Rescission of a contract: when it is allowed and how to do it properly

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

The supplier did not show up. The contractor stopped halfway. The partner did not do their part. And now you are asking: may I rescind? The answer: it depends. A rescission done properly protects you and entitles you to compensation. A rescission done improperly makes you the party in breach, which is exactly the opposite of what you wanted. This guide explains when you may rescind, how to do it properly, and what happens next.

The legal framework: two laws you need to know

Rescinding a contract in Israel is governed mainly by two laws: the Contracts (General Part) Law, 5733-1973 and the Contracts (Remedies for Breach of Contract) Law, 5731-1970. The first deals with making the contract and with rescinding it because of a defect in its making: mistake, deception, duress and unconscionable exploitation (oshek) (sections 14, 15, 17 and 18). The second sets what a fundamental breach is and what the injured party is entitled to when the other side breached: enforcement or rescission, and damages in addition to them or instead of them (section 2).

Section 7 of the Remedies Law distinguishes between two types of breach: a fundamental breach, which gives a right to rescind immediately, and a non-fundamental breach, which first requires an opportunity to remedy it. This distinction is critical, and most disputes over contract rescissions arise because one of the parties did not distinguish between them.

Fundamental breach: when may you rescind immediately?

A fundamental breach is a breach where a reasonable person would not have entered into the contract had they known in advance that such a breach would occur. This definition, from section 6 of the Remedies Law, is broad on purpose, and gives the courts flexibility according to the circumstances. The section also recognizes a breach that the parties agreed in the contract would be treated as fundamental, but a sweeping clause that makes every breach fundamental is valid only if it was reasonable at the time the contract was made.

Examples of a fundamental breach that justify immediate rescission: a contractor who has not started work at all after three months; a supplier who delivers completely wrong goods; a tenant who has not paid rent for months. By contrast, a slight delay in delivery, a small defect in a product, or a wording error in an invoice are usually not fundamental and do not justify rescission.

In a non-fundamental breach, the injured party must, before rescinding, first give the party in breach an extension to perform the contract, and only if the contract was not performed within a reasonable time after the extension was given may it rescind, unless rescission would be unjust in the circumstances (section 7(b) of the Remedies Law). The Law does not set a number of days; it is advisable to give the extension in writing and to set an express date in it.

Rescission under the terms of the contract itself

Apart from a breach, many contracts include independent rescission clauses: “Change of Control”, “Termination for Convenience”, advance notice of 30/60/90 days, and more. When there is such a clause, a party that wants to rescind must comply exactly with its terms: how the notice is delivered, the content of the notice, and the waiting period.

In doubt about the interpretation? 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: the contra proferentem rule in 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 of the contract alone leads to an unreasonable result, or there is a contradiction between its provisions (section 25(a)(2), as worded in Amendment No. 3, 5786-2026).

Cancellation notice: how do you do it properly?

The law does not require writing: a notice under the Remedies Law is given in the way the parties agreed, and where they did not agree, by registered mail or in another way that is usual in the circumstances (section 21). In practice, documented writing that can be proven is better: not orally and not by WhatsApp alone. These are the essential elements:

• An express statement that this is a cancellation notice, that is, notice of rescission of the contract
• A statement of the breach: what the other side did that justifies rescission
• The date the rescission takes effect
• A demand for restitution if advance payments were made
• Reservation of rights: “without prejudice to any right or remedy”

Send the notice by registered mail and by email, so that there is no dispute about when it was received.

What happens after the rescission: restitution and damages

Rescinding a contract is not “erasing” it: it creates mutual duties. Section 9 of the Remedies Law sets a duty of restitution: everything given to the other side under the contract is returned. If you paid an advance, you are entitled to the money back. If you provided a service, you may be entitled to payment for it even after the rescission, according to the real value delivered.

In addition to restitution, the party in breach must pay damages for the harm caused, under sections 10–11 of the Remedies Law. The damages cover direct and foreseeable harm, and sometimes also loss of profit. The damages will not cover harm the injured party could have prevented by reasonable steps (the duty to mitigate, section 14(a)).

A numerical example under sections 9 and 11(a) of the Remedies Law: you ordered goods for NIS 100,000 and paid an advance of NIS 30,000. The supplier breached the contract, and you lawfully rescinded it. On the day of rescission, the value of the same goods is NIS 120,000.

• Restitution (section 9(a)): the party in breach must return what it received under the contract, that is, the NIS 30,000 advance.
• Damages without proof of damage (section 11(a)): the difference between the consideration under the contract and the value on the day of rescission: NIS 120,000 minus NIS 100,000, that is, NIS 20,000.
• Beyond that: additional damage can be claimed under section 10, but it must be proven, and it is subject to the duty to mitigate damage (section 14(a)). The value on the day of rescission is a question of fact that depends on the circumstances.

Rescission of a consumer contract: special laws

When one of the parties is a consumer, the Consumer Protection Law, 5741-1981, adds special cancellation rights, mainly the right to cancel a distance sale (purchase made online or by phone) without giving a reason: for goods, from the day of the transaction until 14 days from the day the goods or the document with the transaction details were received, whichever is later; for a service, within 14 days from the day of the transaction or from the day the document was received, whichever is later (section 14C(c) of the Consumer Protection Law, subject to the exceptions in the Law). This right exists regardless of any breach. Anyone who sells to consumers must know it in depth.

Three things you must not do

A practical checklist

1. Do not rescind orally and then take it back. An oral rescission that is later withdrawn creates serious legal uncertainty.
2. Do not keep performing the contract after you discovered a real breach, because this may be interpreted as waiving the right to rescind.
3. Do not declare rescission and then let things drift. A rescission that is not followed by restitution and firm action may be interpreted as a lack of seriousness.