Paragon Finance plc v Nash (Paragon Finance plc v Staunton)

A contractual discretion to vary a mortgage interest rate is not wholly unfettered. A term will ordinarily be implied that the lender will not exercise it dishonestly, for an improper purpose, capriciously, arbitrarily, or in a Wednesbury-type unreasonable manner. It does not require the lender to match competitors’ rates or prevent it from passing on commercially justified funding costs.

For the extortionate-credit-bargain regime in the Consumer Credit Act 1974, the bargain is assessed when it is made. Subsequent variable-rate changes excluded from the total charge for credit cannot make the original bargain extortionate. A rate that is merely high or unreasonable is insufficient; it must be grossly exorbitant or grossly unfair.

The lender brought possession proceedings against two sets of mortgagors who had fallen into arrears under variable-rate residential mortgages. The borrowers alleged that the lender had kept its rates substantially above market rates, and sought to reopen the agreements as extortionate credit bargains under the Consumer Credit Act 1974.

The Recorder in the Central London County Court struck out the defences and counterclaims on 4 September 2000 and refused proposed amendments. The borrowers appealed. The common issues included the implication and breach of limits on the lender’s rate-setting discretion, whether later rate changes could make the bargains extortionate, the application of the Unfair Contract Terms Act 1977, and the effect of the stabilised-rate facility in one mortgage.

1. Appeals dismissed. Dyson LJ gave the judgment, with Astill J and Thorpe LJ agreeing. The proposed defences and counterclaims had no real prospect of success.

2. A lender’s contractual discretion to set a variable interest rate was subject to an implied term. It could not be exercised dishonestly, for an improper purpose, capriciously or arbitrarily. It was also limited by unreasonableness in the narrow Wednesbury sense: no reasonable lender in the relevant position could have acted in that way. The court disapproved the contrary obiter view in Lombard Tricity Finance v Paton [1989] 1 AER 918.

3. The implied term did not require rates to track the Halifax or other market lenders. A lender could take account of its own increased funding costs and financial difficulties. On the evidence, the higher rates were attributable to commercial considerations, not an improper purpose or arbitrary conduct. The borrowers therefore could not establish breach of the implied term.

4. Under the Consumer Credit Act 1974, whether a credit bargain is extortionate is assessed by reference to the bargain when made. Later discretionary interest-rate variations were excluded from the statutory calculation of total charge for credit and could not be used to make the original bargain extortionate. In any event, the asserted disparity in rates was not capable of showing payments that were grossly exorbitant.

5. Fixing the interest rate did not constitute the lender’s contractual performance for section 3(2)(b)(i) of the Unfair Contract Terms Act 1977. It altered the borrowers’ required performance, not the lender’s provision of an agreed service. The stabilised-rate documentation was not misleading and did not contravene ordinary principles of fair dealing.

• Court of Appeal (Civil Division): dismissed the borrowers’ appeals in [2001] EWCA Civ 1466.
• Central London County Court: the Recorder struck out the borrowers’ defences and counterclaims and refused permission to make the proposed amendments.