Besides the specific laws, banks are also exposed to claims for negligence according to the Tort Ordinance (New Version).
The courts in Israel have set a high standard of care required from banks towards their clients. Over the years the courts have increased the demands and expectations from banks, and today the banks as are regarded as public entities which have increased the level of their duties not only toward their clients but also towards third parties.
A bank should prevent deception of its client by others
The judgement in D.N. 1740/91 Bank Barclays Discount v. S. Frost Kaufman, PDI 47(5), 33 reflects the trend of the expansion of banks' duties.
A lawyer was granted full power of attorney by the bank�s client to act in his accounts opened with the bank. The lawyer abused the authorization given to him and signed a guarantee, according to which the client guaranteed all debts of the lawyer to the bank. The lawyer opened a private account in the bank and accumulated a huge debt. When the bank realized the guarantee and off-set the lawyer's debt from the client's account, the client filed a claim, alleging that the bank had been negligent towards him by allowing the lawyer to perform such irregular transactions in the account without first verifying them with the client.
The Supreme Court found the bank negligent and liable towards the client and determined that the bank is obliged to carry out the client's instructions with proper care while protecting the client's interests. The Court stated that a bank must do its utmost to prevent the client from being deceived by others.
A bank's duty when it has an interest - a bank as a public entity
In C.A. 5891/91 Tefahot Mortgage Bank of Israel Ltd. v. Zabah, PDI 48(2),573, the bank granted loans to buyers of houses built by a contractor, while being aware of the contractor's poor financial condition and that he was on the verge of financial collapse. The bank was one of the contractor's main creditors, and soon after it granted the loans to the buyers it filed a motion to appoint a receiver over the contractor's assets. The buyers filed a claim against the bank demanding cancellation of their loan agreements, since the bank had breached its duty of care and trust towards them.
The court accepted the buyers' claim and ruled that the relationship between a client and a bank is a special one, based on the trust of the public in this institution. The bank is considered by the public to be a professional authority. Since the individual person has a special trust in the bank, believes in its skills and technical abilities, and considers it as a public-like institution, the individual tends not to take precautionary measures of his own, although he may do so. In view of this special relationship, the bank has special duties, in addition to the duties of parties to a regular contract.
In C.F. 60373/96 Union Bank of Israel Ltd. v. Ella & David Weintraub (Tel Aviv Magistrates Court), the court determined that a bank must warn its client when the bank has an interest in a transaction it is offering the client. The Court considers the bank as a kind of social agency which has duties towards its clients and also towards those who are not clients. In fact the bank is considered as a public entity which owes duties deriving from the duties of public authorities.
The appeal over this judgment was denied in C.A. 2855/00 Ella and David Weintraub v. Union Bank of Israel Ltd.
A bank as a professional entity should protect its inexperienced clients' funds
In a recent judgment handed down in June 2004 in C.F. Yaacobi Mazal and Shlomo v. Israel Discount Bank Ltd. (Tel Aviv District Court) the court ruled that the bank was liable for heavy debts accumulated by plaintiffs in their credit account with the bank. Although the court ruled that the bank is not liable for plaintiffs� heavy losses on the stock market and although it was not proven that the bank misled or deceived plaintiffs, the bank was found liable for part of their debts.
Plaintiffs were inexperienced and totally dependent on the bank's professional service and knowledge, therefore the bank owed them a higher level of duty of care.
The court ruled that the bank, being aware of the major deterioration of plaintiffs' investment and credit account, should have informed plaintiffs about the status of their financial condition and limited their credit. By failing to do so, the bank enabled plaintiffs' credit account to deteriorate.
Therefore, the court ruled that the bank should be partially liable for the hundreds of thousands of shekels in debts incurred in plaintiffs' bank account.
A bank's duty towards a guarantor
In a judgment handed down in 2003 in C.F. 81167/99 Israel Discount Bank, Tel Aviv Branch v. Hajaj Zahava and Others (Tel Aviv Magistrates Court), the court dealt with a guarantor who was sued by the bank.
The defendant was a guarantor for a loan taken from the bank by another client. The debtor did not repay the loan and the bank decided to realise the bank guarantee. The defendant alleged that the bank misled him by not advising that the guarantee he signed was in fact in order to guarantee a deficit in a bank account.
