By Adv. Elinor Polak, Shibolet & Co.

Before signing a deed of guarantee to secure an obligation, Tali stipulates her consent on Ira signing as a second guarantor (together with and apart from her). But in fact, Ira is not being asked to sign as a guarantor. What, then, is the status of Tali’s guarantee? Should she be bound by her guarantee in respect of the entire obligation? Or does she have a defense available to her as a result of Ira not having been required to sign as a guarantor? And if so, should she be exempted entirely or only with respect to Ira’s relative share?

This is the key question discussed in the judgment regarding the motion for leave to appeal in the case of Roxy Construction & Investments Ltd. (“Roxy”) v. Palkobi Construction & Investment Company Ltd. (“Palkobi”)[1].

The Herastel ruling

The Contracts Law determines that in cases where the obligation of one debtor is revoked (other than if it is canceled due to a flaw in the competency or representation of the other debtor), the obligation of the other must be revoked as well, and that in cases where the creditor has exempted one of the debtors from the obligation, in whole or in part, the other debtor will be equally exempt, unless the exemption implies a different intention (sections 55(b) and (c) of the Contracts Law).

And what happens in a case where the other debtor was supposed to commit, but in the end did not do so?

On this issue President S. Agranat adopted an English ruling and determined the following ruling (the “Herastel Ruling”)[2]:

“If a person has signed a contractual document formulated in a language that purports to impose upon him, jointly with another or with others, a combined and separate obligation to the creditor, and subsequently it transpires that the other ‘debtors’ or any of them did not sign, he will then be exempt – as will the other signatories – from the obligation in question. (The Herastel Case, page 417).”

However, Judge Agranat qualified this ruling and determined that in cases where it can be proven that the party that had committed himself had directly or indirectly waived the undertaking by the other debtor, the Herastel presumption will not be applied, and the party that had committed himself will not be exempt from his undertaking.

The underlying rationale of the Herastel Ruling is that not having the other debtors, who from the outset were meant to jointly and severally commit themselves as debtors, sign, is damaging to the right of contribution inuring to the debtor who did in fact sign and commit to the obligation. This is because the Contracts Law grants the debtor who had paid more than his share of the debt the right to demand contribution by the other debtors up to the amount he had paid in excess of his share.

In parentheses, I will note that this is the reason why it is our practice to add the following clause to deeds of guarantee:

“Where this deed of guarantee is signed by only part of the guarantors, the deed of guarantee shall be binding upon all those signing it, jointly and severally, and no guarantor shall raise any argument with respect to the absence of the signatures of additional guarantors on this guarantee or with respect to the disqualification or non-validity of the guarantee due to the absence of all signatures upon it and/or any argument with respect to a representation pursuant whereto other guarantors were to have signed this deed of guarantee.”

Application of the Herastel Ruling to an obligation of the guarantee type

It is noted that the Herastel Case discussed a contractual obligation – and not an obligation of the guarantee type. The courts were divided on the question of the application of the Herastel Ruling to an obligation of the guarantee type, with some choosing to apply it to guarantee agreements while others were in doubt.

Indeed, in the Roxy Case Roxy argued that the Herastel Ruling had grown increasingly limited in scope over the years, and consequently the time had come to reexamine it in general and at least, to determine that it should not be applied to an obligation of the guarantee type.

In his judgment, Judge U. Vogelman analyzed the Herastel Ruling while making reference to the existing criticism of this ruling, but determined that the validity of the ruling in general was not the underlying factor in the discussion before him on the Roxy Case, but is applicable to an undertaking of the guarantee type.

To clarify the issue, Judge Vogelman referred to the Guarantee Law to examine if it was possible to find in it an arrangement similar to the Herastel Ruling or to the arrangement set forth in sections 55(b) and (c) of the Contracts Law.

Judge Vogelman ultimately determined that there was no similar arrangement in the Guarantee Law, and accordingly, with respect to the issue of contribution among guarantors the general law must be applied – i.e. section 55(b) of the Contracts Law, mutatis mutandis – also to a guarantee agreement.

As section 55(b) of the Contracts Law and the Herastel Ruling were both designed to protect the debtor’s interest in contribution, Judge Vogelman determined that the Herastel Ruling must also be applied to guarantee agreements. In other words, in a case where a number of guarantors were meant to jointly and severally sign a deed of guarantee and a certain guarantor did not do so, the guarantee of the remaining guarantors is void.

Let us return to the story of Tali and Ira. In light of the foregoing Tali must be exempted from her guarantee, but should she be exempted altogether – a “full domino effect”, or from Ira’s relative share – a “partial domino effect”?

In the Roxy Case, Judge Vogelman determined that there was no room to apply the “partial domino effect” with respect to obligations of the guarantee type.

The future of the Herastel Ruling

It should be noted that Judge Vogelman did not overlook the problematics likely to arise in certain cases as a result of the application of this ruling. Thus, for example, in the case of the Foreign Trade Bank Ltd. v. Porcelain Plant Ltd.[3], one of six guarantors did not sign a guarantee, following which the other five were exempted from their guarantee altogether(!).

 

Judge Vogelman, as well as Supreme Court President Judge M. Naor (then Deputy President), maintain that the time has come to find a fitting expression of the Herastel Ruling in the legislative framework, and have called upon the legislators to “shake off the dust” from the civil law bill recommended by the Codification Committee, in which context they sought to change the existing arrangement, and instead, adopt an arrangement of partial defense in cases where this is justified.



[1] Motion for Leave to Appeal 6642/13 Roxy Construction & Investments. Ltd. v. Palkobi Construction & Investment Company Ltd. (published in Nevo) (hereinafter: the “Roxy Case”).

[2] Civil Appeal 610/68 Herastel v. Ateret Habrit, Registered Company Ltd., Judgments 23(1) 410 (1969) (hereinafter: the “Herastel Case”).

[3] Civil Case (Tel Aviv District Court) 476/67 Foreign Trade Bank Ltd. v. Porcelain Plant Ltd., District Judgments 61 393 (1968).