COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
(Mr Recorder Havelock-Allan QC)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE DYSON
MR. JUSTICE ASTILL
| (1) GEOFFREY NASH
(2) JENNIFER VALERIE NASH
(1) WILLIAM STAUNTON
(2) MARY STAUNTON
|PARAGON FINANCE PLC (formerly The National Home Loans Corporation)
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Nash in person.
Mr D. Falkowski (instructed by Joseph Aaron & Co) for Mr and Mrs Staunton.
Mr A. Malek QC and Mr P. Wulwik (instructed by Wragge and Co) for the Respondents in both appeals
Crown Copyright ©
Lord Justice Dyson:
The Claimant's standard Conditions
Interest will be charged from the date on which the loan is completed. The rate current at the date of this Offer of Loan is as specified in the Offer of Loan. If the rate of interest should change before the Loan is completed, the Company may give the Applicant notice of the change by any method permitted under the Company's Mortgage Conditions for the giving of notice of such change to existing Borrowers…"
7. MONTHLY PAYMENTS
The Monthly Payment specified in the Offer of Loan is calculated on the applicable rate of interest current at the date of this offer… However, the rate of interest may change before (as well as after) the loan is completed and other factors such as insurance premiums or tax rates may affect the amount of the Monthly Payment."
1.5 "Interest" means interest at the rate applicable to the Mortgage from time to time.
1.12 "Payment" means the monthly payment notified to the Borrower as constituting the Payment for the time being by notice given by the Company whether by any offer of loan or revision thereof prior to or at the time of the Mortgage or under these Conditions thereafter.
2.1 The Borrower covenants that he will pay to the Company
2.1.2 The Payment …
2.2 The Payment may be calculated so as to include all or any part of capital, interest and such costs, expenses, liabilities and moneys recoverable or payable and premiums, sums expended and costs and expenses incurred as aforesaid and may be varied to take account from time to time of any increase or decrease in any of the same or any change in the rate or incidence of any tax.
3.3 Interest shall be charged at such rate as the Company shall from time to time apply to the category of business to which the Company shall consider the Mortgage belongs and may accordingly be increased or decreased by the Company at any time and with effect from such date or dates as the Company shall determine provided that the Company will take such steps as it considers to be reasonable and appropriate to bring any such increase or decrease to the attention of the Borrower and further provided that without prejudice to the generality of the foregoing either written notice given in accordance with the provisions in that behalf hereinafter contained or publication of such notice in at least two national daily newspapers shall constitute reasonable and appropriate notice for the purposes of this clause.
7. COMPANY'S REMEDIES
7.3 If the Borrower
7.3.1 is in default of the payment of any two Payments in whole or in part or for two Months in the payment of any sums …
then in any such case all moneys secured by the Mortgage including Interest shall become immediately due and payable and all mortgagees' powers by statute as hereby applied shall immediately become exercisable by the Company and the Company may at any time thereafter and without previous notice to the Borrower and without the Borrower's agreement exercise all or any of such powers."
"8. INTEREST AND MONTHLY PAYMENTS
8.1 The rate of interest applicable to the Loan and the monthly payment will be as specified in the Offer of Loan as varied from time to time in accordance with the applicable Mortgage Condition indicated in the Offer of Loan."
The Consumer Credit Act 1974
"Extortionate credit bargains
137.- (1) If the court finds a credit bargain extortionate it may re-open the credit agreement so as to do justice between the parties.(2) In this section and sections 138-140, -(a) "credit agreement" means any agreement between an individual ("the debtor") and any other person ("the creditor") by which the creditor provides the debtor with credit of any amount, and
(b) "credit bargain" –(i) where no transaction other than the credit agreement is to be taken into account in computing the total charge for credit, means the credit agreement, or
(ii) where one or more other transactions are to be so taken into account, means the credit agreement and those other transactions, taken together.When bargains are extortionate
138.- (1) A credit bargain is extortionate if it –(a) requires the debtor or a relative of his to make payments (whether unconditionally, or on certain contingencies) which are grossly exorbitant,
(b) otherwise grossly contravenes ordinary principles of fair trading.
