Ultra vires

Ultra vires is Latin for “beyond its powers”, a concern which crops up usually in the context of a corporation or governmental authority exceeding the powers and objects set out in its constitution or charter. It may also have some relevance to a Trust.

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In that most valuable and intellectually rewarding pastime of checking a prospective combatantcounterparty’s capacity and authority, ultra vires is your principle concern should it not, after all, have the capacity to transact in your chosen kind of derivative.

These days ultra vires is a rather old fashioned notion as far as an ordinary corporation goes — in most sensible jurisdictions, the vicissitudes of the ultra vires rule for innocent, publicly spirited bystanders (like swap dealers), whose only concern is that an undertaking is prudently managing the financial exposures inherent in its business, have been largely obliterated by legislation, but it is still liable to induce butterflies in your team of legal eagles if you are dealing with a local authority.

Sovereign immunity and ultra vires: not the same

Don’t confuse sovereign immunity with ultra vires — cue thunder crack at the mention of Orange County or Hammersmith and Fulham council and a dramatic look from our house gopher — for they are quite different things.

• Ultra vires: If a contract is beyond your powers or capacity to enter into a contract in the first place then it is void ab initio; any payments you have made under that contract are also void and you may reclaim them, and you can appeal to the court system to do that. That is to say, ultra vires is an “intra-legal” measure, recognised, defended and enforced by the courts.
• Sovereign immunity: Sovereign immunity is a different, “extra-legal” thing: it is to say “I am, quite literally, above the law: I am the law, and I do not have to subject myself to the judicial branch of my law — or anyone else’s law — unless I choose to.” This extends to being free from judicial intervention if I decide not to perform my contractual obligations, but it also means I cannot myself resort to the court process to make my counterparty perform its obligations. If I choose to go to court, then I subject myself fully to the courts as regards actions my counterparty wishes to bring against me.

Don’t mention

derivatives and Orange County or Hammersmith and Fulham council

See also

• Capacity
• Hazell v Hammersmith and Fulham LBC
• Due diligence
• indemnity
• ISDA Master Agreement