Franchise agreements: what Israeli law really provides

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

Anyone who came to franchising from the American literature looks for a document called an FDD and a cooling-off period that requires the franchisor to provide it in advance. It is important to say this clearly: Israel has no franchise law, no statutory disclosure document, and no mandatory waiting period. Anyone who cites a “14-day disclosure duty” is referring to a source that does not exist.

This does not mean the franchisee has no protection. It means that the protection comes from the general law, and that it is built in the contract, not found ready-made in legislation.

The main protection: good faith in negotiations

“(a) In negotiations toward the making of a contract, a person shall act in an acceptable manner and in good faith. (b) A party that did not act in an acceptable manner and in good faith shall pay the other party damages for the harm caused to it as a result of the negotiations or as a result of the making of the contract…”Contracts (General Part) Law, 5733-1973, section 12, Nevo text (unofficial translation)

This is the section that carries most of the weight of protection in franchise transactions. It does not require the franchisor to hand over a defined document, but it turns non-disclosure of material information into a ground for damages, when the circumstances create a duty to disclose.

Section 12(b) refers to sections 10, 13 and 14 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970, that is, to the ordinary rules of compensation, including the foreseeability test in section 10.

Next to it stands section 39: “In performing an obligation arising from a contract, a person shall act in an acceptable manner and in good faith; and the same applies to exercising a right arising from a contract.” This is the section that is relevant to the stage after signing: exercising a right of termination, changing terms, or enforcing procedures. These two stages, disclosure before signing and conduct after it, are what reviewing an agreement before signing should cover in a franchise agreement.

Misrepresentation about performance

The most common claim in franchise disputes is that turnover or profitability figures were presented that did not materialize. Two routes:

• Section 2 of the Commercial Torts Law, 5759-1999: “A dealer shall not publish information, and shall not cause information to be published, which they know or should have known is not correct, about a business, profession, asset or service, theirs or another dealer’s.” Note the words “should have known”: there is no need to prove actual knowledge.
• Sections 11–12 of the same Law: false description is a tort (section 11), but the remedies in sections 13 to 21, among them compensation without proof of damage, do not apply to it (section 12). In a claim for damages under section 2, the damage must be proved.

And when the franchisee is a consumer within the meaning of the Consumer Protection Law, a situation that is not self-evident in a franchise transaction, section 2(a) of that Law is also available. Checking whether the engagement is a consumer one comes before any argument based on it.

What to demand in writing before signing

In the absence of a statutory duty, the tool is to demand the information as a condition for signing and to anchor the demand in the contract. A list that works:

1. Performance figures of existing branches: not an average, but a range, and the number of branches that closed in the last three years.
2. The source of every number provided, and an express representation in the contract that the figures are correct as of the signing date. Such a representation turns an inaccuracy into a breach of contract, not only a good faith argument.
3. The full royalty structure: ongoing royalty, marketing charges, central purchasing and every related payment.
4. The territorial exclusivity policy, and what happens when the franchisor opens an online sales channel that competes with the branch.
5. Grounds for termination and renewal: who may terminate, with how much notice, and what happens to the stock, the equipment and the goodwill.
6. A post-termination non-compete clause: its scope, its duration, and whether it is reasonable. A sweeping clause may not stand.
7. Dispute resolution mechanism: a court or arbitration, and where. See International arbitration when the franchisor is foreign.

Why it works differently from the United States

The American system is built on mandatory advance disclosure under regulatory supervision. The Israeli system is built on liability after the fact: nobody collects a disclosure document in advance, but whoever made an incorrect representation is exposed to a claim.

The practical consequence: in Israel, anything not written in the contract is much harder to prove. The documentation of the negotiations (presentations, emails, spreadsheets that were sent) is the evidence from which a section 12 argument is built, so it is worth keeping it from day one.

Frequently asked questions

Is there a duty in Israel to provide a disclosure document in a franchise?

No. There is no dedicated franchise law, no statutory disclosure document and no mandatory waiting period before signing. The protection comes from the general law.

What protects the franchisee in negotiations?

Section 12(a) of the Contracts (General Part) Law, 5733-1973 requires acting in an acceptable manner and in good faith in negotiations toward the making of a contract. Section 12(b) gives the injured party damages for the harm caused to it as a result of the negotiations or as a result of the making of the contract.

What do you do when performance figures that were presented did not materialize?

Section 2 of the Commercial Torts Law, 5759-1999 prohibits a dealer from publishing information that it knows or should have known is not correct about a business, profession, asset or service. Its breach is a tort (section 11), but the compensation without proof of damage in section 13 does not apply to this tort (section 12), so the damage must be proved.

Can a franchise agreement be canceled?

The law has no special provision on ending a franchise, so the contract and general contract law decide. In a fundamental breach, the injured party is entitled to rescind the contract; in a non-fundamental breach, only after giving the party in breach an extension to perform it and the contract was not performed within a reasonable time, unless rescission would be unjust in the circumstances (section 7 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970). Rescission is made by notice to the party in breach within a reasonable time (section 8), and after it each party returns what it received under the contract, or its value when return is impossible or unreasonable or when the injured party chose so (section 9(a)). Exercising a right of termination set in the contract is also subject to the duty of good faith (section 39 of the Contracts (General Part) Law). On rescission of a contract in general, see Rescission of a contract: when it is allowed and how to do it properly.