(2) In determining whether a credit bargain is extortionate, regard shall be had to such evidence as is adduced concerning –(a) interest rates prevailing at the time it was made,(3) Factors applicable under subsection (2) in relation to the debtor include –
(b) the factors mentioned in subsections (3) to (5), and
(c) any other relevant considerations.(a) his age, experience, business capacity and state of health; and(4) Factors applicable under subsection (2) in relation to the creditor include –
(b) the degree to which, at the time of making the credit bargain, he was under financial pressure, and the nature of that pressure.a) the degree of risk accepted by him, having regard to the value of any security provided;
(b) his relationship to the debtor;(c) whether or not a colourable cash price was quoted for any goods or services included in the credit bargain.
Reopening of extortionate agreements
139.- (1) A credit agreement may, if the court thinks just, be reopened on the ground that the credit bargain is extortionate –(a) on an application for the purpose made by the debtor or any surety to the High Court, county court or sheriff court; or
(b) at the instance of the debtor or a surety in any proceedings to which the debtor and creditor are parties, being proceedings to enforce the credit agreement, any security relating to it, or any linked transaction; or
(c) at the instance of the debtor or a surety in other proceedings in any court where the amount paid or payable under the credit agreement is relevant.
(2) In reopening the agreement, the court may, for the purpose of relieving the debtor or a surety from payment of any sum in excess of that fairly due and reasonable, by order –(a) direct accounts to be taken … between any persons;
(b) set aside the whole or part of any obligation imposed on the debtor or a surety by the credit bargain or any related agreement,
(c) require the creditor to repay the whole or part of any sum paid under the credit bargain or any related agreement by the debtor or a surety, whether paid to the creditor or any other person.
(d) direct the return to the surety of any property provided for the purposes of the security, or
(e) alter the terms of the credit agreement or any security instrument…."
Mr and Mrs Nash
Mr and Mrs Nash and Mr and Mrs Staunton
(ii) Was there an implied term that, in exercising its discretion to vary interest rates, the Claimant was bound to make its judgment fairly, honestly and in good faith, and not arbitrarily, capriciously or unreasonably?
(iii) If there was such an implied term, was the Claimant in breach of it?
(iv) Was the loan agreement an extortionate credit bargain within the meaning of section 138 of the 1974 Act?
(v) Is the counterclaim for relief under section 139 of the 1974 Act time-barred by the Limitation Act 1980?
(vi) Is the claimant's reliance on discretion to vary interest rates contrary to section 3(2)(b)(i) of the Unfair Contracts Terms Act 1977?
Mr and Mrs Staunton
(vii) Did the credit bargain grossly contravene ordinary principles of fair dealing (and was the credit bargain therefore extortionate within the meaning of section 138(1)(b) of the 1974 Act) on the grounds that the Claimant did not sufficiently explain the effect of the Stabilised Rate Facility?
Breach of the express term in clause 3.3 of the General Conditions (1986 edition) applicable to the Nash mortgage
"the Claimants applied different rates of interest to the Defendants' loan from those which were applied to later borrowers falling within the same category of business as did the Defendants, without having any or any sufficient grounds for discriminating in this way against the Defendants".
"It was an (or a further) implied term of the contract, to be implied into the clause conferring the discretion to vary interest rates referred to at paragraph 3 above being an obvious qualification or to give business efficacy to or to give effect to the reasonable expectation of the parties that that discretion was a discretion which the Claimants were bound to exercise fairly honestly and in good faith as between both parties to the contract, and not arbitrarily, capriciously or unreasonably; and that in making a decision or decisions under the said power the Claimants would give proper consideration to the matter, taking into account all relevant matters and ignoring irrelevant matters."
Was there an implied term in the terms pleaded?
"On two potential issues there has been no dispute before us. The first is whether the contract does, as a matter of construction, provide that Lombard may vary the interest rate in their absolute discretion, subject only to due notice. The second, whether such a contract, if made, is lawful. Counsel for Mr Paton concedes that the answer is Yes to both questions. But as the case is of some general importance, and as his concessions mean that he is, to some extent at any rate, unable to support the reasoning of Judge Heald in the county court, we think it right to explain why in our view they were rightly made.
In general it is no doubt unusual for a contract to provide that its terms may be varied unilaterally by one party, in his absolute discretion, to the detriment of the other; in general one would require clear words to achieve that result. But in this particular case it is, we think, part of the background, matrix or surrounding circumstances that market rates of interest are known to vary from time to time and that some variation was very likely to occur during the lifetime of the agreement. There is also provision that the borrower may bring it to an end at any time by repaying the amount outstanding. In theory he could thus avoid the effect of an increase in the interest rate, if he found it unattractive. But we recognise that in practice this remedy is unlikely to be available, since he is unlikely to have the money, or to be able to borrow it from some other lender at less than the prevailing market rate.
