Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd

Factual and Procedural Background

Company A, a major petroleum producer and distributor, entered into two separate “solus” (exclusive-supply) agreements with Company B, the owner of two petrol stations (“Location 1” and “Location 2”). Under each agreement Company B promised to purchase all petrol for resale only from Company A and to operate each station in accordance with Company A’s dealer co-operation plan.

• Location 1 (“Mustow Green”): four years and five months commencing 1 July 1963.
• Location 2 (“Corner Garage”): twenty-one years commencing 1 July 1962; bundled with a £7,000 loan secured by a mortgage that was irredeemable during the same 21-year period.

When cheaper “cut-price” petrol entered the market, Company B began selling it and ceased buying from Company A. Company A sued for injunctions to enforce both ties. The trial judge (Judge [Last Name]) granted the injunctions. The Court of Appeal set them aside, holding the agreements void as unreasonable restraints of trade. Company A appealed to the House of Lords.

Legal Issues Presented

1. Whether the solus agreements (and the mortgage-based tie at Location 2) constitute contracts “in restraint of trade.”
2. If so, whether the restraints are reasonable and therefore enforceable, having regard to (a) their duration, (b) the parties’ legitimate commercial interests, and (c) the public interest.
3. Whether the existence of a mortgage security removes a tying covenant from scrutiny under the restraint-of-trade doctrine.

Arguments of the Parties

Appellant’s Arguments (Company A)

• The covenants relate only to the use of specific land and are therefore outside the doctrine of restraint of trade.
• Even if the doctrine applies, the restraints are reasonable: they secure continuity of outlets necessary for large-scale investment in refining and distribution, and Company B received commercial benefits (rebates, loan, promotional support).
• The mortgage tie at Location 2 is protected by traditional mortgage principles; equity will not interfere with an agreed 21-year term that simply secures repayment.

Respondent’s Arguments (Company B)

• The covenants are personal restraints on trading freedom, not mere land-use restrictions, and therefore fall squarely within the restraint-of-trade doctrine.
• The 21-year tie (and the irredeemable mortgage that sustains it) is far longer than reasonably necessary to protect Company A and is contrary to the public interest.
• The shorter tie at Location 1 is also unreasonable because Company A could readily find alternative outlets within a few years.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Applicability of the Restraint-of-Trade Doctrine. The Law Lords rejected the contention that a covenant is immune from scrutiny simply because it is attached to the use of land. They emphasised the practical effect of the restrictions on the trader’s liberty, not formal property concepts.

2. Classification of the Solus Agreements. Both agreements required Company B to:

• Buy petrol exclusively from Company A;
• Keep the stations open for Company A’s products;
• Bind any successor in title to the same obligations.

These positive and negative obligations went beyond ordinary covenants restricting land use and therefore fell within the restraint-of-trade doctrine.

3. Reasonableness Test.

• The House applied Lord Macnaghten’s dual test: reasonable between the parties and consistent with the public interest.
• Factors favouring Company A included heavy capital investment, need for stable distribution, widespread industry practice, and the competitive bargaining position of garage owners.
• The decisive factor against Company A for Location 2 was the duration: twenty-one years stretched “far beyond any period for which developments are reasonably foreseeable,” and the loan/mortgage structure served chiefly to prolong the tie.
• In contrast, the four-year-five-month tie at Location 1 was within the range normally needed for business planning and did not overreach Company B’s interests.

4. The Mortgage Question. The mortgage did not automatically shield the trading restraint. Once Company B offered to repay the outstanding loan, the existence of the mortgage gave Company A no stronger right to maintain the 21-year tie. A mortgage that primarily “bolsters up” an otherwise unreasonable restraint must fall with it.

Holding and Implications

APPEAL ALLOWED IN PART.

• The solus agreement for Location 1 (four years, five months) is reasonable and enforceable; the injunction granted at first instance is restored.
• The solus agreement and mortgage-based tie for Location 2 (twenty-one years) are unreasonable restraints of trade and therefore unenforceable; Company B may redeem the mortgage and is free from the tie.

Implications: The decision affirms that short-to-medium-term solus agreements (approximately five years) can be valid, while excessively long ties risk invalidity—even when embedded in a mortgage. The House expressly declined to set rigid time limits, indicating that enforceability will turn on evidence of commercial necessity and public interest in each case.