The Hindu Business Line : <I>Non Est Factum </I>

IT TAKES a legal person to realise that a simple journey in a Mumbai suburban train can set off a train of thoughts followed by deep study of legal tomes.

On privileged days when my driver extracts permission to go home early, I travel by local suburban train and get drowned in leisurely talks, hot discussions on mobile phones, desperate SMS messages ... and am compelled to open my law books the next day at office to see if there is a way to solve simple-sounding problems with complicated implications, which my fellow travellers complain about.

One co-traveller was complaining about an electronic PDA/organiser purchased on a well-known web site which she wanted to gift to a friend. However, when the product was delivered, she was shocked to see that the organiser was no more than a key-chain and was hardly about 2x2 inches, contrary to the image displayed on the Web site. Yet, she ended up paying Rs 450 for some thing that would hardly cost Rs 50 and obviously felt utterly cheated.

Similarly, two friends were chatting away about a relative who was offered a package of three days and two nights holiday in a five-star hotel in Nepal with complimentary breakfast. But actually, he was lodged in a two-star hotel without any complimentary breakfast.

Here the question arises as to how could a person protect his/her interests in these day-to-day situations which have monetary implications?

There is a legal maxim non est factum, which means "not his deed" and is a special defence in common law or law of torts to allow a person to avoid having to respect a contract that he or she never formed because of certain reasons such as a mistake as to the kind of contract.

A contract requires a meeting of the minds, which Roman law called consensus ad idem. If one or both parties are mistaken about an element of the contract, then there is no consensus ad idem. But that does not necessarily mean contract is void. Such a rule could breed abuse.

Mistake can be analysed into common mutual mistake, where both parties make the same mistake. Each knows the intention of the other and accepts it but each is mistaken about some underlying and fundamental fact. In a mutual mistake, the parties misunderstand each other and are at cross purposes.

When both parties are mistaken on a basic and fundamental element of the contract, the contract is void ab initio (that is, from the inception) if the mistake is of such significance that it forms a false and fundamental assumption of the contract.

In a decided case, a commercial contract provided for sale of cotton by A to B `ex-Peerless from Bombay'. In fact, two ships named Peerless sailed from Bombay, one in October and the other in December. The buyer proved he meant the October vessel, while the seller meant the December one. Held, the contract was void (Raffles vs. Wichelhaus, 1864).

In unilateral mistake, only one of the parties is mistaken. If the other party is aware of the misperception or should have been aware of the mistake, the contract may not be enforceable, even if the enlightened party did not cause the mistake.

For example, Ajit agrees to buy from Brij a specific picture which Ajit believes to be an original M.F. Hussain work but which in fact is a copy. If Brij is ignorant of Ajay's erroneous belief, the case is one of mutual mistake. But if he knew of it, it is a unilateral mistake. Internationally, a landmark judgment depicting such situation is Imperial Glass Ltd vs Consolidated Supplies Ltd (1960).

Mistake of law would not give rise to judicial interference with a contract as everyone is presumed to know the law.

In a decided case, an error was made by a clerk of a tenderer, resulting in a bid $180,000 lesser than it should have been. It was only after the tender had been selected that the contractor discovered his staff's mistake.

The court held that the contractor intended to submit the figures he submitted right up to and including the moment of submitting the tender, which formed the contract. Held, the contract was enforceable notwithstanding the mistake (Calgery vs Northern Construction Co. 1986)

Non est factum cannot be relied upon if the party could have easily read the contract or if the party had a general idea on its nature and purpose. The defence under non est factum is generally disallowed to a person who has signed a document containing the mistaken fact. The persons pleading non est factum would also have to prove that they sincerely believed that the document they thought they were signing was fundamentally different from the one they actually signed.

This situation has been dealt at length in Ashok Kumar Oswal & Others vs Panchsheel Textiles Mfg. & Trdg. Co. (P) Ltd & others. In this case `A', the petitioner claiming to have control over 68 per cent shares in X Ltd, filed a petition that by a clandestine issue of 10,000 shares in X Ltd to `S' & others, the respondents, his controlling interest in X Ltd came down to 30 per cent and as such his conversion into minority from majority caused a grave act of oppression and, therefore, he sought cancellation of issue of shares in favour of the respondents.

