Characteristics of International Contracts Under Israeli Law
A contract is considered international under Israeli law when at least one party is located outside Israel, when the place of performance is abroad, or when the subject matter of the contract relates to a foreign country. For Israeli technology companies operating in global markets, virtually every significant commercial contract becomes international in nature.
The primary challenge in international contracts lies in the multiplicity of legal systems that may apply to them. When disputes arise, fundamental questions emerge: which court has jurisdiction to hear the case, which law governs the dispute, and how can a judgment from one country be enforced in another.
In Israel, international contracts are subject to diverse normative sources: general Israeli contract law, international conventions that Israel has ratified (such as the Vienna Convention on International Sale of Goods), specific Israeli legislation like the Jurisdiction and Enforcement of Foreign Judgments Law, 5758-1998, and of course the specific agreements between the parties.
- Vienna Convention (CISG): Applies automatically to international sales contracts unless the parties explicitly exclude its application
- Reciprocity agreements: Israel is party to bilateral and multilateral agreements for enforcement of judgments and arbitration awards
- International arbitration centers: Recognition of arbitration by the International Court of Arbitration of the International Chamber of Commerce (ICC) and similar institutions
Commercial reality requires Israeli companies to deal with clients, suppliers and partners from countries with different legal traditions. An Israeli SaaS company working with a German client will operate under European privacy protection laws, a fintech company providing services in the US will need to comply with American financial regulation, and a startup selling to a Japanese company will need to navigate Japanese contracting practices.
Governing Law Selection: Strategies and Implications
The governing law clause is one of the most critical provisions in an international contract. The chosen law will determine contract interpretation, validity, available remedies for breach, and the legal consequences of disputes. A wrong decision could expose the Israeli company to legal risks that do not exist under Israeli law.
Considerations for Choosing Israeli Law as Governing Law
When the Israeli company is the stronger party in negotiations, it is advisable to advocate for Israeli law. Israeli law recognizes freedom of contract and is generally considered more flexible than European civil law systems. Additionally, Israeli contract law is relatively balanced and does not give unreasonable advantages to either party.
- Advantages: Familiarity with the law, access to local legal counsel, relatively short proceedings
- Disadvantages: May deter foreign clients, translation costs in case of litigation, complex enforcement in certain countries
Choosing Foreign Law: When and Why
In certain cases it is preferable to choose foreign law as governing law. If the client is located in a country with a developed legal framework for the relevant field (for example, technology law in California or financial law in London), choosing local law may facilitate the client's acceptance and improve the chances of contract execution.
New York law is particularly common in international technology contracts, partly due to its wide recognition worldwide and its advanced legal development in technology matters. English law is common in financing transactions and financial services.
Note: The United Nations Convention on Contracts for the International Sale of Goods applies automatically to certain transactions unless you explicitly exclude it. If you do not want it to apply, include: "The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement."
Recommended Language for Governing Law Clauses
The governing law clause must be precise and unambiguous:
"This Agreement shall be governed by and construed in accordance with the laws of [country] without regard to its conflict of laws principles."
The phrase "without regard to conflict of laws principles" is important as it prevents a situation where the court decides that another law should apply based on the choice of law rules of the relevant country.
Jurisdiction Selection: Courts versus Arbitration
Jurisdiction selection determines where disputes will be resolved in case of disagreement. This is a separate and independent decision from governing law selection - you can choose Israeli law but specify that disputes will be resolved through arbitration in London, or establish jurisdiction in Israeli courts but with New York state law as governing law.
Courts as Jurisdiction
Choosing local (Israeli) courts is appropriate when:
- The Israeli company is the stronger party in negotiations
- The other party agrees to Israeli court jurisdiction
- Most evidence and witnesses are located in Israel
- The other party has assets in Israel that can be attached
The main limitation of local courts is the difficulty in enforcing judgments in foreign countries. Although Israel is party to the Hague Convention on enforcement of foreign judgments, the process remains complex and lengthy.
Arbitration as Preferred Alternative
In international contracts, arbitration is usually the preferred solution for the following reasons:
- International enforcement: The New York Convention on Recognition and Enforcement of Arbitral Awards (1958) facilitates enforcement of arbitral awards in 160 countries
- Expertise: Ability to choose arbitrators with expertise in the relevant field
- Confidentiality: Arbitration proceedings are not public, unlike court proceedings
- Speed: Arbitration tends to be faster than judicial proceedings
Leading Arbitration Centers
The most common centers for Israeli technology companies are:
- ICC (Paris): The oldest and most prestigious institution, suitable for large transactions
- LCIA (London): Efficient and fast, popular in commercial transactions
- SIAC (Singapore): Convenient for transactions with Asia, fast proceedings
- JAMS or AAA (US): For transactions with American companies
Note the golden rule: Do not mix arbitration with courts in the same clause. Choose one of them only to avoid procedural conflicts.
