[1976] Q.B. 801
Esso Petroleum Co. Ltd. v. Mardon
Court of Appeal
1975 Dec. 8, 9, 10, 11, 12, 15; 1976 Feb. 6
*801 Esso Petroleum Co. Ltd. v. Mardon
Court of Appeal
CA
Lord Denning M.R., Ormrod and Shaw L.JJ.
1975 Dec. 8, 9, 10, 11, 12, 15; 1976 Feb. 6
Negligence--Duty of care to whom?--Careless misrepresentation--Pre-- contractual
situation--Negotiations for tenancy of petrol station--Petroleum company making
statement concerning potential through put of station--Company aware that
prospective tenant relying on accuracy of statement in taking tenancy--Whether
company owing duty of care to tenant--Whether special relationship between parties-Whether breach of duty
Contract--Condition or warranty--Pre--contractual statement--Negotiations for
tenancy of petrol station--Statement by petrol company as to potential throughput-Tenancy taken in reliance on statement--Whether statement constituting warranty
Damages--Measure of damages--Pre--contractual statement--Forecast of petrol
station potential throughput--Compensation for breach of warranty and negligent
statement--Loss of earnings
In 1961 the plaintiffs, a large oil company, found a site on a busy main street which
they considered suitable for a filling station as an outlet for their petrol sales. One of
their servants with some 40 years' experience of the trade calculated that the
potential throughput was likely to reach 200,000 gallons by the third year of
operation. On the basis of that estimate they bought the site and started to build the
station; but the local planning authority refused permission for the pumps to front on
to the main street and the station had to be built back to front. Despite that
fundamental alteration in siting, the plaintiffs early in 1963 interviewed the defendant,
a prospective tenant, and the same experienced servant together with a local
colleague gave him the same estimated throughput of 200,000 gallons. The defendant
suggested that 100,000 to 150,000 was more likely, but his doubts, as the judge
found, were quelled by his trust in the greater experience and expertise of the
plaintiffs' servants; and on April 10, 1963, he entered into a written tenancy
agreement for three years at a rent of <<PoundsSterling>>2,500 for the first two
years and <<PoundsSterling>>3,000 for the third.
Despite his best endeavours the throughput in the first 15 months was only 78,000
gallons, mainly because the pumps were screened from the main street passing
public. In July 1964, after he had sunk all his capital in the business <<PoundsSterling>>6,270, provided by a private limited company in which he and
his wife held all the shares - and had incurred a large bank overdraft he gave the
plaintiffs notice. As they wanted to keep the station open and controlled by a good
tenant they offered him a new tenancy agreement at a yearly rent of
<<PoundsSterling>>1,000 plus a surcharge on petrol sold and he entered into it on
September 1, 1964. But the losses continued; the plaintiffs gave the defendant no
real help, and when he could not pay cash for the petrol supplied they cut off his
supplies. In December *802 1966 they issued a writ claiming possession of the
premises, moneys owed, and mesne profits. The defendant gave up, possession in
March 1967; and he counterclaimed for damages for breach of the warranty as to the
potential throughput, and alternatively for negligent misrepresentation by virtue of
which he had been induced to enter into the contract of April 10, 1963, and the
second agreement of September 1, 1964.
Lawson J. held that the statement as to potential throughput was not a warranty such
as to give the defendant a cause of action in contract for breach of warranty, but that
the plaintiffs were liable for the negligent representation, albeit made during precontractual negotiations. In a separate judgment on the assessment of damages on
the counterclaim he held that the causal effect of the negligent statement had become
spent at September 1, 1964, when the second tenancy agreement was made; and he
awarded as damages the capital sum lost in the business and the bank overdraft,
rejecting the plaintiffs' contention that the lost capital having been provided by a
limited company was not the defendant's loss but he declined to award the defendant
any further damages for loss of a bargain or loss of profits or earnings.
On the defendant's appeal and the plaintiffs' cross-appeal: Held, allowing the appeal and dismissing the cross-appeal, (1) that the statement as
to potential throughput was a contractual warranty for it was a factual statement on a
crucial matter made by a party who had, or professed to have, special knowledge and
skill with the intention of inducing the other party to enter into the contract of
tenancy; that it did induce the defendant to enter into the contract and therefore the
plaintiffs were in breach of the warranty and liable in damages for the breach.
(2) That in any event the statement was a negligent representation made by a party
holding himself out as having special expertise in circumstances which gave rise to
the duty to take reasonable care to see that the representation was correct; that that
duty of care existed during the precontractual negotiations and survived the making
of the written contract which was the outcome of the negotiations; and that therefore
the plaintiffs were also liable for damages for the tort of negligence.
(3) That on the facts the effect of the negligent statement was not spent by
September 1, 1964, when the defendant entered into the second tenancy agreement,
for by that act he was acting reasonably in an effort to mitigate the loss to himself
and to the plaintiffs, and accordingly the loss sustained after that date was
attributable to the original misstatement and was recoverable as damages from the
plaintiffs.
(4) That the measure of the damages for breach of the warranty and for the negligent
statement was the same whether the action was founded in contract or in tort; that
the damages recoverable were what the defendant had lost by being induced to enter
into the contract; and (per Lord Denning M.R.) should be asessed on the same lines
as damages for personal injuries to include estimated loss of earnings.
(5) That in the circumstances of the case the court should disregard the fact that the
capital sum lost was provided by a private limited company, for to treat the company
as a separate legal entity whose loss was not the personal loss of the defendant would
be a denial of justice.
*803 Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, H.L.(E.)
applied.
Bisset v. Wilkinson [1927] A.C. 177 , P.C. distinguished.
Decision of Lawson J. [1975] Q.B. 819; [1975] 2 W.L.R. 147; [1975] 1 All E.R. 203
reversed in part.
The following cases are referred to in the judgments of the court:
Bagot v. Stevens Scanlan & Co. Ltd. [1966] 1 Q.B. 197; [1964] 3 W.L.R. 1162;
[1964] 3 All E.R. 577.
Bentley (Dick) Productions Ltd. v. Harold Smith (Motors) Ltd. [1965] 1 W.L.R. 623;
[1965] 2 All E.R. 65, C.A..
Best v. Edwards (1895) 60 J.P. 9.
Bisset v. Wilkinson [1927] A.C. 177, P.C..
Boorman v. Brown (1842) 3 Q.B. 511; (1844) 11 Cl. &; Fin. 1, H.L.(E.).
Candler v. Crane, Christmas & Co. [1951] 2 K.B. 164; [1951] 1 All E.R. 426, C.A..
Capital Motors Ltd. v. Beecham [1975] 1 N.Z.L.R. 576.
Cassidy v. Ministry of Health [1951] 2 K.B. 343; [1951] 1 All E.R. 574, C.A..
Clark v. Kirby-Smith [1964] Ch. 506; [1964] 3 W.L.R. 239; [1964] 2 All E.R. 835.
De Lassalle v. Guildford [1901] 2 K.B. 215, C.A..
Dennis v. London Passenger Transport Board [1948] 1 All E.R. 779.
Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158; [1969] 2 W.L.R. 673; [1969] 2
All E.R. 119, C.A..
Groom v. Crocker [1939] 1 K.B. 194; [1938] 2 All E.R. 394, C.A..
Efploia Shipping Corporation Ltd. v. Canadian Transport Co. Ltd. (The Pantanassa)
[1958] 2 Lloyd's Rep. 449.
Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465; [1963] 3 W.L.R.
101; [1963] 2 All E.R. 575, H.L.(E.).
Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30, H.L.(E.).
Lister v. Romford Ice and Cold Storage Co. Ltd. [1957] A.C. 555; [1957] 2 W.L.R. 158
; [1957] 1 All E.R. 125, H.L.(E.).
McInerny v. Lloyds Bank Ltd. [1974] 1 Lloyd's Rep. 246, C.A..
Matthews v. Kuwait Bechtel Corporation [1959] 2 Q.B. 57; [1959] 2 W.L.R. 702;
[1959] 2 All E.R. 345, C.A..
Mutual Life and Citizens' Assurance Co. Ltd. v. Evatt [1971] A.C. 793; [1971] 2
W.L.R. 23; [1971] 1 All E.R. 150, P.C..
Nocton v. Lord Ashburton [1914] A.C. 932, H.L.(E.).
Oleificio Zucchi S.p.A. v. Northern Sales Ltd. [1965] 2 Lloyd's Rep. 496.
Reg. v. Smith (Roger) [1975] A.C. 476; [1973] 2 W.L.R. 942; [1973] 2 All E.R. 896,
C.A.; [1975] A.C. 476 ; [1974] 2 W.L.R. 1; [1973] 3 All E.R. 1109, H.L.(E.).
Sanday (Samuel) and Co. v. Keighley, Maxted and Co. (1922) 27 Com. Cas. 296,
C.A..
Sealand of the Pacific Ltd. v. Ocean Cement Ltd. (1973) 33 D.L.R. (3d) 625.
Smith v. Land and House Property Corporation (1884) 28 Ch.D. 7, C.A..
The following additional cases were cited in argument:
Ashcroft v. Curtin [1971] 1 W.L.R. 1731 ; [1971] 3 All E.R. 1208, C.A..
Clarke v. Army and Navy Co-operative Society Ltd. [1903] 1 K.B. 155, C.A. .
Czarnikow (C.) Ltd. v. Koufos [1969] 1 A.C. 350; [1967] 3 W.L.R. 1491; [1967] 3 All
E.R. 686, H.L.(E.).
*804 Dillingham Constructions Pty. Ltd. v. Downs [1972] 2 N.S.W.L.R. 49.
Dodds and Dodds v. Millman (1964) 45 D.L.R. (2d) 472.
Oscar Chess Ltd. v. Williams [1957] 1 W.L.R. 370; [1957] 1 All E.R. 325, C.A..
Philips v. Ward [1956] 1 W.L.R. 471; [1956] 1 All E.R. 874, C.A..
Routledge v. McKay [1954] 1 W.L.R. 615; [1954] 1 All E.R. 855, C.A..
APPEAL from Lawson J.
The plaintiffs, Esso Petroleum Co. Ltd., issued a specially endorsed writ on December
1, 1966, against the defendant, Philip Lionel Mardon. claiming possession of premises
consisting of a petrol service station, showroom and offices and other buildings
fronting Eastbank Street and known as Eastbank Service Station, Eastbank Street,
Southport; the sum of <<PoundsSterling>> 1,133 13s. 9d. as money due on petrol
supplied to the defendant; and mesne profits from December 28, 1966, until
possession should be delivered up. They claimed that by an agreement in writing
dated September 1, 1964, they had let the petrol service station and other buildings
to the defendant for a term of one year from September 1 and thereafter until it
should be determined by either party giving to the other three months' notice in
writing, at a rent consisting of a surcharge from the premises to be calculated in
accordance with a table set out in a schedule; and that under the same agreement
the defendant agreed to pay specific amounts above the plaintiffs' appropriate
wholesale schedule prices applicable at the date of sale multiplied by the number of
gallons of the relevant grade of fuels actually sold by the defendant during the
relevant period; that the defendant was in breach of the petrol clause in failing to pay
the <<PoundsSterling>>1,133 claimed and had not remedied it.
By a defence and counterclaim served on February 28, 1967, the defendant admitted
the agreement of September 1, 1964, and that the plaintiffs were entitled to
possession of the premises which he was in process of delivering up; but he disputed
the amount of the sum claimed as excessive. By his counterclaim, as finally amended
at the trial in July 1974 before Lawson J., he claimed that before the agreement of
September 1, 1964, the plaintiffs and he had entered into an agreement in writing
dated April 10, 1963, in respect of the same premises.
