Are agreements between family members or friends legally binding?

The legal position

A contract requires an intention to create legal relations. The law does not inquire into what each party privately intended. It applies two rebuttable presumptions:

• In commercial dealings, it presumes that the parties intended to be legally bound.
• In domestic and social arrangements, it presumes that they did not.

In a domestic case, the burden lies on the party seeking to enforce the arrangement to prove, by clear evidence, that the parties did in fact intend it to be legally binding. The court looks to the substance of the transaction rather than to the label the parties attach to their relationship. An arrangement between friends that is in substance commercial will be treated as such. The fact that one party relied upon the arrangement is a relevant factor, but it is not decisive.

Two further principles are relevant. First, a gratuitous promise, that is, a promise to give something for nothing, is not enforceable as a contract, however sincerely it was made, unless it is made by deed. Secondly, an agreement made between spouses who have separated is considerably more likely to be enforced than an arrangement made between spouses living together.

Practical implications

Money lent to a relative. Where money has passed between relatives, the first question is often whether it was a loan or a gift. The court will consider several matters: whether terms of repayment were agreed, whether interest was charged, what the parties said in correspondence and messages, and whether any repayments were made. A payment made without terms and without any subsequent request for repayment is more consistent with a gift. A payment made against an agreed schedule of repayment is more consistent with a loan.

Pooled funds. An arrangement under which several persons contribute money on defined terms is more likely to be treated as commercial than as a social favour. Those terms would specify who contributes, how much and when, and who receives the fund. The more precisely the terms were settled, the stronger the case for enforcement.

Promises of property. An informal promise by a family member to leave or transfer land is not an enforceable contract. Such a promise is usually made without consideration, and a contract for the disposition of land cannot in any event be enforced without signed writing. Other equitable principles may, in some circumstances, assist a person who has acted upon such a promise. That is a separate and more complex question.

Recommended steps

A person lending money to a family member or friend should record the loan in a short written acknowledgment signed by the borrower. It should state the amount, the date on which the money was lent, and the terms of repayment. The money should be transferred by bank transfer bearing a reference identifying it as a loan.

A claim to recover a loan must ordinarily be brought within four years of the date on which repayment fell due. Where no date for repayment was agreed, advice should be obtained on when the limitation period began to run. See What is the time limit for bringing a claim for breach of contract?

Where money has already been advanced, the lender should obtain a written acknowledgment of the debt, signed by the borrower. Such an acknowledgment is evidence that the money was lent. It also causes the four-year limitation period to run afresh from its date, as does any part payment. Once the limitation period has expired, however, a subsequent acknowledgment will not revive the claim.

Messages in which the borrower acknowledges the debt should be preserved as evidence. They should not be relied upon to restart the limitation period, since the acknowledgment required for that purpose must be in writing and signed.

Where money or property is intended as a gift, that intention should also be recorded in writing, to avoid disputes at a later date, including disputes in the administration of an estate.