Commercial contracts in Israel: drafting, review and enforcement

The liability clauses, the liquidated damages clause and the exit mechanism are worth checking before signing, not after a dispute has broken out: reviewing an agreement before signing.

What the law provides

The legal framework in this area rests on the following laws. The links lead to the original legislation (in Hebrew); the binding text is the one published in Sefer HaHukim (the official gazette of statutes).

• Contracts (General Part) Law, 5733-1973
• Contracts (Remedies for Breach of Contract) Law, 5731-1970
• Standard Contracts Law, 5743-1982
• Commercial Torts Law, 5759-1999
• Guarantee Law, 5727-1967 (חוק הערבות, התשכ״ז-1967)
• Agency Law, 5725-1965 (חוק השליחות, התשכ״ה-1965)

Legislation index: all the sections the site discusses →

Index of sections on the site: Standard Contracts Law, 5743-1982 · Commercial Torts Law, 5759-1999.

How a contract is made, and when the duty of good faith applies

Section 1 of the Contracts (General Part) Law, 5733-1973 states that a contract is made by way of offer and acceptance. Section 23 states that there is no general requirement of form: a contract can be made in writing or orally, but an oral contract is hard to prove when a dispute arises. Section 12 imposes on the parties to negotiations a duty to act in good faith, and a party that breaches it (for example, by conducting negotiations with no real intention to sign) may be liable for damages even if the contract was not signed in the end. Section 39 extends the duty of good faith to the stage of performing the contract itself, and section 30 states that a contract that is illegal, immoral or contrary to public policy is void.

The three remedies for breach of contract

The Contracts (Remedies for Breach of Contract) Law, 5731-1970 gives the injured party three remedies side by side: enforcement, that is, a demand that the party in breach perform the contract, subject to exceptions (section 3); rescission, immediately in a “fundamental” breach, and after an extension to remedy the breach in a non-fundamental breach (section 7); and damages for the loss caused by the breach (section 10). Liquidated damages can also be set in advance in the contract, and the court can reduce them if it finds that the amount “bears no reasonable relation” to the damage that could have been foreseen at the time of signing (section 15).

A numerical example

A contractor undertook to supply and install a kitchen by 1 March, for a total payment of NIS 60,000, with a liquidated damages clause of NIS 500 for each day of delay. The contractor was 20 days late, so the customer can demand NIS 10,000 (20 × NIS 500) without proving exact financial damage, unless the contractor shows that the amount is completely unrelated to the damage that could have been foreseen at the time of signing, in which case the court can reduce it.

For practical guides, see The duty of good faith in contracts: principles and case law, Breach of contract in Israel: compensation, enforcement or rescission and Liquidated damages clauses: validity and enforcement, as well as the index of sections of the Contracts (General Part) Law and the index of sections of the Remedies Law.

Map of the topic

Contract law sets out how a binding agreement is made, how it is interpreted, what the duty of good faith in negotiations and in performance is, and what the remedies are when a party is in breach: enforcement, rescission and damages. A lawyer is needed before signing a significant agreement, when a breach comes to light and you want to rescind or sue, and when you receive a warning letter or a demand for liquidated damages. The articles were written for business owners and managers who need to understand what they are signing, and for both sides of the agreement, not only one.

Formation, good faith and interpretation

A contract is made by offer and acceptance and does not require a particular form, unless the law or the parties required writing. The duty of good faith applies already at the negotiation stage, and the interpretation of a contract depends on when it was made and on its type. A business contract made or renewed on or after 7 January 2026 that does not set rules of interpretation is interpreted according to its wording alone, unless its wording alone leads to an unreasonable result or to a contradiction between its provisions. A non-business contract, a standard-form contract, an employment contract, a collective agreement and any contract made before 7 January 2026 are interpreted according to the intention of the parties (section 25(a) of the Contracts (General Part) Law, as worded in Amendment No. 3). See: 7 principles in commercial contracts, the duty of good faith, the rules of interpretation, the validity of an oral contract and a letter of intent. The sections: in the Contracts (General Part) Law.

