The Israeli legal system, like many of its counterparts around the globe, is struggling to wrap its head around the legal implications of the COVID-19 crisis. It is already becoming clear that in all likelihood, besides the impact on public health, the damage to the economy will be devastating. Many businesses have come to a grinding halt; others are experiencing unprecedented setbacks. Many face severe difficulties in meeting their contractual obligations. The new crisis has created a legal dilemma, embodied in the need to balance two contradictory concepts.
On the one hand, one must uphold binding contractual obligations (and thus prevent the collapse of the entire commercial contract system). On the other hand, one needs to acknowledge that the execution of a contract in good faith may necessitate the alteration of such obligations under dire circumstances. While creditors demand the full implementation of binding commitments, regardless of the state of events, debtors assert that these are no longer enforceable due to force majeure.
Does Israel’s contract law provide an answer to this dilemma? Well, as in all things legal, the answer is inconclusive and depends on the circumstances of each case. As a general rule, the concept of force majeure, per se, does not exist in Israeli legislation. The closest thing one can find is the Hebrew term sikkul, which is the equivalent of “prevention” or “thwarting.”
The phrase is embedded in article 18 of the Israeli Contract Law (Remedies for Breach of Contract) 1970 – 5731 (“Article 18”). Article 18 specifies extraordinary circumstances under which a breach of the contract will not be grounds for a claim for compensation or enforcement. These circumstances include “events which the breaching party: (1) was unaware of and was not obligated to be aware of at the time of signing and; (2) did not nor could not have anticipated and; (3) was unable to prevent.” Note that these conditions are cumulative.
Israeli courts are known to be very reluctant when it comes to delivering rulings under Article 18. It would take more than the mere assertion of infrequent and severe circumstances to convince a court to nullify a binding contract. The plaintiff would have to show that the execution of the obligations under the contract had become impossible or contradictory to the fundamental purpose, which was the basis for the entire engagement in the first place.
This is no easy burden to lift. Over the years, the Supreme Court has repeatedly expressed a consistent opinion that a court of law should base any ruling concerning the existence of “prevention” under Article 18 on objective criteria. Under this ruling, any argument based on Article 18 should be examined through the perspective of a “reasonable person” rather than in consideration of the actual expectations of the parties. In a ruling rendered some seven years ago, the Supreme Court stipulated that for any prevention to become “eligible” under Article 18, it must be permanent. Hence, a temporary impediment, even if unexpected, cannot be grounds for termination or nullification.
Furthermore, the Supreme Court ruled that even in cases in which circumstances warrant the use of Article 18, this does not necessarily mean that the contract should be nullified in its entirety, but rather that remedies of compensation or enforcement may not be available to the plaintiff as a result of the specific breach in question.
Over the past few months, we have witnessed a growing number of attempts by parties to relieve themselves of their contractual obligations on the basis of the “Corona argument.” These parties should be aware that “Corona” in itself is not a magic word that provides a free pass to evading binding obligations. Every case will be decided on its merits, and the application of Article 18 is not to be taken for granted. Parties who wish to prepare themselves for such eventualities should make sure to include a force majeure paragraph in the contract prior to signing. Any such paragraph should specify the exact events that the parties may consider force majeure or the circumstances under which they will be allowed to postpone the execution of their mutual obligations or even nullify them.
References:
- Case No. 5054/11 Sapir & Barkat Real Estate v. Yaacov Amster, Adv. (March 7, 2013).
- Civil Appeal No. 464/81 Baruch Shamir Enterprises – Investment and Construction Corporation Ltd. v. Bruria Hoch.
Tags: Drafting Clause, Israel, Force Majeure, Contract Law
