Keeping it in the family: how are informal loans treated by the Courts?

Article by Joseph Steadman, 31^st March 2025

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All too often, arrangements between family members arise informally and without the benefit of legal advice. It is often assumed that everyone involved understands what is expected of them, and that any differences or disputes will be sorted out within the family. But certain seismic events – deaths, divorces, bankruptcies and so on – bring these sorts of arrangements inevitably into contact with the legal system.

This article considers two recent cases which illustrate how the Courts seek to grapple with informal loans between family members. Although it may be tempting to assume that special rules apply in the domestic context, the better view is that the resolution of these cases involves the careful application of ordinary principles of law.^[1] A key challenge is providing satisfactory evidence that informal loans were not only made, but intended to be enforceable, and that may be particularly difficult where the witnesses on both sides of the transaction are aligned against a third party.

General principles

At common law, the informality of a loan agreement is no bar to its enforceability.^[2] There is no requirement of writing or any other form.

Thus, provided that the existence of an agreement to lend money can be satisfactorily evidenced, the task for the Court is to identify the parties’ objective intention, namely what a reasonable person – having all the background knowledge available to the parties – would have understood their words and conduct to mean: FCA v Arch Insurance (UK) Ltd [2021] UKSC 1 at [47].

This includes the question of “intention to create legal relations”, by identifying whether the parties’ objective intention was that the loan agreement would be enforceable in Court if need be. There is said to be a “presumption” that agreements made between family members are not usually made with an intention to create legal relations: Jones v Padavatton [1969] 1 W.L.R. 328 at 333, 336–337. However, as with other so-called “presumptions”, the modern approach is ordinarily for the Court to consider the available evidence and decide the case on the balance of probabilities.

Barry v Barry [2024] EWHC 1661 (KB)

A recent example of an informal loan between family members being held enforceable is Barry v Barry [2024] EWHC 1661 (KB). The Defendant, Denis, admitted borrowing over £600,000 from the Claimants, his parents. However, his case was that the loan was never intended to be enforceable in court, and that any dispute was intended to be sorted out within the family. He also claimed that the majority of the loans had in any event been written off.

Dexter Dias KC, sitting as a High Court Judge, introduced the issue as follows (at [3]):

For a contract to be legally binding, there must be an intention to create legal relations. […] Often whether the contract is intended by the parties to be legally enforceable is not in doubt, certainly not in most commercial settings, where there is a presumption, often said to be a strong or “heavy” one, that such an intention is built into the situation (Edwards v Skyways [1964] 1 WLR 349, 355). In other words, a commercial relationship creates a strong presumption of an intention to be legally binding. The context of the case before the court today is different. It is about arrangements (to use a neutral term for now) when parents loan money – here substantial sums – to one of their children. In such cases, given that our experience of the world that matters within a family are often sorted out without an intention of strict enforcement through the courts, the legal presumption operates in the opposite direction: it is presumed that there is no intention to create legal relations (Jones v Padavatton (1969) 1 WLR 328, 331, per Salmon LJ). However, that presumption can be rebutted by evidence of contrary intention (ibid. at 332-33). This is because contract law retains a flexibility to reflect the true intentions of the parties and the seriousness of the situation. If it is proved that they did intend for the loan arrangements to be legally binding in a sufficiently serious situation, and if the other necessary elements of a valid contract (including offer, acceptance and consideration) exist, then the courts may step in to enforce the contract against a recalcitrant debtor – even if the defaulting person is a son or daughter and the persons insisting on legal enforcement are their parents.

The Judge summarised the relevant legal principles in paragraphs [121] to [123]. In particular, he approved the observations of the editors of Chitty at 4-248 that:

There is unlikely to be direct evidence of the parties’ actual intention since the context will generally preclude reference to legal enforcement. Rather, the parties’ intention to be bound is imputed from the relevant circumstances to determine what type of legal arrangement, if any, is most appropriate. The onus of proving that there was an intention to create legal relations is on the one alleging there was such an agreement.

Applying those principles, and having considered a great deal of written and oral evidence, the Judge found on the balance of probabilities that there was indeed an intention to create legal relations. Several factors supported that conclusion.

First, the absence of a formal written contract was not an indicator that the loans were not intended to be legally binding. Rather, it was precisely because the parents expected and trusted Denis to repay the loans that they did not insist upon formality.

Second, the adaptability of the terms and the parents’ forbearance from enforcement were not indicative of an absence of intention to create legal relations but of the parents being patient and sympathetic when Denis found himself in financial difficulty. The absence of a fixed date for repayment was not an obstacle to enforceability but a question concerning the terms of the loan (which the Judge subsequently resolved by finding that the loan was repayable on demand).

Third, the size of the loans was substantial and – when viewed in the context of the parents’ assets and life circumstances, including that they were retired and needed the loaned funds to pay off the mortgage on their home – it was inconceivable that the parents would have expected to be left without legal recourse in the event that Denis simply refused to repay them. As the Judge put it (at [126]):

Examining the situation like that adds weight to the suggestion that these very substantial loans were intended to be legally enforceable, albeit with reluctance and only if necessary. Naturally, within a family, one would have hoped that such legal formality would never prove necessary. Regrettably for all, that has not proved to be the case.

Fourth, there was a history of the parents distinguishing between gifts and loans in the labels applied to bank transfers, not only to Denis but to his siblings. The loans to his siblings had largely been repaid. This indicated that there was a clear expectation of repayment and that the repayment of loans was treated as a serious obligation within the Barry family. They were not “effectively gifts with the option to repay at the discretion of the child”.

