Case No: B2/2001/0456 CCRT1
B2/2001/0524 CCRT1
Neutral Citation No: [2001] EWCA Civ 1466
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CENTRAL LONDON COUNTY COURT
(Mr Recorder Havelock-Allan QC)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 15th October 2001
B e f o r e :
LORD JUSTICE THORPE
LORD JUSTICE DYSON
and 
MR. JUSTICE ASTILL
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	(1) GEOFFREY NASH
(2) JENNIFER VALERIE NASH
and
(1) WILLIAM STAUNTON
(2) MARY STAUNTON	Appellants	
	-v-		
	PARAGON FINANCE PLC (formerly The National Home Loans Corporation)	Respondent	

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(Transcript of the Handed Down Judgment of
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)
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Mr E. Bannister QC and Mr D. Broatch (instructed by Joseph Aaron & Co for Mrs Nash)
 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
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Judgment
Lord Justice Dyson: 
Introduction
1.	These appeals raise a number of points of general importance in relation to sections 137-139 of the Consumer Credit Act 1974 (“the 1974 Act”). Paragon Finance PLC (“the Claimant”) claims possession as mortgagee from Mr and Mrs Nash in the first action and from Mr and Mrs Staunton in the second action on the grounds that they are in arrears with their mortgage interest repayments. Both mortgages contain variable interest clauses. The mortgagors admit the arrears of interest, but assert that, by reason of the rates of interest that they were required to pay, the loan agreements are extortionate credit bargains within the meaning of section 138 of the 1974 Act. No complaint is made that the loan agreements were extortionate credit bargains at the outset. The mortgagors say, however, that the loan agreements became extortionate at a later date when, by reason of the Claimant’s failure to adjust the charging rates in line with Bank of England or prevailing market rates, the interest payable so far exceeded those rates as to be exorbitant. By their counterclaims, the mortgagors seek orders that the loan agreements be reopened under section 139 of the 1974 Act. The Claimant applied for an order that the defence and counterclaims be struck out on the grounds that they had no real prospects of succeeding at trial. In a careful and comprehensive judgment handed down on 4 September 2000, Mr Recorder Havelock-Allan QC struck out the mortgagors’ pleadings in both actions, and refused applications for permission to amend to which I shall come in due course. The mortgagors appeal against the Recorder’s decisions. Before I identify the issues that have been raised in these appeals, I need to set out the relevant facts. 
The facts
2.	Until April 1997, the Claimant was called “The National Home Loans Corporation PLC”. It first entered the mortgage market in the mid-1970s. The attraction of the Claimant to would-be borrowers was that it was willing to make self-certification loans, ie loans to borrowers who vouched for their income. The company was badly affected by rising interest rates in the late 1980s, and got into serious financial difficulties. It was forced to withdraw from further lending in 1991. It was re-financed by a consortium of banks in 1992, and re-entered the market in 1994 via a new subsidiary company, Home Loans Direct Ltd, which in 1997 changed its name to Paragon Mortgages Ltd (“Paragon”). At the heart of both actions is the complaint that the Claimant has consistently charged interest rates which are significantly higher than those of other mortgage lenders, and has done so in order to cover the cost of its refinancing or to retrieve its financial position. 

3.	Mr and Mrs Nash live at 75 Clifton Road, South Norwood, London SE25. On 5 February 1987, they received an Offer of Loan from the Claimant in a sum of £45,000 by way of re-mortgage of their property. The Offer specified that the loan was to be for 25 years. The capital was to be secured by an endowment policy. The interest was to be payable monthly at a variable rate. The starting rate was stated to be 12.75%. The Offer of Loan incorporated certain Special Conditions as well as the printed General Conditions of the Claimant then current. These latter incorporated the Claimant’s  Mortgage Conditions (1986 edition). 

4.	On 30 March 1987, Mr and Mrs Nash entered into a Loan Agreement on the terms of the Offer and the loan was secured by a Legal Charge on their property. They paid the interest as required. In December 1992, they surrendered the endowment policy. They paid the surrender value to the Claimant, and converted the loan to a repayment basis, so that each monthly payment covered both interest and capital. Their financial circumstances took a turn for the worse, and they fell into arrears. By March 1999, the arrears exceeded £5000. The Claimant started proceedings on 5 May 1999.

5.	Mr and Mrs Staunton live at 12 Valentines Road, Ilford, Essex. The Claimant made an Offer of Loan to them on 11 October 1990. The proposed loan was for £70,145 for a period of 25 years, with interest payable monthly at a variable rate, and repayment of capital secured by an endowment policy. The Offer also included a fee for incorporating into the Loan Agreement the provisions of the Claimant’s Stabilised Rate Facility. By this Facility, the borrower was able to cap the amount of interest payable each month. Payment of interest at the variable rate (“the charging rate”) in excess of the cap (“the stabilised rate”) would be deferred by converting the excess into part of the capital amount of the loan. When in any month, the charging rate exceeded the stabilised rate, the difference would be credited to the borrower’s mortgage account as a “monthly credit” up to a maximum figure specified in the Offer of Loan. In the case of Mr and Mrs Staunton, this figure (“the maximum deferred interest to be capitalised”) was £10,500. The Offer of Loan made to them described the maximum approved loan as being £80,645 (£70,145 plus 10,500), and provided that the stabilised rate of interest was to be 10.49%.

6.	On 21 December 1990, Mr and Mrs Staunton entered into a Loan Agreement on the terms of the Offer of Loan from the Claimant, including the Stabilised Rate Facility. The loan was secured by a legal charge on the property. The Loan Agreement incorporated a set of printed General conditions and the Claimant’s Mortgage Conditions (1990 edition). In September 1996, they repaid some capital, and thereafter the repayments included both interest and capital. Mr and Mrs Staunton discharged all their interest liabilities under the Loan Agreement until August 1998, when, the monthly instalments due increased from £548.13 to £928.75. The Recorder said that there was no evidence as to the reason for this sudden jump, but he inferred that it was due, at least in part, to the fact that the maximum deferred interest had been exceeded, so that the Stabilised Rate Period had come to an end. Mr and Mrs Staunton fell into arrears. The Claimant started proceedings on 15 June 1999 asserting that by now the arrears amounted to approximately £6700. 

