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Shabbat Parashat Vayeira 5780

P'ninat Mishpat: How to Calculate Interest on Investment

(based on ruling 71067 of the Eretz Hemdah-Gazit Rabbinical Courts)

Case: The plaintiff (=pl) lent the defendant (=def) $50,000 in shekels for def to use in a high-gain, moderate-risk real estate project. Def was to pay within two years with the plan of receiving 100% profit to be paid from profits (with the use of a heter iska). If there would be no profit, only the principal would be returned. In the case of early or late payment, the calculations would be prorated. After a year and a half, def returned to pl $50,000 in shekels and promised to give interest prorated for that period of time; he paid that much later. All agree that at the time of the first payment, there were not yet profits. Five years later, when it became clear that significant profits had been realized, pl sued def for additional interest. Pl claims that the $50,000 already returned should be considered in part payment of principal and in part payment of interest, with some principal remaining. Interest on the remaining money should be calculated based on the fact that it was for much longer than two years. The interest should also be compounded. Def responds that the whole loan was paid early at a time that there was no profit and therefore no obligation of interest, and that his agreement to pay interest with the assumption of future profit was beyond the letter of the law.

 

Ruling: In order to be able to claim compounded interest (which is possible even with a heter iska – Taz, Yoreh Deah 177:31), there would have to be some indication from the language of the contract. There is no such indication.

Regarding whether there is an obligation to pay as if there was profit when there was not, ostensibly since the money was given for one purpose, there should not be payment if it did not see profit. It is clear from pl’s claims that he understood it this way as well. Beit din was able to determine that indeed there had not been profits from the investment at the time the $50,000 was returned. Although the standard heter iska requires an oath to the effect of no profits (and def is not going to swear), the poskim (see Brit Yehuda 38:(6)) rule that if the investor knows there was no profit, there is no oath requirement. It is a question here whether the later profits that were facilitated by the opportunities created by the original loan, should obligate def. However, since def agreed to pay that interest, there is no issue.

Should we consider the $50,000 payment as returning the whole principal? Usually the recipient determines what the payment is for (Shulchan Aruch, Choshen Mishpat 83:2), but here there are clear indications that it was for the principal. First, the amount is precisely for the amount of the loan. Def also claims that he stipulated that this is what it was for and that pl was quiet. Two dayanim say that he can determine the purpose of the payment only when the two obligations apply at the time, whereas here, the payment for profit did not yet apply at that time. According to the third dayan, since pl claims that there is payment for compounded interest, it thus makes no difference if the payment was for principal or interest because interest turns into principal. Thus, pl admitted that he had no reason to care.

According to all dayanim, def is not required to pay any more.

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