Standard Banking Contracts
Standard Banking Contracts
The Bank of Israel, through the Banking Supervision Department, has been acting in recent years to do away with one-sided conditions in the banking system’s standard contracts. This is part of the Department’s activities to improve the fairness in relations between banks and their customers. While litigation in Standard Contracts Court takes place in regard to the specific bank that is asked to revoke one-sided conditions, the Supervisor of Banks ultimately instructs the entire system to implement the court’s conclusions.
What is a standard contract and how can one-sided conditions in such a contract be canceled?
A standard contract is a contract in which most conditions are determined by one party. Usually, this is the party that provides the service or the product and that has knowledge, skill, and experience in the field. The other party is asked to sign the contract "as is" and has little if any ability to negotiate or amend its clauses. As a rule, large organizations use standard contracts to make their work more efficient and to establish a uniform basis for activity with many customers. Although activity based on standard contracts has an economic advantage (especially in reducing costs to the customer), there is concern that, due to the imbalance between the parties and one side’s ability to dictate the terms, a standard contract will be drawn up in a way that favors its author and may even include terms that give it an unfair advantage over the customer.
Accordingly, the Standard Contracts Law and the regulations based on it authorize several specific entities, including the Bank of Israel, to approach the Standard Contracts Court with a request to revoke or amend one-sided conditions in standard contracts.
Applications to revoke or amend one-sided conditions in banking contracts
The Attorney General approached the Standard Contracts Court and filed an application against one of the banks. Since the Bank of Israel was also empowered to do this, a total of four applications against banks for the cancellation or revision of one-sided conditions in their standard contracts were submitted. The applications are the following:
- This is the most commonly used contract in the banking system. All banks use it to contract with customers who wish to open a current account. At the initiative of the Bank of Israel, the Attorney General asked the Standard Contracts Court to eliminate one-sided conditions in the standard contract customarily used by Bank Leumi le-Israel, Ltd.
- The Court accepted most of the arguments and instructed Bank Leumi to amend many sections of the contract that it found to be one-sided. After the ruling was handed down, both parties appealed to the Supreme Court.
- Before the ruling on the appeal was given, the Supervisor of Banks instructed all the banks to amend the sections that the Court had found to be one-sided and to which the appeal to the Supreme Court did not apply, in all their usual contracts relating to the management of demand accounts. The banks revised their contracts accordingly.
- On February 18, 2010, the Supreme Court, sitting as the Court of Civil Appeals, handed down its ruling on the appeal. Consequently, the Supervisor of Banks instructed the banks to align their customary contracts with the Supreme Court’s rulings.
- A mortgage loan is one of the most important banking services that many customers use. Given the large number of borrowers who may be harmed by one-sided treatment in regard to a mortgage loan and the severe imbalance of forces between the bank and the customer in such a case, the Bank of Israel turned to the Standard Contracts Court against First International Mortgage Bank, Ltd. (which merged with First International Bank of Israel, Ltd., on May 31, 2006).
- On May 5, 2009, after the proceedings in this matter ended, the Standard Contracts Court ruled that many sections of the contract are indeed one-sided. The bank appealed the ruling to the Supreme Court. The Supervisor of Banks instructed the banks to amend or cancel sections in their mortgage-loan contracts in all matters unrelated to the appeal in accordance with the principles of the ruling.
- At this writing, the First International Bank’s appeal of the ruling is still being considered by the Supreme Court.
- Online banking services are accepted and very common in Israel. They help customers to save time. The banks encourage customers to use technological services, and charge less for them than for teller services of the same kind.
- The Bank of Israel asked the Standard Contracts Court to remove or amend one-sided conditions in a contract used by Bank Hapoalim, Ltd., for the provision of banking services online and by mobile phone.
- In its ruling, the Court accepted most of the Bank of Israel’s arguments and instructed Bank Hapoalim to cancel or modify provisions that absolve the bank of responsibility for events that may harm the customer—unauthorized transactions in the customer’s account, sharing of information about the customer, mishaps and disruptions of service, etc.
- Shortly after the ruling was handed down, the Supervisor of Banks instructed banks and credit card companies to amend standard contracts that concern the provision of online services in accordance with the principles of the ruling.
- For much of the population, buying a home is the largest and most significant expenditure they will ever make. When the purchase is made from a contractor, the contractor usually gives the buyer a bank guarantee to secure the buyer’s investment. Sometimes, however, the guarantor bank attaches many conditions to the arrangement that make it hard for the buyer to exercise the guarantee if necessary.
- Due to the frequency of the use of the guarantee and its crucial role in protecting homebuyers’ money, the Bank of Israel approached the Standard Contracts Court against Tefahot Israel Mortgage Bank, Ltd. (which merged with United Mizrahi Bank on December 31, 2004).
- The case ended with the issue of a ruling by the Standard Contracts Court.
- Since then, a standard wording for a bank guarantee under the Sales (Dwellings) (Assurance of Homebuyers’ Investment) (Bank Guarantee) Regulations, 5771-2010, has been formulated.