By paragraph 6 he claimed that in order to induce him to enter into the agreements
and in consideration of his so doing the plaintiffs by their servants and/or agents
repeatedly represented and warranted to him that the petrol filling station, the
subject matter of the agreement, had a potential selling capacity of between 200,000
and 250,000 gallons of petrol per annum which amount would be reached before the
expiration of the first agreement, that the plaintiffs were experts in that sphere of
business, and that the defendant could rely on such representations and warranties.
The representations and warranties were (a) on an occasion at or about the end of
February 1963 at the petrol station one Leitch orally informed the defendant that the
station had a potential throughput of about 200,000 to 250,000 gallons per annum
after a couple of years of building up the business; (b) at a meeting at the plaintiffs'
offices in Manchester in March 1963 at which the defendant, Mr. Allen, Mr. Leitch and
Mr. Wooldridge were present (i) Mr. Allen informed the defendant that the potential of
*805 the petrol filling station was such that within two years the throughput would be
in the region of 200,000 to 250,000 gallons per annum; (ii) the defendant said he
thought that this was high and that a figure of 100,000 to 150,000 gallons per annum
would be more realistic; (iii) Mr. Allen told the defendant "with all due respect we are
the experts. You are, we should say, the layman" or words to the like effect; (c)
immediately after the meeting while at lunch the defendant told Leitch that he was
still doubtful as to the throughput potential of 200,000 to 250,000 gallons per annum
at the end of two years, but that Leitch reassured him, stating that he had had 39
years' experience in the petrol trade and that the defendant should have confidence in
his (Leitch's) experience; (d) in or about April or May 1963 Leitch assured the
defendant that he would have a successful business because the plaintiffs were
convinced of the existence of the throughput potential and by reason thereof had
pursued their planning application in respect of the station to appeal; (e) between
about the beginning of May 1963 and the beginning of 1964 one Kinrade on a number
of occasions orally informed the defendant that the station was a nice site and should
do very well; and that it would take some little time to build up to the potential yearly
throughput of 200,000 to 250,000 gallons; (f) prior to the defendant entering into the
agreement dated September 1, 1964 (which was signed on or about September 18,
1964), and after the defendant had written the plaintiffs a letter dated July 17, 1964,
there was a further meeting attended by the defendant, Allen, and Wooldridge, at the
plaintiffs' offices at Manchester, at which the defendant complained that it looked
much as though the petrol filling station had not a throughput potential of 200,000 to
250,000 gallons per annum. Allen and Wooldridge both questioned the defendant as
to his method of running the petrol filling station, implying that it was his own fault
that the throughput potential was not being realised. Allen used words to the effect
that properly run the petrol filling station had the represented throughput potential
and that in any event the initial two year period had not yet expired.
After giving particulars of the alleged negligence the counterclaim stated that in
consequence of the breaches of warranty and misrepresentations and/or by reason of
the plaintiffs' breach of their duty of care and/or by reason of their negligence the
defendant had sustained damage, the moneys he had expended in equipping the
premises in order to trade therefrom had been lost, he had traded at a loss, he had
lost the profits which he would have made had the station been as represented and
warranted, the plaintiffs had exercised their right to forfeiture of the agreement of
September 1, 1964, and the defendant, to minimise further loss, had been compelled
to give up the premises. The counterclaim concluded that the defendant would give
particulars of his damage in a schedule to be delivered separately; and he
counterclaimed for damages and such further or other relief as might be just.
Schedules of damage were later provided. By their defence to the counterclaim the
plaintiffs denied the allegations in paragraph 6 of the counterclaim.
Lawson J., in a reserved judgment on liability delivered on July 31, 1974 [1975] Q.B.
819, held that the statement as to potential throughput did not constitute a
contractual warranty but that, as the plaintiffs had *806 known that the defendant
relied on their expertise in making the statement before he decided to take a tenancy
of the filling station, that had created a special relationship under which they owed
him a duty of care on the principles stated in Hedley Byrne & Co. Ltd. v. Heller &
Partners Ltd. [1964] A.C. 465, although the statement was made during precontractual negotiations, and as the plaintiffs were in breach of that duty they were
liable to him in negligence.
On January 13, 1975, Lawson J., in an unreported judgment, assessed the damages
on the basis that the measure of damages was narrower in tort than in contract, in
that the plaintiffs were not liable for any loss of a bargain or profits but only for the
proved losses they foresaw or should reasonably have foreseen as flowing from the
negligent misstatement. He held further than the causal effect of the negligent
misstatement had become spent by September 1, 1964, the date of the second
tenancy agreement, so that that date became the "cut-off point" beyond which the
defendant could not recover damages. He awarded the defendant the net sum of
<<PoundsSterling>>9,007, with interest at 7 per cent. for five years (
<<PoundsSterling>>2,520) and only three-fifths of his taxed costs, but granted leave
to appeal against the order as to costs. The sum of <<PoundsSterling>>9,007
represented a total of <<PoundsSterling>> 10,270 damages, consisting of
<<PoundsSterling>>6,270 loss of capital at September 1, 1964, and
<<PoundsSterling>>4,000, the defendant's bank overdraft at that date, from which
fell to be deducted the sum of <<PoundsSterling>> 1,262 as money and mesne
profits due to the plaintiffs on their claim. The judge disregarded a submission for the
plaintiffs that the capital sum was provided from the private company in which the
defendant and his wife held all the shares, holding that in all the circumstances it
would be wrong to draw a distinction between the defendant and his company since in
all practical senses the Eastbank Street business was his business operated by means
of his financial resources at all material times by his overdrawing on his trading
account at his bankers and that the company's bank account was mainly supported by
his trading account.
By his notice of appeal the defendant asked that the judgment be varied so as to give
him a right to recover damages for breach of collateral warranty in addition to or in
substitution for negligent misstatement; as to the proper measure and quantum of
damages; as to the interest on the damages; and as to costs. He asked that
judgment might be entered on his counterclaim for the sum claimed in the schedules
to his counterclaim, namely, <<PoundsSterling>> 82,417.22, or such other sum as
might be just, together with interest thereon for such period and at such rate as
might appear just to the court, together with the whole of his costs, or alternatively
that a new trial might be ordered. His grounds of appeal were, inter alia, (1) that the
judge erred in law in failing to find that the plaintiffs had entered into a collateral
warranty with the defendant and in failing to award him damages for breach of that
warranty in the following circumstances: (a) the judge rightly found that prior to April
10, 1963, the plaintiffs made a statement of existing fact to the defendant, viz., that
the petrol filling station then had the potential or capacity to produce an annual
throughput of petrol of 200,000 gallons in the third year of the tenancy; (b) he rightly
found that the defendant to the knowledge of the plaintiffs was induced to and did
enter into a tenancy agreement dated April 10, 1963, in reliance on that statement of
fact; (c) he correctly found that the statement of fact was *807 incorrect in that in
1963 the petrol filling station had not such a potential throughput or foreseeably in
any year after the third year of the tenancy; (d) he then erred in law in finding that
the statement of fact in reliance on which the defendant was induced to and did enter
into the tenancy agreement was not a collateral warranty as to the existing quality or
attributes of the petrol filling station in consideration for which he entered into the
tenancy agreement and consequently erred in law in failing to award damages for
breach of such collateral warranty. (2) Further or alternatively the judge ought to
have found that the measure of damages was the same for negligent misstatement as
for any other form of negligence, viz., all the damage reasonably foreseeable as a
consequence of, and naturally flowing from, the breach of duty of care; and he ought
to have awarded damages for the loss of opportunity to earn profits which otherwise
would have been made. (3) Further or in the alternative he was wrong in law in
holding that compensation for the loss of the opportunity to make profits which
otherwise would have been made was not a recoverable head of damage. He ought to
have found in law (i) that compensation for the loss of opportunity to make profits
which otherwise would have been made was a recoverable head of damage;
alternatively (ii) if not, then the defendant ought to recover as a head of damage his
loss of such remuneration as he would have earned from other employment open to
him during the relevant period, viz., while he was attempting to run the business of
the petrol filling station. (4) In any event the judge erred in law in holding that the
damages should only be assessed for the period April 10, 1963, to September 1,
1964; he ought to have found that the action of the defendant in entering into a fresh
tenancy agreement dated September 1, 1964, and in continuing to carry on the
business of the petrol filling station thereafter was a reasonable attempt by him to
mitigate the losses he suffered; that it was done by him with the plaintiffs'
encouragement, and that all losses that he suffered as a result of such attempt were
recoverable in law; and that the judge ought to have taken the relevant period for
damages as from April 10, 1963, until a proper and reasonable time after the
defendant gave up possession of the petrol filling station on March 7, 1967. (5) The
judge erred in law in failing to award as a head of damage interest on the loans the
defendant was forced to take to keep the business of the petrol filling station going.
(6) The judge erred in law in not taking account of the effects of inflation in assessing
damages. (7) He wrongly exercised his discretion in only awarding the defendant four
years' interest on his damages on the grounds of delay in prosecuting the
counterclaim; and (8) in any event he wrongly exercised his discretion in depriving
the defendant of two-fifths of his costs in the action on the grounds of (a) delay and
(b) the putting forward of claims for damages which had no chance of success and the
consequential waste of time caused thereby.
The plaintiffs, by a cross notice, appealed on the grounds (A) (1) that the judge was
wrong in law in holding that their forecast to the defendant of a 200,000-gallon
throughput of motor fuels at the service station during the third year of its operation
constituted a statement of representation as to an existing fact and not a mere
expression of opinion; (2) that alternatively the judge was wrong in law in holding
that in relation to such forecast. which was admittedly given in the course of precontractual *808 negotiations between the parties, the plaintiffs owed the defendant
a duty of care such as that found to have existed in Hedley Byrne & Co. Ltd. v. Heller
& Partners Ltd. [1964] A.C. 465 ; (3) that if the plaintiffs owed such a duty of care to
the defendant the judge was wrong in law in holding that the plaintiffs breached it by
giving the forecast. (B) Alternatively if the judge was right in holding that by giving
the forecast the plaintiffs breached a duty of care which they owed to the defendant
(1) he was wrong in law in holding that on the evidence before him it had been
established that the defendant and not Skelmersdale (Cars and Trucks) Ltd. (the
defendant's private company) latterly known as Cars and Trucks (Southport) Ltd. had
suffered a loss of capital in the sum of << PoundsSterling>>6,270 provided by that
company for the purpose of equipping and stocking the service station; and (2) that if
the corporate identity of that company was rightly disregarded the judge failed to
take into account the fact that its issued share capital was owned as to 751 shares by
the defendant and as to 749 shares by his wife and that accordingly of the sum of <<
PoundsSterling>>6,270 the defendant's loss was no more than 751/1500 being <<
PoundsSterling>>3,139.18.
John Hall Q.C. and Alan Rawley for the defendant. The defendant put his counterclaim
for damages in the alternative: for breach of an oral collateral warranty that the
throughput could be 200,000 gallons, and for negligent representation to the same
effect for which the plaintiffs were liable under the doctrine in Hedley Byrne & Co. Ltd.
v. Heller & Partners Ltd. [1964] A.C. 465. The statement as to potential was a
warranty akin to a condition of fitness for purpose on a sale of goods. taking all the
circumstances into account: see Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30,
50, per Lord Moulton on the importance of looking at the nature of the transaction.
The makers of the representation were far more experienced than the defendant,
knew that he relied on the accuracy of their statement as to potential, and intended
him to rely on it to induce him to enter into the contract of tenancy. It was, on the
"reasonable bystander" test, intended to be a warranty and to be acted on by both
parties in relation to the rent and the premises; and the damages for breach of that
warranty should have included damages for loss of a bargain and for the profit which
the defendant would have made if the warranty had been fulfilled. [Reference was
made to De Lassalle v. Guildford [1901] 2 K.B. 215 and Dick Bentley Productions Ltd.
v. Harold Smith (Motors) Ltd. [1965] 1 W.L.R. 623.]
