Esso Petroleum Co Ltd v Mardon

Oil company’s misrepresentation of potential throughput of petrol in negotiations for tenancy of filling station–Statement a warranty not of annual sales of petrol but of the fact that an expert estimate of such sales had been made–Company in any case liable under the Hedley Byrne doctrine, which extends to statements made during negotiations that end in contracts–Further points on assessment of damages in a case of the kind This was an appeal by Philip Lionel Mardon, formerly tenant of Eastbank Service Station, Eastbank Street, Southport, from a judgment of Lawson J in the Queen’s Bench Division on July 31 1974 ([1975] 1 QB 819), and a further judgment of the same judge on January 13 1975 deciding issues as to damages, by the combined effect of which the respondents, Esso Petroleum Co Ltd, were held liable to pay the appellant only some £9,000 in respect of loss suffered by him as the result of a misstatement made to him during the negotiations leading up to his tenancy agreement dated September 1 1964. J A Hall QC and A Rawley (instructed by Batchelor Street Longstaffe, agents for Bellis, Kennan, Gribble & Co, of Southport) appeared for the appellant, and C Ross-Munro QC and J Peppitt (instructed by Durrant Piesse) represented the respondents. Giving judgment, LORD DENNING said that this was a long story of ‘wasted endeavour and financial disaster,’ to quote the judge’s words, and litigation had so far lasted for eight years. In 1961 Esso wanted an outlet for petrol in Southport, and they found a most suitable one on Eastbank Street, one of the busiest streets in the town. They made a careful forecast of what they called the ‘EAC,’ the estimated annual consumption of petrol, and concluded that the throughput of petrol would reach 200,000 gallons a year by the second year after development. Esso accordingly bought the site and proceeded with the construction of a filling station. But then something occurred which threw all their calculations out. The site had outline planning permission, and Esso had assumed that they could have their forecourt and pumps fronting on to the busy main street. The local planning authority made it a condition, however, of detailed permission that the station be built back to front, so that the showroom alone fronted on to the main street, and the forecourt and pumps were at the back of the site, accessible only from side streets and invisible from the main street. Esso had no choice but to build in compliance with these requirements, and they finished the work early in 1963. Now it was that they made what the judge had called their ‘fatal error’: they failed to revise their original EAC of 1961 despite the fact that the throughput would be greatly affected by reason of passing traffic not being able to see the station. Lawson J found that this error was due to want of care on Esso’s part, and there could be no doubt about it. Still under the influence of this error, Esso began looking for a tenant, and they found an excellent man, the defendant. He was seen by their local manager, Mr Leitch, who had 40 years’ experience in the petrol trade and on whose calculations and recommendations Esso had acquired and developed the site. He told Mr Mardon that Esso had produced an EAC of 200,000 gallons after two years. Mr Mardon said that he felt 100,000 to 150,000 gallons would be a more realistic estimate; however, he was convinced by Mr Leitch’s far greater expertise, and on the basis of what he was told, he entered into a tenancy for three years at a rent of £2,500 for the first two years and £3,000 in the last year. He did everything desired of him, was an extremely good tenant, and tried every way he could to increase sales and profitability. He put all his available capital in, more than £6,000, and raised an overdraft which also went into the business. Yet when the accounts were taken for the first 15 months, the throughput was only 78,000 gallons and a net loss of £5,800 had been suffered. On July 17 1964 Mr Mardon wrote to the area manager giving notice to quit, explaining that he sought to salvage as much as he could in the face of the inevitable alternative, bankruptcy. The manager made representations to his superiors, and as a result a new lease was given to Mr Mardon on September 1 1964 for a year certain and thereafter determinable on three months’ notice, the rent being reduced to £1,000 a year plus a surcharge of 1d or 2d per gallon, depending on the amount sold. Still a success could not be made of the site, which was simply not capable of selling more than 60,000 to 70,000 gallons, and Mr Mardon lost more and more of his money. He appealed to Esso, he consulted solicitors, all to no avail; Esso did nothing to help, but instead took steps, such as draining his tanks and cutting off supplies, which put him out of business as a petrol station. Ultimately they brought the present action for possession and for £1,100 odd for petrol supplied, and that defeated him. He gave up the site, having lost all his capital and incurred a large overdraft. By his defence and counterclaim, he sought damages for breach of warranty, the statement as to EAC, alternatively for negligent misrepresentation. No claim could be brought under the Misrepresentation Act 1967, because the representation now in issue was made before that Act took effect. The first question, then, was whether the statement as to the EAC was a warranty. He (his Lordship) quite agreed with Mr Ross-Munro that it could not be regarded as a guarantee that the throughput would be 200,000 gallons. Nevertheless it was a forecast made by a party, Esso, with special knowledge and skill, a party in a much better position to make a forecast than was the defendant. In these circumstances, there was a warranty, as it seemed to him (Lord Denning), that the forecast as to EAC was sound, in the sense that Esso had made it with reasonable care and skill. That warranty had been broken, and for58 this Esso were liable in damages. Even were this not so, he (his Lordship) was of opinion that the principle of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 was not limited, as Mr Ross-Munro had argued, to cases in which no contract came into existence between the parties concerned, but extended to statements made in the course of negotiations which yielded a contract. So for example a professional man might give advice under a contract for reward; or without a contract, in pursuance of a voluntary assumption of responsibility, gratuitously and without reward. In either case, he was under one and the same duty to use reasonable care. For breach of that duty he would be liable in damages, which should be, and were, the same whether he was sued in contract or in tort. Here Esso had clearly made a misrepresentation which was negligent and induced the defendant to enter into an agreement that turned out disastrous. For that misrepresentation Esso were liable in accordance with the Hedley Byrne doctrine. The damages must be measured by the loss Mr Mardon suffered, not by reference to the prospect of a throughput of 200,000 gallons. They were not, however, to be confined, as the judge had confined them, to the period between April 1963 and the entry into the new agreement of September 1 1964. The effect of the original misstatement endured in September 1964, and laid a heavy hand on all that followed. He (the Master of the Rolls) agreed with the judge’s conclusion that Mr Mardon could claim his original capital of £6,000 odd although technically that sum was put up by a private company, one in which he and his wife held all the shares. To that loss must be added the overdraft incurred, plus loss of earnings, plus interest. Damages for having to sell the house to pay off the overdraft were too remote. Actual figures should be agreed if possible, failing which counsel could come back with figures for the court to consider. He (his Lordship) emphasised that the defendant was entitled to substantial damages. ORMROD and SHAW LJJ delivered concurring judgments. The appeal was allowed and the assessment of damages, interest and costs adjourned. On February 27 the court approved the terms of a proposed order, indicating that the figure agreed as damages was in line with their Lordships’ own approach to the matter. The defendant received all his costs in both courts.