Establishing the existence of an oral loan agreement – the key legal principles in NSW

In disputes involving alleged oral loan agreements, the court is often asked to resolve conflicting recollections of conversations that occurred in informal settings, sometimes years earlier. The challenge lies in determining what was said and whether the words spoken amounted to a legally binding agreement. The courts apply well-established legal principles to assess such claims, rooted in contract law and evidentiary standards.

Who must prove the loan?

The person asserting the loan agreement exists bears the burden of proving the agreement. They have to do so on the balance of probabilities. This standard of proof is not watered down simply because the agreement is oral rather than written. As judges of the Supreme Court of NSW have stated, an objective test applies: would a reasonable person, considering the words and conduct of the parties, conclude that there was an intention to enter into a legally binding agreement?

What must be proved?

Establishing an enforceable loan agreement involves showing that there was:

• a clear offer;
• an unqualified acceptance;
• the mutual intention of the parties to create legal relations; and
• sufficient certainty as to the terms of the agreement. 

What sort of evidence is usually relied on?

Conversations

Where a party seeks to rely on spoken words as the foundation of a contract, the court must be reasonably satisfied that the conversation occurred as alleged. This is not a light standard. The court must feel an actual persuasion that the agreement took place and had the legal hallmarks of a binding contract. This is particularly challenging without notes taken from the time of the conversation, documents, or corroborating witnesses.

As the High Court has made clear, the seriousness of the allegation and the gravity of the consequences are relevant in assessing whether the court is satisfied on the balance of probabilities. Vague recollections or indirect inferences will not suffice.

Surrounding circumstances and conduct

The courts will also consider the broader factual context, including such matters as:

• the history of the relationship between the parties;
• their conduct before, during and after the alleged agreement;
• any relevant surrounding circumstances; and
• objective commercial or personal probabilities.

Post-agreement conduct can also shed light on whether a contract was entered.

The fallibility of memory is often a significant issue

Courts are acutely aware of the unreliability of human memory, especially when disputes arise long after the events. Judges have emphasised that memories of conversations are often reconstructed with the benefit of hindsight, influenced by perceptions, self-interest, and subconscious reconstruction.

Accordingly, when oral agreements are alleged to have been made years earlier, courts place greater weight on:

• objective evidence (e.g. bank transfers, emails, text messages);
• documents created at the time of the arrangement; and
• the commercial logic of the alleged arrangement.

Intention to create legal relations

It is not enough to prove that certain words were said. The court must be satisfied that the parties intended to be legally bound. This often involves distinguishing between social or  family-related arrangements and those with a commercial or financial character. A casual agreement between friends or family to “lend some money” may not meet this threshold unless there is clear evidence of a legal intention, such as agreed repayment terms or interest.

Tip

Don’t do it. Rather, enter a written loan agreement prepared by a solicitor.

The solicitor can then ensure that the necessary elements of a contract are incorporated into the agreement; a clear offer; an unqualified acceptance; the mutual intention of the parties to create legal relations; and certainty as to the terms of the agreement… money well spent for a good night sleep.