It has become increasingly common for parents to lend money to help their children out, the so-called “Bank of Mum and Dad”. However, the question arose as to whether such agreements are enforceable. In Barry and another v Barry, the High Court, faced with that specific question, ruled that an informal loan made by parents can be enforceable as they create a legally binding contract.
Background:
The claimants are Irish nationals who wed at the age of 17. They are both devout Catholics and have six children and, prior to the dispute, were a close-knit family. They started proceedings to recover over £600,000 allegedly loaned to their youngest son, the defendant, for property transactions he made for his own benefit. They wanted the money back to pay off the mortgage on their home and live in their advanced years.
Their son denied the claim by arguing that the loan was not intended to create legal relations and was never intended to be enforceable by courts but rather to be sorted within the family. He also contended that the parents told him he could write off the bulk of the money (£500,000). Therefore, the loans made to him personally were forgiven. But the loan to a company he controlled with his wife remains outstanding and, while he accepted that, he claimed that his parents were suing the wrong party. He claimed the litigation was vindictive and based on a falling out.
Decision:
The Court first analysed whether the parties intended to create legal relations. The Court noted that there is a presumption that a family loan is often without strict intention enforcement through the courts. However, such presumption can be rebutted by evidence. So normally, the legal presumption is that a parent could not successfully sue their child for the repayment of the loan although, with sufficient evidence to the contrary, courts might agree to make it enforceable. Based on the factual background and applying settled case law, the Judge concluded that the claimants have proved such intention on the balance of probabilities.
The Court followed the multifactorial analysis set out in Blue v Ashley [2017]. The Judge noted that the parents trusted their son to honour his debt and, only in extreme circumstances, would they have elected to resort to court action.
The Court also found that the defendant and not the company had incurred the relevant debt. As a result, the judgement was entered in the claimants’ favour in the sum of £643,055.90, plus interest.
Implications:
The short answer to the above question is that, in normal circumstances, there is a presumption that family loans do not create legal relations and are not enforceable in a court of law. However, such presumption is rebuttable with sufficient evidence, as demonstrated in this case. The fact that the mother made her understanding clear that she was expecting repayment and their subsequent course of action demonstrates their understanding.
This judgement might have significant implications in the future, especially with the cost of living crisis, as more and more adult children are turning to their parents for financial aid. Depending on the circumstances, such loans could be regarded as a gift or as a loan that ultimately needs to be repaid. If you intend to lend your child money to be repaid within a realistic period, then make sure it is clear and that your actions are consistent with your words. If you are the recipient of such a loan, then it is advisable to have an open conversation with your parents to understand whether they intended it as a loan or as a gift.