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Lending money to a family member or a friend: Loan or a gift

Last year a lady came to see me about a matter which would sound very familiar to many people. This lady,let us call her Daksha to protect her identity, works as an IT professional for a well-known company in the city. Daksha went to Delhi and caught up with one of her school friends Anju (name changed). They talked about old times, went out shopping and came back to Anju's apartment. There Daksha met Anju's daughter Vasu. Vasu was pleased to see Daksha as she had not seen her 'auntie' for many years. They got talking. Vasu told Daksha that she had done well in year 12 but she was finding it impossible to get admission in any good university. Daksh asked her what she was interested in doing. Vasu wanted to do engineering. Daksha said to her that she should also try in some Australian university and that she will be appy to 'help' her. Vasu and Anju were thrilled to hear the off er. Vasu said that she would be glad to return the money when she got a job in Australia after graduation.

A couple of months after the meeting, Vasu emailed to Daksha that she wants her to pay Rs.400,000 to the agent for admission. Daksha transferred the amount from her bank to the agent's nominated bank account. A few weeks later Vasu arrived in Melbourne to join her engineering course. Daksha went to receive her at the airport and brought her to her house.

Vasu stayed with the family for about a year then she moved out.

In the second year of her stay, Vasu asked Daksha to pay her university fees as she was finding it difficult to organise the money. Daksha paid about $13,500 to the university on Vasu's behalf. The relationship was good. Daksha used to visit Vasu's apartment she shared with other students from India, and at times Vasu would come to Daksha's house to spend weekends.

In between, Vasu would ask for assistance, and Daksha would pay the university. Vasu used to say that Daksha was a very kind lady and every time Daksha would remind her that it was a loan and she expects to be paid when Vasu got a job.

By the time Vasu finished her engineering degree, Daksha had paid $39,500 for her education.

Vasu got an excellent job after finishing her education. Daksha waited patiently for the repayment. After two years, Daksha sent an email to Vasu demanding payment. Vasu sent her an email that she did not owe any money as it was a gift. She also said that she was very disappointed that Vasu' aunty' was behaving in such a mean fashion.

Where does Daksha stand legally?

In contracts, the first essential element is the intention to create legal relations. The meaning of creating legal relations is that both parties agree that if there is a breach of contract, either party will take the other to court. In most of the cases family and social agreements, it is presumed that one family member or a friend, will not take the other to court, thus spoil the relationship forever. In Carlill v Carbolic Smoke Ball Company, the court applied the 'objective test' and asked whether a reasonable bystander, after taking into account all the circumstances of the case, thinks that the parties intended to be bound. Remember, civil the standard of proof is 'on the balance of probabilities' while the criminal standard of proof is 'beyond a reasonable doubt.'

In Balfour v Balfour, a husband promised to pay maintenance to his wife, who decided to stay back in England, while he worked in Ceylon (now Sri Lanka). The man sent her money for a few months until she informed him that she had no intention of joining him. The man stopped the payments. The wife sued. Lord Aitkin held that there was no 'intention to be legally bound', even though the wife was relying upon the payments.

On the other hand, in case of Wakeling v Ripley and Todd v Nicole where one party promised the other that if they relocated to Australia from overseas, they would be given exclusive rights to live in the house owned by the person. In these cases, where plaintiffs and defendants were brothers and sisters, the court decided that there was a contract because the relative had to give up their jobs and sell their properties in the UK to come to Australia.

In Coward v MIB, Coward was a pillion passenger who was killed in a motorcycle accident for which the rider was responsible. The negligent rider was both a colleague and a friend. The accident occurred on the way to work. As the rider's insurance policy excluded pillion passengers, Coward's widow was obliged to claim damages from the MIB. The MIB would have liability only where insurance for the pillion was compulsory, and at the time insurance was compulsory only if pillions were carried "for hire or reward". Coward had paid the friend a small weekly contribution for the daily trip, and the widow argued that this amounted to a contract for hire or reward. The MIB countered that carriage for hire or reward required to create legal relations and that on these facts (an agreement between friends), there was no such intention. The Court of Appeal held that there was no contract.

Soon after, in Connell v MIB, a case with materially similar facts, Lord Denning violating the rule that its own decisions bound the Court of Appeal said, 'I am not satisfied by the decision in Coward. I think that when one person regularly gives a lift to another in return for money, there is a contract albeit informal.'

In a recent case of Winter v Nemeth there was an agreement between friends. In this case, the plaintiff said that the defendant had promised in 2010 that if the plaintiff did clerical services concerning the defendant's family court proceedings, she would buy the plaintiff a small house in the suburb of Double Bay in Sydney. The court rejected the application on the basis as the price of a small house in the said suburb was approximately $1,200,000, Further that no reasonable person would believe that the defendant was bound by the promise even if it was made as the amount was out of proportion to the services rendered.

In conclusion, please be careful when lending money to family or friends. Make sure that you have a written contract which has been explained to the borrower by an independent legal counsel. That way, you will save a lot of grief and money on pursuing the defendant in courts.

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