Counsel for Lombard observed that the provision of credit is a competitive industry, and that the effect of competition is likely to restrain Lombard from a capricious increase in their interest rate. That is no doubt true if they increase rates by the same amount and at the same time for both new and old borrowers, as he tells us they do. Indeed if a provider of credit capriciously treated old borrowers unfavourably, one would hope that the Director General of Fair Trading would consider whether he should still have a licence under the 1974 Act. It was also suggested that the provisions of the Act relating to extortionate credit bargains might provide protection for the borrower. But counsel for Mr Paton suggested that ss137 and 138 may apply only to the original credit agreement, and not to how it is subsequently operated. It is unnecessary to express any view on that point.
Bearing all these considerations in mind, we consider that on a fair reading of the agreement it does provide, as counsel for Mr Paton accepts, that Lombard may increase the interest rate at their absolute discretion subject only to notice. A power to vary the rate is conferred in plain terms, there is no other express restriction on it and we can see no sufficient basis for any implied restriction."
"126. These points were well made by Mr Falkowski: but I do not consider that they are sufficient to justify placing the Lombard decision on one side. The fact is that most of the matters to which the Court of Appeal had regard as being "factual matrix" in Lombard apply equally here. The residential mortgage market is highly competitive. Not only do rates vary up and down during the currency of a mortgage loan but the competition between lenders and the variety of risk means that rates may not all vary at the same time or by the same amount. I recognise that it is not easy for a borrower with negative equity in his property to switch mortgage lender and re-mortgage elsewhere: but if negative equity is not a problem it is quite possible for a borrower to move from one lender to another. There is mobility in the residential mortgage market, and has been for the best part of the last decade. On the evidence I have seen, I am unable to find that either Mr and Mrs Nash or Mr and Mrs Staunton were at any time "locked in" to their Loan Agreements with the Claimant by reason of negative equity. Certainly they have no problem of negative equity now and are most unlikely to have done in the past 5 years. Furthermore, as I have already noted, neither Loan Agreement appears to have contained any early redemption penalty after the first two years. It therefore seems to me that the only factor which could have seriously inhibited the Defendants' ability to re-mortgage elsewhere was their personal creditworthiness. The problem is that this factor is precisely the factor which may justify an enhanced rate of interest being charged by the lender, when compared with market rates generally."
"…..Where A and B contract with each other to confer a discretion on A, that does not render B subject to A's uninhibited whim. In my judgment, the authorities show that not only must the discretion be exercised honestly and in good faith, but, having regard to the provisions of the contract by which it is conferred, it must not be exercised arbitrarily, capriciously or unreasonably".
"I would therefore accept as a general qualification that any witholding of approval by reinsurers should take place in good faith after consideration of and on the basis of the facts giving rise to the particular claim and not with reference to considerations wholly extraneous to the subject-matter of the particular reinsurance."
"If there is any further implication, it is along the lines that the reinsurer will not withold approval arbitrarily, or (to use what I see as no more than an expanded expression of the same concept) will not do so in circumstances so extreme that no reasonable company in its position could possibly withold approval. This will not ordinarily add materially to the requirement that the reinsurer should form a genuine view as to the appropriateness of settlement or compromise without taking into account considerations extraneous to the subject-matter of the reinsurance."
Should the Recorder have granted permission to amend?
"(i) whether the Claimants' witness and the Defendants' witnesses are comparing like with like when they are comparing rates of interest, and what the correct comparisons should be, (ii) the suggestion, implicit in the Defendants' criticism of the Claimants' failure to reduce rates in line with the market, that the reason why the Claimant's rates were kept high had nothing to do with the lending risk and everything to do with NHL's financial difficulties, and (iii) the statement made by Mr Rosenberg that the rate of interest charged by Paragon to new lenders is lower than that charged to customers of NHL, such as Mr and Mrs Nash and Mr and Mrs Staunton. If the difference is not explicable in terms of risk, there is at least room for an argument (I say no more) that the Claimant is not treating all of its customers fairly (see Staughton LJ in the Lombard case, quoted in paragraph 61 above.)"
Extortionate credit bargain?
Can variations in rates of interest be taken into account at all?
