Contract

Citation

(2002), "Contract", Property Management, Vol. 20 No. 1. https://doi.org/10.1108/pm.2002.11320aab.002

Contract

Contract

Paragon Finance plc v. Nash and another same v. Staunton and another (2001) The Times October 25 2001

In this case, two couples, Geoffrey and Jennifer Nash and William and Mary Staunton fell into arrears with their mortgage interest payments. Paragon Finance, the lender, sought possession of their properties. Both mortgages contained variable interest clauses. The borrowers admitted the arrears of interest but claimed that although the loan agreements were not extortionate at the outset they became so later when the lender failed to adjust the interest rates in line with the Bank of England or prevailing market rates with the result that the interest payable so far exceeded current rates as to be exorbitant. In their counterclaim the borrowers sought orders that the loan agreements be reopened under s.139 of the Consumer Credit Act 1974. They further argued that the agreement contained an implied term that the lender was bound to exercise the discretion to vary interest rates fairly, honestly and in good faith as between both parties, and not arbitrarily, capriciously or unreasonably, taking into account all relevant matters and ignoring relevant matters.

The lenders applied for an order that the defence and counterclaims be struck out on the ground that they had no real chance of succeeding at trial. The recorder struck out the borrowers' pleadings and the borrowers appealed.

Dyson LJ gave the unanimous judgment of the Court of Appeal. His Lordship said that the recorder had relied on Lombard Tricity Finance Ltd v. Paton (1989) 1 All ER 918 in deciding that the implied term had no prospect of success. However, his lordship could not accept that the power given to the lender in the loan agreement to set interest rates from time to time was completely unfettered, even taking into account commercial and market considerations. The fact that the Director General of Fair Trading exercised regulatory powers over lenders and had the power under s.32 of the 1974 Act to withdraw licences from those who provide credit to consumers, was insufficient to deny the implied term. The power only existed because lenders could act unfairly and improperly. Nor was it sufficient that borrowers could redeem their mortgages and seek loans elsewhere if the lender set rates capriciously. Thus their lordships held that the lender's power to vary interest rates during the mortgage term was subject to an implied term that it was not exercised for an improper purpose, dishonestly, capriciously, arbitrarily or so unreasonably that no reasonable lender would have acted in that way.

However, there was no breach of the implied term despite the fact that the gap between the interest rates charged by Paragon and those charged by the Halifax had widened from 2 per cent to 4 per cent or 5 per cent from 1995. The reason for this was that the lender was in serious financial difficulty because many borrowers had defaulted. The money markets, therefore, charged higher rates to the lender because the risk was perceived to be higher and those costs were simply passed on to the borrowers. Thus it was impossible to say that the power to vary interest rates had been exercised capriciously, unreasonably or for an improper purpose.

Subsequent changes in interest rates were irrelevant in deciding whether the credit bargain was extortionate because these were excluded from the calculation of the total charge for credit and were, therefore, excluded from being part of the credit bargain in s.137(2)(b) of the Consumer Credit Act 1974. Further, the allegation that the rates of interest were grossly exorbitant within s.138(1)(a) had no real prospect of success, only facts existing at the time of the bargain were to be taken into account in determining whether the bargain was exorbitant.

The borrowers were also unable to establish a breach of s.3(2)(b) of the Unfair Contract Terms Act 1977 by arguing that the lenders had defeated their reasonable expectations because the setting of interest rates by lenders was not "contractual performance" within that section of the Act.

Their lordships concluded that the 1974 Act only provided consumers with limited protection from the working of the free market and the court would only be prepared to intervene where a bargain was grossly unfair either because the payments required to be made were grossly exorbitant or grossly contravened ordinary principles of fair dealing. Nothing less would do.