By : PJ Kirby
A consideration of two recent cases concerning the charging of interest rates by lenders
Interest rates are currently at their lowest level since 1955. The Bank of England's base rate stands at 3.75%. Talk of low interest rates must therefore be particularly galling to borrowers who took out loans from secondary or tertiary lenders in say 1989 and who found (normally in the course of defending possession proceedings) that they were still paying interest at an APR of 34.3%.
That was the position that Mr and Mrs Rahman found themselves in Sterling Credit Ltd v Rahman  EWHC 3008 (17 December 2002 Park J). In 1989 Mr and Mrs Rahman had borrowed £5,000 from Greyhound Credit Ltd (which later became Sterling) at an interest rate of 2.35% per month, an APR of 32.1%. Even in 1989 that was a high rate of interest. The loan agreement contained a provision permitting the variation of the interest rate. The rate had only been varied once and that was in 1990 to increase the same to 34.3% APR where it remained.
Although a possession order had been made in November 1990 Mr and Mrs Rahman remained in their property. In 2000 the Court of Appeal had given them permission to counterclaim for relief under section 139 of the Consumer Credit Act (reopening of extortionate agreements) - see  1 WLR 496. In 2001 following the decision of the Court of Appeal in Paragon Finance v Nash and Staunton  1 WLR 685 Mr and Mrs Rahman sought to amend their counterclaim again to plead that the lender had positive obligations to reduce the interest rates from time to time as prevailing markets fell. Park J refused permission to amend to plead such a positive duty. He held that "The Court of Appeal's decision in the Paragon cases does not open the door to a positive implied term that a lender may have a positive obligation to reduce the rates"
The Paragon cases concerned the lenders variation of interest rates. Headlines after the decision suggesting that the Court of Appeal had outlawed unreasonable interest rates were somewhat misleading. Whilst the Court of Appeal was prepared to imply a term concerning the manner in which the interest rate was varied the implied term will be of limited assistance to borrowers generally.
The judgment of the court in the Paragon cases was given by Dyson LJ. He accepted that there was an implied term "that the discretion to vary interest rates should not be exercised dishonestly, for an improper purpose, capriciously, or arbitrarily." Whilst he accepted that the power should not be exercised "unreasonably" this was only in a "Wednesbury unreasonable" sense i.e. unreasonable in the sense that no reasonable lender acting reasonably would do.
In the light of the Paragon and Rahman decisions we appear to be left with a position where a lender's decision not to vary its exceedingly high interest rates cannot be challenged but a decision to vary the interest rate can, albeit in limited circumstances. It seems very unlikely that the decision of Park J in Rahman will be the last word on the subject. Lenders may set a rate at the beginning of the term but they must surely be reviewing their rates throughout the term in the light of economic and their own financial circumstances. A decision not to reduce an interest rate should, it is suggested, be subject to the same implied term as a decision to reduce an interest rate.
It is noted that Park J's primary reason for refusing permission to amend was because "this litigation has gone on far too long". Eleven years after the making of the possession order it is difficult to question that ground for the decision.
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