A commercial contract in Israel: 7 principles before you sign

Service page: Commercial contracts lawyer: drafting, review and enforcement.

Principle 1: intention to be bound (the agreement must be real)

For a contract to be valid, both parties must agree on the same terms, and with the same understanding. It is not enough that each party understood something different. Section 2 of the Contracts (General Part) Law, 5733-1973, requires an intention to be bound and certainty for a binding contract to exist.

In practice: in a contract open to different interpretations, where one of the parties had the upper hand in shaping its terms, an interpretation against that party is preferred (section 25(b1) of the Contracts (General Part) Law). And a business contract made or renewed on or after 7 January 2026 that does not set how it is to be interpreted will be interpreted according to its wording alone, unless the wording alone leads to an unreasonable result, or a contradiction arises between its provisions (section 25(a)(2), as worded in Amendment No. 3, 5786-2026). The Law does not define what a “business contract” is, and the question of which contracts will be considered as such will be decided by the case law. It is clear only that an employment contract and a collective agreement are, as a rule, interpreted according to the intention of the parties, and that a standard-form contract is interpreted this way even if it states otherwise (section 25(a)(4)).

A contract can be made even without a signed document. Acceptance may be by an act performing the contract or by other conduct, if these ways of acceptance are implied by the offer (section 6(a) of the Contracts (General Part) Law), and this is what is sometimes called an “implied agreement”; and a contract may be made orally, unless a law or an agreement between the parties makes its validity conditional on a particular form (section 23). On the other hand, silence alone is not acceptance: a statement by the offeror that no response will be treated as acceptance has no effect (section 6(b)). And on the difficulty of proving an agreement that was not written down: An oral contract: validity and proof.

Principle 2: certainty (define the essential terms) All the essential terms must be defined: the price, the scope of work, the timetables and the termination mechanisms. A contract that leaves central issues “to be agreed in the future” may be unenforceable.

A classic example: a contract that says “the pay terms will be agreed later” is exposed to the claim that no binding contract was made on that matter. Details not set in the contract can be determined by the practice existing between the parties and, if there is no such practice, by the practice usual in contracts of that type (section 26 of the Contracts (General Part) Law); but you should not rely on such gap-filling when an essential term was deliberately left open.

Principle 3: good faith (a duty that cannot be contracted out of)

Every commercial contract in Israel is subject to the duty of good faith set in section 39 of the Contracts (General Part) Law, 5733-1973. Each party must act candidly, honestly and in line with the shared intention underlying the agreement.

Someone who exploits a technical loophole in the contract to gain an unfair advantage risks the court holding that their conduct is a breach of the duty of good faith.

Principle 4: remedies (what happens when the other party does not perform)

The Contracts (Remedies for Breach of Contract) Law, 5731-1970, sets out the remedies available in the event of a breach:

• Compensation: a payment for damage that the party in breach foresaw, or should have foreseen, at the time the contract was made, as a likely result of the breach (section 10)
• Enforcement: the court can require a party to meet its obligations, unless the contract cannot be performed, enforcement would mean compelling personal work or service, carrying out the order would require unreasonable supervision, or enforcement would be unjust in the circumstances (section 3)
• Rescission of the contract: in a fundamental breach, the injured party may rescind the agreement (section 7(a)); in a non-fundamental breach, as a rule only after giving the party in breach an extension to perform and the contract was not performed within a reasonable time after it (section 7(b)). Rescission is made by notice to the party in breach within a reasonable time (section 8); see Canceling a contract: when it is allowed, and how to do it correctly
• Restitution: once the contract has been rescinded, each party returns what it received under it, or its value (section 9)

Principle 5: jurisdiction and governing law (do not forget to state them)

A contract must state clearly which law applies to the agreement (usually Israeli law), and which forum will resolve disputes (an Israeli court, arbitration or mediation). If the contract is silent on this, the court will infer it from the circumstances of the case, and not always in your favor.

This is especially critical when the parties are from different countries, because a foreign law may apply to an agreement you thought you drafted under Israeli law.

Principle 6: indemnity (who pays when the other party causes damage to a third party) An indemnity clause protects one party against damage, legal costs and claims caused by the acts of the other party. For example: if a supplier infringes copyright while performing the work, an indemnity clause requires the supplier to bear all the costs caused to the client.

Principle 7: force majeure (when reality overrides the contract)

A force majeure clause releases a party from liability in the event of exceptional events beyond its control: war, an earthquake, an epidemic, a government lockdown. It is important to define in advance which events will count as such, and what happens after them. Following the lessons of COVID-19 and October 2023, Israeli circumstances call for explicit wording, not general wording.

“A contract you did not read to the end is a contract waiting for problems. Before you sign, make sure you understand every clause, not just its heading.”

Frequently asked questions

Is a contract binding even without a signed document?

Yes, as a rule. Acceptance may be by an act performing the contract or by other conduct, if these ways are implied by the offer (section 6(a) of the Contracts (General Part) Law), and a contract may be made orally, unless a law or an agreement between the parties makes its validity conditional on a particular form (section 23). On the other hand, silence alone is not acceptance: a statement by the offeror that no response will be treated as acceptance has no effect (section 6(b)).

The contract says that “the terms will be agreed later”. Is it binding?

Not necessarily. A contract that leaves an essential term “to be agreed in the future” is exposed to the claim that no binding contract was made on that matter. Details not set in the contract can be determined by the practice existing between the parties and, if there is no such practice, by the practice usual in contracts of that type (section 26 of the Contracts (General Part) Law); but you should not rely on such gap-filling when an essential term was deliberately left open.

How will a business contract made on or after 7 January 2026 be interpreted?

If it does not set how it is to be interpreted, according to its wording alone, unless the wording alone leads to an unreasonable result, or a contradiction arises between its provisions (section 25(a)(2) of the Contracts (General Part) Law, as worded in Amendment No. 3, 5786-2026). The Law does not define what a “business contract” is, and the question of which contracts will be considered as such will be decided by the case law.

When may you cancel a contract because of a breach?

In a fundamental breach, the injured party may rescind the contract (section 7(a) of the Contracts (Remedies for Breach of Contract) Law); in a non-fundamental breach, as a rule only after giving the party in breach an extension to perform and the contract was not performed within a reasonable time after it (section 7(b)). Rescission is made by notice to the party in breach within a reasonable time (section 8), and once the contract has been rescinded, each party returns what it received under it, or its value (section 9).

What happens if the contract does not say which law applies and where disputes will be decided?

The court will infer it from the circumstances of the case. When the parties are from different countries, a foreign law may apply to an agreement the parties thought they drafted under Israeli law. So it is worth stating clearly in the contract which law applies and which forum will resolve disputes: an Israeli court, arbitration or mediation.