The court ruled that it had been proven that the bank tellers did not notify the defendant of the debtor's account status, nor did they explain to him the nature of the guarantee he was signing. Therefore, the defendant was not held liable as a guarantor.
A bank's duties towards third parties
Over the years the courts have also extended the bank's duties towards third parties who were not clients of the bank. By implementing the usual principles and public considerations, the court regards a bank as a highly professional body which is treated with a high level of trust by the public, hence it owes a higher standard of care.
In April, 2004 in O.M. 1267/02 Gerber Adina v. Leumi Mortgage Bank Ltd. the District Court of Jerusalem dealt with liability toward third parties. In this case the court found the bank liable towards a third party who purchased a flat from the bank's client, and relied on a bank confirmation that the mortgage for the house had been fully paid. It transpired that there was another loan which had not been paid, but this fact was not disclosed to the buyer by the bank's client.
The court determined that the bank's duty of care may apply towards anyone, even not a client, who could be expected to be harmed as a result of the bank's negligence.
A bank's legal exposure in tort when financing a "closed" construction project
Recently we have witnessed relatively new types of claims being filed against banks in relation to their activities in the financing of construction projects.
The most common example is of a claim filed against a bank for negligence towards a third party who purchased an apartment in a construction project financed by the bank as a "Closed Project".
In these cases the bank enters into an agreement with a construction company for financing a construction project, which is financed as a Closed Project i.e. all the moneys paid by the buyers and the financing loan received from the bank, are deposited in a special account managed by the bank. This account is referred to as the Bank's "lending expenses" account and money is released from this account according to the stages of progress in construction which it also supervises. The buyers do not have a contract with the bank.
The construction company may face financial difficulties and be unable to continue the construction work. In a "no fault" situation the money left in the bank's lending expenses account should be sufficient to complete the project. However, in some cases the balance in this account is not sufficient due to negligent management of the account by the bank.
The collaterals provided to the purchasers by law, do not cover all the damages caused by the collapse of the construction company, such as taxes, levies, lawyers fees, financing costs, alternative dwelling, mental anguish etc. As a result the buyers file a claim against the financing bank for negligence in managing the bank's lending expenses account.
In C.F. 1794/95 (District Court of Tel Aviv) Hayek Izhak v. Bank Hapoalim, Takdin-District (4) 2002,820, the Court dealt with such a claim, filed by a buyer against the financing bank in a Closed Construction project.
The Court accepted the claim and determined that the bank acted negligently towards plaintiff by explaining that in a Closed Project there are two separate sets of contracts - one between the buyer and the contractor and the other between the contractor and the bank. However, the concept behind these separate contracts turns it into a three-party relationship which cannot be separated.
Although the bank's undertaking to monitor and control the bank's lending expenses account is, first and foremost, for its own benefit, i.e. to protect its investment - expectations are raised among the buyers that the bank will monitor the expenses properly. A reasonable buyer who knows that he is depositing money in an account monitored by the bank, within the scope of the three-party relationship between the bank the buyer and the contractor, as described above, expects the bank to perform its duty properly.
The bank is not obliged to take upon itself to perform such supervision, however once the bank has done so, and has led third parties to rely on this supervision by obliging them to deposit the money in its account, the bank has undertaken a duty of care towards them.
Protection offered by the Court - In the Hayek case the Court offers a way in which the bank could protect itself if it does not wish to take responsibility towards the buyers. This may be done only by bringing to the attention of the buyer in a clear and unequivocal manner, that supervision by the bank over the project is solely for the purposes of protecting its own investment and not for the benefit of the buyers.
The bank should notify the buyers that they must establish their own protective systems directly with the contractor (such as appointing their own supervisor), and that the bank does not take any responsibility towards the buyers.
Another judgement which was handed down on 8 December 2004 in this respect is C.F 2239/03 Rahamim Judith & Others v. Israel Discount Bank & Others (Magistrates Court, Hadera) published at the www.nevo.co.il web site. In this case the purchasers paid the money to the contractor who did not deposit it with the bank. The bank was found negligent for not ensuring that the purchase money was deposited in the lending expenses account, although there was no contract between the bank and the purchasers obliging the bank to do so, and the bank's role was only as a financier for the contractor. The court used the same reasoning as that in the Hayek case above, and found the bank liable towards the purchasers.
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