Civil Claim 19563-04-10 Badihi: Mizrahi Tefahot will pay USD 221,046 over a cheque lost in collection abroad

Background and facts in Civil Claim 19563-04-10 Badihi v. Mizrahi Tefahot Bank

The judgment was given on June 10, 2012 in the Central District Court, by Judge Prof. Ofer Grosskopf. The plaintiffs are Eyal Badihi Diamonds Ltd. and two guarantors of its debts. The defendant, which also filed a counterclaim, is Mizrahi Tefahot Bank.

According to the judgment, in May 2009 the company sold diamonds to a dealer from Dubai. To secure payment it received, in addition to cheques of a Hong Kong company that were dishonored, a personal cheque of the dealer for USD 368,410, drawn on an English bank. In October 2009 the diamond dealer deposited the personal cheque for collection at the bank's branch in the Diamond Exchange.

Before the deposit, the branch manager signed, on behalf of the bank, a written undertaking to return the cheque if it was returned for any reason whatsoever. The next day the cheque was sent for collection through a correspondent bank in England. The cheque was lost on the way, and the English bank claimed it had not received it. A copy presented later was not honored, and the original cheque was not returned to the diamond dealer.

In January 2010 the English bank announced that it could not honor the copy of the cheque, on the ground "REFER TO DRAWER". According to its explanation, this is a standard ground, which usually indicates insufficient funds or that the drawer of the cheque could not be reached.

The bank rejected the demand for compensation, and in a counterclaim demanded from the company and the guarantors NIS 1,581,705, the debit balance in the account.

The parties' arguments

According to the diamond dealer, the bank is responsible for negligence in collecting the cheque and for the negligence of the correspondent bank. He also argued that the bank breached the undertaking to return the cheque, and that the original cheque was essential to him for collection in Dubai.

The bank argued that its handling of the cheque was proper and that it is not responsible for the failures of a foreign bank. In its view the undertaking was conditional: to return the cheque only if it physically came back to the branch. The bank further argued that no damage was caused, because the dealer could be sued even without the original cheque. At the start of the proceeding the bank also raised doubt as to whether the diamond transaction took place.

What the court held: Mizrahi Tefahot's liability for the lost cheque

The transaction was genuine

The court held that the diamond transaction was genuine. It held that the suspicions the bank raised were "unfounded", and that the branch manager himself testified that he did not think the transaction was fictitious.

Liability for the correspondent bank

The court found no negligence in the bank's own actions. The use of a correspondent bank was reasonable, because the cheque had been changed by hand from pounds sterling to dollars and could not be collected automatically. However, it was held that the correspondent bank was negligent: it presented no documentation of delivering the cheque to the English bank.

The court held that an Israeli bank is liable for the negligence of a correspondent that carries out a technical action for it, by virtue of the law of agency and by virtue of section 7(a) of the Bailees Law. The court relied on the Bank Leumi precedent on correspondents. The bank pleaded an exemption clause in the account terms, but it was held that it cannot remove this liability by a standard exemption clause in a standard form contract.

The court added a policy consideration. The customer does not know the foreign bank and has no relationship with it, and so would have difficulty suing it. If it is appropriate to join the correspondent to the proceeding, it is better for the Israeli bank to do so by a third-party notice, and in this case the bank chose not to do so.

Breach of the undertaking to return the cheque

The court accepted the diamond dealer's interpretation. The word "returned" in the undertaking was interpreted as the dishonoring of the cheque, and not as its physical return to the branch. Any other interpretation would empty the undertaking of content. The bank did not prove that the cheque was lost in circumstances beyond its control or the control of its agent.

Calculating the damage

The court assessed the damage from the failure to present the original cheque at 20% of its amount. It held that the chances of collection in this way were not high, because the cheque could not be cleared automatically and because there were insufficient funds in the drawer's account when the copy was presented.

The court assessed the damage from the failure to return the cheque at 40%. Without the original cheque the diamond dealer had to sue the dealer in court, instead of opening execution proceedings. The court added that a personal cheque is stronger as security than a company cheque. On the other hand, it noted that the diamond dealer did not submit an expert opinion on collection proceedings in Dubai, and did not prove an offer to buy the cheque at 80% of its value.

In total, damage of 60% of the cheque was determined, USD 221,046, which is NIS 829,365 on the date of demand.

This sum, plus linkage differentials and interest, NIS 840,072, was set off against the company's debt balance to the bank. The bank's counterclaim was allowed in the amount of NIS 741,633, with linkage differentials and interest under the Adjudication of Interest Law only, and not at the contractual interest rate. The bank may continue to enforce the mortgage if the debt is not repaid within 45 days. The bank was ordered to pay costs and legal fees of NIS 150,000 including VAT.

Quotes from the decision

I undertake to return the above cheque to Eyal Badihi if the cheque is returned for any reason whatsoever, so that he can take legal action against the owner of the cheque

The wording of the branch manager's undertaking, as quoted in the judgment, chapter "The facts of the case" (translated from Hebrew).

Bank Mizrahi bears, under Israeli law, liability for the failures of the correspondent bank, which was negligent in safeguarding the personal cheque and in fulfilling its agency to deliver the cheque to the drawee bank

The judgment, summary of the chapter on the bank's liability for the failure to present the cheque (translated from Hebrew).

What it means for Mizrahi Tefahot customers

The judgment holds that a customer who deposits a foreign cheque for collection does not have to sue a foreign bank he does not know himself. The Israeli bank is liable for the correspondent bank it chose, at least in technical actions such as presenting a cheque. A written undertaking by a branch manager was interpreted according to its purpose.

A customer who deposits a bill of special importance can ask for a written undertaking and keep a copy of it. Another judgment on correspondent banks at Mizrahi Tefahot: case 18101-09-20 on correspondent bank fees.

Sources

• Text of the judgment in Civil Claim 19563-04-10 (ygoldlaw.co.il website)

Frequently asked questions about court rulings against Mizrahi Tefahot Bank

How to cite

Civil Claim 19563-04-10 (Eyal Badihi Diamonds Ltd. et al. v. Mizrahi Tefahot Bank), Central District Court, 10.06.2012. Source: Net HaMishpat (Israeli courts database), case Civil Claim 19563-04-10 (Eyal Badihi Diamonds Ltd. et al. v. Mizrahi Tefahot Bank).