The phrase “don’t expect to get your money back if you loan it to family or friends” is common but a misconception according to a significant decision handed down by the Queensland Supreme Court of Appeal on 13 October 2017.
While verbal agreements for monies loaned to family members are often construed as gifts, and challenging to prove to a Court that there was an intention to create legal relations between the parties, the recent decision of Berhan & Anor v Berghan  QCA 236 demonstrates that the threshold for proving an intention to create a legally binding contract may be lower than what we have previously thought.
The facts of the case
In 2009, Mr and Mrs Berghan transferred $98,000 to the bank account of a Company in which their son and the son’s ex-wife were the registered shareholders. The couple’s daughter was also employed by the Company that was experiencing financial difficulty.
The $98,000 funds transfer was not documented in an Agreement, but upon the Company receiving the financial aid from his parents, the son is alleged to have declared “I will definitely repay the monies back and even more; I will look after you in your old age.” No re-payment plan was discussed.
Between February 2009 to September 2013, another 13 advances of money were made to the Company upon the son asking the father to financially assist. The father is alleged to have agreed on the verbal proviso that the money had to be repaid.
In late 2012, the son told his father that he was struggling to pay his bills and asked to use the father’s credit card while he was injured and unable to work. This was allowed, and then a fresh credit card was issued by the father to the son in the son’s name to assist him. The son incurred a further debt of $13,471.09.
The total amount advanced by the parents to the Company and their son personally was $286,471.09.
No repayments were made. Nothing occurred until January 2015 when the father sent a tentative email to their son expressing concern “with giving so much of our money to you” and requesting that they purchase the daughter’s equity in the Company.
A trail of emails ensued between the parents, the son and his brother in which the son questioned the urgency for repayment, blamed the brother for “putting mum and dad into the negotiation” and claimed to “have an agreement with Mum for the return” (presumably different to what was canvassed in the emails). His emails also appeared to acknowledge that he had to repay the funds.
There were no ledgers kept by the parents to document the transfers. However, the Bank Statements referred to the amounts as “loans”. A formal demand for payment of the entire amount did not occur until 10 April 2015. It was by way of correspondence from the parents’ solicitors to the son.
The decision at trial
His Honour, District Court Judge Everson, gave Judgment in favour of the son. He found that the general verbal statements made by the son were consistent with him being “morally obliged” to repay his parents rather than bearing the indicia of entering into a legally binding loan agreement.
He found that there was no intention to create legal relations and that it was understandable that the parents would “extend their charity” to the Company which was struggling and in which their daughter was also employed. His Honour gave a similar characterisation of charity to the credit card use by the son (rather than an intention to create a binding loan agreement enforceable by law).
His Honour specifically referred to the fact that no ledgers were kept by the parents and payment was not requested until 2015.
Interestingly, his Honour accepted the evidence of the parents, rejected the evidence of the son and accepted that there was an expectation that the money was to be repaid. However, the critical point was that his Honour did not accept that the requisite intention to create a legally binding contract was established, an element essential to the formation of a Contract and fundamental to Contract law.
The Honourable Everton DCJ’s decision was set aside by the Supreme Court of Appeal. The matters referred to by his Honour were considered immaterial to the question of whether there was an intention to create legally binding relations.
The fact that the parents appeared to give almost all their funds to one child (out of four of their children) was determined as inconsistent with the theory that the funds were a gift as was the reference to the word “loan” in the Bank Statements and the verbal references to repayment being intended (and some similar acknowledgements amongst other content in email form).
The Judges of the Supreme Court of Appeal also determined that the money was loaned to the son personally rather than the Company (due to, amongst other factors, the ex-wife of the son being a shareholder and evidence that the parties “in lay man terms” referred to the Company and the son as interchangeable even though that was, technically, not accurate).
Significantly, it was also determined that – in the absence of terms for repayment – it would be reasonable to deem that the entire amount was due upon demand.
What does this mean for you?
While we may have empathy for the parents in this case and it may be seen an equitable result, there may – arguably – be further implications arising from this decision.
It appears that establishing whether there was an intention to create a legally binding arrangement is easily satisfied. There are no strict indicia, and the facts will be interpreted with some amount of discretion by the Judges. This may be the most equitable and appropriate course for the Court to take in such matters but the key here’s what you need to be mindful of:
- Don’t necessarily dismiss verbal agreements between family members as not being legally binding just because some of the usual indicia you would expect may be absent. If in doubt, consult with your trusted legal advisor;
- Be clear as to the terms of any agreement, preferably in writing (for example, the time-frame for repayment and whether it is payable upon demand);
- It may not be a bad idea to document gifts in writing (as well as loans) just in case there are arguments later down the track. Be clear as to the intention of the parties and document everything in writing. This is likely to assist in avoiding family distress, costs and anguish for the parties which may potentially occur.