Paragon Finance plc v Nash and another
Paragon Finance plc v Staunton and another
Court of Appeal 15 October 2001 [2001] EWCA CIV 1466

Mr & Mrs Nash took out a £45,000 loan from National Home Loans Corporation plc in 1987. Their annual flat rate was stated to be 12.75% variable. They fell into arrears and, in May 1999 when the default was over £5,000, Paragon Finance, as National Home Loans had now become, began proceedings for possession of their home.

Mr & Mrs Staunton took out a £70,145 loan from the same lender in 1990. Their rate was 10.49% variable. The also had a Stabilised Rate Facility, which allowed the debtors to cap their payments if the charge rate exceeded the cap; and any consequent underpayment would be added to the capital outstanding. This capped capital increase was limited to £10,500 and their loan offer showed the maximum approved loan available to them as £80,645 (the sum of the two amounts). Mr & Mrs Staunton made the required payments of £548.13 on time until 1998 when the payments almost doubled, to £928.75, presumably because the maximum cap had been exceeded so the Stabilised Rate Facility had ended. They were unable to keep to these higher payments and fell into arrears. In June 1999 when they were £6,700 in default, Paragon Finance began proceedings for possession of their home.

The debtors defended the actions, their main basis being that the failure of the lender to vary the rates charged on their accounts when other lenders’ rates had been considerably reduced over the same period made the agreements extortionate.

Mr & Mrs Nash argued that, because the rate had been lower for Mr & Mrs Staunton than for them, this showed that the earlier rate should have been lowered by 1990. Mr  & Mrs Staunton argued, that because they had been given no warning of the end of the cap, it had been unreasonable for them to be put into the position of having to increase their payments by so much.

The court decided that there was an implied term in credit agreements, that a lender should not set its rates dishonestly, for an improper purpose, capriciously or dishonestly. But, in these cases, that could not be said to be the case. Although Paragon had increased the gap between its rates and the Halifax Building Society from 2 percentage points in 1992 to over 5 points in March 1999, evidence had been given in the lower courts that Paragon was in financial difficulties of its own, because it had an unexpectedly high proportion of customers in default, and it was facing more expensive borrowings on the money markets. Paragon did not have to consider only its debtors in assessing the rates to charge.

Even if they were setting higher rates than other lenders, that would not make them extortionate, because the Act required rates to be “grossly exorbitant” from the start of the agreement, so only the initial rate would be relevant. It would be up to the Office of Fair Trading to consider any unfair trading practices thereafter.

The court discounted totally the other claim of Mr & Mrs Nash – the company had shown that the two couples were on different schemes, coming from different risk bands. The court considered that the Stauntons’ capping arrangement was clear enough that they could not argue that its effects were unfair.

For full report of this case click here. It is a downloadable MS Word 2000 document.