The Claimant’s standard Conditions
7.	         “General Conditions (1986) edition
“6. INTEREST
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.”

8.		Mortgage Conditions (1986 edition)
	           “1. DEFINITIONS
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. PAYMENTS
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. INTEREST
	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.”

9.		General Conditions (1990 edition)
		“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
10.	The principal conditions with which these appeals are concerned are contained in    sections 137-139, which provide:
		“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,
	or
	(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,
	 (b) the factors mentioned in subsections (3) to (5), and
	 (c) any other relevant considerations.
(3) Factors applicable under subsection (2) in relation to the debtor include –
		(a) his age, experience, business capacity and state of health; and
	(b) the degree to which, at the time of making the credit bargain, he was under financial pressure, and the nature of that pressure.
(4) Factors applicable under subsection (2) in relation to the creditor include –
(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….”
The issues
Mr and Mrs Nash
11.	 (i) Was there a breach of the express term contained in clause 3.3 of the General Conditions (1986 edition)?
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?
12.	Both appeals concern applications to strike out under CPR Rule 3.4 and under the inherent jurisdiction of the court. The grounds relied on by the Claimant are that the amended defences and counterclaims disclose no reasonable grounds of defence or are an abuse of the process of the court. The Recorder adopted the test of asking in each case whether the defence and counterclaim had any real prospect of success. It is common ground that the Recorder adopted the correct test.
Breach of the express term in clause 3.3 of the General Conditions (1986 edition) applicable to the Nash mortgage
13.	This is a new point not taken in the court below. The proposed substitute amended defence and counterclaim alleges that there was a breach of clause 3.3 in that:
	“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”.
14.	The particulars relied on are contained in two schedules to the draft pleading. The first is a schedule of interest rates from 1 March 1986 to 1 April 1998: it compares the Claimant’s “standard” mortgage interest rates on house purchase and remortgage (payable by mortgagors such as Mr and Mrs Nash) with its “Blue Chip” remortgage interest rates. This shows that from 1986 until early 1997, the “standard” rates were about 2-3% higher than the Blue Chip rates. In 1997 and 1998, the differential rose to about 4%. The second schedule is Table 3 in the expert’s report of Mr R Rosenberg dated 14 April 2000. Mr Rosenberg was the expert instructed on behalf of Mr and Mrs Nash in these proceedings. This table compares the rates of interest payable between April 1997 and May 1999 (a) by borrowers (such as the appellants) who took out mortgages with the Claimant in the late 1980s and early 1990s with (b) later borrowers who obtained mortgages from Paragon from the mid-1990s and who have benefited from the highly competitive rates then being offered by Paragon. This table shows a differential of a little above 4%. Mr Bannister QC submits that the relevant “category of business” within the meaning of clause 3.3 is “first legal charges over residential property”.
15.	In answer to this new case, Mr Ali Malek QC makes the following points. First, the pleading does not attempt to define the “category of business” to which Mr and Mrs Nash belong. Secondly, the first schedule does not show a breach. It compares two different products marketed by the Claimant, namely its standard loans and its “Blue Chip Home Loans”. The Claimant’s Blue Chip loans differed from its standard loans in that they were subject to different terms, and set a rate of interest based on LIBOR. Thirdly, as regards the table in Mr Rosenberg’s report, the position is that the business written by Paragon differed from that written by the Claimant: it was lower risk, and therefore not the same category of business with that of Mr and Mrs Nash. 
16.	I am in no doubt that there was no breach of clause 3.3 of the Nash loan agreement. The phrase “category of business” is not a term of art and it is not defined. The clause referred to the “category of business to which the Company shall consider the Mortgage belongs” (my emphasis). It is clear that the Claimant considered that its standard borrowers did not belong to the same category of business as its Blue Chip borrowers, or the subsequent Paragon borrowers. It is true that the evidence is somewhat exiguous. This may be because the allegation of breach of clause 3.3 was not made in the court below. It is also true that the evidence as to the circumstances in which the Claimant withdrew from the lending market in 1991, and re-emerged in 1994 are not explained in the witness statements before the court. But there is material in the documents that are before the court from which it is possible to say with some confidence what happened. By 1991, the Claimant was in financial trouble. One result of this was that the money markets were charging higher rates for lending to the Claimant because it was perceived as a greater risk than other mortgage lenders. Not surprisingly, these higher charges were passed on to borrowers (who were about 70,000 in number). The Claimant, therefore, decided to withdraw from the lending market. In 1994, it decided to re-enter the market through a different entity, Paragon. According to the Claimant’s chief executive, the plan was to “undertake relatively low risk business which will be suitable for securitisation”. 
17.	I cannot accept that clause 3.3 obliged the Claimant to charge the same rate of interest to all mortgagors who had borrowed money to secure first legal charges on residential property. And yet that is the effect of Mr Bannister’s submission. It is a submission which ignores the fact that the clause defines the category of business by reference to the opinion of the Claimant. But it also involves the proposition that the Claimant would have agreed to charge the same rate of interest to all borrowers who had granted first charges on residential property regardless of the other terms of the loan, the credit-rating of the borrower and matters of that kind. That is a most unlikely commercial arrangement which I would not impute to the Claimant without clear express words. For these reasons, I consider that the allegation of breach of clause 3.3 has no real prospect of success, and should not be permitted by way of amendment.
Implied term
18.	The amended defences and counterclaims that were before the Recorder both pleaded that the discretion given to the lender to vary the interest rate was subject to an implied term. Two alternative formulations were put forward in the pleadings, viz (a) the Claimant would determine the rate “in line with interest rates being charged from time to time by mortgage lenders within England and Wales to status borrowers”; or (b) “the interest rate would only vary in accordance with the changes in the interest rate of the Bank of England from time to time”. The Recorder rejected each of these formulations, saying that they stood no real prospect of success (paragraph 127). There is no appeal from that part of his judgment. 
19.	It was also pleaded that upon the true construction of the variation of rate clause, the Claimant was bound to exercise its discretion to vary the interest rate “fairly as between both parties to the contract, and not arbitrarily, capriciously or unreasonably”. The Recorder rejected this construction of the contract, but said (paragraph 121) that his decision would be different if the defendants had sought to achieve the same result by way of an implied term. Encouraged by this remark, the defendants in both proceedings applied to the Recorder for permission to amend their defences and counterclaims. The implied term was formulated in accordance with the Recorder’s suggestion. Permission was, however, refused on the grounds that the pleadings gave insufficient particulars of breach. 
20.	All the appellants appeal against the Recorder’s refusal to grant permission to amend their defences to plead breach of an implied term. The implied term that it is sought to plead in the substitute amended pleadings is at paragraph 6 of the amended defences, and is in these terms: 
	“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.”
21.	The breaches are alleged at paragraph 7 of the proposed pleadings. It alleges that the Claimant has exercised its discretion in a manner which is unfair and/or arbitrary and/or unreasonable by increasing the appellants’ loan repayment interest rates and/or failing to decrease them (a) without reference to prevailing market rates, and/or (b) taking into account an irrelevant matter, namely its own financial difficulties. Particulars are then given comparing the Claimant’s rates with the standard rates from time to time of the Halifax Building Society, these being taken as representative of the prevailing market. 
22.	Mr Malek submits that the appellants would have no real prospect of establishing the implied term at a trial, and in any event the Recorder exercised his discretion correctly in refusing permission to amend the pleadings on the grounds that the alleged breaches were not sufficiently particularised. Mr Bannister QC and Mr Falkowski submit that (a) the term for which they contend is to be implied, or at least that it has not been shown that there would be no real prospect of establishing such an implied term at a trial, and (b) the Recorder should have granted permission to amend to plead the implied term and the allegations of breach of it.
Was there an implied term in the terms pleaded?
23.	The decision of this court in Lombard Tricity Finance v Paton [1989] 1 AER 918 has loomed large in the debate on this issue. In that case, the defendant borrower entered into a credit agreement with the plaintiff credit company to finance the purchase of a computer. The agreement provided that interest would be “subject to variations by the creditor from time to time on notification as required by law”. The borrower fell into arrears with his monthly payments. The lender started proceedings claiming the amount due. The judge dismissed the claim on the grounds that the agreement did not comply with the statutory requirements as to notification of variations in the rate of interest. The lender’s appeal was allowed by this court. Staughton LJ gave the judgment of the court. It was common ground that the lender could vary the interest rate in its absolute discretion. If the exercise of the discretion had been subject to some fetter, that would potentially have had a bearing on the issues raised on the appeal. No doubt aware of the wider significance of the concession, the court went to some trouble to explain why in its opinion the concession had been rightly made. At page 923A, the court said:
	“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.” 

