Breach of Contract in Israel: Enforcement, Cancellation and Damages under the Contracts Law

What the Law Gives the Injured Party

Section 2 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970, provides that when a contract is breached (hafarat choze), the injured party may sue to enforce it or may cancel it, and is also entitled to damages, in addition to one of these remedies or instead of them. Choosing between enforcement and cancellation is the first decision: a party that still wants the deal demands enforcement, and a party that wants out cancels and claims its losses.

Enforcement is the rule. Under section 3, the injured party is entitled to enforcement unless the contract cannot be performed, enforcement would compel personal work or personal service, carrying out the order would require unreasonable supervision, or enforcement would be unjust in the circumstances. Under section 4, the court may make enforcement conditional on the injured party performing its own obligations.

Material or Non-Material Breach: When You May Cancel

Section 6 defines a material breach (hafara yesodit): a breach about which it can be assumed that a reasonable person would not have entered into the contract had he foreseen the breach and its consequences, or a breach that the contract itself declares material. A blanket clause making a breach of all or most of the contract's provisions material is valid only if it was reasonable when the contract was made.

After a material breach, the injured party may cancel the contract at once. After a non-material breach, the injured party must first give the breaching party an extension (arkha) to perform, and may cancel only if the contract was not performed within a reasonable time after the extension, unless cancellation would be unjust in the circumstances (section 7).

Cancellation is made by notice to the breaching party within a reasonable time after learning of the breach, and where an extension was given, within a reasonable time after it ends (section 8). A party that goes on acting as though the contract is in force long after the breach may lose the right to cancel. After cancellation, each party returns what it received under the contract, or its value (section 9).

Damages and Agreed Damages

Under section 10, the injured party is entitled to damages for the harm caused by the breach and its consequences, where the breaching party foresaw it or should have foreseen it, when the contract was made, as a probable result of the breach. The harm must be proven: loss, expenses, lost profit. Section 13 also allows the court to award compensation for non-pecuniary harm.

In two cases damages are awarded without proof of harm. Where an obligation to supply property or a service was breached and the contract was cancelled, the injured party is entitled to the difference between the contract price and the value on the date of cancellation (section 11(a)). Where an obligation to pay money was breached, the injured party is entitled to damages equal to interest from the breach until payment (section 11(b)).

Agreed damages (pitzuim muskamim) are an amount the parties set in advance in the contract for the case of breach. Under section 15 they are paid without proof of harm, but the court may reduce them if they were set without any reasonable relation to the harm that could have been foreseen at signing. Under section 14, an injured party will not be compensated for harm it could have prevented or reduced by reasonable means, so act to reduce the harm right away.

What to Do When the Contract Is Breached, and How Long You Have

Document the breach and collect the correspondence. Send a warning letter that sets out what was breached and what is demanded, and for a non-material breach include a defined extension. Word it carefully: a cancellation notice sent without grounds can turn the sender into the breaching party.

When the other side has announced in advance that it will not perform, or it is clear from the circumstances that it cannot or will not perform, the remedies may be used even before the agreed date (section 17). On the other hand, under section 18, a party that breached because of circumstances it did not know of and could not have foreseen or prevented, which made performance impossible or fundamentally different, is exempt from enforcement and damages. The courts read this defense narrowly.

A claim for breach of a contract that does not concern real estate is generally time-barred seven years after the cause of action arose, under the Limitation Law, 5718-1958. Different rules apply to real estate transactions; see real estate contracts.

Breach of Contract throughout Israel

The firm represents clients from all over Israel: Jerusalem and the Shfela, Be'er Sheva, Ashdod and Ashkelon, Haifa and the North, the Sharon and Gush Dan. Meetings take place at our two Modiin branches, at the WE Towers branch in Tel Aviv or by video call, and documents can be sent in advance on WhatsApp. We represent clients in the courts, the Labor Courts and before planning committees throughout Israel. How we work with clients across Israel.

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