Key Takeaways:

  • Constructive notice assumes that third parties have educated themselves about a company's publicly available information, such as memorandums and articles of association.

  • Several reforms have reduced the burden of constructive notice, shifting responsibility to companies.

When running a business, you should be aware of several critical concepts in company governance. The common law rule of constructive notice is one such concept that has significant legal implications for any employer. Understanding this concept is essential for businesses to protect themselves and those involved in contractual agreements with the company from legal complications. 

What Is the Common Law Rule Of Constructive Notice?

To put it simply, the common law doctrine of constructive notice is the idea that all parties involved in a contract or legal agreement with your business will know about the company's articles of association, even if they do not have an actual notice of contract. 

The main premise of the common law rule of constructive notice is that since the company’s articles of association are publicly accessible, it is reasonable to expect that those dealing with the company should have checked these documents before entering into any agreement. 

By making this assumption, the common law rule of constructive notice protects businesses from costly legal claims and liabilities by holding external parties responsible for educating themselves about the company's articles of association which are publicly accessible.

Constructive Notice Meaning and Purpose

The main purpose of a common law rule of constructive notice is to ensure transparency and fairness for all parties involved in agreements with a business. 

By assuming that all parties should be aware of a company’s publicly available information, the common law rule encourages everyone involved to perform their diligence before entering into any legally binding contracts. 

This distributes the burden of responsibility fairly among the company and those involved with the company and reduces the chances of legal disputes or misunderstandings. It also prevents external parties from claiming ignorance about matters that are already outlined in publicly accessible information–as legally, it was their responsibility to perform due diligence before entering into contracts.

Some key details that parties need to be aware of when entering into contracts are: 

  • Company Rules & Regulations: When entering into an agreement with a business, the external party should familiarize themselves with any company rules and regulations that are publicly available.

  • Approval Requirements: If the company’s articles of association state that all contracts must be approved by the board of directors, a third party cannot claim ignorance if such approval is not obtained. 

  • Legal Clauses: If the company’s articles of association have specific clauses, external parties cannot claim ignorance about those clauses after entering into an agreement with the business.

Effect of the Common Law Rule of Constructive Notice On Contracts and Liability

The legal implications of the common law rule of constructive notice on contracts and liability is very significant and far-reaching. Since this rule places the onus on third parties to perform due diligence regarding a company’s publicly available information, they can be held liable if they fail to stay informed. They will not have legal grounds to claim ignorance and any contract that goes against the company’s articles of association will be considered void. 

In other words, not inspecting and reviewing a company’s publicly available documents can lead to significant losses for any party entering into a contract with that business, and they will also not have legal protection from such liabilities.

Constructive Notice vs. Actual Notice

It's important to understand the differences between constructive notice and actual notice. While constructive notice is based on the assumption that a party should have known certain facts, actual notice states that the company should directly notify the other party of those facts.

For example, if a company directly informs a third party about its approvals process–be it verbally or in a written notice directly addressed to the party–then the third party is considered to have actual notice. 

On the other hand, if the third party is expected to be aware of the approvals process because it is clearly specified in the publicly accessible documents, then the common law rules of constructive notice would apply.

Understanding the difference between these two types of notice is important because they have a direct impact on the validity of contracts, and have legal consequences.

Implications for Businesses and Contractual Relationships

The evolution of the common law rule of constructive notice has significantly changed contractual relationships in the corporate world. Companies must now be proactive about informing their business partners about any relevant restrictions, requirements, or processes. They must also ensure that their own internal processes are being performed diligently and that all necessary approvals are obtained before entering into contracts.

Navigating the Common Law Rules on Constructive Notice

To summarize, while the common law rule on constructive notice has historically provided more protection for companies than for third parties, in modern corporate governance it has now evolved to adopt a more balanced approach. The responsibility for transparency, due diligence, and effective communication is now being fairly distributed to all parties–the company, as well as the parties they enter into agreements with.

For this reason, businesses need to understand company law. If needed, you can consult with business attorneys through UpCounsel to carefully navigate these complex legal areas and ensure proper compliance. 

FAQ

What are the exceptions to constructive notice?

Exceptions to the common law rule of constructive notice include situations where third parties act in good faith without knowledge of a company’s internal processes. This is where the common law rule of indoor management is applied.

What is the criticism of constructive notice?

The common law has been criticized for being too harsh on third parties and placing an unreasonable burden on them to be aware of a company's public documents.

What's the difference between constructive notice and actual notice?

Constructive notice assumes knowledge based on the availability of information, while actual notice involves direct and explicit communication of that information.