24.	The Recorder relied on Lombard in arriving at his decision that the implied terms alleged in the amended defences that were before him when he delivered his judgment on the main issues had no real prospect of success. At paragraph 126 of his judgment, he said:

	“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."

25.	At paragraphs 127-130, he explained why he thought that an implied term such as that for which the defendants sought permission to amend at the hearing on 4 September 2000 had a real prospect of success. He relied in particular on Abu Dhabi National Tanker Co v Product Star Shipping Ltd (The Product Star) (No 2) [1993] 1 Lloyd’s Rep 397. That case concerned a charter party under which the Master and the Owners had a discretion in determining whether any port to which the vessel was ordered was dangerous. In the express terms of the charter, the discretion was unqualified. The question was whether any restriction on the exercise of the discretion was to be implied. In giving the leading judgment of the court, Leggatt LJ said (at page 404): 
	“…..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”.

26.	It will be seen at once that the formulation of the implied term for which the appellants now contend is closely based on this passage in the judgment of Leggatt LJ. The authorities to which Leggatt LJ was referring were charterparty cases. The Recorder said that in his view there was nothing special about charter contracts which sets them apart from other kinds of contract such as contracts of loan. As he put it: “a contract where one party truly found himself subject to the whim of the other would be a commercial and practical absurdity”. 

27.	Mr Bannister submits that Lombard is not authority against the implication of the term for which he contends. It was concerned with a question of construction. No argument had been addressed to the court on the question whether any term should be implied, and it is misconceived to treat the passage at page 923F as holding that as a matter of law a variation clause could not be subject to an implied term. In short, he submits that this passage is both obiter and wrong.

28.	Mr Malek submits that in a case such as this, a term will only be implied if the strict test of necessity has been satisfied: see, for example, per Lord Steyn in Equitable Life Assurance Society v Hyman [2000] 3 WLR 529, 539. He submits that this test is not satisfied in this case for a number of reasons. First, commercial considerations require a lender to behave sensibly when fixing interest rates. Market forces dictate that the interest rate must be competitive and comparable with other available interest rates, since if it is not, the borrowers will simply go elsewhere. Secondly, the regulatory framework is relevant. The Director General of Fair Trading has considerable regulatory powers, including the power to grant or withold licences under section 25 of the 1974 Act. Thirdly, neither the Nash nor the Staunton agreements prevented the borrowers from redeeming their mortgages and re-mortgaging elsewhere, although they did contain certain penalty provisions in the event of early redemption.

29.	Fourthly, Mr Malek submits that it is inherently unlikely that at the date of the making of a variable interest loan agreement, a lender would agree to restrict the rates to “reasonable” rates. There are problems of determining the yardstick by reference to which reasonableness is to be judged. There are different types of loans and mortgages suitable for different kinds of borrowers. Moreover, there are different types of lending institution ranging from high street banks and building societies to so-called “tertiary” or “non-status” lenders. The latter carry out the most limited checks of the proposed borrower’s financial circumstances, and they often deal with borrowers who have a poor credit rating. Mr Malek also makes the point that if the lender were precluded from demanding “unreasonable” interest rates, there would be endless disputes as to what was payable, and it is most unlikely that the lender would have agreed to a term which had that consequence.