Drafting Arbitration Clauses
An arbitration clause must explicitly specify:
- The institution administering the arbitration
- Number of arbitrators (usually 1 or 3)
- Place of arbitration
- Language of proceedings
- Allocation of arbitration costs
Example of standard language:
"Any dispute arising out of or in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one arbitrator appointed in accordance with the said Rules. The place of arbitration shall be London, England, and the language of the arbitral proceedings shall be English."
Contract Interpretation and Clarity Clauses
In international contracts, language and legal culture differences can create different interpretations of the same text. Therefore, it is important to include clauses that clarify the parties' intentions and minimize the chance of misunderstandings.
Order of Precedence Clauses
In complex transactions involving multiple documents (main agreement, schedules, statements of work, general terms and conditions), the order of precedence in case of conflict must be clearly established:
"In the event of any conflict between the terms of this Agreement and any other document, the order of precedence shall be: (1) this Agreement; (2) Statements of Work; (3) General Terms and Conditions."
Contract Language and Translations
Many contracts are executed in multiple languages. In such cases, it is essential to determine which version will be controlling:
"This Agreement has been executed in English and Hebrew. In case of discrepancies between the language versions, the English version shall prevail."
Note: The determination of a "controlling" language is not always respected according to the governing law. Under Israeli law, if a contract is signed by an Israeli party in Hebrew, courts may prefer the Hebrew version even if the contract states that the English version controls.
Definitions and Technical Terms
In technology contracts, precise definitions of technical terms are essential. Terms such as "Confidential Information", "Intellectual Property", "Personal Data" can have different meanings in different countries.
- Confidential information: Define precisely what is included and excluded (public information, independently developed information)
- Intellectual property: Specify whether this refers only to patents and copyrights or also to trade secrets
- Personal data: Use definitions that align with GDPR if relevant
Integration and Entire Agreement Clauses
These clauses clarify that the written contract is the complete and sole documentation of the parties' agreement:
"This Agreement constitutes the entire agreement between the parties and supersedes all prior negotiations, representations, or agreements relating to the subject matter hereof, whether written or oral."
In Israel, such clauses are generally enforced, but courts can accept evidence of misrepresentations or concealment of material information even in such situations.
Liability and Indemnification: Limitations and Defenses
Liability and indemnification clauses are among the most important in international contracts, especially when the Israeli company provides services or sells products to countries with a high litigation culture. Differences between countries regarding product liability, professional liability and tort liability require careful planning.
Limitation of Liability
The purpose of liability limitation clauses is to cap the company's financial exposure. Limitations can be quantitative (maximum amount), qualitative (types of damages that will not be compensable), or temporal (short limitation period).
- Quantitative limitation: "The company shall not be liable for damages exceeding the amount paid by the client in the preceding 12 months"
- Qualitative limitation: "The company shall not be liable for indirect damages, loss of profits, or damage to reputation"
- Temporal limitation: "Claims must be filed within 6 months of discovery of the damage"
Note: Under Israeli law, liability limitations in business-to-business contracts are generally enforceable, but there are exceptions in cases of fundamental breach, gross negligence or intentional misrepresentation.
Indemnification
Indemnification clauses require one party to cover legal expenses and compensation that the other party is required to pay as a result of the first party's actions. In technology contracts, indemnification is typically required for the following issues:
- Intellectual property infringement: The Israeli company will indemnify the client if the software infringes a third party's patent
- Privacy law violations: Who will be responsible for GDPR fines or similar penalties
- Local law violations: Responsibility for compliance with laws in the client's country
Caution: Mutual indemnification sounds fair, but usually harms the Israeli company more than it helps, since the foreign client is typically exposed to fewer legal risks than the Israeli company.
Professional Liability Insurance
Many international contracts require the Israeli company to maintain professional liability insurance. Insurance requirements should be:
- Reasonable: The insured amount should align with the size of the transaction
- Geographically relevant: Insurance must cover the relevant countries
- Enforceable: The insurance company must be recognized in the client's country
As of the date of this article, most Israeli insurance companies offer international coverage, but it is important to verify that the policy aligns with specific contractual requirements.
