Paragon Finance plc v Nash [2001] EWCA Civ 1466; [2002] 1 WLR 685; [2002] 2 All ER 248; [2001] 2 All ER (Comm) 1025
Contract – Implied Terms – Unfair Terms
Facts
Mr and Mrs Nash obtained a mortgage from Paragon Finance for their matrimonial home. The mortgage agreement gave Paragon a discretion to vary the rate of interest. 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. The appeal was heard with a similar claim involving Mr and Mrs Staunton. The borrowers appealed against the striking out of their defences and counterclaims and refusal of permission to amend them.
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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
The Court of Appeal dismissed both appeals. There was an implied contractual term that Paragon would not set interest rates dishonestly, for an improper purpose, capriciously or arbitrarily. The discretion was also limited by unreasonableness in the narrow sense of a decision that no reasonable lender, acting reasonably, would make. This was not a general obligation to charge reasonable rates or to track the Bank of England or other lenders.
On the material before the court, the borrowers had no real prospect of establishing a breach. Whilst the lender had not reduced its interest rates in line with other lenders, passing on increased funding costs caused by its own financial difficulties was a legitimate commercial consideration.
The separate claim under sections 137–139 of the Consumer Credit Act 1974 also failed. Whether a credit bargain was extortionate had to be assessed when it was made; subsequent interest-rate changes did not make it extortionate for these purposes. Even if those later rates could be considered, the allegation that they were grossly exorbitant had no real prospect of success. Merely high or unreasonable rates were insufficient.
Furthermore, the setting of interest rates was not the lender’s “contractual performance” for the purposes of section 3(2)(b)(i) of the Unfair Contract Terms Act 1977. It altered the payments required of the borrowers rather than the performance of an obligation undertaken by the lender. The court did not need to decide the limitation arguments.
