Informal Agreements or a Binding Contract?

Everyone knows what a contract means. But what does a “non-binding contract” mean? Does it encompass, for example, a memorandum, meeting minutes, a document containing nonspecific points of consent in principle? A recent Israeli Supreme Court ruling overturned the district court’s ruling on the matter and redelineated softer boundaries for recognizing such documents as contracts.

The ruling addresses the contractual status of a “meeting minutes” document. Both parties signed such a document, formed during mediation, reflecting non-detailed points of agreement regarding disputed property units, but ultimately, the parties did not pursue it.

The district court thus ruled that the meeting minutes did not constitute a binding contract, since the parties had no intention of forming a binding contract when they signed the minutes (in legalese, absence of finality of decision) and because the document did not contain adequately specific conditions (in legalese, absence of specificity).

Subsequent to the district court ruling, one of the parties appealed to the Supreme Court. The Supreme Court accepted the appeal, overturned the district court’s ruling, and found that the meeting minutes document does constitute a binding contract and that enforcement is due.

Requirements of a Binding Contract

As a rule, according to the law, a binding contract must contain two elements – finality of decision and specificity (a real estate contract must also contain a deed requirement). Finality of decision is fulfilled when there is a meeting of wills between the parties to engage in a transaction (offer and acceptance). Specificity is fulfilled when the document specifies the principal terms and conditions essential to the engagement.

Over the years, the courts have slightly softened the specificity requirement and recognized contracts even when they did not contain all of the principal essential terms and conditions. The courts recognized such contracts in instances in which these specifics could be completed in an interpretive way, pursuant to the supplementary statutory arrangements (based on other documents, statutory provisions, a negative arrangement, common practice, or the principle of best performance). Today, the prevailing approach holds that if the parties decisively agree to engage in a contract, one of them cannot renounce it on the grounds that some of its terms and conditions are not adequately specific.

The Supreme Court Ruling – Meeting Minutes

With regard to the meeting minutes, the Supreme Court ruled that the document reflected the finality of the parties’ decision to mutually covenant to the subjects contained therein.

 The rationale behind the Supreme Court’s ruling was as follows:

1. The parties signed the document.
2. The signed document states the parties agree to the principles specified therein and covenant to comply with the defined timetable.
3. The parties worded their agreement regarding the consideration as a fundamental consent, without qualification. This wording implies the parties’ commitment to it.
4. The parties agreed that each party would appoint a lawyer to draft the entire agreement. From this, the court concluded that the parties intended to agree on the legal details of the transaction, while they had already agreed upon the fundamental terms and conditions in the meeting minutes.
5. The parties defined a three-month time frame in the meeting minutes to draw up and sign the agreement. This short time frame led the court to conclude that the parties had reached a final decision to engage in the agreement.
6. The meeting minutes referenced another party, describing it as “not a party to the agreement.” This statement indicates the parties to the document are parties to an agreement.

The Supreme Court Ruling – Requirement of Specificity

With regard to the requirement of specificity, the situation is more complex. The meeting minutes explicitly state that they do not constitute the entire agreement, and therefore it is clear that they lack full specificity.

Israeli case law, as stated above, has developed a position over the years. The position is that an interim document could be deemed a binding final contract, provided that the missing details can be completed according to the supplementary statutory arrangements. 

However, in this case, the Supreme Court, led by Justice Grosskopf, adopted an innovative approach, determining that this position is not the only possible one. Here, the Supreme Court ruled that the finality of the decision was remarkably high, with consensus on how the missing details would be completed, and that the parties expressed a willingness to finalize key remaining details, thereby minimizing the risk of unresolved issues arising during negotiations.

Therefore, the Supreme Court ruled to recognize the meeting minutes as having binding legal validity, acknowledged them as a contract, and determined that the parties were obliged to act accordingly and fulfil the transaction.

Conclusion

The Israeli Supreme Court essentially set a new ruling and eased the criteria for deeming informal documents that fulfill particular requirements as binding contracts. We will see the impact of this ruling in the coming years based on how the courts apply it.

In the meantime, it is advisable to pay attention to what you agree to and what you sign, and to be aware that a “quasi-agreement” can become a “binding agreement.”

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Barnea Jaffa Lande’s Litigation Department is at your service to answer questions about contracts, agreements, and other issues.

Adv. Gal Livshits is a partner in the Litigation Department.