The judge did decide that the representation about throughput was negligent and that
the defendant was entitled to damages because the representation was a statement
of fact which was incorrect. He treated it as a promise, and not as an undertaking that
the station in all the circumstances could - not would - have the throughput forecast;
but he wrongly held that a different measure of damages applied for breach of
warranty and for the tort of negligent misrepresentation and also erred in law in not
awarding as damages for that form of negligence all the damage reasonably
foreseeable as a consequence of, and naturally flowing from, the breach of the duty of
care.
The judge also erred in that, having found that the forecast was a negligent
misrepresentation entitling the defendant to damages, he held *809 that its effect
was spent by the time the defendant entered into the second tenancy agreement and
in finding that there was a "cut-off" point at September 1, 1964, beyond which he was
not entitled to any damages. What the defendant did by entering into the second
tenancy agreement was to mitigate the losses by staying on and trying to make a new
start. Both parties were equally anxious that there should be a change in the terms of
tenancy so that the station could be kept open. If the defendant had not made the
new agreement and had been turned out he would have had a clear claim for all his
loss. It does not lie in the plaintiffs' mouth to say: "Because you have lost faith in
what we told you in order to induce you to take the tenancy in April 1963 we are no
longer liable to you." He did not have a free choice; the effect of the negligent
representation was still continuing and he is entitled to the loss of capital and profits
at least up to the date when he gave up altogether. His loss of profit is recoverable as
a head of damage and also what he might have earned by his own labour, and by the
use of his capital. On the most limited view he should be allowed as damages the
interest which could have been earned on his capital. [Reference was made to
McGregor on Damages, 13th ed. (1972), para. 538, and Halsbury's Laws of England,
4th ed., vol. 12 (1975), para. 1129.]
If the defendant's claim in contract is upheld his damage is loss of a bargain; if it is
upheld in tort his damage is loss of the opportunity of putting his money to work
properly. In order to ascertain the damage in tort one must assume reasonable
interest on the capital and assess that and also what his labour was worth. The
question in tort is what damage was foreseeable if the representation was not correct.
The answer is that the defendant would have missed the opportunity of earning
money elsewhere: see C. Czarnikow Ltd. v. Koufos [1969] 1 A.C. 350, which was
concerned with damages for breach of contract but contains in the speech of Lord
Reid in particular the basis of the statement in Halsbury's Laws of England, 4th ed.,
vol. 12, para. 1139.
A possible approach in assessing damages for loss of profits would be to take the loss
of capital, and add the interest that it would have earned over X years and a figure for
the defendant's labour, or even what return on capital this business would have
produced if the defendant had been a full working partner - another way of looking at
the assessment of damages for lost opportunity. The measure of damages would be
precisely the same in the present circumstances in respect of misrepresentation as in
a case of fraud. [Reference was made to Doyle v. Olby (Ironmongers) Ltd. [1969] 2
Q.B. 158, 166-167.] Damages should be assessed on the basis, not of the defendant
working the station for the rest of his working life, but on the length of time it would
take him to reinstate himself having regard to all the circumstances, including the fact
that he was entitled to a three-year tenancy under the first contract and that both
parties contemplated his carrying on during a fourth year in another station. On the
measure of damage, Dodds and Dodds v. Millman (1964) 45 D.L.R. (2d) 472 was
concerned with something saleable and so the measure of damage was the difference
in value. In Philips v. Ward [1956] 1 W.L.R. 471, the correct measure of damage was
*810 held to be the difference between the buying and the selling price; but those
decisions have no bearing on the present case.
Colin Ross-Munro Q.C. and John Peppitt for the plaintiffs. The judge was right in
finding that September 1, 1964, was the appropriate "cut-off date" for assessing the
damages for negligent misrepresentation The duty to act reasonably to mitigate the
damage caused by it rested on the defendant, not on the plaintiffs; and once it was
obvious that the business venture was a failure the court should look at all the
circumstances in order to decide how long the defendant should have stayed on.
On the question whether there was a warranty, the plaintiffs say that it was not a
warranty; it was not a statement as to an existing fact, but a statement of opinion,
that the site had been assessed as capable of an estimated throughput of 200,000
gallons in the third year. In Bisset v. Wilkinson [1927] A.C. 177 the Privy Council
decided that a misrepresentation made by an experienced sheep-farmer about the
capacity of a farm was not a warranty, for the farmer had no experience on the actual
land. In the present case the experience that has to be considered is not the worldwide experience of Esso but the experience of the Esso representatives who made the
statement as against the experience of the defendant himself. The most important
factor in Bisset v. Wilkinson was that the farm which was sold had never carried
sheep before; so also in the present case the all-important factor was that the station
had never been operated before, and the representation concerned matters which
could be affected by extraneous factors.
Bisset's case is indistinguishable. In deciding whether the words were uttered with the
intention of giving rise to contractual liability the question is whether the situation
could be affected by extraneous factors; and if it could be, it is unlikely to be a
warranty. In Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30, 43, Lord Atkinson
said that one must look at the totality of the evidence touching the mind of the party
making the affirmation to see if it amounts to a warranty and that that is a jury
question - a question of fact. The judge, having considered all the evidence, came to
the correct conclusion that the statement was not intended to constitute a warranty
by the plaintiffs.
The plaintiffs' case can be put in two ways: (1) when you look at the words and the
totality of the evidence the statement is a statement of opinion; (2) if that is wrong,
then to constitute a warranty there must be an affirmation of the statement. A
prophecy about some future event, even if it amounts to a statement of fact, cannot
amount to a warranty.
All expertise is divided into actual experience of one filling station and the relevant
facts in possession of each party. Both sides had expertise: indeed, the defendant's
estimate turned out nearer to the factual throughput than that of the company. The
only additional knowledge in the company was the little sketch showing their estimate
of competitors. The fact that on the evidence the defendant was himself an expert is
relevant in deciding whether or not there was a warranty. Dick Bentley Productions
Ltd. v. Harold Smith (Motors) Ltd. [1965] 1 W.L.R. 623, which is the high-water mark
on warranty, is wholly distinguishable. There is no reported case in which an estimate
or forecast *811 of this quality has been held to be a warranty. Almost all the
warranty cases concerned statements of presently existing facts or facts easily
ascertainable. Looking at the warranty as pleaded and what the judge found, there is
no evidence as to whether the rent fixed in 1963 was in direct ratio to the throughput
estimate; the rent was fixed in relation to the capital investment in the station at 6
per cent., and the premises, which included office accommodation: see Routledge v.
McKay [1954] 1 W.L.R. 615, 622, where Sir Raymond Evershed M.R. said that a
warranty must be contractual in form and that if it was made before the bargain was
entered into it was unlikely to be a warranty - though it is conceded that there have
been cases since 1954 of representations made days before a contract which have
been made the basis of the contract, and the position has been considerably altered
by the Misrepresentation Act 1967. [Reference was also made to Oscar Chess Ltd. v.
Williams [1957] 1 W.L.R. 370.] Two elements are necessary to constitute a warranty:
(1) a promise and (2) intention to create contractual relations. That is a question of
fact, and the judge who saw the witnesses found that it was not intended by Esso to
constitute a contractual promise.
The judge, in finding that the cut-off point was September 1, 1964, took into account
not only that the defendant was not bound by a three-year contract and could have
got out in July 1964 and sued Esso for damages and that there was no further
representation by Esso to induce him to enter into the second tenancy agreement:
see, on mitigation of damage, McGregor on Damages, 13th ed., paras. 209-211. It is
accepted that the defendant was a good tenant; but in considering his counterclaim
for damages in the light of what he in fact did, the question is whether he acted
reasonably; and to take on the second tenancy when his losses were over
<<PoundsSterling>>5,000 and he had no faith that he would save the station and to
go on until 1965 was not acting reasonably. He hoped for a "cream site" to recoup his
losses; but Esso's attitude was that they could not give him preference over others
already in the queue. It would be quite unreasonable if Esso because of a negligent
misstatement made honestly in 1961 should be held liable for the defendant's losses
up to 1969.
On the question of the damages for negligent misrepresentation and whether they are
the same as those for breach of warranty, the defendant does not recover for the loss
of a bargain, for that is only recoverable in contract. The measure of damages
applicable is that under the doctrine in Hedley Byrne & Co. Ltd. v. Heller & Partners
Ltd. [1964] A.C. 465, namely, the actual damage directly flowing from the negligent
statement which is directly foreseeable. That will include the loss of capital - though
there is a cross notice which raises the point that it was not the defendant's capital
but that of the limited company in which he and his wife held all the shares. The
moneys borrowed from the bank to keep the business going for a reasonable period which the judge put at <<PoundsSterling>>4,000 up to his cut-off point - are also
recoverable; but on the basis of Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158,
the defendant must give credit for benefits received while running the station for such
time as the *812 court considers reasonable. He is not entitled to damages for the
sums his capital would otherwise have earned. If he gets the capital and interest on it
that should be sufficient compensation unless he both pleads and proves that if he
had had the capital he could have made more than the average rate of interest; and if
he claims that he could have earned a substantial income by his labour and his capital
he must both plead and prove what he would have earned. Those heads of claim were
not pleaded nor argued before the judge and it is now too late to amend his pleading
and claim this additional head of damage without allowing Esso to call evidence on
what he claims he would have been able to earn. There was no evidence on what his
capital would have earned if it had been invested in some business or in shares in
1963; and though at the last stage of the trial it was suggested that he might have
earned <<PoundsSterling>>3,000 or << PoundsSterling>>4,000 a year as a courier,
that had not been pleaded and the judge declined to allow him to amend his pleading
at that late stage. If a party does not put his case in the alternative on loss of profit or
loss of gains the court does not award damages.
[LORD DENNING M.R. In Doyle's case this court awarded the damages on a jury
basis.]
The judge was right to disregard much of the evidence given to support the figures of
loss of profit in the schedule to the defendant's counterclaim and to describe many of
them as purely speculative and an accountant's exercise.
On the plaintiff's cross-appeal against the decision that a duty on the Hedley Byrne
principle [1964] A.C. 465, could arise in pre-contractual negotiations, the position in
law is that once parties enter into a contract their rights are defined in the contract
and pre-contractual promises merge in the contract: see per Lord Reid in Hedley
Byrne [1964] A.C. 465, 480. The judge in deciding that the duty arose in precontractual negotiations was conscious that he was making an inroad into the
principle of caveat emptor. The accepted position in law is that where people
negotiate at arm's length, the duty to see, for instance, that a house is in good repair
lies with the purchaser and not the vendor: in Dillingham Constructions Pty. Ltd. v.
Downs [1972] 2 N.S.W.L.R. 49, it was stated that the policy of the common law is to
uphold contracts freely made and that pre-contractual relations would not normally
come within the "special relationship" duty evolved in the Hedley Byrne case [1964]
A.C. 465. In deciding whether the duty arises one looks not only at the nature of the
relationship but also at whether there was an assumption of responsibility. There is no
reported case where it has been held that the Hedley Byrne duty arose in respect of
advice or information relating to a future forecast as opposed to a statement of a
present fact or opinion; and, if the majority opinion of the Privy Council in Mutual Life
and Citizens' Assurance Co. Ltd. v. Evatt [1971] A.C. 793, is accepted, that duty only
arises where the representor carries on the business of giving advice, or holds himself
out as possessing the necessary skill and competence. Lawson J. preferred the view of
the minority in the Privy Council case, but applying the majority view, which this court
is asked to prefer, there is no evidence that Esso held themselves out as possessing
such special skill and competence. *813 [Reference was also made to Candler v.
