Operation Swords of Iron constitutes a state of emergency in Israel unlike any other in past decades, with at least 1,400 citizens killed and some 300,000 reservists called up for duty. This state of emergency is being felt across the entire Israeli economy and business sector.
The war may affect international companies doing business in Israel in a number of fashions: delays in the procurement and shipment of materials to Israel, manpower shortage, delays in obtaining local permits or authorizations, etc.
In times of war, many international companies may wonder what legal remedies are available to them.
War as Force Majeure
The first and logical reflex of international companies confronted with the war in Israel should be to verify that war is indeed recognized as force majeure in their contracts.
If war qualifies as force majeure, the contractual provisions will determine the effects of force majeure. These typically include an exemption of liability for breach of contract by the party affected by the force majeure event.
While the affected party is exempt from performance for the duration of the force majeure event, the other party will remain, in some cases, obligated to continue paying for the services of the affected party (even though these services are not being rendered).
Israeli Law – Common Definition
If your contract is silent on force majeure, the common rules of Israeli law will apply.
Strangely enough, Article 18 of the Israeli Contracts (Remedies for Breach of Contract) Law does not refer to force majeure per se but to frustration.
Frustration exists upon the fulfilment of several cumulative conditions:
- The breach of a contract results from circumstances that the breaching party, at the time of the contract’s conclusion, did not know and could not have known about, or did not foresee and could not have foreseen in advance.
- The breaching party could not prevent such breach.
- The fulfilment of the contract under such circumstances was impossible or fundamentally different from what was agreed upon between the parties.
When these conditions are met, the breaching party may invoke frustration and request that the breach of the contract not result in forced enforcement of the contract or payment of damages to the counterparty.
International companies should note that Israeli courts do not automatically recognize force majeure or frustration solely because of a general state of war in Israel.
In a 1979 ruling, the Supreme Court pointed out that Israel is a country with a constant threat of war. Therefore, war does not in itself constitute force majeure.
On the other hand, Israeli courts will examine on a case-by-case basis if the conditions of frustration were fulfilled, and if the performance of the contract became either practically impossible or fundamentally different from what was agreed upon between the parties.
Electricity Authority’s Definition
The Electricity Authority’s definition of force majeure is substantially more restrictive and stringent than most definitions existing in Israeli contracts. Our recommendation, when negotiating a contract with Israeli IPPs, is to avoid adopting a full back-to-back definition of force majeure with the Electricity Authority’s definition.
According to Section 130 of the Electricity Authority’s Book of Standards (January 2023), force majeure is any event that meets the following cumulative conditions:
- The event is not within the reasonable control of the IPP.
- The event is not caused by an act and/or omission of the IPP.
- The IPP not prevent the event’s occurrence by reasonable means.
- The IPP could not reasonably have foreseen the event’s occurrence.
In addition, one of the following circumstances must exist to qualify as force majeure:
- The event substantially delays the establishment of the electricity plant.
- The event causes substantial physical damage to the electricity plant.
- The event substantially interferes with the commercial operation of the facility.
For a better understanding of the implications of war on the performance of international contracts in Israel, we recommend reaching out to your Israeli counsel to find appropriate remedies to the situation.
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Barnea Jaffa Lande’s Corporate Department is at your service to answer questions related to business conduct during a state of war and any other questions.
Adv. Samuel Henri Samuel is a partner in the department.