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The effect of "choice of
law" and "choice of forum" provisions under Israeli law
We have been asked to review three Exclusive Distribution Agreements between Foreign
Supplier Inc. ("FS") and three local Israeli distributors: Alef Ltd.
("Alef"), Bet Ltd. ("Bet") and Gimel-Daled Ltd. ("Gimel") strictly
from a standpoint of Israeli law.
At the outset we note that all
three Agreements are for all intents and purposes identical in
respect of their substantive, non-commercial legal provisions. Of
the three, only the Alef agreement appears to have been signed by
the Israeli party. The Bet and Gimel agreements remain unsigned to
date. We shall comment briefly upon the effect of a lack of
signature by a party upon the legal unenforceability of the
agreement against that party under Israeli law. For purpose of the
instant discussion which focuses on the enforceability of the choice
of law and choice of forum clauses specifically, the absence of the
Israeli parties signature may be all important as we shall discuss.
However, for present purposes we shall assume that the Bet and Gimel
agreements are enforceable notwithstanding their lack of signature
and analyze the viability under Israeli law of the choice of law and
choice of forum clause.
The relevant clause appears as
Paragraph XX in all agreements as follows:
This Agreement and all
terms and conditions of all transactions hereunder shall,
including without limitation all disputes concerning the
beginning and termination of this Agreement as well as any and
all rights and duties arising out of this Agreement, in all
respects be subject to, governed by and interpreted in
accordance with the laws of Unnamed_Country. Place of performance and fulfillment of this Agreement as well as the jurisdiction for
any and all disputes hereunder is Unnamed_Country, and the parties agree
to submit to the non-exclusive jurisdiction of the courts
located in Unnamed_Country.
CHOICE OF LAW
This clause has two important
aspects for the present discussion: (1) it applies
Unnamed_Country law as
the governing law of the contract; and (2) it appears to give the
courts of Unnamed_Country at least non-exclusive jurisdiction of covered
disputes. As a general rule, Israeli courts are inclined to enforce
choice of law clauses that apply foreign law so long as the body of
law chosen has some reasonable connection to the transaction and
does not contravene Israeli public policy. On its face, Paragraph XX appears to meet both criteria. The FS subsidiary in
Unnamed_Country is the
party to the contract. Consequently, Unnamed_Country has a logical nexus
with the transaction.
Moreover, with very few exceptions, there is
no reason to question the propriety of the vast majority of the
Agreement under Israeli law from a public policy standpoint.
Having said this, we note that
as a practical matter, the question of whether or not to apply
Unnamed_Country law will only arise if the dispute is brought in whole or in
part in Israel. Obviously, an Unnamed_Country court would entertain a
serious challenge to the clause or the applicability of its own law.
As a result, we will confront this important threshold issue if and
only if litigation is brought in Israel, presumably by the local
distributor.
Our experience with Israeli
judges applying foreign law is not a salutary one. There is a
general reluctance to deal with choice of law issues and to try and
fathom the subtleties of foreign law, even when it expressly applies
to the controversy before it. As in most countries, foreign law must
be proved as a fact in accordance with the laws of evidence. This
means adducing expert testimony. Judges here find this process
unnecessarily complicated and time-consuming.
Consequently, many
judges will be unreceptive to applying foreign law and apply the
general principle that in a case where foreign law would apply under
the rules of private international law or by force of an express
contractual provision to that effect, the court will assume the
foreign law and the Israeli law are the same and proceed to
adjudicate the case according to Israeli substantive law.
Moreover,
even if an Israeli judge permits foreign law to be applied, he/she
will nevertheless apply local procedural rules on the theory that
the choice of law clause incorporates substantive foreign law only
and does not displace the forum's procedural rules.
As we have seen, foreign choice
of law clauses are as a rule enforceable in Israel, subject to the
practical problems described above.
The FS distribution agreements
suffer from a possible complicating factor. This is Paragraph YY.Z.
This clause obligates the Israeli party to abide not only by Israeli
laws but also by United States public law. An Israeli judge is
likely to find this highly problematic for at least two reasons.
First, it appears to conflict with the choice of law clause
discussed able which applies Unnamed_Country law to the contract. Second,
Paragraph YY.Z purports to make the Israeli distributor subject to
all the requirements and vagaries to at least two and possibly more
U.S. public law enactments: the Foreign Corrupt Practices Act and
the United States Export Administration Act and Regulations. As
drafted, it is questionable whether an Israeli court would enforce
American public law on an Israeli distributor.
The solution is not
to incorporate U.S. law by reference, but to spell out the
requirements and restrictions as a matter of contract law in the
contract or an appropriate appendix. If these limitations are made
part of the parties' express bargain rather than by way of a
wholesale application of a corpus of foreign statutory law, we do
not envision an Israeli court declining enforcement. The key here is
in the drafting.
Because of the intricate subject matter and
procedural requirements of the U.S. (with which we are quite familiar), we do not think it would be appropriate for us to
undertake redrafting the clause at this juncture.
CHOICE OF FORUM
Turning from the choice of law
aspect of Paragraph XX to the choice of forum clause, we have two
basic problems.
