Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd [1984] EWCA Civ 2 (08 November 1984)

Facts

The plaintiffs, a family-owned company, Alec Lobb (Garages) Ltd, and its directors, Mr. and Mrs. Lobb, were in severe financial distress. To avoid insolvency, they entered into a complex transaction in 1969 with the defendant, Total Oil (GB) Ltd. The agreement consisted of a lease and lease-back arrangement for their garage premises. The plaintiffs leased the freehold of the property to Total for a term of 51 years in return for a premium of £35,000. Simultaneously, Total leased the property back to the company for a 21-year term. A crucial component of this arrangement was a ‘solus tie’ agreement, obligating the plaintiffs to purchase all their petrol and diesel fuel exclusively from Total for the entire 21-year duration of the lease-back. Throughout the protracted negotiations, the plaintiffs were represented by their own solicitors and received independent legal and financial advice. After the agreement was executed, the plaintiffs sought a declaration that the transaction was voidable, arguing it was an unconscionable bargain procured by undue pressure and that the 21-year solus tie constituted an unreasonable restraint of trade.

Issues

The Court of Appeal was required to determine two primary legal issues:

1. Whether the lease and lease-back agreement, coupled with the solus tie, was liable to be set aside in equity as an unconscionable bargain, given the plaintiffs’ dire financial situation and the perceived inequality of bargaining power.
2. Whether the 21-year solus tie constituted an unreasonable restraint of trade and was therefore contrary to public policy and unenforceable.

Judgment

The Court of Appeal unanimously dismissed the appeal, affirming the trial judge’s decision in favour of the defendants, Total Oil. Lord Justice Dillon delivered the leading judgment.

Unconscionable Bargain and Undue Pressure

The court rejected the claim that the agreement was an unconscionable bargain. Dillon L.J. clarified the necessary elements for equitable relief on this ground, requiring more than just inequality of bargaining power. He articulated a three-part test:

…first, that one party has been at a serious disadvantage to the other, whether through poverty or ignorance or lack of advice or otherwise, so that circumstances existed of which unfair advantage could be taken… secondly, that this weakness of the one party has been exploited by the other in some morally culpable manner… and thirdly, that the resulting transaction has been, not merely hard or improvident, but overreaching and oppressive.

While acknowledging the plaintiffs’ serious financial disadvantage, the court found no evidence that Total had exploited this weakness in a ‘morally culpable’ way. The transaction was a standard commercial arrangement, and Total had not acted improperly. The court placed significant weight on the fact that the plaintiffs had received competent, independent legal advice throughout the process. This advice counteracted any potential vulnerability arising from their financial desperation. Dillon L.J. concluded:

But where, as here, a party has had the benefit of independent advice from a solicitor, and the disadvantage under which he might otherwise have suffered has been, in effect, removed, I cannot see any basis for holding that he has been the victim of an unconscionable bargain.

The court determined that the plaintiffs’ will was not ‘coerced’ or ‘overborne’; they made a rational commercial choice, albeit a difficult one, with full knowledge and legal guidance.

Restraint of Trade

The court held that the doctrine of restraint of trade was not applicable to the solus tie in this case. The reasoning distinguished between imposing a restraint on an existing freedom and acquiring a new interest subject to a restraint. Here, the plaintiffs had surrendered their freehold interest (and the freedom of trade associated with it) by leasing the property to Total for 51 years. They then acquired a new, lesser interest—the 21-year lease-back—which came with the tie agreement already embedded in it. They were not giving up a pre-existing freedom but rather acquiring a new asset with certain conditions attached. Dillon L.J. followed the principle established in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, which held that the doctrine does not apply where a trader acquires a right to trade on a particular piece of land, subject to a covenant, which they would not otherwise have had. As the plaintiffs had no prior right to trade under the lease-back interest, they could not claim to have been restrained. The court further noted that even if the doctrine had applied, the 21-year tie was not necessarily unreasonable in the commercial context of the transaction.

Implications

The decision in Alec Lobb v Total Oil is significant for its clarification of commercial contract law principles. It narrowly defines the scope for equitable intervention on grounds of unconscionable bargain, particularly in a commercial setting. The case establishes a high threshold, demanding proof of morally reprehensible conduct by the dominant party, not simply an imbalance of power and a hard bargain. It powerfully underscores the importance of independent legal advice as a shield against claims of undue pressure or exploitation, reinforcing the court’s reluctance to paternalistically interfere with contracts made by advised parties. Furthermore, the judgment refines the application of the restraint of trade doctrine in property transactions, confirming that restrictions inherent in a newly acquired interest are viewed differently from those imposed on a pre-existing freedom, thus protecting the integrity of common lease and lease-back financing arrangements.

Verdict: The appeal was dismissed.