Israeli Law Prevails Over Foreign Jurisdiction Clauses in Consumer Contracts

A recent Israeli Supreme Court ruling has significant implications for consumer-related legal issues, as well as for commercial agreements between foreign companies and Israeli customers. 

Consumer Protection Law and Foreign Corporations

The Supreme Court ruled on Agoda, a Singapore-registered company operating a digital travel booking platform. The website’s users have the option of browsing in Hebrew and paying in ILS. However, when Agoda displays the final price of a booking to customers in Israel, it does not include the VAT component, in violation of Israeli Consumer Protection Law provisions.

As a result, plaintiffs filed a motion in May 2018 to certify a class action against Agoda.

Agoda based its defense arguments, inter alia, on the fact that according to its terms of use, Singapore law governs the relationship between the parties. In its ruling, the Supreme Court rejected the application filed on Agoda’s behalf for leave to appeal the decision to certify the action as a class action. It also established binding rulings that expand the application of Israeli consumer protection laws to foreign corporations.

The Supreme Court’s Ruling

The Supreme Court stated that, in relation to choice of law, there is no justification for differentiating between individual litigation proceedings and class actions.

When does Israeli law apply to digital supplier-customer relations?

Israeli law will apply to on-line display of information to customers and provision of digital services if one of the following two circumstances exists:

1. The customer is browsing an “Israeli website” (including its configuration), i.e. the website is in Hebrew, the prices are in ILS, etc.
2. For international corporations conducting activities in Israel, the customer is browsing the website from an Israeli IP address.

These are situations where, according to the choice of law rules, in the absence of a terms of use provision stipulating the applicable law, it is, by default, Israeli law. Therefore, if case law develops in Israel that answers the questions of what the choice of law rules are for internet transactions and in what instances Israeli law will apply, the court may find additional circumstances in which Israeli law as the applicable law.

When does a foreign choice of law stipulation constitute an invalid discriminatory stipulation?

The Supreme Court ruled that a choice of law clause that applies foreign law in a manner that circumvents cogent provisions of consumer law constitutes a discriminatory clause in a standard form contract. It is invalid for two reasons:

1. It imposes foreign law and contradicts cogent provisions of law enacted to protect the weaker parties who are unable to protect themselves on their own against improper contractual arrangements offered to them by stronger parties.
2. It gives an unfair advantage to the supplier, as opposed to the situation had Israeli law applied.

Conditioning the choice of law rules

The Supreme Court further ruled that, in relations between global corporations operating in Israel and small customers (i.e., private consumers and small businesses), a choice of law clause stipulated in a standard form contract should not prevail over Israeli choice of law rules. Such a stipulation is invalid, and the law does not require the customer to prove that the foreign law per se is discriminatory.

Misleading the Public

In its ruling, the Supreme Court emphasized that once a court determines a choice of law clause is a discriminatory clause, thereby invalidating the standard form contract, its continued display on a website’s terms of use may, per se, constitute an action intended to mislead customers. This is an important determination, since it establishes an independent cause of action in Israel purely on the grounds that the choice of law clause dissuades customers from exercising their legal right. We can also apply this statement to other instances. An example is when legal documents displayed on a website or in a store stipulate provisions inconsistent with the law, such as regarding consumers’ right to cancel a transaction or warranty.

Non-Consumer Implications of the Ruling

The legal question, “What is considered appealing to an Israeli audience?” is a broad question that arises in several contexts, even those non-consumer-related. Inter alia, this question arises in relation to licensing obligations or compliance with various regulatory requirements (such as offering financial services to Israelis). Case law is gradually answering this question. For instance, the position expressed in the Agoda ruling may also affect the obligation to comply with regulatory requirements during cross-border activities. This landmark Supreme Court ruling is unequivocal: appealing to Israelis triggers the obligation to comply with Israeli law.

Practical Advice to Foreign Corporations

Foreign corporations that stipulate foreign choices of law, when their activities target Israeli consumers, should take the Israeli Supreme Court ruling into account. Foreign corporations that decide to retain their foreign jurisdiction clauses are subjecting themselves to significant exposure. The Israeli Supreme Court has ruled that a choice of law clause in a consumer agreement that compels customers to litigate under the law of a foreign country is invalid under Israeli law, in instances when Israeli law applies to disputes according to Israeli choice of law rules. The choice of law stipulation is invalid not only because it purports to prevail over cogent provisions of Israeli consumer protection law, but also because it is a discriminatory clause in a standard form contract.

In light of this ruling, companies appealing to Israeli audience should examine the provisions of their terms of use or their commercial agreements. This will help to ensure the provisions stipulated in them do not purport to prevail over cogent provisions of law in Israel.

As for consumer issues, companies’ failure to amend choice of law clauses could also result in class actions and not merely non-enforcement of choice of law stipulations upon a dispute. Moreover, stipulating contractual provisions that contradict cogent law in Israel increases the chances an Israeli court will acquire jurisdiction and adjudicate the dispute according to Israeli law.

Companies with an Israeli nexus in their business activities should also examine this Israeli Supreme Court ruling. In particular, they should focus on the Supreme Court’s position with regard to the question of what constitutes “activities in Israel.”

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Barnea Jaffa Lande has extensive experience in international commercial law, consumer protection law, and all types of commercial litigation. We are at your service to answer any questions about this landmark ruling or any other issues.

Adv. Anat Even-Chen is a partner and heads the firm’s Regulatory Practice.

Adv. Inbar Gorelick is a partner in the firm’s Corporate Department.