We are well aware that over time certain doctrines are formulated to aid the existing laws. The Doctrine of Constructive Notice is one of such doctrines that evolved. The origin of this doctrine can be traced back to the 1850s under English Law.
What is the Doctrine of Constructive Notice?
The doctrine of Constructive Notice works on the basic assumption that when one deals with a company one will gather necessary information related to it that is available to him. The Article of Association must be well-known to the outsider who intends to enter into a contract or hold any relation with the company. The law provides that the Article of Association of the Company must be available to the public and is made available to everyone according to Section 399 of the Companies Act, 2013.
From the inception when the company is formed and registered, the Article of Association and the Memorandum of Association are assumed to be public documents. These documents are available for inspection by anyone from the general public.
Article of Association and the Memorandum of Association are significant documents that aid a person to understand the nature of business and the running of a company. The doctrine of constructive notice also extends to all the other documents. All the documents that are required to be registered with the Registrar of Companies are included. However, the doctrine does not apply to the documents that are filed with the registrar of companies for the sake of records only.
Initially, this doctrine was applied to cases of fraud only but later on it was extended to cases of gross negligence also.
It is the duty of the party entering into an agreement to collect, examine and apprehend the documents. The constructive notice means that a notice is assumed to be given, even without a real notice existing.
Effect of the Doctrine of Constructive Liability
The courts assume it to be the obligation of the party that is getting into the agreement with a company to investigate the legal documents before agreeing to the settlement phrases. It is likewise anticipated that the individual is aware of every phrase of the settlement before agreeing to it. This doctrine prevents legal complaints from being filed.
In other words, if someone enters right into an agreement that’s beyond the powers of a company, then the agreement cannot be executed and he has no right as stated in the agreement against the company. The Memorandum of Association indicates the powers and limitations of the company. Also, if the agreement is past the authority of the directors as described within the Articles, the outsider has no rights.
Drawbacks of the Doctrine
The doctrine itself creates destructive weather for the enterprise because it creates a disproportionate burden on a part of the outsider, which was, in turn, impeding easy trading. This belief of the doctrine is strongly criticized, unanimously with the aid of using the jurists in addition to writers. The outsiders could only understand the company with the limited information available. The public documents cannot tell whether the company complies with the internal formalities.
The rule established by the doctrine of constructive notice was considered to be inconvenient for many companies as it hindered their daily business transactions.
The doctrine of Constructive Notice is frequently quoted as an unreal doctrine. The motive at the back of that is that the doctrine is created through courts through judicial pronouncements and is an imaginary doctrine. Many contracts take place in a company day in and day out. The doctrine lays a responsibility on the outsider making him responsible to have prior knowledge of all of the legal documents of the organization before entering into a deal or contract.