"(1) Any calculation under these Regulations shall be made on the
(d) in the case of a transaction which provides for variation of the rate or amount of any item included in the total charge for credit in consequence of the occurrence after the relevant date of any event, the assumption that the event will not occur; and, in this sub-paragraph, 'event' means an act or omission of the debtor or of the creditor or any other event (including where the transaction makes provision for variation upon the continuation of any circumstance, the continuation of that circumstance) but does not include an event which is certain to occur and of which the date of occurrence, or the earliest date of occurrence, can be ascertained at the date of the making of the agreement."
"3. Total charge for credit. For the purposes of the Act, the total charge for the credit which may be provided under an actual or prospective agreement shall be the total of the amounts determined as at the date of the making of the agreement of such of the charges specified in regulation 4 below as apply in relation to the agreement but excluding the amount of the charges specified in regulation 5 below."
"4. Items included in total charge for credit. (1) Except as provided in regulation 5 below, the amounts of the following charges are included in the total charge for credit in relation to an agreement:
(a) the total of the interest on the credit which may be provided under the agreement; .."
"The time as at which the bargain is to be tested. The question is whether the credit bargain is extortionate, not whether it has become unprofitable through a drop in the level of interest rates, nor whether the creditor has acted unconscionably in enforcing it. The Court has adequate powers to grant relief to the debtor from the consequences of unconscionable enforcement. Whether the credit bargain is extortionate has to be determined as at the date of the credit agreement, not in the light of subsequent events."
"Is extortionate. The time at which the factors listed in the section are to be applied is the time of the agreement. This is explicit in sub-ss (2)(a) and (3)(b), and it would be neither sensible nor a natural reading of the language of the section to construe the remaining provisions otherwise".
In this passage, Professor Goode does not cite the two earlier authorities and bases his view on the language of section 138 alone.
"(1) The Secretary of State shall make regulations containing such provisions as appear to him appropriate for determining the true cost to the debtor of the credit provided or to be provided under an actual or prospective consumer credit agreement (the "total charge for credit"), and regulations so made shall prescribe –
(a) what items are to be treated as entering into the total charge for credit, and how their amount is to be ascertained;
(b) the method of calculating the rate of the total charge for credit."
"Nevertheless, it seems clear that the concepts of extortion and unconscionability are very similar. 'Extortionate', like 'harsh and unconscionable', signifies not merely that the terms of the bargain are stiff, or even unreasonable, but that they are so unfair as to be oppressive. This carries with it the notion of morally reprehensible conduct on the part of the creditor in taking grossly unfair advantage of the debtor's circumstances. This element of moral culpability, in the form of abuse of power or bargaining position, is well brought out in the judgment of Sir John Donaldson MR in Wills v Wood  CCLR 7:
'It is, of course, clear that the Consumer credit Act 1974 gives and is intended to give the widest possible control over credit bargains which, for a variety of reasons, might be considered "extortionate". But the word is "extortionate", not "unwise". The jurisdiction seems to me to contemplate at least a substantial imbalance in bargaining power of which one party has taken advantage'.".
Were the rates of interest grossly exorbitant?
The Limitation Issues
Section 3(2)(b)(i) of the Unfair Contract Terms Act 1977
"(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business.
(2) As against that party, the other cannot by reference to any contract term—
(b) claim to be entitled—
(i) to render a contractual performance substantially different from that which was reasonably expected of him, or
(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,
except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness"
"Nevertheless it seems unlikely that a contract term entitling one party to terminate the contract in the event of a material breach by the other (e.g. failure to pay by the due date) would fall within paragraph (b), or, if it did so, would be adjudged not to satisfy the requirement of reasonableness. Nor, it is submitted, would that provision extend to a contract term which entitled one party, not to alter the performance expected of himself, but to alter the performance required of the other party (e.g. a term by which a seller of goods is entitled to increase the price payable by the buyer to the price ruling at the date of delivery, or a term by which a person advancing a loan is entitled to vary the interest payable by the borrower on the loan)."
Mr and Mrs Staunton: the Stabilised Rate Facility
"The Company's obligation to credit any Monthly Credit shall cease if the amount of the next Monthly Credit when aggregated with Monthly Credits previously paid and amounts of Interest capitalised or accrued in accordance with Condition 5 would equal or be greater than the Maximum Deferred Interest shown on the Offer of Loan."
Mr Justice Astill:
Lord Justice Thorpe:
I also agree.