Paragon Finance plc v Nash
A lender's discretion to vary the interest rate on a mortgage is subject to an implied term that it will not be exercised dishonestly, for an improper purpose, capriciously, arbitrarily or in a way no reasonable lender would.
Facts
Mr and Mrs Nash borrowed money from Paragon, secured by mortgages, at variable interest rates which Paragon could vary at its discretion. When interest rates in the market fell, Paragon did not reduce its rates, because it had financial difficulties and was seeking to protect its own position. When the borrowers fell into arrears, Paragon sought possession. The borrowers argued that Paragon had breached an implied term about the setting of interest rates, and that the agreement was an extortionate credit bargain.
Legal principle
The Court of Appeal held that there was an implied term that the lender would not set interest rates dishonestly, for an improper purpose, capriciously or arbitrarily, or in a way in which no reasonable lender, acting reasonably, would do. However, the term did not prevent the lender from setting rates by reference to its own commercial interests, including its financial difficulties. Dyson LJ said that Paragon had not breached the term, and the agreements were not extortionate credit bargains. The case is the leading authority on the limits of contractual discretion in lending.
Related cases on lending, guarantees and security
- Agnew v Commissioner of Inland Revenue (Re Brumark Investments Ltd) [2001] UKPC 28, [2001] 2 AC 710
- Barclays Bank plc v O'Brien [1994] 1 AC 180
- Re Charge Card Services Ltd [1987] Ch 401
- Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2009] UKPC 19
- Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159
- Holme v Brunskill (1878) 3 QBD 495
- Kleinwort Benson Ltd v Malaysia Mining Corp Bhd [1989] 1 WLR 379
- Moschi v Lep Air Services Ltd [1973] AC 331
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