30.	I cannot accept the submission of Mr Malek that the power given to the Claimant by these loan agreements to set the interest rates from time to time is completely unfettered. If that were so, it would mean that the Claimant would be completely free, in theory at least, to specify interest rates at the most exorbitant level. It is true that in the case of the Nash agreement, clause 3.3 provides that the rate charged is that which applies to the category of business to which the Claimant considers the mortgage belongs. That prevents the Claimant from treating the Nashes differently from other borrowers in the same category. But it does not protect borrowers in that category from being treated in a capricious manner, or, for example, being subjected to very high rates of interest in order to force them into arrears with a view to obtaining possession of their properties. 

31.	The Stauntons do not even have the limited protection that is afforded by clause 3.3 of the Nash agreement. In the absence of an implied term, there would be nothing to prevent the Claimant from raising the rate demanded of the Stauntons to exorbitant levels, or raising the rate to a level higher than that required of other similar borrowers for some improper purpose or capricious reason. An example of an improper purpose would be where the lender decided that the borrower was a nuisance (but had not been in breach of the terms of the agreement) and, wishing to get rid of him, raised the rate of interest to a level that it knew he could not afford to pay. An example of a capricious reason would be where the lender decided to raise the rate of interest because its manager did not like the colour of the borrower’s hair.

32.	It seems to me that the commercial considerations relied on by Mr Malek are not sufficient to exclude an implied term that the discretion to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously or arbitrarily. I shall come shortly to the question whether the discretion should also not be exercised unreasonably. But before doing so, I should explain in a little more detail why I would reject Mr Malek’s submission that there is no need for an implied term at all. 

33.	Of course I accept as a general proposition that a lender must have an eye to the market when it sets its rates of interest. To do otherwise is bound ultimately to lead to commercial disaster. But commercial considerations of that kind will not necessarily deter a lender from acting improperly in all situations. They may not deter a lender from unfair discrimination against an individual borrower. They may not even avail a class of borrowers. Take the present cases. The appellants borrowed from the Claimant which withdrew from the lending business in 1991. The rates of interest offered by Paragon are highly competitive. But the history of the interest rates demanded by the Claimant in the late 1990s demonstrates how limited the deterrent argument is. The proof of the pudding is in the eating. Between 1989 and 1992, the difference between the Claimant’s standard rate and the rate demanded by the Halifax Building Society was approximately 2 percentage points. By 1997, the gap was in excess of 4 points. In March 1999 it rose to 5.14, when the Claimant’s rate was 12.09% and the Halifax rate was 6.95%. 

34.	The argument based on the existence of the regulatory powers of the Director General of Fair Trading is in my view not sufficient to deny the implied term. I note that in Lombard, the court said that if a lender 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” (my emphasis). One would indeed have such a hope, but that does not seem to me to be a secure basis on which to decide that there is no need for an implied term that a lender will not exercise the discretion to set rates of interest capriciously. There are two strands to the argument that found favour with the court in Lombard: (a) it is implicitly accepted that the lender should not act capriciously; but (b) there is no need to impose an obligation on the lender not to act capriciously, because there is no realistic possibility that he will do so. I can see that there may be no need to impose such an obligation on a lender where it would be impossible for him to act in breach of it. But it is inter alia for the very reason that lenders can act unfairly and improperly that the Director General has the power to withdraw licences from those who provide credit to consumers. In my judgment, the existence of the Director General and the fact that he has certain regulatory powers is not a good reason for holding that the power to set rates of interest is absolutely unfettered.

35.	Finally, I must consider whether the fact that the borrowers can redeem their mortgages and seek loans from another source if the rates are set capriciously etc is a sufficient reason for acceding to Mr Malek’s argument. In my view, it is not. As with the last point, this is not so much an argument against the need to imply a term as an argument that it is unlikely to be broken because the lender will be aware that it is open to the borrower to go elsewhere. But it seems to me to be obvious that there may be circumstances in which the lender will act capriciously towards an individual borrower knowing that it might compel the borrower to redeem the mortgage and go elsewhere. Indeed, the lender may have decided to increase the rate of interest for that very reason. But why should the lender be able capriciously to compel the borrower to find another lender with impunity? The borrower may find it difficult to find another lender, especially if he has fallen into arrears with the first lender as a result of that lender’s interest rate policy. His employment status may have changed adversely since he entered into the first loan agreement. The process of re-mortgaging is costly. The new lender will probably require a survey. There will be lawyers’ fees. And there may be a penalty for early redemption. 

36.	It follows that I do not agree with the obiter dicta expressed by this court in Lombard  in the passage that I have cited. I would hold that there were terms to be implied in both agreements that the rates of interest would not be set dishonestly, for an improper purpose, capriciously or arbitrarily. I have no doubt that such an implied term is necessary in order to give effect to the reasonable expectations of the parties. I am equally in no doubt that such an implied term is one of which it could be said that “it goes without saying”. If asked at the time of the making of the agreements whether it accepted that the discretion to fix rates of interest could be exercised dishonestly, for an improper purpose, capriciously or arbitrarily, I have no doubt that the Claimant would have said “of course not”. 

37.	I come, therefore, to the question whether the implied term should also extend to “unreasonably”.  The first difficulty is to define what one means by “unreasonably”. Mr Bannister was at pains to emphasise that he was not saying that the rates of interest had to be reasonable rates in the sense of closely and consistently tracking LIBOR or the rates charged by the Halifax Building Society. He said that what he meant by the unreasonable exercise of the discretionary power to set the rate of interest was something very close to the capricious or arbitrary exercise of that power.

