In these turbulent times, effective crisis (and contract) management could be the difference between sustaining contractual relationships, or, in the worst case, the failure to maintain a going concern.
Whilst, like with many contractual questions, our clients’ risk profiles will depend on the wording agreed, we set out below some overarching guidance about force majeure application and some key steps to take now.
What is ‘Force Majeure’
The doctrine of force majeure seeks to relieve contractual counter-parties of their respective obligations in circumstances that are deemed to have been unpredictable (and out of their control). This concept usually finds itself applied as part of the doctrine of “frustration” when one or more contractual counterparties find themselves, by no fault of their own, unable to perform obligations, or able to perform them only in such drastically different circumstances, so as to have ‘frustrated’ the intention of the parties when signing their agreement.
Pursuant to Israeli law, the doctrine may be adopted in two principal ways:
It is common for contracts governed by Israeli law to contain an explicit force majeure clause, which sets out the circumstances which constitutes a force majeure event. These will then typically provide for the consequential remedies. In such cases, Israeli courts will first seek to interpret the language of the contract, so as to establish the parties’ intent. Where pandemics, health crises or analogous terms have been included, it is likely that a force majeure will be deemed to have occurred. Where there is no specific reference to such an event, it will be necessary to interpret the provisions to determine whether the list of events included was intended to be exhaustive or not, and whether other provisions may help to indicate the parties’ intent.
General Principles of Frustration
Where a contractual clause is interpreted not to include pandemic events within the scope of force majeure, or where there is no applicable clause, Israeli courts may be called upon to invoke general principle of ‘frustration of contract‘ pursuant to section 18(a) of the Contracts Law (remedies for breach of contract), 5731-1970, which sets out as follows:
“Where the breach of the contract is the result of circumstances which the breaching party, when entering into the contract, did not know about, was not required to know about or which it did not foresee and was not required to foresee in advance, and could not prevent them, and the fulfilment of the contract in such circumstances is impossible or is fundamentally different from the agreement between the parties, a breach of the contract would not warrant enforcement of the contract which was breached or compensation [for such breach];”
Israeli courts have only ever allowed for a defence of frustration in a handful of extreme cases (not even where the claimed frustration arose out of acts of war) on the basis that the Israeli courts have repeatedly held all such events to be foreseeable in Israel. Nevertheless, and given the unprecedented, and global scale of the current COVID-19 crisis, it is possible (though perhaps still not likely) that Israeli courts will adopt a broader and more permissive approach to claims of frustration in the current circumstances.
Naturally, given the nature of the remedy of frustration, this can only ever be fully assessed on a case-by-case basis.
What can you do?
Though none of us can know exactly how the current crisis will play out, we would encourage our clients to consider the following steps:
- Identify your most material contractual relationships:
- Are they specifically susceptible to the current crisis (e.g. travel industry businesses)?
- As many will be, are they indirectly susceptible to the current crisis?
- Do they contain explicit force majeure provisions?
- Do they relate to the employment or engagement of staff – in which case, ensure you are updated of the most recent (and frequently changing) regulations applicable to changing staff conditions;
- Consider what, if any, steps you should take to mitigate risks identified in relevant agreements, whether through additional preparatory steps to ensure compliance, renegotiation, or potential enforcement of applicable provisions; and
- Consider the need to include appropriately worded risk-allocation provisions in any new contractual relationships being negotiated, especially as the current crisis is likely to be deemed ‘foreseeable’ from this point onwards.
As ever, your Epstein Rosenblum Maoz (ERM) team stands at your side, ready to assist with all your contractual needs.
Please don’t hesitate to contact us.
Gideon Weinbaum, Partner Jeremy Seeff, Partner