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based on ruling 80067 of the Eretz Hemdah-Gazit Rabbinical Courts

Where Could the Investment Money Go?

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Beit Din Eretz Hemda - Gazit

Shvat 18 5782
Case: The plaintiffs (=pl) invested 200,000 NIS with the defendant (=def), an investment corporation owned by def2, in a project to build a commercial building. The following provisions are included in an investment agreement signed in 07.2015: 1. When def will receive a building permit, they will create a subsidiary for this project, in which pl will have a 6.6% stake. 2. If the project does not work (criteria detailed, but not in this presentation), pl’s investment will be used for another project, chosen by pl. 3. Until the subsidiary is formed, pl’s money will be kept in escrow. The property still lacks a building permit, and def has used pl’s money, not keeping it in escrow. Pl accuses def of being evasive about information, assuring them that the building permit is coming soon, and for a long time keeping as a secret that the money is not in escrow. Pl asked to have the money transferred to other investments, but def offered only a loan with interest, which pl turned down. Therefore, pl demand their money back along with expected profits of 7% annually, and compensation for his lawyer’s fee. Def2 responds that he told pl there was a potential for loss. The project became more complicated and expensive than envisioned, and pl’s money has been spent, and will not be available until the project is finished. Def2 claims that the clause about escrow was a technical mistake, as money needed for a project would be useless in escrow. Def2 also rejects pl’s demand that he accept personal liability since the contract was with def.

Ruling: First, we determine that the project failed to materialize as defined by the contract.

According to the contract, pl’s money was not to be used until the project received a building permit, which is a time at which the most money becomes needed for construction. One can claim there is a mistake in a contract only with proof (Shulchan Aruch, Choshen Mishpat 49:6). The Tumim (49:5) says that this is either when the only logical meaning is something else or when there are witnesses. The Beit Meir (4) adds that it can be a mistake that most people would not catch. Def’s claim does meet any of these criteria, and therefore this claim is rejected.

Although def violated the agreement, pl might have been mochel the violation when they chose, upon learning the money was not in escrow, to continue investing it with def rather than demand its return. However, there are indications that the mechila was on false premises, believing def2 that the building permit was close at hand, which was untrue (see Rama, CM 241:17). Furthermore, it is unclear whether pl’s mechila was explicit, and silent mechila is invalid according to many opinions (see K’tzot Hachoshen 12:1 and Netivot Hamishpat 12:5). Finally, pl have a contract in their favor, in which case many rule the mechila must come with an act of kinyan to be binding (see Rama, CM 241:2). Due to the combination of all these reasons, pl can demand their money back.
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