38.	As we have seen, in The Product Star, Leggatt LJ said that where A and B contract with each other to confer a discretion on A, the discretion must be exercised honestly and in good faith, and not “arbitrarily, capriciously or unreasonably”. In that case, the judge held the owner acted unreasonably in the sense that there was no material on which a reasonable owner could reasonably have exercised the discretion in the way that he did. Leggatt LJ (with whom the other two members of the court agreed) found that various factors called into question the owners’ good faith and strongly suggested that their decision was arbitrary. He also upheld the judge’s approach to the question of reasonableness. Thus the word “unreasonably” in the passage at page 404 must be understood in a sense analogous to unreasonably in the Wednesbury sense: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223.

39.	This question whether an apparently unfettered discretion is subject to an implied limitation that it must be exercised reasonably has been considered in other contexts. They were helpfully reviewed by Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] All ER (D) 33. That case concerned a reinsurance contract which contained a clause which provided that no settlement or compromise of a claim could be made or liability admitted by the insured without the prior approval of the reinsurers. One of the questions that arose was whether the right to withold approval was subject to any (and if so what) restriction. The judge held that the reinsurers could not withold approval unless there were reasonable grounds for doing so. Mance LJ (with whom Latham LJ agreed) decided that the right to withold consent was less restricted. Having reviewed a number of previous authorities, Mance LJ said (paragraph 64) that what was proscribed in all of them was “unreasonableness in the sense of conduct or a decision to which no reasonable person having the relevant discretion could have subscribed”. At paragraph 67, he said:
“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.”

40.	After a detailed consideration of what considerations could properly be take into account, he said at paragraph 73:
“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.”

41.	So here too, we find a somewhat reluctant extension of the implied term to include unreasonableness that is analogous to Wednesbury unreasonableness. I entirely accept that the scope of an implied term will depend on the circumstances of the particular contract. But I find the analogy of Gan Insurance and the cases considered in the judgment of Mance LJ helpful. It is one thing to imply a term that a lender will not exercise his discretion in a way that no reasonable lender, acting reasonably, would do. It is unlikely that a lender who was acting in that way would not also be acting either dishonestly, for an improper purpose, capriciously or arbitrarily. It is quite another matter to imply a term that the lender would not impose unreasonable rates. It could be said that as soon as the difference between the Claimant’s standard rates and the Halifax rates started to exceed about two percentage points, the Claimant was charging unreasonable rates. From the appellants’ point of view, that was undoubtedly true. But from the Claimant’s point of view, it charged these rates because it was commercially necessary, and therefore reasonable, for it to do so. 

42.	I conclude therefore that there was an implied term of both agreements that the Claimant would not set rates of interest unreasonably in the limited sense that I have described. Such an implied term is necessary in order to give effect to the reasonable expectations of the parties. 

Should the Recorder have granted permission to amend?

43.	The issue here is whether on the basis of the draft pleadings in their present form, the appellants have a real prospect of successfully establishing breaches of the implied term. Mr Bannister relies on paragraph 106 of the Recorder’s judgment. In that paragraph, the Recorder held “not without considerable hesitation” that there was a real prospect of success for the argument that the Claimant had contravened the “ordinary principles of fair dealing” in fixing its interest rates. At paragraph 131, he said “not without misgivings” that for much the same reasons as he had concluded at paragraph 106 that there was an arguable case that the credit bargains were extortionate that “if the correct implied term were to be pleaded, the allegation of breach is not so improbable that it stands no real prospect of success and it ought to be struck out”. The “correct implied term” was that to which I have referred at paragraphs 36 and 42 above. 

44.	What were the factors that led the Recorder to conclude at paragraph 106 that the allegation of breach of the “correct” implied term had a real prospect of success? They were:

	“(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.)”

45.	But at paragraph 7 of the draft pleading that is now relied on by the appellants, the breaches alleged are that the Claimant fixed the rates of interest (a) without reference to prevailing market rates, and/or (b) taking into account an irrelevant consideration, namely its own financial difficulties. The particulars of breach that are given are based on a comparison of the Claimant’s rates of interest and those of the Halifax, especially between 1995 and 2000, and a comparison of the Claimant’s rates and those of Paragon after April 1997. The rates charged by the Halifax are taken as the paradigm of “prevailing market rates”. 

46.	In my judgment, the mere fact that the rates charged were made “without reference to the prevailing rates” is not evidence from which it can be inferred that, in fixing them, the Claimant acted in breach of the implied term. It is not said by Mr Bannister that the rates set by the Claimant had to match those of the Halifax. As Mr Rosenberg points out in his report (paragraph 4.3.7), the Claimant was not regarded as a sub-prime lender; it was a centralised lender with no branch network; and relied on self-certification by borrowers. It was not in the same category of lenders as the Halifax. The real complaint is that the gap between the Claimant’s rates and those charged by the Halifax widened from 1995 onwards. It widened from about 2 percentage points to 4-5 points. One of the reasons for this according to counsel for the Claimant (if not the only reason) was that the Claimant was in serious financial difficulties because many of its borrowers had defaulted, the money markets charged higher rates for lending to the Claimant because it was perceived to be a greater risk than other mortgage lenders, and these higher costs had been passed on to borrowers. It is the fact that the Claimant took this into account in deciding at what level to fix its rates that forms the basis of the second way in which the case of breach of the implied term is put. In my view, if it was the case that the rates were increased because the Claimant was in financial difficulties for reasons of that kind, that would not be a breach of the implied term. If a lender is in financial difficulty, for example, because it is obliged to pay higher rates on interest to the money market, then it is likely to have to pass those increased costs on to its borrowers. If in such circumstances the rate of interest charged to a borrower is increased, it is impossible to say that the discretion to set the rate of interest is being exercised for an improper purpose, capriciously, arbitrarily or in a way in which no reasonable lender would reasonably do. 

47.	     On the material placed before this court, there is no evidence to suggest that the decision to widen the gap between the rates of interest charged by the Claimant to the appellants and the standard rates charged by the Halifax Building Society to its borrowers was motivated by other than purely commercial considerations. The Claimant is not a charitable institution. Its aim is to make a profit by lending money. It follows that if it encounters financial difficulties, it may feel obliged to raise the interest rates paid by its borrowers. In deciding whether to raise interest rates, it will have to make fine commercial judgments. But if it decides to take that course in order to overcome financial difficulties, it is not acting dishonestly, capriciously or in an arbitrary manner. It is not taking into account an irrelevant consideration. Nor is it acting in a way which is so unreasonable that it can be said of it that no reasonable lender would take that course if placed in that situation. 

