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.

Held

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.