The Supreme Court: One guarantor should not be permitted to “hitch a ride” on the settlement agreement of another guarantor

The Supreme Court dismissed an appeal from a District Court judgment, ruling that the Bank does not have to encourage a guarantor to carry out negotiations in circumstances where he does not show any interest in settling his debts

12.02.17 | Globes

The Supreme Court dismissed an appeal from a District Court judgment, ruling that the Bank does not have to encourage a guarantor to carry out negotiations in circumstances where he does not show any interest in settling his debts.

The appellant, together with his friend, was a guarantor for the debt of certain companies, and they signed personal guarantees as shareholders and managers in the companies, when they wanted to secure financing from Discount Mortgage Bank for a construction project.

The companies were unable to pay off the loan which, at the time of filing the claim, stood at approximately 60 million shekels, and the Bank approached the guarantors and demanded they pay the debt by virtue of their guarantee. Negotiations commenced between the Bank and the guarantors with the objective of reaching a settlement agreement.

At the end of the process, the Bank reached an understanding with one of the guarantors, according to which he would pay 12 million shekels from liquidation of the companies’ assets.

The second guarantor conducted negotiations in which he raised a number of conditions, which were unacceptable to the Bank, and ultimately no settlement agreement was reached with him, and the Bank sued him for an amount of 2.5 million shekels, despite the fact that according to the Bank the debt was higher. The District Court accepted the Bank’s claim and ordered the other guarantor to pay.

The guarantor filed an appeal with the Supreme Court, in which he argued that the agreement that was formulated during the negotiations he held with the Bank, which he signed after he had made certain changes therein, constitutes a binding contract between him and the Bank.

He also argued that the Bank had breached its duty of good faith in that it behaved in a different manner with the two guarantors when it signed a settlement agreement only with one; in that it did not inform him of having concluded a settlement agreement with the other guarantor; and also in the manner in which the negotiations with him were conducted. In light of these, he believes that the Bank’s lawsuit against him should be denied.

The Bank, on the other hand, through  Attorney Assaf Englard, head of the Banking and Financing Department at law firm Hamburger Evron & Co., and through Adv. Zohar Ilan from his firm, argued that the guarantee contract is valid, and that the appellant should pay the amount awarded against him by the District Court.

The Supreme Court, by a majority of two judges against one, denied the guarantor’s appeal and even charged him with payment of costs of 20,000 shekels to the Bank.

Justices Anat Baron and Salim Joubran accepted the Bank’s arguments that the appellant had adopted a passive approach and did not take any responsibility for his debts to the Bank, and that the changes made in handwriting in the term sheet are fundamental changes whose significance is that he was not interested in carrying out his part in the binding agreement. The Court determined that the appellant had not shown the Bank treated him with bad faith when negotiating with him.

The Supreme Court subsequently made two in-principle rulings: One relates to the stage of negotiations that preceded the signing of the settlement agreement when it was determined that it is not the duty of a bank, at a stage where a settlement agreement has not yet been signed, to encourage a guarantor to return to the negotiation table in circumstances where the guarantor for his part had not shown any interest in settling his debts to the bank, and that under the circumstances, non-inclusion of one guarantor in negotiations being held with the second guarantor does not constitute a breach of good faith on the part of the bank.

The second ruling refers to the stage following the signing of the settlement agreement with only one guarantor. The Supreme Court determined that it is not appropriate to allow the one guarantor, after a settlement agreement has been signed with the second guarantor, “to hitch a ride” on the work and the effort that the other guarantor invested in arriving at the settlement agreement, and thereby to completely cast off his liabilities to the Bank.

Justice Neal Hendel was in the minority and argued that the appeal should be accepted in part.