In this unusual period where reality changes from moment to moment, the question arises as to what will happen to many contracts that have been signed and as a result of the corona virus their existence has become difficult to the point of impossible.
In this article I will briefly explain what the laws of thwarting general contracts are, I will present a number of key rulings that will demonstrate the interpretation given by the courts and the trend in rulings to recognize these claims in unusual situations. At the end, I will present the controversies that, in my opinion, are likely to arise in the courts following the outbreak of the corona virus, if not in the near future, certainly in the not-too-distant future.
Laws of breach of contract constitute an exception to the basic doctrine in contract law according to which "contracts must be fulfilled". According to the doctrine, the contractual responsibility is an absolute responsibility, that is, the obligation to perform a contract stands in its full scope regardless of any circumstances. In this regard, the laws of prevention are a softening measure for the absolute contractual liability[1].
Section 18 of the Law on Contracts (Remedies for Breach of Contract), 1970, regulates the issue in Israeli law and states that when the party breached the contract due to circumstances of which he did not know at the time of the conclusion of the contract, should not have known about them and should not have foreseen them ("principle of anticipations"), and which made the performance of the contract in those circumstances impossible or different Fundamentally from what was agreed, the breach of the contract will not be grounds for enforcement or compensation.
In such a case determines Section 18 (b) of the law, that the court may compel each of the parties to return to the other what he received under the contract and to compensate the injured party for the reasonable expenses he incurred and the obligations he reasonably undertook in order to fulfill the contract, all if the court deems it just under the circumstances.
So when would it be right under the circumstances ?
For years, the approach in court rulings was to reduce the circumstances that could be considered a breach of contract.
In the Katz case [2] which was decided in 1979, there was talk of a contract made by a subcontractor with a main contractor in 1973, to perform work at a certain price. Following the outbreak of the Yom Kippur War, the work was stopped and the subcontractor enlisted in the army. After he returned he found that the price he committed to doing the work was low and he could not afford it. Therefore, he asked the main contractor to update the price, and when the contractor refused, he stopped fulfilling the contract. In the lawsuit filed against him, he claimed to have thwarted the contract. The court rejected the claim and stated that as long as there is no peace between Israel and its neighbors, the danger of an outbreak of war at any time is within the bounds of what is expected for a person from Israel.
However, in the 1990s, a trend began to erode the law that reduced the general contract frustration laws.
In the case of Regev v. the Ministry of Defense [3], there was talk of a contract signed in 1990 between a private company and the Ministry of Defense to purchase expired ADF masks for a certain price. At the same time, the same company entered into an agreement with an American company to sell the masks at a profit. In the summer of that year Iraq invaded Kuwait and due to the new political and security situation in the region, it was decided to delay the delivery of the IDF masks. The company sued the Ministry of Defense for breach of contract.
In the ruling, Judge Englerd criticized the strict approach in his opinion established in the Katz case and believes that the effect of the unusual event, such as the outbreak of war, on the essence of the contractual relationship must be examined in each case. He further refined his approach that the principle of expectations should be applied not to the unusual event itself, but to the practical consequences of the event on the essence of the contract. He also stated that there is a great conceptual closeness between the principle of prevention and the requirement of good faith in the performance of a contract. An excerpt from his words: A contracting party who insists on exact execution of the contract despite the substantial change that has occurred due to external circumstances - such a contracting party is not acting in good faith."
Finally, in a judgment handed down in 2016, the Zoevi case [4], there was talk of a lease signed between the state and Walid Hamuda Zoevi, under which Zoevi leased to the state a floor in a building in Nazareth for the operation of a welfare office in the area. Following several criminal incidents that occurred near the building, including automatic shooting and an explosive device explosion, the state decided to terminate the lease agreement. Zoevi filed a claim for breach of contract.
In the judgment on appeal, Judge Amit expressed his position that the strict interpretation given to the principle of expectations established in section 18 of the law should be softened. It is important to note that the ruling in the case was based on the section of the Law on the Customer of the Lease Law which establishes a special arrangement for the thwarting of a lease contract, so that no explicit applicability to section 18 was determined.
In conclusion, although it seemed for years that the law of thwarting in the law of contracts was a dead letter, it appears from the rulings of the courts that there is recognition of the claim of thwarting a contract in certain circumstances. As for myself, I am identified with the approach of the Honorable Judge (retired) Yitzhak Englerd, according to which each case will be examined on its merits and circumstances. For example, there is no similarity between a contract in which a person paid for a study course that did not take place and a contract for the supply of goods that were not supplied or were supplied partially or defectively.
Regarding the corona virus and some of the disputes that may arise in the courts: whether an epidemic in itself may be considered an event that thwarts a contract, whether in this specific case the consequences following the event affected the essence of the contract, what is the legal issue of the 'force majeure' clauses in the agreement that refer to epidemics. Time will tell how the courts will deal with the many claims that will come up...
It is important to emphasize that this article deals with general frustration laws as stated in the Contract Law, and does not refer to other articles of law intended to regulate issues of contract frustration in other branches of law, for example international rental or sales laws, where there are specific and other arrangements. In any case, it is recommended to consult a lawyer who is knowledgeable in the field.
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