Crane, Christmas & Co. [1951] 2 K.B. 164 and Nocton v. Lord Ashburton [1914] A.C.
932.]
To support the submission that in a pre-contract situation the Hedley Byrne doctrine
does not apply reliance is placed on Lord Reid's speech in that case at [1964] A.C.
465, 483; and McNair J. in Oleificio Zucchi S.p.A. v. Northern Sales Ltd. [1965] 2
Lloyd's Rep. 496, 519, though against it is the statement of Lord Denning M.R. in
McInerny v. Lloyds Bank Ltd. [1974] 1 Lloyd's Rep. 246, 253. Though both the Hedley
Byrne decision and the Misrepresentation Act 1967 have affected the principle of
caveat emptor the position in contract still remains that if a person gives an honest
opinion or acts honestly he does not have to look over his shoulder every time he
makes a forecast. And there is a whole series of decisions that a solicitor can be sued
for negligence only in contract and not in tort: see Clark v. Kirby-Smith [1964] Ch.
506. If those cases are rightly decided they support the submission that once parties
enter into a contract any pre-contractual promises merge into the contract.
Finally, the judge was wrong on the evidence in treating the capital sum of
<<PoundsSterling>>6,220 as if it were the personal property of the defendant, for in
law it belonged to the company so that the loss of the capital in the business venture
was that of the company and not of the defendant. The defendant acted thoughout in
the business as an individual; the company bought the petrol; even the accountants
could not distinguish between the company and the defendant. [Reference was made
to Ashcroft v. Curtin [1971] 1 W.L.R. 1731-1732.] It was not pleaded that the
company was the agent of the defendant, nor was it argued, nor was there any
evidence on that issue. The company with a legal entity of its own provided the
capital and the loss of capital was that of the company.
Hall Q.C. in reply. Though the plaintiffs now concede that the representation about
throughput was made, it was not accepted until the third day of the trial. As to
damages, what the defendant has lost is the opportunity to develop a profitable
business and have the advantage of it for a period of six to seven years; and he is
also entitled to interest on his loss of profits.
There is no logical reason why the Hedley Byrne principle [1964] A.C. 465 should not
apply to a negligent forecast. A duty of care can arise in pre-contractual situations:
see Clarke v. Army and Navy Co-operative Society Ltd. [1903] 1 K.B. 155 and Nocton
v. Lord Ashburton [1914] A.C. 932. [Reference was also made to section 12 of the
Prevention of Fraud (Investments) Act 1939.]
Bisset v. Wilkinson [1927] A.C. 177 is a decision on its own facts and nothing said in
it supports a submission that a forecast could not be a misrepresentation attracting
damages. There what was forecast was "merely" an opinion: here Esso had all their
enormous experience, while the defendant had none; and when all the facts are
looked at from the point of view of the intelligent bystander this was a case where
reliance was placed on the view of the experts. Bisset v. Wilkinson [1927] A.C. 177 is
therefore not persuasive authority and, if it is, is clearly distinguishable.
On damages the test is what did the defendant lose. He was one man *814 who lost
the money he put into the business and the living he would have got from the
business.
On the question whether the view of the majority or the minority in Mutual Life and
Citizens' Assurance Co. Ltd. v. Evatt [1971] A.C. 793, should be preferred, though the
court is invited to say that the minority were right, it does not matter in the present
case because Esso's representatives said that they had the knowledge and experience
and the financial interest and were therefore holding themselves out as having special
skill and expertise, in line with the majority view in the Privy Council.
Cur. adv. vult.
February 6, 1976. The following judgments were read. LORD DENNING M.R.
"This is," said the judge, "a tragic story of wasted endeavour and financial disaster."
It is a long story starting as long ago as 1961, and finishing in 1967. Since then eight
years have been spent in litigation.
In 1961 Esso Petroleum wanted an outlet for their petrol in Southport. They found a
vacant site which was very suitable. It was on Eastbank Street, one of the busiest
streets of the town. It had already got outline planning permission for a filling station.
Esso thought of putting in a bid for the site. But before doing so, they made
calculations to see if it would be a paying proposition. They made a careful forecast of
the "estimated annual consumption " of petrol. This was the yardstick by which they
measured the worth of a filling station. They called it the "e.a.c." In this case they
estimated that the throughput of petrol would reach 200,000 gallons a year by the
second year after development. This would accrue to their benefit by sales of petrol.
In addition, they would get a substantial rental from a tenant. On May 25, 1961, the
Esso local representatives recommended the go ahead. They gave the figures, and
said: "We feel most strongly that this does genuinely represent a first-class
opportunity of gaining representation in the centre of Southport." On that
recommendation Esso bought the site and proceeded to erect a service station.
But then something happened which falsified all their calculations. Esso had thought
that they could have the forecourt and pumps fronting on to the busy main street. But
the Southport Corporation, who were the planning authority, refused to allow this.
They insisted that the station should be built "back to front." So that only the
showroom fronted on to the main street. The forecourt and pumps were at the back
of the site and only accessible by side streets. They could not be seen from the main
street. Esso had no choice but to comply with these planning requirements. They built
the station "back to front." It was finished early in 1963.
Now at this point Esso made an error which the judge described as a "fatal error."
They did not revise their original estimate which they had made in 1961. They still
assessed the e.a.c. (estimated annual consumption) of petrol at 200,000 gallons.
Whereas they should have made a reappraisal in the light of the building being now
"back to front." This adversely affected the site's potential: because passing traffic
could not see the station. It would reduce the throughput greatly. The judge found
that *815 this "fatal error" was due to want of care on the part of Esso. There can be
no doubt about it.
It was under the influence of this "fatal error" that Esso sought to find a tenant for the
service station. They found an excellent man, Mr. Philip Lionel Mardon. He was seen
by Esso's local manager, Mr. Leitch. Now Mr. Leitch had had 40 years' experience in
the petrol trade. It was on his calculations and recommendations that Esso had
bought this site and developed it. At the decisive interview Mr. Leitch was
accompanied by the new area manager, Mr. Allen. I will give what took place in the
words of the judge:
"Mr. Mardon was told that Esso estimated that the throughput of the Eastbank Street
site, in its third year of operation, would amount to 200,000 gallons a year. I also find
that Mr. Mardon then indicated that he thought 100,000 to 150,000 gallons would be
a more realistic estimate, but he was convinced by the far greater expertise of,
particularly, Mr. Leitch. Mr. Allen is a far younger man and, although on his
appointment as manager for the area I am satisfied he made his own observations as
to the potentiality of the Eastbank Street site, in the result he accepted Mr. Leitch's
estimate. Mr. Mardon, having indicated that he thought that a lower figure would be a
more realistic estimate, had his doubts quelled by the experience and the estimate
furnished by Mr. Leitch; and it was for that reason, I am satisfied, because of what he
was told about the estimated throughput in the third year, that he then proceeded to
negotiate for and obtain the grant of a three-year tenancy at a rent of
<<PoundsSterling>>2,500 a year for the first two years, rising to
<<PoundsSterling>>3,000 yearly in the last year."
To the judge's summary, I would only add a few questions and answers by Mr. Allen
in evidence:
"(Q) Now we know that the person who originally put forward this estimated 200,000
gallons forecast was Mr. Leitch? (A) Yes. (Q) Would somebody have checked Mr.
Leitch's figures before they reached you? (A) Oh, very much so.... (Q) You have told
my Lord that you accept that, at that interview,... you might have said that Eastbank
was capable of achieving a throughput of 200,000 gallons after the second complete
year? (A) Yes. (Q) Would that have been your honest opinion at the time? (A) Most
certainly."
All the dealings were based on that estimate of a throughput of 200,000 gallons. It
was on that estimate that Esso developed the site at a cost of <<
PoundsSterling>>40,000: and that the tenant agreed to pay a rent of <<
PoundsSterling>>2,500, rising to <<PoundsSterling>>3,000. A few answers by Mr.
Allen will show this:
"(Q) Would you agree that the potential throughput of a station is an important factor
in assessing what rent to charge a tenant? (A) Yes.... (Q) The rent would be
substantially higher if your estimate was one of 200,000 gallons than if your estimate
was one of 100,000 gallons? (A) Generally speaking, that is right.... (Q) You would be
able to command a higher rent if the throughput was 200,000 than if it was 100,000?
(A) Had it been an estimated throughput of 100,000 gallons, they [Esso] would not
have bought it in the first place."
*816 Having induced Mr. Mardon to accept, Mr. Leitch and Mr. Allen sent this
telegram to their head office:
"We have interviewed a Mr. Philip Lionel Mardon for tenancy and find him excellent in
all respects. We recommend strongly that he be granted tenancy."
So a tenancy was granted to Mr. Mardon. It was dated April 10, 1963, and was for
three years at a rent of <<PoundsSterling>>2,500 for the first two years, and
<<PoundsSterling>>3,000 for the third year. It required him to keep open all day
every day of the week, including Sunday. It forbade him to assign or underlet.
On the next day Mr. Mardon went into occupation of the service station and did
everything that could be desired of him. He was an extremely good tenant and he
tried every method to increase the sales and profitability of the service station. Esso
freely acknowledge this.
But the throughput was most disappointing. It never got anywhere near the 200,000
gallons. Mr. Mardon put all his available capital into it. It was over
<<PoundsSterling>>6,000. He raised an overdraft with the bank and used it in the
business. He put all his work and endeavour into it. No one could have done more to
make it a success. Yet when the accounts were taken for the first 15 months, the
throughput was only 78,000 gallons. After paying all outgoings, such as rent, wages
and so forth, there was a net loss of <<PoundsSterling>> 5,800. The position was so
serious that Mr. Mardon felt he could not continue. On July 17, 1964, he wrote to Mr.
Allen: "I reluctantly give notice to quit forthwith. This is an endeavour to salvage as
much as I can in lieu of inevitable bankruptcy." Mr. Allen did not reply in writing, but
saw Mr. Mardon. As a result he put in a written report to his superiors recommending
that Mr. Mardon's rent should be reduced to <<PoundsSterling>>1,000 a year, plus a
surcharge according to the amount of petrol sold. Mr. Allen telexed to his superiors on
several occasions pressing for a decision. It culminated in a telex he sent on August
28, 1964:
"Unless we hear soon the tenant is likely to resign and we will have difficulty in
replacing this man with a tenant of the same high standard."
This brought results. On September 1, 1964, a new tenancy agreement was made in
writing. It granted Mr. Mardon a tenancy for one year certain and thereafter
determinable on three months' notice. The rent was reduced to <<
PoundsSterling>>1,000 a year, and a surcharge of 1d. to 2d. a gallon, according to
the amount sold.
Again Mr. Mardon tried hard to make a success of the service station: but again he
failed. It was not his fault. The site was simply not good enough to have a throughput
of more than 60,000 or 70,000 gallons. He lost more and more money over it. In
order to help him, Esso tried to get another site for him - a "cream" site - so that he
could run the two sites in conjunction to offset his losses. But they never found him
one. Eventually on January 1, 1966, he wrote to Esso appealing to them to find a
solution. He consulted solicitors who wrote on his behalf. But Esso did nothing to help.
Quite the contrary. They insisted on the petrol being paid for every day on delivery.