First, again as a general rule Israeli courts do not
refuse to enforce choice of forum clauses ipso facto, provided they
satisfy the requirement of reasonable nexus to the chosen forum. The
problem is that as a practical matter many trial court judges here
do show wide deference to the local litigant and often permit it to
maintain suit in Israel, thereby forcing the foreign party to engage
in long and expensive appeals to the District Court and ultimately
to the Supreme Court, where the jurisprudence tends to reflect the
general receptivity to private choice of forum clauses evinced in
most Western legal systems.
In sum, it is a problem of practice and
not principle.
The second problem with the
choice of forum clause is the way it is drafted in Paragraph XX. The
relevant language appears to create an unnecessary ambiguity. At
first the clause appears to state that Unnamed_Country is the jurisdiction
(read: the sole jurisdiction) for disputes under the agreement to be
resolved. But in the very next clause the contract says that "the
parties agree to submit to the non-exclusive jurisdiction of the
courts located in Unnamed_Country ." [Emphasis added]. If the jurisdiction of
the Unnamed_Country courts is expressly non-exclusive, then the prior
reference to jurisdiction for disputes being Unnamed_Country cannot be
otherwise. The reference to non-exclusivity is unfortunate, in our
view, because it effectively invites the Israeli party to commence
litigation in Israel and opens a wide door for the Israeli court to
defer to any litigation brought in Unnamed_Country .
It is almost a certainty
that if Israeli litigation precedes litigation in Unnamed_Country, the
Israeli courts will not relinquish jurisdiction to their
Unnamed_Country counterparts under the clause as drafted.
Moreover, even if
litigation is commenced first in Unnamed_Country, there is no assurance that
the Israeli courts will defer to Unnamed_Country under the lis alibi pendens
rule, which applies in Israel, but with apparent difficulty as the
case law demonstrates.
In short, if it is FS's
intention to force all dispute resolution to take place in
Unnamed_Country,
it best revise Paragraph XX to make Unnamed_Country the exclusive venue for
disputes under the Agreements. Consider amending Paragraph XX to
along the following lines:
Place of performance and
fulfillment of this Agreement as well as the sole and exclusive
jurisdiction for any and all disputes hereunder is
Unnamed_Country, and the
parties agree to submit to the exclusive jurisdiction of the courts
located in Unnamed_Country. In the event that Distributor brings suit against
Company in any jurisdiction other than Unnamed_Country, Distributor shall
pay all of Company' costs, including its actual attorney's fees and
other costs of litigation incurred in moving Distributor's action to
Unnamed_Country.
Enforceability of Unsigned
Agreements
As noted, the Bet and Gimel
agreements were apparently never signed. This poses another
significant problem for FS if it wants to ensure that any litigation
under the Agreements take place in Unnamed_Country. The local parties will
simply claim that they were never bound by all the written terms and
conditions, including in particular the choice of forum clause.
Another reason why FS would want the litigation to take place in
Unnamed_Country under Unnamed_Country law is to avoid the very generous compensation
rules that have been developed by the Israeli courts to protect
local distributors and agents in the event of termination. These
rules are judge-made equivalents of the commercial agency
termination statutes in effect in such places as Germany and
Belgium. If the two agreements are unsigned, the local distributors
will claim full protection of the Israeli law in this area and deny
any consent to be governed by the Unnamed_Country rules. In such a case,
there can be no assurance that an Israeli court would give effect to
the limitation of damages provision, Paragraph AB. A waiver of
this sort may well be deemed to contravene Israeli public policy and
could conceivably even override foreign law were its applicability
to be upheld.
The burden of proving that the
Israeli parties agreed to be bound by all the terms of the draft
agreements falls squarely upon FS under Israeli law. The fact that
an agreement is unsigned does not automatically nullify the
agreement. Israeli contracts law is clear that an unsigned agreement
is as enforceable as a signed one. There is no equivalent of a
statute of frauds in Israeli law. On the other hand, the party
relying upon the written agreement bears an exceedingly heavy burden
to show that the other party actually assented to its terms. Absent
such proof it will not be possible to enforce the draft agreements
according to their terms. This means, among other things, that
Paragraph XX would not be honored and FS could not only be forced to
litigate in Israel but would likely be subject to the Israeli common
law rules of a distributorship termination.
Protecting FS's Property Rights
in Still Unpaid Merchandise
Paragraph CD.E of the Agreement
attempts to solve the problem of protecting FS's property right in
the goods pending payment in full by the local distributor. The
concern here is primarily to give FS a priority over third-party
creditors in the event of insolvency or liquidation of the local
distributor. Such clauses are quite common in U.S. sales contracts,
subject as they are to the special reservation of title rules of the
Uniform Commercial Code, Article 2.
The situation is not so clear
under Israeli law. We have come across this issue in the past for
foreign, particularly U.S.-based clients. We have advised them that
the mere reservation of "title" following delivery of the goods is
not sufficient to protect the goods from seizure by the
distributor's creditors, even if they are physically segregated from
the rest of the distributor's inventory and specially marked. In our
view, the most effective way of protecting the manufacturer's
interest in the goods pending payment is to register a specific
charge over the goods with the Companies Registry under the
Companies Law.
Alternatively, since the goods are inventory and will
be constantly turned, it may be sufficient register what is called a
"floating charge" under the Companies Law. This is somewhat
different from the classic security interest provided for in Article
9 of the Uniform Commercial Code, but is common in the United
Kingdom, whence it is derived.
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