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New Developments
A. Introduction - Why Foreign Currency
The legal currency in Israel is the Israeli Shekel. The jurisdiction of the various Courts (i.e. Magistrates, Districts) is determined according to the amount in Israeli currency of the claim. In many cases, the amount claimed is in a foreign currency but is converted to Israeli currency for the purpose of the Court’s jurisdiction and payment of Court fees.
However, although the Courts regard foreign currency as linked to the Israeli currency, there is one major difference in dealing with the awarded amount (which may be in Israeli Shekels, in a foreign currency, or in any combination of these). The difference is in the rate of interest which should be added to the principal amount of the judgement.
We would note that the interest as imposed by law, in principle, is not of a punitive nature. It is rather aimed at maintaining the value of the insurance benefits when the payment of such benefits is postponed (whether or not for justified reasons).
B. Interest Rate on Foreign Currency - The Previous Rule
Section 4(c) of the Adjudication of Interest and Linkage Law - 1961 (hereinafter: the Interest Law), and Section 28(D) of the Insurance Contract Law -1981, both provided that the interest rate applicable on payments in foreign currency, would not exceed the interest rate paid by the Bank of Israel to banking institutions, on deposits in the same currency, for a three month period.
 In September 1992 the Bank of Israel ceased this kind of deposit and therefore, there was no way to apply this clause to debts in foreign currency.
In view of the fact that the law did not respond to this change and in view of the necessity of indemnifying the insureds for depreciation of the value of the amount awarded in foreign currency, the Israeli Courts have applied the rate of interest which is applicable to debts in Israeli currency i.e. 11%.
The Court determined that this rate would apply unless it is proven by solid evidence, that in the specific case the rate should be otherwise, e.g. proof that a specific Plaintiff paid the bank for foreign currency loans at a different rate. In the absence of any evidence to the contrary regarding the appropriate interest rate, the rate of 11% should be applied.
All this was recently changed.
C. Amendments to the Law
On 20th March 2001, the Interest Law and Section 28(D) of the Insurance Contract Law were amended in that the Minister of Finance is now authorised to set by way of regulations, different rates of interest.
On 20th February 2003 new regulations to the Interest Law were enacted by the Minister of Finance to be effective from 1st April 2003. The new regulations provide that the interest rates on any payment in foreign currency will be Libor + 1%.
Libor rates were defined as yearly Libor rates for deposits in foreign currency for a 3 month period, as published by Reuters or any similar publication.
From that date, every three months the Ministry of Finance has published the relevant Libor rates which, during the past year ranged between 1% - 2%.
Based on the above, any debt in foreign currency incurred since April 2003 is subject to an interest rate of Libor + 1%, which currently totals approximately 3% p.a. - a significant change from the previous rate of 11%.
D. What is the interest rate on a past debt, i.e. a debt incurredbefore April 2003?
Two Supreme Court judgements, handed down on the same day, referred to this question:
C.A. 6260/97 Ploska Morska v. Bank Nasional De Paris - New York (not yet published), (hereinafter: the Polska Case), and C.A. 6388/98 Deniztas Nakliyat Ve Ticaret et al. v. Credit Lyonnais S.A. et al. (not yet published) (hereinafter: Credit Lyonnais Case).
While different opinions were given on the issue whether new regulations may be applicable to past debts, it was agreed that the new arrangement may apply to “old debts” as the default option. The parties may provide proof to convince the Court that in any specific case another rate of interest should apply. However, in the absence of such proof, the applicable rate will be Libor + 1%.
E. Summary
It is clear that the amendment of the Interest Law, which also applies to the Insurance contract Law, improves foreign insurers’ position in all cases where insurers face legal claims, which lead to imposition of interest, in addition to insurance benefits.
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