Legal Updates

Checks traded over to a bank will be honored even if no consideration has been received for such

February 7, 2024

A retail fashion chain provided 34 marketable postdated checks in the amount of over ILS 4 million to an importer for goods to be received. The checks were deposited in the importer’s bank, but the importer's business subsequently collapsed and the retailer canceled the checks whic due date has not yet arrived due to failure to receive consideration for such.

The Court held that the retailer must pay the amount of the checks even though it did not receive any consideration for such. Israeli law sets that under the following preconditions, a holder of a promissory note ” will be deemed a “holder in due course”: The holder took the promissory note intact and in good condition under its appearance; The holder becomes the holder of the note before the payment date specified therein; and the holder took the note in good faith and for value and at the time of the transaction had no knowledge that the trader’s right was impaired. Holding in due course (which derives from the concept of Marché Ouvert – Market Overt) "purifies" the note and gives the holder "immunity" from any contention in relation to the note, including if no consideration was given for the note (consideration failure(. Here, the checks were drawn in favor of the bank and the drawee signed the back of the checks, without specifying the drawee's name, and delivered the checks to the bank. The bank acted in good faith and did not know that these were checks intended for future transactions or that the goods for them were not provided. The importer left behind a debt to the bank in the amount of ILS 20 million and the bank held the checks as collateral for granting credit. Therefore, the bank gave value in favor of the checks and is deemed a holder in due course and is immune from any contention of consideration failure. Thus, the retailer must pay the amount of the checks, despite that it did not receive any consideration for such.