Paragon Finance v Nash [2001] EWCA Civ 1466
Contract – Implied Terms – Unfair Terms
Facts
Mr and Mrs Nash obtained a mortgage from Paragon Finance for their matrimonial home. The mortgage agreement allowed Paragon to vary the rate of interest ‘at their discretion’. After the Bank of England base rate of interest dropped, Paragon failed to match the drop in interest and continued charging a significant amount above this rate. After Mr and Mrs Nash could no longer continue to afford these payments, Paragon applied for an order for possession as a precursor for a sale of their property.
Issues
Whether or not Paragon were entitled to continue charging rates at their discretion when the Bank of England’s interest rate had fallen. Whether or not there was an implied term limiting the exercise of their discretion. Whether or not the terms could be considered unfair under the Consumer Credit Act 1974 or the Unfair Contract Terms Act 1977.
Decision/Outcome
There was an implied term that the power to vary the interest rate had to be exercised in a reasonable manner. Under the provisions of the Consumer Credit Act 1974 this meant that rates could not be capricious, dishonest, improper or unreasonable. This required the court to assess the position at the time the bargain was made. In this case, the rate was not applied in an unreasonable or unfair manner and so the clause allowing this discretion was not void. Furthermore, the setting of interest rates could not be considered a form of ‘contractual performance’ by the court, and so the terms of s3(2)(b) Unfair Contract Terms Act 1977 did not apply in this instance. Whilst the lenders had not reduced their interest rates in line with other lenders, they had a commercially legitimate objective in doing so, and so the implied term that the rate be ‘reasonable’ was satisfied.
Updated 19 March 2026
This case summary remains broadly accurate. Paragon Finance plc v Nash [2001] EWCA Civ 1466 is still good law and continues to be cited as authority for the implied term that a contractual discretion to vary interest rates must not be exercised dishonestly, for an improper purpose, capriciously, or in a way that no reasonable lender acting reasonably would adopt.
One point of context worth noting: the article references the Unfair Contract Terms Act 1977 and the Consumer Credit Act 1974, both of which remain in force. However, readers should be aware that for consumer contracts entered into after 1 October 2015, the Unfair Terms in Consumer Contracts Regulations 1999 (which were also relevant to this area at the time of the decision) have been replaced and consolidated by the Consumer Rights Act 2015, which now governs unfair terms in consumer contracts. The 1977 Act continues to apply primarily in a business-to-business context. This does not affect the correctness of the case summary itself, but students applying these principles to modern consumer mortgage disputes should consider the Consumer Rights Act 2015 as the primary legislative framework for unfairness arguments, rather than the 1977 Act.
The core principle regarding implied terms and the exercise of discretion in variable-rate mortgage contracts stated in this summary remains an accurate reflection of the Court of Appeal’s decision.