Liquidated damages, limitation of liability and guarantees

A liquidated damages clause is enforced without proof of damage, but the court may reduce it if it bears no reasonable relation to the damage that could have been foreseen. Limitation of liability and exemption clauses are examined according to how they are worded and according to the law on standard-form contracts. See: liquidated damages clauses, limitations of liability and disclaimers, limitation of liability in a contract, commercial guarantees and bank guarantee. The remedies for breach: in the Contracts (Remedies) Law.

Special-purpose agreements: confidentiality, agency and escrow

Each type of agreement has its own structure: a non-disclosure agreement defines what confidential information is and for how long; an agency agreement sets the limits of the agent’s authority; an escrow agreement deposits money or documents with a third party until a condition is met. See: non-disclosure agreements (NDA), agency agreements, distribution agreements, escrow agreements and an independent contractor agreement.

Breach, rescission and assignment of rights

In a breach, the injured party has the remedies of enforcement, rescission and damages, and a fundamental breach allows immediate rescission. A contractual right can be assigned without the debtor’s consent, but transferring an obligation requires the creditor’s consent. See: remedies for breach of contract, rescission of the contract, frustration of contract, assignment of rights and assignment of obligations and standard-form contracts and unfair terms. To resolve disputes outside court: commercial arbitration and commercial mediation. A customer who does not pay: from a warning letter to enforcement proceedings, including enforcement proceedings (Execution Office) or a claim and interest and linkage on a debt.

The guides in this area (48)

All the indexed guides on the site in this area. Each guide states the legislation it relies on.

• Limitation of liability in a contract: what works, what does not — and how not to get it wrong
• Bank guarantee: what it is, what types exist and how to get one
• Agency agreements: legal structure and rights
• Escrow agreements: uses and terms
• Rescission of a contract: when it is allowed and how to do it properly
• The duty of good faith in contracts: principles and case law
• Assignment of rights and assignment of obligations: what really requires consent
• Liquidated damages clauses: validity and enforcement
• Franchise agreements: what Israeli law really provides
• Distribution agreements: what governs termination and notice
• Barter agreement: exchanging goods and services between businesses
• Non-disclosure agreements (NDA): a comprehensive guide
• Trade secrets: protection and enforcement in Israel
• A commercial contract in Israel: 7 principles before you sign
• Breach of contract in Israel: compensation, enforcement or rescission
• Contract interpretation: the rules the court applies
• Letter of intent: is it legally binding
• Oral contract: is it valid in Israel?
• Frustration of contract: the cumulative conditions section 18 requires
• Consignment agreement: who owns the goods, who is responsible for them, and what happens in a collapse
• Consortium agreement: structure, mutual liability and a joint bid in a tender
• Business cooperation agreement and joint venture (JV)
• Taking part in government tenders: disqualification and appeal
• An international contract: governing law, jurisdiction and the CISG
• Commercial tenant’s rights: what the contract sets, what the law adds, and how to defend yourself
• Late delivery of an apartment by a contractor: compensation under section 5A of the Sale (Apartments) Law
• Limitations of liability and disclaimers: legal drafting
• Standard-form contracts: consumer protection and unfair terms
• Extreme weather: the effect on contracts
• Carbon credit offsetting: what Israeli companies must know before they sign
• Charity fraud: recognizing it and protecting yourself
• Nonprofit governance: proper management duties
• Opening a limited company in Israel: steps, fee and directors
• Convertible notes and SAFEs: a legal guide
• Subrogation in insurance: when the insurance company sues in your name
• Service level agreement (SLA): what to check before signing, and how to enforce a breach
• An independent contractor agreement: what prevents reclassification
• Commercial arbitration: the process, advantages and disadvantages
• Commercial mediation: how to settle a business dispute, and what makes the settlement enforceable
• Duties of a company officer: care, loyalty and personal liability
• Right to inspect company documents: what a shareholder may demand, and what a director may
• Drag-along and tag-along: the drag right and the join right in a shareholders’ agreement
• Dissolving a business partnership: when the partnership dissolves, and what happens to the assets and debts
• IT outsourcing agreement: data security, ownership of the code, breach and termination
• Joint ownership of a patent and a copyright: what each co-owner may do alone
• Founders’ agreement: all the clauses that must be there from day one
• Technology license agreements: types and terms
• Withholding tax on payments to suppliers: who withholds, how much, and what happens to the money withheld