48.	It follows that in my view, there is no real prospect that the appellants would be able to prove at trial that the Claimant acted in breach of the implied term in relation to either of these appellants. Accordingly, I would uphold the decision of the Recorder to refuse permission to amend.

Extortionate credit bargain?
Can variations in rates of interest be taken into account at all?

49.	In summary, the Recorder held as follows. The notice of interest rate increases or decreases could not fairly be described as “transactions” so as to form part of a “credit bargain” within the meaning of section 137(2) of the 1974 Act (paragraphs 38-39 of the judgment); nor were they relevant considerations within the meaning of section 138(2)(c) in assessing whether the credit bargain was one which, after its inception, became extortionate (paragraphs 40-64); so that the appellants’ causes of action (if any) accrued when they entered into the loan agreements (paragraph 64). 

50.	Mr Bannister accepts that the notices of changes in interest rates are not “transactions” so as to form part of a “credit bargain” within the meaning of section 137(2). But he submits that the question whether subsequent transactions are to be taken into account in determining whether a credit bargain is extortionate is a “red herring”. The only inquiry required by the 1974 Act is whether a credit bargain requires the borrower to make payments which are grossly exorbitant (section 138(1)(a)) or otherwise grossly contravenes ordinary principles of fair dealing (section 138(1)(b)). 

51.	As regards section 138(1)(a), the appellants are plainly required by the terms of the loan agreements and mortgages (ie the credit bargains) to pay interest at the rates that have been demanded. The agreements, therefore, fall within section 138(1)(a) unless the Claimant discharges the burden on it of showing that the payments so required to be made were not “grossly exorbitant”: see section 171(7) of the 1974 Act. 

52.	Mr Bannister submits that, quite apart from the burden of proof, there was ample evidence to support the view that the rates demanded of borrowers since the early to mid-1990s were grossly exorbitant. At paragraphs 106-107, the Recorder examined the evidence and concluded “not without considerable hesitation” that, if (contrary to his view) post-contract events were relevant, then he would not have struck out the appellants’ argument that the credit bargains were extortionate.

53.	Mr Malek submits that a variation in interest rates after a credit bargain is entered into does not come within sections 137-139 of the 1974 Act. The relevant inquiry should be limited to facts existing at the time of entering into the bargain. In support of this submission, Mr Malek makes the following points. First, if subsequent events were relevant to the question whether the credit bargain is extortionate, the issue would become unacceptably uncertain. Secondly, the language of sections 137-139 is all directed to the circumstances that exist at the date of the making of the credit bargain. The present tense is used in sections 137(1), 138(1) and 139(1). The time at which the factors listed in sections 138(2)-(5) are to be applied in determining whether a credit bargain is extortionate is the time of the making of the agreement. 

54.	Thirdly, section 189(1) of the 1974 Act provides that “total charge for credit” is defined as meaning a sum calculated in accordance with regulations under section 20(1). The relevant regulations are the Consumer Credit (Total Charge for Credit) Regulations 1980 SI 1980/51. Regulation 2 provides that:
 	“(1) Any calculation under these Regulations shall be made on the                
	 following assumptions:
	….	
	(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.”

55.	Regulation 3 provides: 
	“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.”

56.	Regulation 4(1) provides:
	“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; ..”

57.	It follows that, as the Recorder said at paragraphs 38 and 63 of his judgment, variations in the rate of interest charged in consequence of unpredictable future occurrences are to be excluded from the calculation of the total charge for credit and are excluded from being part of the credit bargain under the definition contained in section 137(2)(b). 

58.	The question whether a subsequent interest rate change may be relevant in determining whether a credit bargain is extortionate has been considered on a number of occasions in the county court, but never at any higher level. It is clearly a matter of very considerable importance, since credit bargains commonly provide that the rate of interest shall be at the discretion of the lender. In every case but one, the county court judge held that subsequent changes in interest rates are irrelevant to the question whether the credit bargain is extortionate. The exception is J&J Securities Ltd v Khan and Khan (18 August 1999), a decision of His Honour Judge Altman at Bradford County Court. 

59.	The point has been the subject of academic comment. Goode: Consumer Credit Law and Practice Volume 1 paragraph 47.27 says:

	“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.”

60.	Professor Goode cites two cases in support of this last sentence: Harris v Clarson [1910] 27 TLR 30 and Harrison v Gremlin Holdings Property Ltd [1962] NSWR 112. The first is a decision under the Moneylenders Act 1900, and the second a decision under the Moneylenders and Infants Loan Act 1941 of New South Wales. With respect to Professor Goode, like the Recorder, I do not derive any support from these decisions, based as they are on a consideration of different statutes which contain language that is significantly different from that of the 1974 Act.

61.	But in his commentary on section 138 of the 1974 Act in Volume 2, paragraph 5.268, Professor Goode says:

	“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.

62.	The Encyclopaedia of Consumer Credit Law (Guest and Lloyd), Volume 1, paragraph 2-139 states that “it is possible that under subs (2)(c) [of section 138] factors arising during the agreement may be relevant”. But a little later in the same paragraph the authors record that in Lombard the court of appeal left open the question whether ss 137 and 138 might apply to the unfair operation of a clause which empowered the creditor to vary the rate of interest unilaterally at his discretion, and state: “but it is submitted that, in principle, these sections apply only to the original credit bargain”.

63.	In my judgment, the Recorder was right to hold that the subsequent changes in rates of interest were irrelevant to the question whether the credit bargains were extortionate. The submission advanced by Mr Bannister is seductively simple. It is that the interest payments that the appellants were required to make were payments required to be made by the credit agreements. Accordingly, they were payments to which section 138(1) applies, and if they were grossly exorbitant, that would be sufficient to render the credit bargains extortionate. It is to be noted that Mr Bannister does not submit that changes in interest rates are capable of being “other relevant considerations” within the meaning of section 138(2)(c).

