War and Force Majeure – Implications for Contract Performance

As a rule, combat situations in Israel do not constitute events of force majeure. Therefore, the current combat situation is not sufficient by itself to justify breaches of contractual obligations on the grounds of frustration of contract due to force majeure. The parties to the contract must analyze the specific circumstances and act with bona fides, both when seeking to cancel the contract and when insisting on its strict performance.

Within this context, we emphasize that events such as war and hostilities, as well as other events, are not necessarily considered unforeseeable, at least not from a legal perspective. For example, Israeli courts did not recognize previous rounds of fighting in northern and southern Israel, or the outbreak of the COVID-19 pandemic, as events of force majeure.

Operation Swords of Iron

The ongoing events in Israel affect various businesses differently, and the extent of the disruption depends on several factors. One key factor is the location of the business, which determines the level of disruption caused. Another key factor is the number of the business’s employees effected by the events or that are serving on reserve duty. However, the current security situation does not necessarily justify releases from contracts on the grounds of force majeure.

The existing statutory arrangement will apply to parties whose contracts do not prescribe specific provisions addressing the current circumstances.

In any case, based on the parties’ obligation to act with bona fides in the performance of a contract, it is still possible to demand performance of the contract, with possible adjustments depending upon the specific circumstances of the parties and the contract. This was also the Ministry of Justice’s principal recommendation during the COVID-19 pandemic, when similar legal questions arose.

Postponement of Deadlines Law

The Knesset has enacted special provisions of law to assist populations harmed by the combat events. Depending on the progress of the war, lawmakers are likely to enact additional provisions of law.

The Postponement of Deadlines Law, enacted on October 18, 2023, focuses on reliefs for individuals and small businesses directly injured or directly affected by the events, but does not apply to medium-sized and large businesses.

Pursuant to this law, several types of businesses and populations may postpone deadlines, including in relation to the fulfillment of contractual obligations, as well as payments by virtue of a judgment or payments to state authorities.

List of Businesses and Populations

1. Any person who served as a soldier, as defined in the Military Justice Law, during all or a portion of “the determined period,” including anyone called up for reserve duty.
2. Any person who served as a police officer, as defined in the Military Justice Law, during all or a portion of “the determined period.”
3. Any prison guard who performed particular roles affected by the security situation, as specified in the law, during all or a portion of “the determined period.”
4. Any person who served as a firefighter, as defined in the National Firefighting and Rescue Authority Law, during all or a portion of “the determined period.”
5. Any person who was missing, abducted, or held captive during all or a portion of “the determined period.”
6. Any person who, prior to the start of “the determined period,” lived in a community that was evacuated.
7. Any person hospitalized for at least seven days for an injury sustained during “the determined period” as a result of a hostile act.
8. Any employee or volunteer in a “rescue organization” whose activities were equivalent to a full-time job.
9. The spouse of each of those specified above, who is jointly responsible for obligations.
10. The estate of any deceased person specified above in clauses 1-5 and 7-8.
11. Any company with a maximum of five shareholders, if one of its shareholder is a person specified in clauses 1-6 above and holds 50% of the means of control over the company, or any partnership in which such person participates in managing the partnership’s business and controls at least 50% of its assets.

The postponement does not apply to alimony payments or wages, and is subject to additional exceptions prescribed in the law. The postponement also does not apply if both parties to the contract fall under one of the categories of populations entitled to a postponement.

At this stage, the Postponement of Deadlines Law has defined “the determined period” as October 7 to November 7, 2023. The Minister of Defense, with the consent of the Minister of Justice and the Minister of Finance, and after consulting with the Minister of Interior, and with the approval of the Knesset Foreign Affairs and Defense Committee, may extend “the determined period” until December 31, 2023.

The list of communities, which currently includes the communities surrounding the Gaza Strip and in northern Israel that were ordered to be evacuated, is also likely to be updated according to the evacuation orders to be issued by the various security authorities depending upon the progress in the fighting.

Public Appeal

Concurrently, the Ministry of Justice has issued a public appeal for positions and suggestions regarding changes needed to the Contracts Law as a result of the war. The debate will address the following topics:

1. Situations in which it would be appropriate to leave the contract as is, but to suspend or postpone all or a portion of the contract’s obligations for a defined time frame, and whether concurrent reciprocal obligations should be postponed accordingly.
2. Situations in which it would be appropriate to allow a party to the contract to cancel the contract.
3. Situations in which it would be appropriate to prevent a party from canceling the contract.
4. Situations in which performance of the contract is impossible and if it would be appropriate to allow for approximate performance of the contract.
5. If it is warranted to differentiate between monetary and non-monetary obligations.
6. If it is warranted to differentiate between long-term ongoing contracts, including relational contracts, and short-term contracts.
7. If Section 18 of the Contracts (Remedies for Breach of Contract) Law, which addresses frustration of contract, provides an adequate solution for the current situation or if there is a need to prescribe a specific provision in this regard considering the current situation.

Similar public consultations took place during the COVID-19 pandemic, resulting in some legislative amendments, mainly addressing consumer contracts in the fields of cultural performances and events and private preschools, and contracts with residential construction contractors.

During the pandemic, the main recommendation was for parties to renegotiate their contractual relations in good faith and to make necessary adjustments depending upon the circumstances.

Based on past experience, it appears legislative intervention will be justified for contracts involving a clear power imbalance between the parties and where protection is needed for the weaker party, or for instances in which there is uniformity between the arrangements and a legislative arrangement could provide a solution for the complexities created by the war. For contracts between sophisticated parties for which a wide variety of legal arrangements exist, effective legislative intervention will not be difficult.

Another factor that will have a significant impact on contracting parties’ incentives and on the renegotiation of arrangements between parties is the compensation regime the government implements. At this stage, the government has not yet finalized the compensation plan. The ability of parties to an agreement to receive compensation for losses caused to them is likely to influence how courts view contractual parties’ bona fide conduct during the complex circumstances that have arisen.

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Barnea Jaffa Lande is at your service to answer any questions about contract performance during this special state of emergency. Adv. Anat Even-Chen is a partner in the firm, and leads the Regulation Practice.