FAQ

What is the difference between a fundamental breach and a non-fundamental breach?
A “fundamental” breach is a breach about which it can be assumed that a reasonable person would not have entered into the contract had they foreseen the breach and its results, or a breach that the parties agreed in the contract would be considered fundamental (section 6 of the Remedies Law), and it gives a right to immediate rescission (section 7). A non-fundamental breach gives a right to rescission only if the party in breach was given a reasonable extension to remedy it and did not do so.

Is an oral contract valid in Israel?
Yes. Section 23 of the Contracts (General Part) Law states that there is no general requirement of form for a contract, unless the law requires otherwise (for example, in real estate transactions). In practice, an oral contract is very hard to prove when a dispute arises over its content.

When can a court reduce liquidated damages set in a contract?
When it finds that the amount set “bears no reasonable relation” to the damage that could have been foreseen at the time the contract was made (section 15 of the Remedies Law). As long as the amount is reasonable in relation to the expected damage, it can be claimed without proving exact financial damage.

If a party pulls out of advanced negotiations without signing, can you sue them?
Yes, in some cases. Section 12 of the Contracts (General Part) Law imposes a duty of good faith on the parties to negotiations, and a party that breaches it (for example, by conducting negotiations with no real intention to sign) may be liable for reliance damages for the loss caused, even if the contract was never signed.

Is an oral contract, or one made by WhatsApp message, binding?
As a rule, yes. Under the Contracts Law, a contract can be made orally, in writing or in any other form, unless the law or the parties required a particular form, for example the requirement of writing in a real estate transaction. The difficulty is proof: correspondence, price quotes and actual payments serve as evidence of the terms of the agreement. More: Oral contract: is it valid?.

What is the difference between a fundamental breach and an ordinary breach?
A fundamental breach is one where a reasonable person would not have entered into the contract had they foreseen it, or a breach that the parties expressly defined as such in the contract. It allows the injured party to rescind the contract immediately. In a non-fundamental breach, the party in breach must be given a reasonable extension to remedy it before rescission. In both cases you can also claim damages and enforcement. See: Breach of contract: remedies.

Can a court reduce liquidated damages set in a contract?
Yes. Under the Contracts (Remedies for Breach of Contract) Law, liquidated damages are enforced without the need to prove damage, but the court may reduce them if it finds that they were set with no reasonable relation to the damage that could have been foreseen when the contract was made. So it is worth setting an amount that can be justified and documenting the considerations. More: Liquidated damages in Israel.

When is it worth having a lawyer check a contract before signing?
When the amount or the length of the engagement is significant, when the agreement was drafted by the other side, when it includes exclusivity, non-compete, liquidated damages or limitation of liability clauses, and when the other side is abroad. A starting point: 7 principles every business must know.

For collected answers in all practice areas, see the FAQ page, and for the map of services — all practice areas.

All the questions on the site about commercial contracts, grouped by page, and each question links to its answer.

For short definitions with the section of the law, for example fundamental breach, liquidated damages and unfair term, see the glossary of legal terms.

Calculators and self-checks in employment and consumer law: see the calculators and tools page.

The content of this page is general information, is not legal advice and does not create an attorney-client relationship. Translated: 12 November 2026 · Hebrew version updated: 27 October 2026.