Law Report: Bank has to disprove constructive notice
LAW REPORT: 25 April 1997
In possession proceedings by a bank in whose favour a husband and wife had executed a legal charge on the property, the onus was not on the wife to plead expressly that the bank had constructive notice of her right against her husband to have the legal charge set aside.
The Court of Appeal allowed the appeal of the second defendant against a ruling in the county court that, unless she had expressly pleaded constructive notice, she could not argue at the trial that the plaintiff bank had constructive notice of her claim that she had been induced to sign a legal charge by misrepresentation.
The first and second defendants, who were husband and wife, executed a legal charge over their house in favour of the bank. After the husband's failure to comply with a demand from the bank for payment of sums alleged to be owed, the bank started possession proceedings. The wife served a separate defence, admitting that she had signed the legal charge but pleading that she had done so as a result of a misrepresentation by the husband. She counterclaimed for a declaration that she had a half share in the property free of the legal charge.
Christopher Coney (Comptons) for the wife; Michael Sullivan (Teacher Stern Selby) for the bank.
Lord Justice Mummery said that the sole question on appeal was whether, on the pleadings as presently drawn, the wife was entitled to argue that the bank was fixed with constructive notice of her claim against her husband.
The wife's case was that she had pleaded all the relevant facts and matters which entitled her to mount that argument.
She had pleaded the legal charge (which she admitted having signed); that she was the wife of the debtor; had given particulars in support of her claim that her husband had made a misrepresentation to her on which she had relied in signing the charge; had claimed that she had received no explanation of the meaning and effect of the charge before she signed it; and thus contended that she had a right in equity to have the charge set aside.
It was submitted that the legal consequences of material facts did not have to be pleaded and that, if established by evidence, the legal consequence of the facts pleaded was to fix the bank with constructive notice.
The bank relied principally on the rules of pleading, in particular RSC O 18 r 8(2) and r12(4), submitting that it was necessary to plead every ground of defence to an action for possession, including constructive notice.
In his Lordship's judgment the appeal should be allowed. Procedure and practice required that all material facts should be pleaded. In general, only facts should be pleaded; not evidence relied on to prove the facts; not points of law; not argument.
As only material facts had to be pleaded, the wife was entitled to argue at the trial, on the basis of the facts already set out in her defence and counterclaim, the issue of constructive notice. It was not necessary for her to add another paragraph expressly alleging constructive notice.
The relevant substantive law confirmed that conclusion. On the authority of Lord Browne-Wilkinson's speech in Barclays Bank plc v O'Brien  1 AC 180 and on well-established equitable principles, the burden was not on the wife to plead and prove that the bank had constructive notice: it was on the bank to plead and prove that it did not.
It was well established that the doctrine of bona fide purchaser for value without actual or constructive notice was a defence which could be raised to defeat a claim of an equitable right or interest, and that the burden was on the person raising that defence to plead and prove all its elements: it was a "single defence".
The speech of Lord Browne-Wilkinson in O'Brien supported the view that the same approach to pleading and proof of constructive notice applied in O'Brien cases as in the standard case.
It was irrelevant in such cases whether the land was registered or unregistered: the question was whether the creditor had actual or constructive notice of the facts on which the equity to set aside the transaction was founded.
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