64.	But I cannot accept his argument. My principal reason is that variations in rates of interest are excluded from the calculation of the “total charge for credit” and therefore excluded from being part of the credit bargain.  Section 137(1) provides that a credit agreement may be reopened if the credit bargain is extortionate. Section 137(2)(b) defines “credit bargain” by reference to the transaction or transactions that are to be taken into account in computing the “total charge for credit”. It is not in dispute that the effect of section 20 of the 1974 Act and the Credit (Total Charge for Credit) Regulations 1980 is that (with exceptions that are immaterial for present purposes) subsequent variations of the rate of interest are not taken into account in determining the total charge for credit. This is the clear effect of Regulations 2(1)(d), 3 and 4 of the 1980 Regulations and section 20(1) of the 1974 Act which provides:

	“(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.”

65.	Thus the purpose of the 1980 Regulations is to determine the “true cost to the debtor of the credit provided”, and it does this by defining the total charge for credit. The definition of “credit bargain” in section 137(2)(b) is based on the transaction or transactions which are taken into account in determining the total charge for credit. The total charge for credit is central to a consideration of whether a credit bargain is extortionate. It would be extraordinary if the rules for computing the total charge for credit were to be ignored in deciding whether a credit bargain is extortionate, and yet that is the effect of Mr Bannister’s submission. He submits that section 137(2)(b) serves no other purpose than that of defining the credit bargain, and ensuring that all transactions that are taken into account in computing the total charge for credit, and not merely the credit agreement, are taken into account. I agree that section 137(2)(b) does serve that purpose. But it does not follow that the rules for computing the total charge for credit can be ignored when deciding whether a credit bargain is extortionate. An important purpose of the Regulations which define the total charge for credit is to provide a measure by reference to which it can be determined whether a credit bargain is extortionate. Regulation 2 contains detailed provisions as to the assumptions that should be made in carrying out the calculation. 

66.	Quite apart from the argument based on the 1980 Regulations, I derive support from the language of section 138 itself. The factors that are relevant to the question whether a credit bargain is extortionate are not only the credit agreement and other transactions that are to be taken into account in computing the “total charge for credit”, but also other factors present at the time when the credit bargain was made. Thus it is expressly provided in section 138(2)(a) (interest rates prevailing) and section 138(3)(b) (financial pressure) that the relevant time for considering these matters is the time of the making of the credit bargain. It is also the natural reading of section 138(3)(a) (age, experience, business capacity and state of health), section 138(4)(a) (degree of risk), section 138(4)(b) (relationship to the debtor), section 138(4)(c) (quote of a colourable cash price for goods or services included in the credit bargain) that all of these matters are to be considered as at the date when the credit bargain is made, and at no other time. 

67.	It might be said that, if variations in rates of interest are not to be taken into account in deciding whether a credit bargain is extortionate, then there is a glaring lacuna in the protection provided by the 1974 Act. Mr Malek was unable to suggest any policy reason why the protection should be limited in this way. But if I am right in holding that the discretion to set variable interest rates is subject to an implied restriction that it will be exercised in the way that I have described, then the lacuna is less considerable than it might appear. Moreover, the measure of the protection that is undoubtedly afforded by the 1974 Act should not be overstated. At paragraph 47.26 of Consumer Credit Law and Practice, Professor Goode says:
“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 [1984] 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’.”.

68.	In practice, there are unlikely to be many situations in which an allegation of breach of the term that I have held should be implied would fail where the same allegation, expressed as a complaint that the rate of interest is “grossly exorbitant” so as to render the transaction “extortionate”, would succeed. 

Were the rates of interest grossly exorbitant?

69.	In view of my conclusion that the subsequent rates of interest are irrelevant to the question whether a credit bargain is extortionate, I shall deal with this issue very shortly. The particulars relied on by the appellants are precisely the same as those relied on as particulars of breach of the implied term for which they contend. For substantially the same reasons as I have rejected their case on breach of the implied term, I would hold that the allegation that the rates of interest were grossly exorbitant has no real prospect of success. The rates are not merely required to be exorbitant. The appellants must show that they are grossly exorbitant. In my judgment, if one looks at the rates alone, the disparity between the rates that the Claimant was charging the appellants from about 1995 onwards and those charged during this period either by the Halifax or by Paragon was not such as to make the Claimant’s rates grossly exorbitant. It may be said that they were high, even unreasonably high, but that is insufficient. Thus, even if the subsequent rates could be taken into account in deciding whether the credit bargains were extortionate, I am not persuaded that the appellants would have real prospects of success on this issue at trial. 

The Limitation Issues
70.	A number of arguments were addressed to us as to when the cause of action under section 139 of the 1974 Act first arose, and indeed as to whether the Limitation Act 1980 applies at all to such a cause of action. I mention in passing that in Rahman v Sterling Credit Limited [2001] 1 WLR 496, it was held by this court that a claim to reopen an agreement under section 139 is “an action upon a specialty” for which the relevant limitation period under section 8 of the Limitation Act 1980 is 12 years. Mr Bannister submits that this decision proceeded on the basis of a concession by counsel for the borrower that a claim to relief under section 139 is an action upon a specialty, and that it is wrong. Since I have reached the clear conclusion that the appellants have no real prospect of succeeding in their claim under section 139, it is unnecessary for me to decide the limitation point, and I do not propose to do so.

Section 3(2)(b)(i) of the Unfair Contract Terms Act 1977
71.	Section 3 of the Act provides so far as material:
“(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”

72.	It is submitted on behalf of the appellants that they were reasonably entitled to expect that, in performing their side of the bargain, the Claimant would not apply rates which were substantially out of line with rates applied by comparable lenders to borrowers in comparable situations to the appellants. It is contended that the setting of interest rates is “contractual performance” within the meaning of section 3(2)(b) of the 1977 Act, and that the Claimant set interest rates that defeated that expectation. 

