Law students studying contract law and unfair bargaining can learn a lot from Alec Lobb Garages Ltd v Total Oil Great Britain Ltd [1985]. In this case, the legal doctrine of unconscionable bargains is explored, with a particular focus on the contractual dynamics between parties of unequal bargaining power. This case provides valuable insights into how courts handle claims of inequality and unfairness in contractual agreements.

  • In the case of Alec Lobb Garages Ltd v Total Oil Great Britain Ltd [1985] 1 W.L.R. 173, it was held that for an unconscionable bargain claim to succeed, there must be evidence that one of the parties engaged in unconscionable conduct. It is insufficient that there is a disparity between the bargaining powers of the parties, or that the agreement terms are objectively unreasonable.

Facts of the Case

  • In 1968, C owned and operated a petrol station. Since 1964, C was, in effect, under a tie-in agreement to exclusively obtain their petrol supplies from D.
  • Facing financial difficulty in 1968, C proposed a new lease and lease-back agreement with D. C would lease the station to D in return for a premium and nominal rent, with D granting a sub-lease to C for annual rent.
  • Eventually, while the new agreement proved costly, C was able to pay all his outstanding debts. 10 years after the new agreement was accepted, C sought to have the agreement set aside for unequal bargaining power.
  • C relied on Lord Denning’s ruling in Lloyd’s Bank v Bundy, where an agreement can be set aside where there is a disparity in the bargaining power between the parties, and the terms are not fair and reasonable.

Issues

  • Was the fact that there was a disparity in the bargaining powers of the parties, and the terms were not fair and reasonable, sufficient to set aside the agreement?

Held by the Court of Appeal (Civil Division)

  • Finding for D, that these were insufficient to have the agreement set aside. Despite the terms being objectively unreasonable, D was not guilty of unconscionable conduct in agreeing to and arranging the agreement. Even if there had been, C would have been barred due to the length of time he had operated under the agreement.

Dillon L.J.

  • C has argued that the lease-back agreement ought to be set aside in equity because a contract between two parties with unequal bargaining power can be enforceable if the terms of the contract are fair, just and reasonable.
  • This concept is taken from Lord Denning’s judgment in Lloyd’s Bank v Bundy [1975].
  • This laid down the proposition that where there was unequal bargaining power, the contract could not stand if the weaker party did not have separate legal advice.
  • C had received separate advice from his own solicitor. D rejected any modifications to the agreement, and C had been advised to reject the agreement. It could be argued that C felt he had no alternative but to accept D’s terms. Against this background, separate legal advice will not save the transaction if it is found to be unconscionable.
  • “The emphasis is on extortion/undue advantage taken of weakness, an unconscientious use of the power arising out of the inequality of the parties’ circumstances, and on unconscientious use of power which the court might in certain circumstances be entitled to infer from a particular-and in these days notorious- relationship unless the contract is proved to have been in fact fair, just and reasonable. Nothing leads me to suppose that the course of the development of the law over the last 100 years has been such that the emphasis on unconscionable conduct or unconscientious use of power has gone and relief will now be granted in equity in a case such as the present if there has been unequal bargaining power, even if the stronger has not used his strength unconscionably. I agree with the judgment of Browne-Wilkinson J, in Multiservice Bookbinding Ltd. v Marden [1979], which sets out that to establish that a term is unfair and unconscionable it is not enough to show that it is, objectively, unreasonable” [182H].
  • The deputy judge found that D’s conduct was not unconscionable, coercive or oppressive. There is ample evidence of this, and it is not challenged by C. The fact that D has greater bargaining power than C is not conclusive.
  • Inequality of bargaining power is a relative concept. It is seldom in any negotiation that the bargaining powers of the parties are absolutely equal. For instance, an individual borrowing from a bank has virtually no bargaining power.
  • Lord Denning did not envisage that any contract would be reviewed by the courts to determine whether it is reasonable. He envisaged that the court would only interfere in exceptional cases whereas a matter of common fairness it is not right that the strong should be allowed to push the weak to the wall.

Significance of the Case in Legal Development

Alec Lobb Garages Ltd v Total Oil is pivotal in understanding unconscionable contracts within UK law:

  1. Lloyds Bank Ltd v Bundy [1975]: This case introduced the concept that a contractual agreement might be set aside if one party’s bargaining power is significantly weaker, and the terms are unfair.
  2. National Westminster Bank plc v Morgan [1985]: Reinforced that undue influence or unfairness must be clearly demonstrated to rescind a contract.
  3. Multiservice Bookbinding Ltd v Marden [1979]: This case is often cited to underline the necessity of proving that an agreement was not just unreasonably unfair but also resulted from an abuse of a position of power.

Exam Questions and Answers

Below, you will find answers to questions that are most commonly asked based on this case.

How does current UK law address the balance between contractual freedom and protection against unconscionable bargains?

UK law strikes a balance between upholding contractual freedom and protecting parties from unconscionable bargains primarily through the application of common law principles and specific legislation like the Consumer Rights Act 2015. The common law doctrine of unconscionability requires a demonstration of an inequality in the bargaining power that results in an oppressive contract. The courts may intervene if a contract is proven to be both procedurally and substantively unconscionable — meaning the terms were unfairly negotiated and the contract terms are excessively one-sided.

What legal remedies are available today for parties deemed to have been victims of unconscionable bargains?

For parties deemed victims of unconscionable bargains, the UK legal system offers several remedies:

  1. Rescission: The contract can be set aside, returning both parties to their pre-contractual position.
  2. Reformation: Adjusting the contractual terms to more equitable ones.
  3. Damages: Compensation for losses incurred due to the unfair terms.

These remedies aim to deter unfair practices and rectify the imbalances caused by unconscionable bargains.

In what ways can a contract be challenged as unconscionable under UK law outside of the scenarios discussed in Alec Lobb Garages Ltd v Total Oil?

Besides the scenarios presented in Alec Lobb Garages Ltd v Total Oil, a contract can be challenged as unconscionable in the UK under various grounds:

  • Undue influence: Where one party is able to influence another excessively to their advantage.
  • Misrepresentation: If one party has been misled by another about a significant element of the contract.
  • Duress: Contracts entered under threats may also be deemed unconscionable.

Each of these scenarios reflects a broader application of unconscionability in the context of protecting individuals from entering into contracts where their consent has been compromised. 

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