Legal justification - constructive notice, Business Law and Ethics

Legal justification - Constructive notice:

The legal justification for this rule is that since the company's public documents in its file at the Companies Registry are available there for inspection by any interested member of the public he should have gone to the Registry, asked for the Company's file, inspect the contents and, having found the memorandum of association, read the objects clause in order to ascertain whether the proposed contract is consistent with the company's objects. He would then have realised that the contract was not within the company's objects. If he fails to do so and it happens that the concluded contract was neither expressly nor impliedly within the company's objects, he will be regarded as having been aware that the contract was ultra vires. He cannot therefore be allowed to enforce it. The "constructive notice' rule may be likened to the old adage, "you can take a donkey to the river but you cannot force it to drink", but with the addition that, on your way back home, you would be entitled to tell the donkey: "Since you have simply refused to drink for no apparent reason, I will take it that you have drunk for today. I will therefore not take you to the river again today but will do so tomorrow when the drinking time comes".

There appears to be no moral justification for allowing a person contracting with a company to rely on his own inaction as the basis for instituting legal proceedings against the company. It is rather tempting to say that the law, like God, protects only those who also protect themselves.

The only plausible criticism that could be made against the constructive notice rule is its assumption that a potential contracting party who reads a company's objects will be able to make the correct legal conclusion regarding the vires of the proposed transaction, and its refusal to validate the transaction in cases where the party mistakenly believed the proposed contract to be intra vires the company.

The fact that a perusal of the company's objects clause does not guarantee its correct interpretation is amply demonstrated by a number of English cases in which judges of the High Court, having read a disputed clause, concluded that the transaction was intra vires but the decision was later on reversed by the Court of Appeal or the House of Lords. If such senior judges can differ over the vires of a particular transaction, why should an ordinary businessman, or his legal advisor, be expected to decide the matter correctly?

A close study of some of the relevant English cases pertaining to this issue, particularly the Ashbury case, seem to indicate that the decision of the higher court which finally disposed of the case was "correct" only in the sense that the higher court, being constitutionally mandated to make the final decision, also made the "correct" decision.

There seems to be no legal justification for retention of the constructive notice rule. The fact that a person intending to contract with a company read the company's objects does not guarantee that he will interpret it correctly. And there appears to be no moral justification for blaming a person for not making a decision that was beyond his technical competence to make.

Posted Date: 1/12/2013 2:36:38 AM | Location : United States







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