On August 28, 1966 (by some mistake or misunderstanding while Mr. Mardon was
away), they came and drained *817 his tanks of petrol and cut off his supplies. That
put him out of business as a petrol station. He carried on as best he could with odd
jobs for customers, like washing cars. Esso had no pity for him. On December 1,
1966, they issued a writ against him claiming possession and <<
PoundsSterling>>1,133 13s. 9d. for petrol supplied. This defeated him. On March 7,
1967, he gave up the site. He had tried for four years to make a success of it. It was
all wasted endeavour. He had lost all his capital and had incurred a large overdraft. It
was a financial disaster.
Such being the facts, I turn to consider the law. It is founded on the representation
that the estimated throughput of the service station was 200,000 gallons. No claim
can be brought under the Misrepresentation Act 1967, because that Act did not come
into force until April 22, 1967: whereas this representation was made in April 1963.
So the claim is put in two ways. First, that the representation was a collateral
warranty. Second, that it was a negligent misrepresentation. I will take them in order.
Collateral warranty
Ever since Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30, we have had to
contend with the law as laid down by the House of Lords that an innocent
misrepresentation gives no right to damages. In order to escape from that rule, the
pleader used to allege - I often did it myself - that the misrepresentation was
fraudulent, or alternatively a collateral warranty. At the trial we nearly always
succeeded on collateral warranty. We had to reckon, of course, with the dictum of
Lord Moulton, at p. 47, that "such collateral contracts must from their very nature be
rare." But more often than not the court elevated the innocent misrepresentation into
a collateral warranty: and thereby did justice - in advance of the Misrepresentation
Act 1967. I remember scores of cases of that kind, especially on the sale of a
business. A representation as to the profits that had been made in the past was
invariably held to be a warranty. Besides that experience, there have been many
cases since I have sat in this court where we have readily held a representation which induces a person to enter into a contract - to be a warranty sounding in
damages. I summarised them in Dick Bentley Productions Ltd. v. Harold Smith
(Motors) Ltd. [1965] 1 W.L.R. 623, 627, when I said:
"Looking at the cases once more, as we have done so often, it seems to me that if a
representation is made in the course of dealings for a contract for the very purpose of
inducing the other party to act upon it, and actually inducing him to act upon it, by
entering into the contract, that is prima facie ground for inferring that it was intended
as a warranty. It is not necessary to speak of it as being collateral. Suffice it that it
was intended to be acted upon and was in fact acted on."
Mr. Ross-Munro, retaliated, however, by citing Bisset v. Wilkinson [1927] A.C. 177 ,
where the Privy Council said that a statement by a New Zealand farmer that an area
of land "would carry 2,000 sheep" was only an expression of opinion. He submitted
that the forecast here of 200,000 gallons was an expression of opinion and not a
statement of fact: and that it could not be interpreted as a warranty or promise.
*818 Now I would quite agree with Mr. Ross-Munro that it was not a warranty - in
this sense - that it did not guarantee that the throughput would be 200,000 gallons.
But, nevertheless, it was a forecast made by a party - Esso - who had special
knowledge and skill. It was the yardstick (the e.a.c.) by which they measured the
worth of a filling station. They knew the facts. They knew the traffic in the town. They
knew the throughput of comparable stations. They had much experience and
expertise at their disposal. They were in a much better position than Mr. Mardon to
make a forecast. It seems to me that if such a person makes a forecast, intending
that the other should act upon it - and he does act upon it, it can well be interpreted
as a warranty that the forecast is sound and reliable in the sense that they made it
with reasonable care and skill. It is just as if Esso said to Mr. Mardon: "Our forecast of
throughput is 200,000 gallons. You can rely upon it as being a sound forecast of what
the service station should do. The rent is calculated on that footing." If the forecast
turned out to be an unsound forecast such as no person of skill or experience should
have made, there is a breach of warranty. Just as there is a breach of warranty when
a forecast is made - "expected to load" by a certain date - if the maker has no
reasonable grounds for it: see Samuel Sanday and Co. v. Keighley, Maxted and Co.
(1922) 27 Com.Cas. 296; or bunkers "expected 600/700 tons": see Efploia Shipping
Corporation Ltd. v. Canadian Transport Co. Ltd. (The Pantanassa) [1958] 2 Lloyd's
Rep. 449, 455-457 by Diplock J. It is very different from the New Zealand case where
the land had never been used as a sheep farm and both parties were equally able to
form an opinion as to its carrying capacity: see particularly Bisset v. Wilkinson [1927]
A.C. 177, 183-184.
In the present case it seems to me that there was a warranty that the forecast was
sound, that is, Esso made it with reasonable care and skill. That warranty was broken.
Most negligently Esso made a "fatal error" in the forecast they stated to Mr. Mardon,
and on which he took the tenancy. For this they are liable in damages. The judge,
however, declined to find a warranty. So I must go further.
Negligent misrepresentation
Assuming that there was no warranty, the question arises whether Esso are liable for
negligent misstatement under the doctrine of Hedley Byrne & Co. Ltd. v. Heller &
Partners Ltd. [1964] A.C. 465. It has been suggested that Hedley Byrne cannot be
used so as to impose liability for negligent pre-contractual statements: and that, in a
pre-contract situation, the remedy (at any rate before the Act of 1967) was only in
warranty or nothing. Thus in Hedley Byrne itself Lord Reid said, at p. 483: "Where
there is a contract there is no difficulty as regards the contracting parties: the
question is whether there is a warranty." and in Oleificio Zucchi S.p.A. v. Northern
Sales Ltd. [1965] 2 Lloyd's Rep. 496, 519, McNair J. said:
"... as at present advised, I consider the submission advanced by the buyers, that the
ruling in [Hedley Byrne [1964] A.C. 465] applies as between contracting parties, is
without foundation."
*819 As against these, I took a different view in McInerny v. Lloyds Bank Ltd. [1974]
1 Lloyd's Rep. 246, 253 when I said:
"... if one person, by a negligent misstatement, induces another to enter into a
contract - with himself or with a third person - he may be liable in damages."
In arguing this point, Mr. Ross-Munro took his stand in this way. He submitted that
when the negotiations between two parties resulted in a contract between them, their
rights and duties were governed by the law of contract and not by the law of tort.
There was, therefore, no place in their relationship for Hedley Byrne [1964] A.C. 465,
which was solely on liability in tort. He relied particularly on Clark v. Kirby-Smith
[1964] Ch. 506 where Plowman J. held that the liability of a solicitor for negligence
was a liability in contract and not in tort, following the observations of Sir Wilfrid
Greene M.R. in Groom v. Crocker [1939] 1 K.B. 194, 206. Mr. Ross-Munro might also
have cited Bagot v. Stevens Scanlan & Co. Ltd. [1966] 1 Q.B. 197, about an
architect; and other cases too. But I venture to suggest that those cases are in
conflict with other decisions of high authority which were not cited in them. These
decisions show that, in the case of a professional man, the duty to use reasonable
care arises not only in contract, but is also imposed by the law apart from contract,
and is therefore actionable in tort. It is comparable to the duty of reasonable care
which is owed by a master to his servant, or vice versa. It can be put either in
contract or in tort: see Lister v. Romford Ice and Cold Storage Co. Ltd. [1957] A.C.
555 , 587 by Lord Radcliffe and Matthews v. Kuwait Bechtel Corporation [1959] 2
Q.B. 57. The position was stated by Tindal C.J., delivering the judgment of the Court
of Exchequer Chamber in Boorman v. Brown (1842) 3 Q.B. 511, 525-526:
"That there is a large class of cases in which the foundation of the action springs out
of privity of contract between the parties, but in which, nevertheless, the remedy for
the breach, or non-performance, is indifferently either assumpsit or case upon tort, is
not disputed. Such are actions against attorneys, surgeons, and other professional
men, for want of competent skill or proper care in the service they undertake to
render:... The principle in all these cases would seem to be that the contract creates a
duty, and the neglect to perform that duty, or the nonfeasance, is a ground of action
upon a tort."
That decision was affirmed in the House of Lords in (1844) 11 Cl. & Fin. 1, when Lord
Campbell, giving the one speech, said, at p. 44:
"... wherever there is a contract, and something to be done in the course of the
employment which is the subject of that contract, if there is a breach of a duty in the
course of that employment, the plaintiff may either recover in tort or in contract."
To this there is to be added the high authority of Viscount Haldane L.C., in Nocton v.
Lord Ashburton [1914] A.C. 932, 956:
"... the solicitor contracts with his client to be skilful and careful. For failure to
perform his obligation he may be made liable at law in *820 contract or even in tort,
for negligence in breach of a duty imposed on him."
That seems to me right. A professional man may give advice under a contract for
reward; or without a contract, in pursuance of a voluntary assumption of
responsibility, gratuitously without reward. In either case he is under one and the
same duty to use reasonable care: see Cassidy v. Ministry of Health [1951] 2 K.B.
343, 359-360. In the one case it is by reason of a term implied by law. In the other, it
is by reason of a duty imposed by law. For a breach of that duty he is liable in
damages: and those damages should be, and are, the same, whether he is sued in
contract or in tort.
It follows that I cannot accept Mr. Ross-Munro's proposition. It seems to me that
Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, properly
understood, covers this particular proposition: 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. If he
negligently gives unsound advice or misleading information or expresses an erroneous
opinion, and thereby induces the other side to enter into a contract with him, he is
liable in damages. This proposition is in line with what I said in Candler v. Crane,
Christmas & Co. [1951] 2 K.B. 164, 179-180, which was approved by the majority of
the Privy Council in Mutual Life and Citizens' Assurance Co. Ltd. v. Evatt [1971] A.C.
793. and the judges of the Commonwealth have shown themselves quite ready to
apply Hedley Byrne [1964] A.C. 465, between contracting parties: see in Canada,
Sealand of the Pacific Ltd. v. Ocean Cement Ltd. (1973) 33 D.L.R. (3d) 625; and in
New Zealand, Capital Motors Ltd. v. Beecham [1975] 1 N.Z.L.R. 576.
Applying this principle, it is plain that Esso professed to have - and did in fact have special knowledge or skill in estimating the throughput of a filling station. They made
the representation - they forecast a throughput of 200,000 gallons - intending to
induce Mr. Mardon to enter into a tenancy on the faith of it. They made it negligently.
It was a "fatal error." and thereby induced Mr. Mardon to enter into a contract of
tenancy that was disastrous to him. For this misrepresentation they are liable in
damages.
The measure of damages
Mr. Mardon is not to be compensated here for "loss of a bargain." He was given no
bargain that the throughput would amount to 200,000 gallons a year. He is only to be
compensated for having been induced to enter into a contract which turned out to be
disastrous for him. Whether it be called breach of warranty or negligent
misrepresentation, its effect was not to warrant the throughput, but only to induce
him to enter the contract. So the damages in either case are to be measured by the
loss he suffered. Just as in Doyle v. Olby (Ironmongers) Ltd. [1969] 2 Q.B. 158, 167
he can say: "... I would not have entered into this contract at all but for *821 your
representation. Owing to it, I have lost all the capital I put into it. I also incurred a
large overdraft. I have spent four years of my life in wasted endeavour without
reward: and it will take me some time to re-establish myself."
For all such loss he is entitled to recover damages. It is to be measured in a similar
way as the loss due to a personal injury. You should look into the future so as to
forecast what would have been likely to happen if he had never entered into this
contract: and contrast it with his position as it is now as a result of entering into it.
The future is necessarily problematical and can only be a rough-and-ready estimate.
But it must be done in assessing the loss.
The new agreement of September1, 1964
The judge limited the loss to the period from April 1963 to September 1964, when the
new agreement was made. He said that from September 1, 1964, Mr. Mardon was
carrying on the business "on an entirely fresh basis, of which the negligent
misstatement formed no part."
I am afraid I take a different view. It seems to me that from September 1, 1964, Mr.
