Esso bought a new site for a service station. When they purchased it they estimated that it could sell 200,000 gallons of petrol a year. However, building regulations made them put the pumps on the back of the property. This considerably lowered the amount that could be sold, but no change was made to the estimate. They leased it to Mardon, and assured him contrary to his skepticism that the site could sell 200,000 gallons a year. However, it did not sell anywhere near this amount. Esso realized this and renegotiated the contract, but even that did not properly assess how much could be sold. Mardon tried his best, however he lost money. Eventually Esso cut off his petrol supply when he stopped paying. Mardon is seeking damages. Esso was successful at trial which Mardon appealed.
- Do parties with special knowledge have to take care when giving “guarantees” in contract?
Appeal allowed .
Denning, writing for a unanimous court, says that this case can proceed in two ways. The first is the idea of a "collateral warranty". Although counsel for Esso submitted that the guarantee was not a warranty as it was only a future estimate, Denning states that the facts that it was made by a party with special knowledge in an attempt to induce the other party to enter into a contract, and that it was relied upon, makes it a warranty. This warranty was breached, and Esso is liable for damages.
He goes on to say that the Hedley Byrne principle also applies, and that damages can be awarded on that basis. This is a negligent misrepresentation because Esso is in a special relationship with Mardon and they are in a position to have special knowledge. Mardon relied on this information which was made negligently, and he suffered loss. Therefore he is entitled to recover damages.
- Future predictions can be warranties if they are given with the intent to induce another party to enter into a contract, and they are relied upon in the decision to enter into the contract (these are called collateral warranties).
- The Hedley Byrne principle applies to contract law as well – when two parties in a "special relationship" are parties to a contract, the party with special knowledge has a duty not to be negligent in the representations that they give to the other party.