Extending Time To Pay – Are There Risks?

Posted on November 17th, 2016

Share on LinkedInTweet about this on TwitterEmail this to someoneShare on Google+Print this page

Particularly amongst family members, or close friends, it is not uncommon for money to be loaned under oral agreements. In its simplest form, it might be an agreement between friends to “spot” $50.00 until payday. In more sophisticated contexts, it may be an agreement to loan substantial amounts of money simply on the promise that the borrower will repay that amount, with or without interest. oral loan agreement

The NSW Court of Appeal recently looked at a situation involving an original oral loan agreement; and a claim the repayment date had later been varied, also by oral agreement.

In simplified form, a Ms Smith had loaned sums of money to a Ms Young over a four-year period commenced in late 2000. By the time the Court case began, the amount owed, including interest, was around $500,000.00. Ms Smith’s original claim was that Ms Young had agreed to repay each individual amount advanced to her, within two years of the advance(s). However, Ms Young asserted this claim was statute barred, that is, more than six years had passed since the respective repayment dates such that it was now too late for Ms Smith to sue. Ms Smith then amended her claim to assert there had been two subsequent oral variations of the original loan agreement to provide that all amounts would be repaid, firstly in December 2007 and subsequently in December 2010.

The technical legal issue for the Court was whether, assuming the conversations relating to the varied repayment dates had in fact occurred, the claim was still statute barred. Generally, a mere acknowledgment of an earlier debt, without more, does not create a new agreement. Therefore the only claim on which a lender could sue was the original agreement (and if the lender was already out of time, the acknowledgment did not assist to extend it). Ms Smith contended that the ‘variation conversations’ were not merely an acknowledgment of an existing debt, but rather, amounted to a “forbearance to sue” which, as a matter of law, was consideration in support of a new agreement. On this argument, the new or varied agreement came into existence less than 6 years before the Court case had begun and was not statute barred.

The Court considered Ms Smith’s contentions were at least arguable and therefore her claim should be allowed to proceed to a final hearing.

Because the argument was dealt with in the context of an application for summary dismissal, all the Court was doing was considering whether Ms Smith’s case was “arguable”. It did not express a view as to whether the argument would succeed at final hearing.

The case does, however, illustrate some of the risks that can be involved in informal oral agreements. If, for example, a parent lends a child a sum of money for a deposit on a house, but the money is not repaid for six years or more, the capacity to recover the debt may be lost. Even if there are conversations between the parent and child in the interim, much will turn on whether the conversations amounted – at law – to a mere acknowledgment of the existing debt, or constituted a fresh agreement to repay the money on a different basis. These are matters that are likely to be very difficult to prove. Consequently, particularly where significant sums of money are involved, it is always prudent to have a written agreement and, if there is any doubt that repayment will be made in accordance with the original agreement, it is important that a fresh agreement and/or variation be entered into and documented, so that the capacity to seek repayment of the loan is not lost: Smith v Young [2016] NSWCA 281.

Tony Cavanagh Director at Mullane & Lindsay Solicitors NewcastleTony Cavanagh is a Director at Mullane & Lindsay Solicitors and practises extensively in Commercial dispute resolution and litigation, and employment law. If you require any assistance in these areas please contact Tony Cavanagh or contact our Newcastle or Sydney office.

Share on LinkedInTweet about this on TwitterEmail this to someoneShare on Google+Print this page