Mardon acted most reasonably. He was doing what he could to retrieve the position,
not only in his own interest, but also in the interest of Esso. It was Esso who were
anxious for him to stay on. They had no other suitable tenant to replace him. They
needed him to keep the station as a going concern and sell their petrol. It is true that
by this time the truth was known - that the throughput was very far short of 200,000
gallons - but nevertheless, the effect of the original misstatement was still there. It
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. It seems to me that the
losses after September 1, 1964, can be attributed to the original misstatement, just
as those before.
The company position
The initial capital of <<PoundsSterling>>6,270 was not provided by Mr. Mardon
personally out of his own bank account. It was provided by a private company in
which he and his wife held all the shares. It was suggested that this, in some way,
prevented Mr. Mardon from claiming for the loss of it. The judge rejected this
suggestion: and so would I. The business of this filling station was undoubtedly the
personal business of Mr. Mardon. The money put into it might be obtained by
overdraft at the bank or by loan from his own private company - but wherever it
came from, it was a loss to him: and he can recover that loss. It is no concern of Esso
where it came from: compare Dennis v. London Passenger Transport Board [1948] 1
All E.R. 779.
If Mr. Mardon had not been induced to enter into the contract, it is fair to assume that
he would have found an alternative business in which to invest his capital. (The judge
said so.) It is also fair to assume (as he is a very good man of business) that he
would have invested it sufficiently well so that he would not have lost the capital. Nor
would he have incurred any overdraft or liabilities that were not covered by his
assets. and it may be assumed that he would have made a reasonable return by way
of earnings for his own work (in addition to return from his capital). But *822 equally
it must be remembered that after March 1967 (when he gave up the site at
Southport) he should have been able (if fit) to take other employment or start
another business and thus mitigate his loss: and gradually get restored to a position
equal to that which he would have had if he had never gone into the Esso business. It
would take him some time to do this. So the loss of earnings could only be for a
limited number of years.
On this footing, the loss which he has suffered would seem to be as follows (subject
to further argument by the parties): Capital loss: cash put into the business and lost,
<<PoundsSterling>>6,270; overdraft incurred in running the business,
<<PoundsSterling>>7,774. Loss of earnings to be discussed. There will be interest to
be added for a period to be discussed.
Mr. Mardon also claimed damages for having to sell his house to pay off the overdraft.
That seems to me too remote and should be compensated by interest on the
overdraft. He also suffered in health by reason of all the worry over this disaster, and
was off work. That should be compensated by loss of future earnings.
Conclusion
I would like to express my appreciation of the full and careful way in which the judge
found the facts and analysed the law. It has been most helpful to the determining of
the case. The result is that Mr. Mardon is entitled to substantial damages on his
counterclaim. There remain the issues of interest and costs to be discussed. We are
also willing to hear further argument on the assessment of damages.
ORMROD L.J.
I agree. Lawson J., after a long and careful inquiry, finally awarded Mr. Mardon the
sum of <<PoundsSterling>>9,007, with interest at 7 per cent. for five years, which
represents damages assessed at <<PoundsSterling>>10,270, less
<<PoundsSterling>>1,103 admittedly due by way of rent and mesne profits to the
plaintiffs, and <<PoundsSterling>>159 for which credit had also to be given to the
plaintiffs. The defendant claims to have suffered damage far in excess of this sum.
The plaintiffs by their cross-appeal have raised the issue of liability. These damages
were awarded for negligent misstatement on the Hedley Byrne principle [1964] A.C.
465, the judge having rejected Mr. Mardon's primary submission that he was entitled
to damages for breach of warranty.
The award rests on three basic conclusions, all of which have been challenged by Mr.
Hall on behalf of Mr. Mardon in an able and most helpful argument. The three
conclusions are (1) that Mr. Mardon had a cause of action in tort for negligence but
not in contract for breach of warranty; (2) that the measure of damages in tort on the
facts of this case is narrower in tort than in contract and (3) that the causal effect of
the negligent misstatement had become spent by September 1964, which, therefore,
became the so-called "cut-off point" up to which Mr. Mardon could recover his losses,
but no further.
Mr. Ross-Munro for the plaintiffs challenged the finding of negligence on the ground
that the Hedley Byrne principle does not apply to statements made during precontract negotiations if they ultimately result in a contract. Alternatively he submitted
that the duty of care only arose where the *823 person making the alleged negligent
statement carried on the business or profession of giving advice.
Subject to liability, Mr. Mardon will succeed on this appeal if he can show that any one
of the judge's three conclusions is wrong; and, if he can show that conclusion (3) and
either of the other two are wrong, his damages will be substantially increased.
Breach of warranty
The warranty relied upon as pleaded in paragraph 6 of the defence and counterclaim
was that Mr. Leitch and later Mr. Allen on behalf of Esso, had informed Mr. Mardon
that this service station "had a potential throughput of about 200,000 to 250,000
gallons per annum after a couple of years." None of the material facts is in issue,
although the judge preferred the evidence of the plaintiffs' witnesses, namely Mr.
Leitch and Mr. Allen, to Mr. Mardon's where they differed. In effect, he discarded the
more highly coloured parts of Mr. Mardon's evidence on the ground that he had been
living with and brooding over his grievance for a period of years which had affected
the accuracy of his recollection. The pivotal finding, which is not challenged, is that
Mr. Mardon was, in fact, induced to enter into a tenancy agreement for three years of
the plaintiffs' Eastbank service station, in Eastbank Street, Southport, by
representation made by Mr. Leitch and Mr. Allen that the estimated throughput or, as
the plaintiffs call it, the e.a.c., meaning estimated annual consumption, of this service
station was 200,000 gallons in its third year of operation. This representation was,
unquestionably, made in good faith but, as Lawson J. rightly found, negligently. It
proved to be disastrously wrong; since it was opened by Mr. Mardon in April 1963,
this station has rarely achieved a throughput equal to half the plaintiffs' estimate. The
fact was that this assessment of 200,000 gallons was reasonable when it was made;
unfortunately, the plaintiffs never revised it in the light of subsequent developments
which made it quite unrealistic.
The judge's reasons for rejecting Mr. Mardon's contention that this was a warranty are
summarised in this passage in his judgment [1975] Q.B. 819, 825:
"I think that the authorities indicate conclusively that, to constitute a warranty, a
statement must, first, be intended by the maker to constitute a promise which can be
described as a warranty, or, putting it into common language, it must be a statement
by which the maker says: 'I guarantee that this will happen.' Secondly, to constitute a
warranty a statement must be of such nature that it is susceptible in relation to its
content of constituting a clear contractual obligation on the part of the maker of the
statement."
With great respect, I think that in formulating the first of these reasons the judge
misled himself. It was no part of Mr. Mardon's case that the plaintiffs had warranted
that the throughput would reach 200,000 gallons in the third year. His case was that
the plaintiffs, through Mr. Leitch and Mr. Allen, had by implication warranted that on a
careful assessment they - that is, Esso Petroleum Co. Ltd. - had estimated the
throughput of *824 this service station at 200,000 gallons in the third year. Mr. Allen
in the course of his cross-examination put it in these words:
"I would have told him that in our opinion the site was assessed as being capable of
doing an estimated throughput of 200,000 gallons in the second full year of the site's
operation."
If it is necessary in this context (which I doubt) to draw a hard and fast distinction
between statements of fact and statements of opinion, the judge, rightly in my view,
regarded this as a statement of fact. It was precisely equivalent to saying that Esso
rated this service station as one of their "Grade A" or "Four Star" sites.
On this basis, no question of a guaranteed throughput arises; had it failed to reach
the estimate owing to a cause or causes outside the plaintiffs' control, for example, an
unforeseen traffic diversion scheme, greatly reducing the traffic flow in Eastbank
Street, or the appearance across the street of a rival filling station, there would have
been no breach of warranty on the part of the plaintiffs.
So far as the judge's second reason is concerned, I have some difficulty in
understanding it. The estimated throughput in this case was as much part of the
description of the property which was to be let as the number of pumps or the area of
the site. However, his reference to the speeches of Lord Haldane, Lord Atkinson and
Lord Moulton in Heilbut, Symons & Co. v. Buckleton [1913] A.C. 30 may indicate that
he was thinking of the difficulty of expressing this representation as a separate
collateral contract. Yet it is not really difficult to formulate it in terms such as: "In
consideration of you entering into the proposed tenancy we warrant that after careful
consideration we have assessed its e.a.c. at 200,000 gallons" and so on. The problem
of finding a reliable criterion for deciding whether a statement is to be treated as a
"mere representation" carrying no contractual consequences, or as a so-called
warranty which forms part of the contract itself, or possibly as a contract collateral to
the main contract, has exercised the courts for many years. Where the contract is
entirely oral, the difficulties are less; but where it has been reduced to writing, the
common law's mistrust of oral evidence, particularly of the parties themselves, and its
reluctance to impugn the certainty of the written word, comes into conflict with the
principle that the law should so far as possible give effect to the presumed intention
of the parties. The one proposition which seems to have survived unscathed is Holt
C.J.'s dictum, quoted with approval by Viscount Haldane L.C. and others in Heilbut,
Symons & Co. v. Buckleton, at p. 38, that "an affirmation can only be a warranty
provided it appear on evidence to have been so intended." Another form of it which
appears in the judgment of Wills J. in Best v. Edwards (1895) 60 J.P. 9, which was
cited with approval by A. L. Smith M.R. in De Lassalle v. Guildford [1901] 2 K.B. 215 ,
222, is, was the representation "seriously intended... to be the basis of the
contractual relations between the parties. " Lord Denning M.R., in Dick Bentley
Productions Ltd. v. Harold Smith (Motors) Ltd [1965] 1 W.L.R. 623, 627, put it this
way:
"Looking at the cases once more, as we have done so often, it seems to me that if a
representation is made in the course of dealings for a contract for the very purpose of
inducing the other party to act upon *825 it, and actually inducing him to act upon it,
by entering into the contract, that is prima facie ground for inferring that it was
intended as a warranty."
On the other hand there are dicta, particularly in the speeches in Heilbut, Symons &
Co. v. Buckleton [1913] A.C. 30, which suggest a more restrictive or conservative
approach: for example, Viscount Haldane L.C. said, at p. 37:
"It is contrary to the general policy of the law of England to presume the making of
such a collateral contract in the absence of language expressing or implying it..."
and Lord Moulton said, at p. 47:
"It is evident, both on principle and on authority, that there may be a contract the
consideration for which is the making of some other contract. ' If you will make such
and such a contract I will give you <<PoundsSterling>> 100,' is in every sense of the
word a complete legal contract. It is collateral to the main contract, but each has an
independent existence, and they do not differ in respect of their possessing to the full
the character and status of a contract. But such collateral contracts must from their
very nature be rare."
He continued:
"Such collateral contracts, the sole effect of which is to vary or add to the terms of
the principal contract, are therefore viewed with suspicion by the law. They must be
proved strictly. Not only the terms of such contracts but the existence of an animus
contrahendi on the part of all the parties to them must be clearly shown. Any laxity on
these points would enable parties to escape from the full performance of the
obligations of contracts unquestionably entered into by them and more especially
would have the effect of lessening the authority of written contracts by making it
possible to vary them by suggesting the existence of verbal collateral agreements
relating to the same subject matter."
A variety of tests have been suggested to determine the intention of the parties. For
example, it is said that to constitute a warranty a representation must be of fact and
not of opinion; or a statement about existing facts as opposed to future facts such as
a forecast. To quote again, in De Lassalle v. Guildford [1901] 2 K.B. 215 , 221, A. L.
Smith M.R. said:
"In determining whether it was so intended, a decisive test is whether the vendor
assumes to assert a fact of which the buyer is ignorant, or merely states an opinion or
judgment upon a matter of which the vendor has no special knowledge, and on which
the buyer may be expected also to have an opinion and to exercise his judgment."
