Esso Petroleum Company Ltd v Mardon (1976)

Hedley Byrne v Heller (1964) established that a careless statement can give rise to liability in tort for financial loss. What it left unclear was whether that liability survives when the statement leads the two parties into a contract with each other. Esso argued that once there is a contract, the parties' rights are governed only by the contract, and Hedley Byrne has no place.

The Court of Appeal rejected that argument. A person with special knowledge or skill who makes a statement to induce another to contract with him owes a duty of reasonable care. If he breaks it, he is liable in damages in tort — even though a contract followed.

It is also a leading case on when a forecast by an expert party can be a contractual warranty, and on how damages for a misstatement are measured: the plaintiff is put back where he would have been had he never entered the contract. He is not given the profit he was promised.

In 1961 Esso bought a site on Eastbank Street, Southport, a busy street, to build a filling station. It estimated the "estimated annual consumption" (e.a.c.) of petrol at 200,000 gallons a year. The planning authority then refused to let the pumps front the main street. The station had to be built "back to front", with the pumps at the back, out of sight of passing traffic.

Esso did not revise its estimate. The trial judge called this a "fatal error" and found it was due to want of care on Esso's part.

In 1963 Esso's local manager, Mr Leitch, with forty years' experience in the trade, and the area manager, Mr Allen, interviewed Mr Mardon for the tenancy. They told him the throughput would reach 200,000 gallons a year. Mr Mardon suggested 100,000–150,000 gallons would be more realistic, but his doubts were quelled by Mr Leitch's experience. He took a three-year tenancy from 10 April 1963 at £2,500 a year, rising to £3,000.

The throughput never came near 200,000 gallons: 78,000 gallons in the first fifteen months. Mr Mardon put in all his capital and ran up an overdraft. In September 1964 Esso agreed a new tenancy at a reduced rent of £1,000 plus a surcharge. The losses continued. In 1966 Esso cut off his supplies and sued for possession and the price of petrol. He gave up the site in March 1967, having lost all his capital.

Mr Mardon counterclaimed for damages. The Misrepresentation Act 1967 did not apply, because it came into force only on 22 April 1967, after the 1963 representation. So he relied on collateral warranty and on negligent misstatement.

At trial, Lawson J rejected the warranty claim but held Esso liable in negligence on the Hedley Byrne principle. He limited damages to losses up to 1 September 1964, the date of the new agreement. Mr Mardon appealed on the warranty and on damages; Esso cross-appealed on liability.

1. Was Esso's forecast of 200,000 gallons a warranty, or only an expression of opinion?
2. Does the Hedley Byrne duty of care apply to a statement made in pre-contract negotiations that result in a contract between the same parties?
3. Is that duty limited to those in the business of giving advice?
4. How are damages measured, and did the new agreement of September 1964 cut off Esso's liability?

Mr Mardon's appeal was allowed and Esso's cross-appeal dismissed. Mr Mardon was entitled to damages for breach of warranty and, in the alternative, for negligent misrepresentation. The Master of the Rolls summed up: "Mr. Mardon has succeeded on all the points of principle which were argued in this court."

The forecast was a warranty that it was made with care

The Master of the Rolls agreed that Esso did not guarantee a throughput of 200,000 gallons. But the forecast was "made by a party - Esso - who had special knowledge and skill". Such a forecast "can well be interpreted as a warranty that the forecast is sound and reliable in this sense that they made it with reasonable care and skill." He held: "there was a warranty that the forecast was sound, that is, Esso made it with reasonable care and skill. That warranty was broken."

Bisset v Wilkinson was distinguished. There the land had never been used as a sheep-farm, and both parties were equally able to form an opinion.

Ormrod LJ put the test this way: "the test is whether on the totality of the evidence the parties intended or must be taken to have intended that the representation was to form part of the basis of the contractual relations between them." A forecast needs "much more cogent evidence" before it is treated as contractual. But this case was "exceptional", because the e.a.c. was vital to both sides' calculations.

Shaw LJ relied on Bowen LJ's statement that "a statement by one who knows the facts best often involves a statement of a material fact for he impliedly states that he knows facts which justify his opinion." Mr Mardon had complained that "he had been sold a pup". Shaw LJ agreed, and called it "a warranted pup".

Hedley Byrne applies to pre-contract statements

Esso argued that when negotiations end in a contract, the parties' rights are governed by contract alone. The Master of the Rolls rejected this. He held that a professional man's duty of care "arises not only in contract, but is also imposed by the law apart from contract, and is therefore actionable in tort."

He stated the principle in the form students should learn: "If a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another - be it advice, information or opinion - with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable."

Applying it: "Esso professed to have - and did in fact have - special knowledge or skill in estimating the throughput of a filling station." They made the forecast negligently to induce the tenancy. "For this misrepresentation they are liable in damages."

Shaw LJ agreed: "It is difficult to see why, in principle, a right to claim damages for negligent misrepresentation which has arisen in favour of a party to a negotiation should not survive the event of the making of a contract as the outcome of that negotiation."

The duty is not limited to professional advisers

Esso relied on the majority of the Privy Council in Mutual Life and Citizens Assurance v Evatt, which confined the duty to those in the business of giving advice. Ormrod LJ preferred the minority view (Lord Reid and Lord Morris), saying: "If the majority view were to be accepted the effect of Hedley Byrne would be so radically curtailed as to be virtually eliminated."

Damages — reliance loss, not loss of bargain

"Mr. Mardon is not to be compensated here for "loss of a bargain"." The representation's effect "was not to warrant the throughput, but only to induce him to enter into the contract. So the damages in either case are to be measured by the loss he suffered." The court was to compare his present position with what would likely have happened "if he had never entered into this contract". His lost capital and overdraft were recoverable, and loss of earnings for a limited period was left for assessment. The claim for having to sell his house was held "too remote".

No cut-off at September 1964

The trial judge was wrong to stop the losses at the new agreement. The original misstatement "laid a heavy hand on all that followed. The new agreement was an attempt to mitigate the effect. It was not a fresh cause which eliminated the past." Shaw LJ called the judge's conclusion "a fallacious one".

The one-man company

It made no difference that the capital came from a private company owned by Mr Mardon and his wife. The Master of the Rolls said "wherever it came from, it was a loss to him: and he can recover that loss."

Where a person who has, or professes to have, special knowledge or skill makes a representation — advice, information or opinion — intending to induce another to enter into a contract with him, he owes a duty to use reasonable care that it is correct. If he negligently misstates, and the other enters the contract on the faith of it, he is liable in damages in tort under Hedley Byrne. The fact that a contract followed does not exclude that liability. Such a forecast may also be a contractual warranty that it was made with reasonable care and skill. Damages are measured by the loss caused by entering the contract, not the loss of the promised bargain.

• Direct question: Discuss liability for negligent misstatement. Does it extend to statements made in pre-contractual negotiations? Begin with Hedley Byrne, then use Esso v Mardon to show that the duty survives the making of a contract. Quote the Master of the Rolls' formulation.
• Problem question: a seller with expert knowledge gives a careless forecast of a business's sales to induce a buyer or tenant, and the business fails. Apply the special-skill test, the intention to induce, and reliance. Measure damages by reliance loss — capital lost and debts incurred — not the profits promised.
• Short note: Statement of opinion when one party knows the facts best. Use Bowen LJ's passage as quoted by Shaw LJ, and contrast Bisset v Wilkinson.
• Damages point: mitigation — a plaintiff who reasonably carries on under a revised arrangement to cut his losses does not break the chain of causation.
• Remember the court: this is the English Court of Appeal. Name it as such in your answer.