73.	The first question is whether the fixing of rates of interest under a discretion given by the contract was “contractual performance” within the meaning of section 3(2)(b). Mr Broatch submits that it is. He relies on two authorities. The first is Timeload Ltd v British Telecommunications PLC [1995] EMLR 459. In that case, the plaintiff set up a free telephone inquiry service, and entered into a contract with BT whereby BT provided the plaintiff with the use of a certain telephone number. There was a clause in the contract which authorised BT to terminate apparently without reason. BT gave one month’s notice of termination, and the plaintiff sought an injunction to restrain BT from terminating. It was held by the court of appeal that it was at least arguable that a clause purporting to authorise BT to terminate without reason purported to permit partial or different performance from that which the plaintiff was entitled to expect, and that section 3(2) of the 1977 Act applied. But the licence agreement imposed clear performance obligations on BT. Thus, clause 1.1 obliged BT to provide the various services there set out. In these circumstances, it is not difficult to see why the court thought that it was at least arguable that a clause authorising termination of the obligation to provide those services for no good reason purported to permit a contractual performance different from that which the customer might reasonably expect.

74.	The second authority is The Zockoll Group Ltd v Mercury Communications Ltd [1999] EMLR 385. This was another telecommunications case. The plaintiff planned to set up a network of franchisees to provide goods and services to the public in response to telephone inquiries. It entered into a contract with Mercury under which it obtained a number of telephone numbers. Mercury wished to withdraw one number from the plaintiff and asserted that it was entitled to do so at its sole discretion. The plaintiff brought proceedings and relied on section 3(2)(b)(i) of the 1977 Act. The court held that the withdrawal of the disputed number did not render the contractual performance substantially different from what was expected. Mr Broatch points out that it is implicit in the decision of the court that it was accepted that the withdrawal of the disputed number was capable of being contractual performance substantially different from that which it was reasonable to expect.

75.	In my judgment, neither of these authorities assists Mr Broatch’s submission. In both cases, the defendant telecommunications provider was contractually bound to provide a service. The question was whether the withdrawal of the service in the particular circumstances of the case was such as to render the contract performance (ie the provision of that service) substantially different from that which it was reasonable for the other contracting party to expect. The present cases are quite different. Here, there is no relevant obligation on the Claimant, and therefore nothing that can qualify as “contractual performance” for the purposes of section 3(2)(b)(i). Even if that is wrong,  by fixing the rate of interest at a particular level the Claimant is not altering the performance of any obligation assumed by it under the contract. Rather, it is altering the performance required of the appellants. 

76.	There appears to be no authority in which the application of section 3(2)(b)(i) to a situation similar to that which exists in this case has been considered. The editors of Chitty on Contracts (28th edition) offer this view at paragraph 14-071:

	“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).”

77.	In my judgment, this passage accurately states the law. The contract term must be one which has an effect (indeed a substantial effect) on the contractual performance reasonably expected of the party who relies on the term. The key word is “performance”. A good example of what would come within the scope of the statute is given at paragraph 14-070 of Chitty. The editors postulate a person dealing as a consumer with a holiday tour operator who agrees to provide a holiday at a certain hotel at a certain resort, but who claims to be entitled, by reference to a term of the contract to that effect, to be able to accommodate the consumer at a different hotel, or to change the resort, or to cancel the holiday in whole or in part. In that example, the operator has an obligation to provide a holiday. The provision of the holiday is the “contractual performance”. But that does not apply here.

Mr and Mrs Staunton: the Stabilised Rate Facility
78.	As I explained at paragraph 5 of this judgment, the Stabilised Rate Facility enabled Mr and Mrs Staunton to cap the amount of interest payable each month and defer payment of the excess by granting a “monthly credit” and converting the credit (up to a maximum of £10500) into part of the capital amount of the loan. The Offer of Loan incorporated certain Special Conditions in respect of the Stabilised Rate Facility. Condition 2 provided that:
“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.”

79.	In other words, once the maximum deferred interest of £10500 was reached, Mr and Mrs Staunton ceased to be entitled to the benefit of the cap. If that occurred, they would inevitably face a jump in interest rates.

80.	Mr Falkowski submits that they were not warned of the jump in interest rates that would occur once the Stabilised Rate Period came to an end. What was required was an explanation in plain and intelligible language of the way in which the Facility would operate. The failure of the contract documents to do this rendered the credit bargain extortionate, since it grossly contravened ordinary principles of fair dealing: see section 138(1)(b) of the 1974 Act.
81.	In my view, there is nothing misleading or underhand about the contract documentation. It may not be especially easy for a lay person to understand. But it does clearly describe the way in which the Stabilised Rate Facility works. It does not even contravene ordinary principles of fair dealing, let alone contravene them grossly. I would reject Mr Falkowski’s argument.
Conclusion
82.	In my judgment, therefore, these appeals must be dismissed. This may seem a harsh result, since it is clear that the appellants have suffered serious hardship as a result of the increases in interest rates. But the 1974 Act provides borrowers with only limited protection from the working of the free market. Parliament has empowered the court to intervene only where a bargain is grossly unfair to the borrower, either because the payments required to be made are grossly exorbitant, or because it otherwise grossly contravenes ordinary principles of fair dealing. Nothing less will do. For the reasons that I have explained, money lending agreements which contain provisions for variable rates of interest are also subject to an implied term of limited scope, but that cannot avail the appellants in this case. If greater protection is to be accorded to borrowers, that is a matter for Parliament.

Mr Justice Astill:

I agree.

Lord Justice Thorpe:

I also agree.
Order:  appeals dismissed; order made in terms of draft minute of order produced by Mr Malek QC; permission to appeal to the House of Lords refused; stay of order granted pending petition to House of Lords for leave and, in the event of petition succeeding, pending the determination of the subsequent appeal; detailed public funded costs assessment for Mrs Nash.
(Order not part of approved judgment.)