The great unknown

Well, it can be, in certain circumstances, but it used not to be. All clear? Let me explain.

In 1802 the Lord Chief Justice told us that not knowing the law is no excuse for anything. In criminal law, that was the case for years before and still holds today. But the application of this rule to civil law, especially the law of contract, has changed recently. Now the courts are telling us that ignorance of the law can be a helpful point to raise in a contractual dispute. If somebody tells you the law or the effect of the law in a particular context and you rely on that statement when entering into a contract with them, but it turns out not to be true, you may now have a claim for damages against them.

The case Pankhania vs London Borough of Hackney (2 August 2002) relates to a property auction. Mr Pankhania successfully bid £3.9m for a property which he intended to redevelop and subsequently found that the status of the occupier was not as advertised in the auction particulars. Property people get excited, you see, about whether businesses occupy land under a licence or a lease. Leases can acquire protection under the 1954 Landlord and Tenant Act, making it difficult to evict the tenant even after their lease has expired. Licences do not offer this protection.

The auction catalogue said this property was subject to a licence which could be terminated on three months' notice. Pankhania bought the property with this understanding but as it turned out, the occupier was a tenant. When it asserted its right to remain, Pankhania turned to the seller and sued for damages.

Whether a right to occupy is a licence or a lease is a statement of law or, at least, the application of legal rules to a set of facts. The court said Pankhania could sue for misrepresentation of law and found he had relied on the misrepresentation and it was quite reasonable for him to do so.

What has this got to do with the construction industry? Well, it's not unusual for a client or its lawyers to put forward a form of building contract or professional appointment to contractors or consultants who do not take legal advice on the specific terms of the contract.

Don’t bully people into signing contracts quickly or fob them off with explanations about the effect of terms

Looking at the design obligation, a contractor or consultant might say to the client: "As long as you are telling me that this is nothing more than an obligation to exercise reasonable skill and care, and will therefore be within the scope of my professional indemnity insurance policy, I'm happy with it. But if it is a stricter obligation such as fitness for purpose, I'm not." The client assures him it is an insurable obligation.

A few years down the line there's a problem with the building. The client sues the designer and the court finds that the design obligation does in fact require fitness for purpose. The designer is liable even though he has not been negligent, and must pay damages. His insurers refuse to see him right because they will only cover liability for negligence.

Two centuries ago this would have been tough luck for the designer. Now, though, a court might say that it was reasonable for the designer to rely on the misrepresentation by the client as to the legal effect of the design obligation and that he has a counterclaim against the client for misrepresentation. This claim would, all things being equal, cancel out the damages awarded to the client for the design fault.

What if the damages claim for the defective building was by the beneficiary of a collateral warranty? The designer would pay damages to the beneficiary and then make his claim for misrepresentation against the client. The client could end up writing a cheque, and would have no one to turn to – except, perhaps, its own lawyers.

The key issue here will be reliance by the designer. Did he rely on what was said to him about the legal effect of the contract? Was it reasonable for him to do so? It is a little surprising that the court found sympathy with Pankhania, since he was an experienced developer and his own lawyer had had the opportunity to review the legal papers before the auction. But keep in mind that this was a property auction and there was limited time for Pankhania and his advisers to check things out.