When walking your client through a due diligence checklist, or discussing the representations and warranties being made by your client who is the vendor of a business in a sale-of-business transaction, you as counsel should think about the possibility that your client “ought to have known” about certain representations and warranties.
For example, if a selling party, who has or claims to have an expert knowledge or skill in a particular field, makes a representation with the intention of inducing an individual to enter into a contract, then that party is responsible for ensuring that the representation is reliable and correct.
Moreover, if an expert negligently gives unsound advice, misleading information, or expresses an erroneous opinion to induce another party to enter into a contract, the expert is liable for any damages that result from his/her advice. If negligent misrepresentation can be proven then it will take precedent over innocent misrepresentation in court.
Therefore, despite misrepresenting information without the intent, if an individual can be proven to have acted in a reckless and careless manner in which the individual, under normal circumstances, is expected to know that the information has been misrepresented, then the individual can be found liable for damages.
Esso Petroleum Co Ltd v Mardon stands as precedent for this. In this case, Mr. Mardon (Mardon) entered into a contract with Esso Petroleum Co Ltd. (Esso) to purchase a petrol station that was franchised by Esso. Esso had told Mardon that, according to their calculations, the petrol station would sell 200,000 gallons per year. However, Esso had failed to take into account that local council had made a decision to reject permission for the petrol station to have direct access from the main street. This ultimately meant that the petrol station’s actual sales were substantially lower than that stated in Esso’s estimate.
Mardon then brought an action against Esso for damages resulting from breach of a representation and related warranty.
Esso countered that its estimate was simply an opinion and did not constitute a warranty. The court ruled that Esso’s estimate did not constitute a warranty, in the sense that it did not guarantee that the petrol station would sell 200,000 gallons per year. However, the court also acknowledges that Esso, who had expert knowledge and skill in the approximation of sales, were in a better position than Mardon to make the estimation. Esso had also made this estimation with the intent that Mardon act upon it, and he did in fact act upon it. Thus, the court concluded that the estimate can be interpreted as a warrant because a reasonable individual would assume that an expert in this field would make a forecast that is reliable. The court ultimately decided that Esso was liable for damages that occurred as a result of their misrepresentation.
– – –
This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.