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.