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Doctrine of Constructive Notice:

The ‘doctrine of constructive notice’ is more or less an unreal doctrine. It does not take notice of the realities of business life. People know a company through its officers and not through its documents. The courts in India do not seem to have taken it seriously though. For example, in Dehra Dun Mussorie Electric Tramway Co. v. Jagmandardas, the Allahabad high court allowed an overdraft incurred by the managing agent of a company when under the articles the directors had no power to delegate their borrowing power.

High Court held that unless there is wilful or fraudulent turning away from enquiry, the doctrine of constructive notice would not apply. The case Re Bright's Trusts (1856) 21 Beav. 430 was also referred to. That relates to a charge without notice on a chose in action, and it appears that except so far as the actual notice was given, subsequent incumbrancers could have no knowledge whatever of the existence of any prior charge. In that case the charge was one on a fund in the hands of trustees, and notice was given only of one of two charges created in the same deed, that for the life policy being mentioned, and that the express notice given implied that no other charge was alleged. It is clear that the principles of that case apply only to the duty of enquiry arising in cases where, apart from constructive notice, there is nothing to put the purchaser on enquiry.

The doctrine confined originally to cases of fraudulent turning away was subsequently extended to cases of gross negligence and in West v. Reid (1843) 2 Hare 249, the same learned Vice-Chancellor stated that there might be a degree of negligence so gross (crassa negligentia) that a Court of Justice might treat it as evidence of fraud though in fact as pointed out by Romilly M.R. in Jones v. Williams (1857) 24 Beav. 47, no fraudulent intent may be present. Lord Cranworth expressed the rule thus in Ware v. Lord Egmont (1854) 4 De G. M. & G. 460 at page 473:

Where a person has actual notice of any matter of fact, there can be no danger of doing injustice if he is held to be bound by all the consequences of that which he knows to exist. But where he has not actual notice, he ought not to be treated as if he had notice, unless the circumstances are such as enable the Court to say, not only that he might have acquired, but also, that he ought to have acquired, the notice with which it is sought to affect him-that he would have acquired it but for his gross negligence in the conduct of the business in question. The question, when it is sought to affect a purchaser with constructive notice, is not whether he had the means of obtaining, and might by prudent caution have obtained, the knowledge in question, but whether the not obtaining it was an act of gross or culpable negligence. It is obvious that no definite rule as to what will amount to gross or culpable negligence, so as to meet every case, can possibly be laid down.

Though no definite rule defining what would constitute gross negligence could by its very nature be laid down, the Courts of Equity held that if a purchaser of property omits to make proper and usual inquiries into his vendor's title, such omission, in the absence of reasonable explanation, would amount to gross negligence and the purchaser must, therefore, be fixed with constructive notice of facts which he would have known if he had made such inquiries. This proposition was also in some cases rested on the original theory of fraudulent turning away by saying that such omission on the part of the purchaser, if not explained, may be evidence "of a design inconsistent with bona fide dealing to avoid knowledge of the true state of the title". But whatever be the legal theory on which the proposition may be supported, the principle underlying the proposition was that a purchaser of property, as an ordinary prudent man, is expected, for the protection of his own interest, to make proper and usual inquiries into his vendor's title before he purchases the property and if he omits to do so, without any reasonable explanation, an inference can legitimately be drawn that either he has wilfully abstained from making inquiries for the purpose of avoiding notice of facts which he would have known had he made the inquiries or he is guilty of gross negligence. This principle was explained by Lord Selborne, in Agra Bank v. Barry (1874) L.R. 7 H.L. 135, where with reference to the duty of a purchaser to investigate title the learned Law Lord said:

It has been said in argument that investigation of title and inquiry after deeds is 'the duty' of a purchaser or a mortgagee; and, no doubt, there are authorities which do use that language. But this, if it can properly be called a duty, is not a duty owing to the possible holder of a latent title or security. It is merely the course which a man dealing bona fide in the proper and usual manner for his own interest, ought, by himself or his solicitor, to follow, with a view to his own title and his own security. If he does not follow that course, the omission of it may be a thing requiring to be accounted for or explained. It may be evidence if it is not explained, of a design inconsistent with bona fide dealing, to avoid knowledge of the true state of the title. What is a sufficient explanation, must always be a question to be decided with reference to the nature and circumstances of each particular case

Lord Lindley also said much to the same effect when after referring to the passage from the judgment of Lord Cranworth in Ware v. Lord Egmont (supra), he observed in Bailey v. Barnes (1894) 1 Ch. 25 at page 35:

Gross or culpable negligence" in this passage does not import any breach of a legal duty, for a purchaser of property is under no legal obligation to investigate his vendor's title. But in dealing with real property, as in other matters of business, regard is had to the usual course of business; and a purchaser who wilfully departs from it in order to avoid acquiring a knowledge of his vendor's title is not allowed to derive any advantage from his wilful ignorance of defects which would have come to his knowledge if he had transacted his business in the ordinary way Can we say that Mr. Lilley or his solicitors 'ought reasonably' to have made inquiries into the validity of the sale by Barnes? 'Ought' here does not import a duty or obligation; for a purchaser need make no inquiry. The expression 'ought reasonably' must mean ought as a matter of prudence, having regard to what is usually done by men of business under similar circumstances.

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Category Corporate Law, Other Articles by - Sameer Sharma