Breach of contract in Israel: compensation, enforcement or rescission

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

You paid, you signed, and you relied on it, and the other party did not meet its obligation. Now the question is not only “what am I owed” but “how do I get it”. Under Israeli law you have several ways to act, and it is important to know what the limits are.

What exactly counts as a breach of contract?

A breach of contract is a failure to perform a contractual obligation, whether it is non-payment, non-delivery, defective performance or late performance. The Contracts (Remedies for Breach of Contract) Law, 5731-1970, distinguishes between two types of breach:

• Fundamental breach: a breach in view of which a reasonable person would not have entered into the contract had they foreseen it and its consequences. It is also a breach that the contract itself states will be considered fundamental. A sweeping clause that makes every breach fundamental is valid only if it was reasonable when the contract was made (section 6). It gives an immediate right of rescission.
• Non-fundamental breach: any other breach. It gives a right to enforcement and compensation. It gives a right to rescission only if the contract was not performed within a reasonable time after the party in breach was given an extension (section 7(b)).

What remedies can you claim for breach of contract, and how do you choose between them?

The remedies available to you under the Law:

• Monetary compensation: the most common remedy. You can claim compensation for the damage actually caused to you (loss of money and business loss, including loss of profit). You can also claim reasonable expenses you incurred to prevent or reduce the damage (section 14(b)). The compensation is limited to damage that was foreseeable when the contract was made.
• Specific performance: the court orders the party in breach to perform the obligation. Under Israeli law this is a right of the injured party. The exceptions are when the contract cannot be performed, enforcement would compel personal work or service, performance would require unreasonable supervision, or enforcement would be unjust in the circumstances (section 3).
• Rescission of the contract: rescission by notice to the party in breach (section 8), after which each party returns what it received (section 9). In a fundamental breach, there is no need for an extension. In a non-fundamental breach, rescission is possible only if the contract was not performed within a reasonable time after an extension was given (section 7).
• Set-off: if you also owe money to the other party, you can set it off against the amount you owe.

Important: enforcement and rescission are alternative remedies. Someone who rescinded the contract cannot demand its enforcement. Compensation can be claimed in addition to either of them or instead of them (section 2).

How much money can you sue for?

The compensation you are owed is the damage caused, but with two important limits:

• Foreseeability of the damage: a court will compensate only for damage that could reasonably be expected to result from the breach. Exceptional and unforeseeable damage will usually not be compensated.
• The duty to mitigate the damage: you must take reasonable steps to minimize the damage. If you did not, the compensation will be reduced accordingly.

What about penalties set in advance in the contract? Contractual penalties (“liquidated damages”) are valid. But the court may reduce them if they were set with no reasonable relation to the damage that could have been foreseen when the contract was made (section 15(a) of the Remedies Law). The test is not the damage actually caused. So a penalty clause of “a million shekels for each day of delay” may be reduced significantly by the court.

Can you get compensation without proving damage? Yes, in situations the Law defines. If a contract to supply or receive an asset or a service was rescinded because of its breach, the compensation is the difference between the consideration in the contract and the value of the asset or service on the day of rescission (section 11(a)). If a sum of money was not paid on time, the compensation is shekel interest under the Adjudication of Interest and Linkage Law, 5721-1961 (חוק פסיקת ריבית והצמדה, התשכ״א-1961), from the day of the breach until the day of payment, unless the court set a different rate (section 11(b)). If liquidated damages were set in the contract, they are given without proof of damage, subject to the power to reduce them (section 15(a)). For non-financial damage, such as emotional distress, the court may award compensation at the rate it sees fit (section 13).

What do you do first, before going to court?

The first step is a letter of demand. It should include:

• Details of the specific breach (what, when, how much).
• A demand to put it right within a reasonable period of time (14–30 days).
• A statement that if it is not put right, you will go to court.

A professionally written letter of demand is sometimes enough to solve the problem. And if not, it significantly strengthens your position in the lawsuit. Note: a claim for breach of contract generally becomes time-barred 7 years after the day of the breach. That is the day on which the cause of action arose (sections 5(1) and 6 of the Prescription Law, 5718-1958).