Force Majeure
Force majeure clauses are particularly relevant in international contracts due to the risk of geo-political disruptions. The clause must clearly define what constitutes force majeure and the consequences:
"Force Majeure events include acts of war, terrorism, natural disasters, government actions, and pandemics, but exclude economic hardship or changes in market conditions."
Contract Termination and Transaction Exit
Careful planning of contract termination is essential in international transactions, as the procedural and legal complications of early termination of an international contract can be significant. Differences in contract laws between countries create uncertainty regarding the parties' rights upon termination.
Termination Events and Advance Notice
An international contract must detail precisely all events justifying early termination:
- Material breach: Failure to meet central obligations that was not cured within the specified period
- Insolvency: Bankruptcy, liquidation, or similar proceedings
- Change of control: Sale of the company or ownership change beyond a certain percentage
- Legal violations: Breach of relevant laws and regulations
Advance notice periods must consider geographical distance and the time required for alternative arrangements. A 30-day notice may be sufficient for a simple technology service, but a complex service may require 90 days' notice or more.
Return of Information and Equipment
In international technology contracts, it is essential to plan for data return, confidential information deletion, and equipment return:
- Return timeframes: How much time each party has to return information and equipment
- Return format: In what format data will be returned
- Deletion verification: Confirmation of deletion of confidential information and personal data
- Return costs: Who bears shipping and transfer costs
Note: In cases involving personal data of EU citizens, GDPR laws require data deletion within a specified time, even without explicit client request.
Transition Arrangements and Service Continuity
International clients expect business continuity even when contracts terminate. It is advisable to include transition arrangements in the contract:
- Transition period: Continued service provision for a limited period to allow transition to alternative supplier
- Transfer assistance: Obligation to transfer information and knowledge to alternative supplier
- Transition period pricing: Whether prices remain the same or change
Survival Clauses
Some contractual obligations must continue to apply even after formal contract termination:
- Confidentiality: Obligation to maintain confidential information continues for 3-5 years
- Liability and indemnification: Liability for actions taken before termination
- Intellectual property: Licenses and restrictions on intellectual property use
- Non-compete restrictions: In relevant cases, according to governing law
Survival clause language must be specific: "The following sections shall survive termination of this Agreement: Section X (Confidentiality), Section Y (Intellectual Property), and Section Z (Limitation of Liability)."
Regulatory Compliance and Target Country Adaptation
One of the central challenges in international contracts is the need to comply with regulatory requirements of multiple countries simultaneously. An Israeli company providing services to an American company operating in Europe may be subject to the laws of three or more countries.
Privacy Protection and Personal Data
This is the most complex regulatory area for Israeli technology companies. The EU's GDPR applies to all processing of personal data of EU residents, even if the company is not located in Europe. Additionally, similar laws such as CCPA in California and PIPEDA in Canada create additional requirements.
- Data Processing Agreements (DPA): Required when the Israeli company processes personal data on behalf of the client
- Data Protection Impact Assessments: Required for high-risk processing
- International transfers: Special requirements for transferring data from the EU to Israel
- Data subject rights: Ability to delete, correct and transfer personal data
As of the date of this article, Israel has a partial adequacy decision from the European Union, which facilitates data transfers, but this decision is subject to periodic review and may change.
Financial Regulation
Israeli fintech companies providing services abroad face complex regulations:
- Financial licensing: Requirements to obtain local licenses in certain countries
- AML/KYC: Customer identification and anti-money laundering
- Regulatory reporting: Reporting obligations to local supervisory authorities
- Client fund segregation: Requirements to segregate client funds from company funds
Cybersecurity and Information Security
Cybersecurity regulations vary significantly between countries. In international contracts, the following should be clarified:
- Security standards: Which standard will apply (ISO 27001, SOC 2, etc.)
- Security incident reporting: Reporting timeframes to the other party and authorities
- Security audits: Who may examine security levels and at what frequency
- Information storage: Restrictions on server locations and data storage
Division of Regulatory Responsibility
In international contracts it is important to explicitly divide regulatory responsibility:
Example: "Client shall be solely responsible for compliance with the laws of countries in which it operates, except for requirements directly related to the service provided by the Company."
Such division protects the Israeli company from regulatory obligations it cannot control, while still requiring it to meet standards related to its own service.
A well-adapted international contract is an essential tool for the success of Israeli technology companies in global markets. Proper handling of governing law, jurisdiction, liability limitations and regulatory compliance issues can save enormous costs and ensure stable business relationships for the long term.
The information contained in this article is general in nature and does not constitute legal advice. For advice tailored to the specific circumstances of your company, we invite you to contact our firm.