But he went too far in speaking of the "decisive test" which was strongly disapproved
of by Lord Moulton in the Heilbut, Symons case [1913] A.C 30, 50.
In my judgment, these tests are no more than applied common sense. *826 A
representation of fact is much more likely to be intended to have contractual effect
than a statement of opinion; so it is much easier to infer that in the former case it
was so intended, and more difficult in the latter. Similarly, where statements of future
fact or forecasts are under consideration, it will require much more cogent evidence to
justify the conclusion that such statements were intended to be contractual in
character. It is, therefore, with respect to Mr. Ross-Munro's argument, not an answer
to say, simply, that the statement relied upon was an expression of opinion or a
forecast and therefore cannot be a warranty. In my view, following Lord Moulton in
the Heilbut, Symons case, at p. 50, 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. Bisset v. Wilkinson
[1927] A.C. 177, 180 fits into this scheme. After a considerable conflict of judicial
opinion in New Zealand, the privy Council decided finally that the representation:
"the land which was the subject of the agreement had a carrying capacity of two
thousand sheep if only one team were employed in the agricultural work of the said
land"
was not to be taken as a warranty. It was a statement about the potential of the land
in question, based, not on experience or special expertise, and made in the course of
negotiations with a buyer who was not ignorant of such matters. As Cheshire and
Fifoot point out in the Law of Contract, 8th ed. (1972), pp. 112 et seq., where the
party making the representation has special knowledge or skill, the inference that the
parties intended it to have contractual effect will more readily be drawn.
The present case is exceptional in that the evidence clearly demonstrates that the
e.a.c. of this site at Eastbank Street was a vital factor in the calculations of both
parties. The internal documents disclosed on discovery show that the decision of
Esso's head office to purchase this site in the first place was strongly influenced by, if
not dependent on, its having an e.a.c. of 200,000 gallons. The document headed
"Proposal for Purchase of Existing Station or Land for Service Station Development"
contains a precise calculation of the profit to be expected from this site, on the basis
of an annual throughput of 200,000 gallons and the proposed rent to be charged to a
tenant. It is a reasonable inference that Esso would never have proceeded with the
purchase and development of this site if the e.a.c. had been a lesser figure. Mr. Allen
himself said that had it been 100,000 gallons Esso would not have bought it in the
first place. The rent proposed was <<PoundsSterling>>1,231, exclusive of the
proposed showroom. While not directly calculated on the e.a.c. this figure must have
been fairly closely related to it. There can be no doubt that an estimate of this kind,
made under such circumstances, by a company with the vast experience of Esso,
would reasonably have a great influence on the mind of a man like Mr. Mardon who
was negotiating for a tenancy of a newly developed service station. He had had some
experience of the business of selling petrol, but it was negligible compared with that
of a leading oil company. The judge rejected his evidence that when he queried the
figure of 200,000 gallons Mr. Allen replied that Esso were the experts and he was only
a layman; but if this *827 was not said in so many words it undoubtedly represents
the reality of the relationship.
In these circumstances I think that Mr. Mardon has established the warranty alleged
in paragraph 6 of the defence and counterclaim and is entitled to damages for breach
of contract.
Negligent misstatement
Mr. Ross-Munro challenged the judge's finding of negligence on the Hedley Byrne
principle [1964] A.C. 465 , on two grounds. In the first place, he relied on the views
of the majority of the Privy Council in Mutual Life and Citizens' Assurance Co. Ltd. v.
Evatt [1971] A.C. 793, that the duty of care is limited to persons who carry on or hold
themselves out as carrying on the business or profession of giving advice; and urged
this court to adopt the same view. Lord Reid and Lord Morris, both of whom had been
parties to the decision in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C.
465, however, dissented, and restated the principle in these words [1971] A.C. 793 ,
812:
"It appears to us to be well within the principles established by the Hedley Byrne case
to regard his action in giving such advice as creating a special relationship between
him and the inquirer and to translate his moral obligation into a legal obligation to
take such care as is reasonable in the whole circumstances."
Like Lawson J. I much prefer the reasoning of the minority in this case and think that
it should be followed. If the majority view were to be accepted, the effect of Hedley
Byrne would be so radically curtailed as to be virtually eliminated.
Mr. Ross-Munro's second point is that this principle has no application to statements
made in pre-contract negotiations where they result in a contract. There is no specific
reservation of this kind in the speeches in Hedley Byrne, although Lord Reid may have
assumed it. He said, at p. 483: "Where there is a contract there is no difficulty as
regards the contracting parties: the question is whether there is a warranty." This is. I
think, a difficult point, for it is an attractive argument that, when a contract results,
the rights of the parties should be governed by the terms agreed, subject of course,
to the right to sue for damages for fraud or under the Misrepresentation Act 1967. In
fact, since this Act was passed there may be virtually no room for an action in
negligence in such cases. But if there is a gap, as there is in this case, because the
Misrepresentation Act 1967 was not in force at the relevant time, I see no reason why
an action in negligence should not be available in a proper case. Much will depend
upon how the law on warranties is applied. If a restrictive view is taken, there will be
room for this cause of action; but, if not, most, if not all, misstatements which fall
within the Hedley Byrne principle are likely to be regarded as warranties. Had I taken
the same view as Lawson J. on the warranty point I would certainly have held, with
him, that Mr. Mardon had proved his case in negligence. The parties were in the kind
of relationship which is sufficient to give rise to a duty on the part of the plaintiffs.
There is no magic in the phrase "special relationship"; it means no more than a
relationship the nature of which is such *828 that one party, for a variety of possible
reasons, will be regarded by the law as under a duty of care to the other. In this case
the plaintiffs had all the expertise, experience and authority of a large and efficient
organisation carrying on the business of developing service stations to sell their
petroleum products through dealers who were expected to invest a substantial
amount of capital in the business and to observe the detailed trading requirements
laid down in the tenancy agreements. There can be no doubt that the plaintiffs
fulfilled the second condition for Hedley Byrne liability. On the evidence they clearly
assumed responsibility for the reliability of their own e.a.c.
Damages
I now turn to the difficult question of damages and shall begin by attempting to define
the extent of Mr. Mardon's actual loss and then consider how much of it is recoverable
in law.
Within the first year of operation it was apparent that the sales of petrol at the
Eastbank Service Station were far below the e.a.c. In the three years from April 1963
to April 1966 they amounted to 58,375 gallons, 83,306 gallons and 86,502 gallons
respectively. The effect on Mr. Mardon was catastrophic. By September 1964, all the
capital which had gone into the business had been lost. This was agreed at the figure
of <<PoundsSterling>>6,270. He had also incurred a substantial overdraft at that
time amounting to some <<PoundsSterling>> 4,000. His drawings from the business
were only <<PoundsSterling>>159 because he lived on other resources. It is not
suggested and has never been suggested that Mr. Mardon is to be held responsible for
any part of this loss. The plaintiffs' internal memoranda make this absolutely clear.
They recognised, too late, that the prospects of this service station had been ruined
by compliance with the planning requirements of the Southport Corporation which
prevented them from placing the pumps on the street frontage to Eastbank Street,
and required them to be sited behind the showrooms and, therefore, largely out of
sight of the heavy traffic using Eastbank Street. The e.a.c. was completely invalidated
by this change of plan.
In September 1964 the plaintiffs appreciated that Mr. Mardon was in an extremely
difficult position. In consequence they made a new agreement with him cancelling the
original three-year tenancy agreement at a rent of << PoundsSterling>>2,500 and
substituting for it a so-called rental surcharge agreement by which the rent was
reduced to <<PoundsSterling>>1,000 per annum and a proportion of the petrol sales
were paid directly to Esso. The losses continued, until in April 1967, Mr. Mardon could
carry on no longer. By that time his overdraft stood at <<PoundsSterling>>7,774 and
his creditors stood at <<PoundsSterling>>2,716 as set out in schedule 1 to the
defence and counterclaim. His capital loss, therefore, totalled
<<PoundsSterling>>6,270 plus <<PoundsSterling>>7,774 plus
<<PoundsSterling>>2,716 which makes a total of <<PoundsSterling>>16,760 from
which <<PoundsSterling>>690 representing assets must be subtracted, leaving a
negative balance of <<PoundsSterling>> 16,070.
In addition to this loss of capital Mr. Mardon has lost the income which he could
reasonably have expected to earn from the business, made up partly by loss of the
use of his capital and partly by the loss of his time and energy in running the
business. This head of loss, of course, continued after the closure of the business
because Mr. Mardon no longer had the *829 capital to reinvest in another business. A
further source of loss is the interest which has accrued on the overdraft. There were
associated losses which are set out in schedule 3 to the counterclaim.
How much of this is recoverable in this action? The figures of <<
PoundsSterling>>6,270 and <<PoundsSterling>>4,000, representing the capital loss
up to September 1964, are undoubtedly recoverable. The judge held that the losses
after this date were irrecoverable because Mr. Mardon was not induced by the
plaintiffs' breach of duty to enter into the new agreement in September 1964, the
rental surcharge arrangement. He therefore took September 1964 as the "cut-off
point." With the greatest respect I do not think that this is the right way of
approaching the problem. By September 1964, the breach of contract or of duty was
clear to all concerned. The question then was what could be done about it. Mr.
Mardon's first obligation was to mitigate his damage thereafter. He might have
offered to surrender his tenancy and cease to trade, taking the risk that it would be
argued that had he carried on for another year sales would have improved. In fact, as
the plaintiffs' internal memoranda make perfectly plain, they were more than anxious
to retain him as a tenant of this service station because they foresaw great difficulty
in finding anyone to take it over. It was very much in their interest to keep this
service station open and selling their petrol. It was in these circumstances that Mr.
Mardon attempted to carry on with the business. Was this an unreasonable decision?
In my judgment he had scarcely an option to do otherwise. He was trapped, as he
said, by his losses and his only hope was to carry on in the hope of recovering his
position if he could. The third phase followed as the trading position failed to improve.
At this stage Mr. Mardon raised with the plaintiffs the possibility that they might give
him a "prime site" to run with or "carry" the unsuccessful Eastbank site as a last
resort. The plaintiffs did not reject this and discussions took place over a period of
time but came to nothing, and the end came in April 1967.
I think that the whole of this tragic story is directly attributable to the original mistake
of the plaintiffs and that they co-operated with Mr. Mardon in his unsuccessful
attempts to escape its consequences. It cannot, therefore, be said that Mr. Mardon
failed to mitigate his loss. Accordingly, he is entitled to recover his capital losses up to
the time when the business finally closed.
The income losses present greater difficulties. There has been serious delay in
bringing this action to trial which has made matters worse than they might have
been. On the other hand, the plaintiffs have had the use of the money representing
Mr. Mardon's capital losses up to the present. It is, therefore, not unreasonable that
they should be liable for the interest on the overdraft, and on his capital investment.
The claim for loss of profits is, in my opinion, virtually incapable of proof, and I will
not deal with that.