The result was that Denis was ordered to repay the parents the amount of the loans, with interest from the date of the written demand.

DR v ES [2024] EWFC 176

The Court reached the opposite conclusion in DR v ES [2024] EWFC 176. The dispute arose in the context of a divorce, with the wife (DR) denying that the husband (ES) owed almost £2m to his parents (JS and KS), as both the husband and his parents claimed. Those sums were allegedly due from the husband to the parents in return for their transfer to him in 2004 of an interest in the family home and the shares in certain companies through which the family business operated.

In contrast with Barry v Barry, therefore, this was not a dispute between parents and their recalcitrant son concerning the enforceability of informal loans. The evidence of both “sides” of the transaction was that the son had always been expected to repay the parents. Rather, the wife’s case was summarised by the Judge (at [10]) as being that:

[T]he husband and his parents have closed ranks and have pretended to fall out with their son […] in order to defeat the wife’s financial remedy claims. She says that the timing of this is remarkable, that just as she makes a financial remedy claim against the husband, suddenly the husband […] owes his parents the sum of £1.853m […]. She asserts that the whole thing is a sham to defeat her claims against the husband.

The Judge accepted this characterisation of the case, and having considered the evidence found that at most “there may have been some sort of understanding that the husband would make payment to his parents for his one third share in X Group when in due course called upon to do so” but that “it defies common sense to assert that this alleged loan (on any basis soft loan) suddenly became payable coincidentally with the institution by the wife of her financial remedy application”.

One of the factors which led to that conclusion was the absence of certainty as to the terms. The Judge, in rejecting the submission that the evidence was consistent with the son’s continuing liability to pay for his share in the family home, asked rhetorically: “What were the terms of this loan? When was it repayable? Was interest due? Was the deal that, if the husband was “a bad boy” (J’s words), the loan would suddenly become due?”.

This illustrates the “acutely fact-specific” nature of these sorts of cases, as highlighted in Barry v Barry at [150]. In Barry v Barry, the absence of certainty as to the terms of the loans was not fatal in the context of a clear evidential picture which otherwise weighed in favour of enforceability. In DR v ES, however, the lack of clarity about when the loans would be enforceable was yet another reason for the Judge to reject an account which he had already formed the view was lacking in credibility.

The Judge’s conclusion that there were no enforceable liabilities meant that he did not go on to consider in detail whether those liabilities were so-called “soft” loans. This is a concept which is peculiar to the family law context, and warrants a brief discussion.

Section 25(2)(b) of the Matrimonial Causes Act 1973 requires the Court to consider “the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future” when deciding what financial provision orders to make. Thus, if an informal loan is not likely in reality to be enforced, then it will be left out of account when considering the parties’ financial positions.

The factors which might point towards a loan being categorised as “hard” or “soft” are summarised in P v Q [2022] EWFC B9 at [19]:

Factors which on their own or in combination point the judge towards the conclusion that an obligation is in the category of a hard obligation include (1) the fact that it is an obligation to a finance company; (2) that the terms of the obligation have the feel of a normal commercial arrangement; (3) that the obligation arises out of a written agreement; (4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings; (5) that there has not been a delay in enforcing the obligation; and (6) that the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly.

Factors which may on their own or in combination point the judge towards the conclusion that an obligation is in the category of soft include: (1) it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship; (2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement; (3) there has been no written demand for payment despite the due date having passed; (4) there has been a delay in enforcing the obligation; or (5) the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being soft obligations.

It can be seen from this that there is a degree of overlap between the factors which might indicate an absence of intention to create legal relations and those which might indicate a “soft” loan. However, the concepts are distinct. In particular, there may be greater scope for the Courts to consider subsequent conduct—the question whether a loan is enforceable falls to be answered by reference to the parties’ (objective) intentions at the time the agreement (if any) was made, whereas the question whether it is likely to be enforced falls to be answered by reference to the circumstances at the time of trial.^[3]

Concluding thoughts

Subjecting informal family arrangements to rigorous legal analysis is inevitably an imperfect exercise, not least because the context lends itself to assumption, misunderstanding, and imprecision. However, the Courts can and do apply ordinary legal principles in the domestic context, and there is no hard-and-fast rule precluding the enforcement of loans between family members.

The task facing the Courts is especially difficult where there is no dispute between the parties to the alleged agreement, but a third party seeks to challenge its enforceability. That challenge might come from the spouse in a divorce case (as in DR v ES), from HMRC in a probate case (see IHTM28323: is a loan from family and friends allowable?), or from the trustee in a bankruptcy case.

As the two contrasting cases discussed in this note illustrate, it is the Court’s assessment of the evidence that is crucial. While the legal principles may be the same regardless of the context, each case will turn on its own facts.

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^[1] Indeed, a key case on the enforceability of informal agreements is Blue v Ashley [2017] EWHC 1928 (Comm) – the infamous case involving Mike Ashley’s (alleged) drunken promise to pay Jeffrey Blue a bonus of £15m if he raised the share price of Sports Direct from £4 to £8 – which arose in a commercial rather than domestic context.

^[2] Moreover, the detailed statutory provisions concerning the form and content of consumer credit agreements do not apply to “non-commercial” agreements: section 74(1)(a) of the Consumer Credit Act 1974.

^[3] The potential relevance of subsequent conduct discussed in Barry v Barry at [151] to [152].

 

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