- und Gesellschaftsrecht), including foundations.
Conclusions
The analysis of just a few European regulations of private foundations showed a distinctive diversity of the scope in which a purpose of such a foundation limits the foundation’s capacity to perform legal actions: from a relatively comprehensive adoption of the ultra vires doctrine in Swiss law to a total rejection of this concept in Poland.
From the perspective of long-term estate planning, a private foundation should have instruments to protect its purpose, especially after the founder’s death, as, since then, the purpose specified by the founder is the main remaining way of fulfilling the founder’s will. Including a protection modelled on the ultra vires doctrine may be a sensible path to this end. On the other hand, third parties require protection and should not be surprised by invalidity of certain legal actions because of their non-compliance with the foundation’s purpose. In case of private foundations, the latter is often confidential, and therefore publicly unknown. This strengthens the need for third parties’ protection.
To balance these values, adopting a middle-way solution seems to be attractive. Liechtenstein’s law meets this goal, as no element of the ultra vires doctrine would affect a third party who did not know (and did not need to know) about the purpose-based restriction regarding a particular transaction. However, full rejection of the ultra vires mechanism, like in Austria or Poland, has its strengths as well, because the legal framework regarding the capacity of a private foundation beyond its purpose is clear (no invalidity) and third parties can predict the results of entering into legal relationships with a private foundation.
Krzysztof Grzegorczyk
The text provides an accessible, non-specialist overview of the research findings obtained within the framework of the project “The Dead Hand. Private Foundation as a Multi-Generational Estate Planning Tool” (National Science Centre, Poland, grant no. 2021/41/B/HS5/00857).