It remains to consider Mr. Ross-Munro's final submission that in fact no capital loss
fell on Mr. Mardon personally because the <<PoundsSterling>>6,270 came from a
private company in which he and his wife held all the shares. The judge, who
examined with meticulous care the trading arrangements which Mr. Mardon adopted
in this business, came to the conclusion that his *830 and the company's finances
were so inextricably intermingled that it was impossible to differentiate between
them. I agree with this conclusion. This is one of those cases of a business run partly
on a one-man company's account and partly on a personal account by the only person
who was active in the company. Mr. Mardon simply regarded the capital of the
company as, to all intents and purposes, his own money. At an earlier stage in the
company's history someone wrote out some very formal-looking minutes; but it is
absurd to suppose that Mr. and Mrs. Mardon sat down from time to time and held a
board meeting. The reality is that the money was made by Mr. Mardon's efforts and
whether it found its way into the company's account or his personal account was
largely a matter of chance unless his accountant kept him straight. It would be
extremely unrealistic and a denial of justice in a case like this to allow the plaintiffs,
who were quite unaffected by the existence of this company, to take advantage of a
piece of legalistic purism. As Lord Reid once said: "The life blood of the law is not logic
but common sense": Reg. v. Smith (Roger) [1975] A.C. 476, 500. It will be for Mr.
Mardon and the company to arrange their own affairs hereafter. I would therefore
allow this appeal and dismiss the cross-appeal.
SHAW L.J.
This appeal discloses a sorry history. It has been recounted in all its essential details
in the judgment of Lord Denning M.R. I need in truth do no more than say that I
respectfully agree with the conclusions which he has stated in regard to the issues
raised on this appeal. It is only because this court is differing from some of the views
of Lawson J. in respect of matters which may be of general importance that I venture
to add a few brief observations.
A cardinal issue in the action was that raised by paragraph 6 of the amended defence
and counterclaim. There followed a recital of the representations made in the course
of the negotiations out of which it was asserted the warranty relied upon emerged.
By paragraph 2 of their amended defence to counterclaim the plaintiffs averred that
"save that the matters alleged to constitute representations and warranties are not
admitted each and every allegation in paragraph 6 of the amended counterclaim is
denied."
As foreshadowed by this pleading there was little that was material in controversy
between the parties as to the factual course of the negotiations which had led up to
Mr. Mardon taking the tenancy of the Eastbank filling station. The essential issue was
whether or not the representations which at the trial it was admitted had been made
gave rise to a warranty as to the capacity of the filling station.
Mr. Ross-Munro submitted on behalf of Esso that Mr. Leitch and Mr. Allen did no more
than proffer a forecast of the potential of the filling station. They expressed their
opinion and no contractual obligation in the form of a warranty or otherwise could be
derived from it as it was honestly stated. Mr. Ross-Munro cited the New Zealand case
of Bisset v. Wilkinson [1927] A.C. 177 in the Privy Council: but he cannot get much
assistance or support from it. In the course of the judgment Lord Merrivale, at p. 182,
refers to Smith v. Land and House Property Corporation (1884) 28 Ch.D. 7, *831
where a vendor's description of the tenant of the property sold as "a most desirable
tenant" was called in question. It was argued for the vendor that this was a statement
of opinion and that it imported no representation of fact; but the Court of Appeal held
otherwise. In a well known passage Bowen L.J. said, at p. 15:
"... it is often fallaciously assumed that a statement of opinion cannot involve the
statement of a fact. In a case where the facts are equally well known to both parties,
what one of them says to the other is frequently nothing but an expression of opinion.
The statement of such opinion is in a sense a statement of a fact, about the condition
of the man's own mind, but only of an irrelevant fact, for it is of no consequence what
the opinion is. But if the facts are not equally known to both sides, then a statement
of opinion by the one who knows the facts best involves very often a statement of a
material fact, for he impliedly states that he knows facts which justify his opinion."
The decision of the New Zealand case itself proceeded on a number of grounds. One
of the more important was that the vendor's assertion, whether it was fact or opinion
or both, was not falsified by the evidence. Another relevant factor was that the vendor
scarcely had a better basis for any opinion that he might form than the purchasers
had.
What is clear from that case is that the answer to the question warranty or no
warranty cannot be given by looking simply at the words which are used. How must
the respective parties have regarded the representation when it was made? How were
they then related respectively to the subject matter? What was the purpose of making
the representation and might it influence the outcome of what was in negotiation
between the parties?
The answers to these questions will provide the touchstone for answering the ultimate
and critical question, did the representation made found a warranty by the party
making it?
In the present case Mr. Mardon was not merely becoming a tenant of Esso. He was
committing himself to further their commercial interest by the use of his capital as
well as by the application of his energy and effort. Esso could hardly have expected
that they could procure any man with a modicum of business sense to put all his
capital as well as his future at risk for a nebulous prospect based on a mere opinion
which is casually given and for the rightness of which all responsibility is disclaimed.
In the world of business the suggestion that this was the real nature and effect of
what was said by Messrs. Leitch and Allen to Mr. Mardon as to the potential
throughput would be derided as nonsensical. It bears no better appearance in a court
of law despite Mr. Ross-Munro's able and urbane presentation of the case for Esso.
That organisation stood in a very different position from Mr. Mardon in regard to the
information available to them for the purpose of assessing the potential capacity of
the filling station. They also had a wealth of experience from which it was to be
expected they could evolve a sound and trustworthy estimate of the potential of a
given filling station. They would understand better than anyone who was not in a
similar position what effect such factors as location, size, appearance and accessibility
would be likely to have and, *832 taking account of these and other matters they
knew to be relevant, they could put forward not merely an informed but an
authoritative assessment on which reliance could be placed by persons minded to
enter into a business relationship with them.
The representations which were admittedly made to Mr. Mardon conveyed and in my
view were intended to convey that Esso warranted that information which they had
available to them and on which the representations were founded established the
Eastbank filling station in the category of stations with a potential 200,000 gallons
throughput attainable in two years or thereabouts.
It so happened that when that station had actually been developed, it was
contemplated that the pumps would face the roadway so as to be in full view of
passing traffic. But when planning consent was granted it was for a development
which screened the pumps from the road. This was a serious drawback and was
bound adversely to affect the station's potential. Nevertheless, in their negotiations
with Mr. Mardon, Esso adhered to their original estimate. All that need be said is that,
if those responsible for the original estimate were right when it was made, those who
later maintained that figure to Mr. Mardon could hardly have had real confidence in its
accuracy then. Yet Mr. Leitch professed to Mr. Mardon during a lunch at Manchester
that he was confident about the forecast he had given.
Mr. Mardon complained that "he had been sold a pup." I think he had; but it was a
warranted pup, so that Esso are in breach of warranty and liable in damages
accordingly.
In this regard I would differ from the finding of the judge below in holding as he did
that no warranty was given by Esso. Lawson J. did, however, decide that Esso owed
Mr. Mardon a duty to take care in relation to the statement made to him as to the
potential of the filling station and that they were in breach of that duty. I agree
entirely with the reasons and conclusions of the judge on this part of the case. Thus,
even if it were right that Esso did not give a warranty to Mr. Mardon, they would be
liable to him in negligence, following the principle enunciated in Hedley Byrne & Co.
Ltd. v. Heller & Partners Ltd. [1964] A.C. 465, unless a further argument advanced by
Mr. Ross-Munro stood in the way.
He contended that where the negotiations between the parties concerned actually
culminate in a contract between them they cannot look outside that contract in the
assertion of any claim by one against the other which is founded on the subject
matter of the negotiations and of the contract. To such a situation, Mr. Ross-Munro
submitted, the Hedley Byrne principle had no application. It would follow that,
notwithstanding the fact that one party to the negotiations induced the other by a
negligent misrepresentation to enter into the contract. the other would have no
remedy unless one were available under the Misrepresentation Act 1967. As the
matter.s of which Mr. Mardon complained occurred in 1963. his only available means
of redress would be such as his contract with Esso afforded: so that if there was no
warranty he would have no remedy at all.
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 *833 the outcome of that
negotiation. It may, of course, be that the contract ultimately made shows either
expressly or by implication that, once it has been entered into, the rights and
liabilities of the parties are to be those and only those which have their origin in the
contract itself.
In any other case there is no valid argument, apart from legal technicality, for the
proposition that a subsequent contract vitiates a cause of action in negligence which
had previously arisen in the course of negotiation. In the present case the proposition
would not save Esso from liability if they be held to have given a warranty. Thus Mr.
Mardon is entitled in my view to damages for breach of warranty or for negligent
misrepresentation.
Before considering how those damages are to be computed, it is necessary to
consider the "cut-off" of the incidence of damage at September 1, 1964, as found by
the judge. He took the view that the new agreement then made between Mr. Mardon
and Esso, having been entered into voluntarily by Mr. Mardon, had no relation to the
first agreement and its consequences. Accordingly, so the judge held, any loss
suffered by Mr. Mardon while the second agreement was in operation and thereafter
was unrelated to the negligent misrepresentation and to the breach of any warranty.
It would follow, as the judge held, that such late loss was not to be taken into account
in assessing the compensation to which Mr. Mardon was entitled.
This conclusion in this respect is a fallacious one and has its origin in an erroneous
view of what took place between the parties in September 1964. Mr. Mardon was not
then saying that he had made a bad bargain and that he wanted a better one for the
future. What had happened was that he had been brought to the brink of bankruptcy
in consequence of Esso's false assertion as to the potential of the filling station. In
that desperate situation he looked for some means of averting complete ruin - an
outcome for which Esso would have had to face responsibility. They, for their part,
wanted to preserve the Eastbank site as a going concern with no break in the
continuity of the business there. The new arrangement, so far from being unrelated to
the original agreement, offered a reasonable means of mitigating the damage and
loss which Mr. Mardon had sustained through Esso's default in regard to the first
contract. If the second agreement had not been made, Mr. Mardon, denuded as he
was of his savings and surrounded by debt, might not have found employment for a
very long time. In that case his claim for damages could have been extended over
many years and it might have been more considerable in respect of each year for
which Esso were held liable.
The second agreement was thus in a practical sense an extension of the first, for it
was the best means that offered a prospect of salvaging something from the wreck for
both sides. Esso cannot claim to be exonerated from liability as from September 1,
1964. The judge's conclusion that they could so claim erred in law.
Another argument on behalf of Esso in relation to damages was that it was not Mr.
Mardon's money that had been brought into the venture and lost. It was, said Mr.
Ross-Munro, the money of a company in which Mr. Mardon and his wife were the only
shareholders. It was a company which had no business, for it had sold the goodwill of
the business which it had once conducted. It does not appear to have had any
creditors either. *834 So Mr. and Mrs. Mardon could at any time have wound the
company up by their own resolution and taken the money standing to its credit in its
bank account for themselves as their own money.
Mr. Mardon did not go through this formality which could have been initiated over the
breakfast table in his home. Instead, he drew cheques on his company's account. It
was to all intents and purposes his and his wife's money. If the bare title was with the
company then I would hold that Mr. Mardon borrowed the money and remains
accountable to his dormant company. I thought the argument a very unattractive
one. It is also a bad one and can be forgotten.
As to the computation of damages, these present very difficult problems. I agree with
the formulation proposed by Lord Denning M.R. I would allow this appeal.
Representation
Solicitors: Batchelor Street Longstaffe for Bellis, Kennan, Gribble Co., South port;
Durrant Piesse.
Appeal allowed. Cross-appeal dismissed. Final assessment of total of damages, costs
and interest adjourned for possible agreement between parties. Petition: February 27.
The court approved the terms of a proposed order agreed by the parties by which the
defendant's appeal was allowed with costs, including the appeal against the order of
Lawson J. relating to costs; the cross-appeal of the plaintiff company was dismissed
with costs; and on terms indorsed on counsel's brief made an order for payment out
to the defendant's solicitors of the <<PoundsSterling>>4,000 in court; an order for
legal and taxation of the defendant's costs; and liberty to apply. The court, having
been shown the terms indorsed, stated that the figure for damages agreed by the
parties was in line with that which the court would itself have arrived at in default of
the parties' agreement. (M. M. H. )
(c) Incorporated Council of Law Reporting For England & Wales
[1976] Q.B. 801
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