The facts were that `R', the Chairman of X Ltd and father of `A' & `S', left behind a will which stated that an understanding had been reached between him and his two sons that the ownership and control of X Ltd will be with `A' and that of other two companies will be with `S'. `A' was the Chairman and Managing Director of X Ltd during the lifetime of `R'. After the death of `R', `S' proposed himself for being appointed Chairman and Managing Director of X Ltd. `A' suspected that his brother was trying to throw him out of his post as CMD and opposed his proposal as being in contravention of the Articles.

Though the proposal was withdrawn, the same was again mooted after three months at a board meeting. Suspecting some foul play by his brother, `A' made an inspection of records of the Registrar of Companies and found that 10,000 shares of X Ltd had been allotted `S's wife (1,000) and his daughter (9,000).

`A' knew nothing about the allotment or the board meeting at which they were allotted. The issue amount of the additional shares was only Rs 1 lakh, which was very insignificant for the company. By the allotment, the respondents had acquired 26.2 per cent shares in X Ltd thus indirectly acquiring control over X Ltd which as per the will of their father was to go to `A'.

However, it was noted that through a will, control of listed companies could never be bequeathed and even family settlement cannot be the subject of petition under Section 397/398 of the Companies Act on oppression and mismanagement.

It was also contended that no notice was given to `A' of the board meeting at which the allotment was made and, therefore, he had no knowledge of such allotment. The document relied on by the respondents about the petitioner's knowledge was the Annual Report signed by `A'. The respondents had also produced attendance sheets of several board meetings printed on blank papers and signed by `A'. However, `A' had never attended those meetings.

The petitioner had stated that he had signed the Annual Report but he had not referred the annexures, which were fudged by adding figures in ink. However, the defence would not allow `A' to plead non est factum on the ground of negligence in signing a document.

It was also stated that carelessness on the part of a person signing a document would preclude him from later pleading non est factum on the principle that no man may take advantage of his own wrong (cases referred: Saunders vs. Angila Building Society, and United Dominions Trust Limited Vs. Western).

However, the Company Law Board (CLB), notwithstanding the merits of the case, felt that it was beyond one's comprehension that a person would voluntarily allow himself to be reduced to minority by assenting to the allotment of new shares and accordingly, purely on equitable grounds, the CLB felt that the control of X Ltd should go to `A', the petitioner along with all its assets and liabilities.

The CLB tacitly did rely on the maxim non est factum and went beyond the apparent facts of `A' petitioner signing the documents, to the core of the issue and granted relief to the petitioner whereby on certain requirements being fulfilled the 10,000 new shares issued would be cancelled reinstating `A' as majority shareholder.

It should be noted that mistaken assumptions are immaterial to a contract. A hypothetical illustration: A man agrees to purchase through mail order a `Magical Dress' from a trader who had said that the wearer will see everybody around him, but no one could see or recognise him. The man paid Rs 5,000 for what he thought was a unique magical dress but ended up receiving a burkha worth Rs 250!

Unilateral mistake is not enough to prevent the acceptance of an offer unless (1) the mistake is as to the terms of the contract (as opposed to motivation) and (2) the mistake is known to the offeree at the time of purported acceptance. The contract is valid despite the mistaken assumption that a dress would be such that it will make a person invisible to human eye.

The seller relied on human psychology of dwelling in imaginary realm, which would make the prospective buyer believe that the dress being magical would make him invisible.

Rightly, Miserama est servitus ubi jus est ant vagum, aut incertum meaning miserable must be the condition of those people where the administration of the law is capricious and uncertain.

To protect the commercial system, the courts have consistently shown that in the presence of a signature by a person endowed with the capacity to contract, non est factum is a very difficult defence to hold in a court. Unfortunately, as with so much of common law, the final determination of what the rules are for dealing with mistake are still up in the air, moving with the changing decisions of the courts.

Even globally, this common subject — mistake — lacks a legislative stamp. With the advent of e-commerce, it becomes critical to crystallise the law on this.

(The author is Company Secretary and Whole-Time Director of ALSTOM Projects India Ltd and is based in Mumbai.)

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