Foreign corporations exempted in tender law

21 August, 2023

Legal Update- Exemption for a Foreign Corporation from the Contractors’ Registration Law for an International Tender

On July 20, 2023, the Supreme Court handed down a precedent-setting ruling on a petition in which our firm represented one of the respondents, the government-owned company Mekorot (hereinafter: “Mekorot”). The ruling establishes guidelines for exempting a foreign company from the provisions of the Engineering and Building Contractors Registration Law (hereinafter: “Contractors Registration Law”) for participation in an international tender.

Avraham Yitzhak Ltd. filed the petition regarding a tender published by Mekorot for infrastructure works amounting to tens of millions of shekels awarded to Chinese company China Railway Tunnel Group Co., Ltd. (hereinafter: “CRTG”). An administrative petition filed with the Tel Aviv District Court against the selection of CRTG as the winner of the tender, in which our office also represented Mekorot, was dismissed on October 25, 2023.

Before the decision on the administrative petition, the petitioner filed a petition with the High Court of Justice against the decision of the Minister of Housing and Construction (hereinafter: “the Minister”) to grant CRTG an exemption from entry in the contractors’ register, based on the Minister’s authority under section 14a of the Contractors Registration Law.

On February 28, 2023, a partial ruling dismissing the High Court of Justice petition was issued without reason. On July 20, 2023, a supplementary ruling was issued by the Honorable Judge D. Bark Erez, with the consent of the Honorable Judges A. Groskopf and J. Kanfi-Steinitz. In the supplementary ruling, the Supreme Court discusses the cumulative conditions under which, according to section 14a of the Contractors Registration Law, the Minister may exempt a foreign company from the jurisdiction of the law.

First condition: the company’s place of business is outside Israel.

The Supreme Court determined that this condition should be interpreted by a functional/substantive test, meaning that the Minister should examine where the foreign company’s primary and consistent business activity is concentrated. In this context, it was determined that previous exemptions granted to CRTG, under which CRTG is carrying out several projects in Israel, do not contradict the Minister’s determination that CRTG’s place of business is outside Israel. Furthermore, the court ruled that in the absence of explicit legislation, there is no strict limit to the number of times a foreign company can be exempted from entry in the contractors’ register.

Second condition: the company does not have a registered place of business in Israel.

The main dispute that required a decision regarding this condition pertains to the relationship between this condition and section 346 of the Israeli Companies Law (hereinafter: “the Companies Law”), which requires a foreign company to register as a foreign company in Israel in order to have a “place of business.” In this matter, the Supreme Court ruled that the obligation to register a foreign company indicates that its primary activities are outside Israel.

The court determined that the term “place of business” for the purpose of section 346 of the Companies Law relates to the presentation of a specific address for legal purposes, while “place of business” for the purpose of section 14a of the Companies Law refers to the actual location of the business activity. Consequently, it was determined that the fact that CRTG is registered as a foreign company does not contradict the second condition, which states that the company must not have a registered place of business in Israel.

The Supreme Court refrained from determining in its ruling what would be considered a registered place of business in Israel that would preclude granting an exemption according to the second condition.

Third condition: the exemption is sought for an international tender.

The ruling determined that in the absence of a clear definition of the term “international tender” in the Contractors Registration Law, the question of this condition’s existence is primarily a factual matter: if the tender is open to foreign entities, as in the case in question, it is an international tender.

Timing of exemption request submission and expected timeframefor the Minister’s decision.

The Supreme Court accepted the petitioner’s claim that the foreign company should submit its request for exemption from entry in the contractors’ register to the Minister before submitting its bid in the tender or, at the very least, before the tender results are determined. It was also ruled that the exemption request discussion and decision should occur before the tender results are known. The aim is to avoid the concern that the tender results would influence the decision on the exemption request. According to the ruling, this ruling is consistent with the language and purpose of the Contractors Registration Law, which is designed to exempt the foreign company from fulfilling preliminary requirements that apply to Israeli contractors, including entry in the contractors’ register. Accordingly, just as it is not possible to choose a winner of a tender who is not entered in the contractors’ register when submitting its proposal, it is also not permissible to choose a winner who is not exempted from the registration obligation at that time.

The Supreme Court’s ruling on the timing of submission of an exemption request and the expected time for the Minister’s decision on it contradicts the policy under which the Minister examines requests for exemption from entry in the contractors’ register only after the foreign company has won the tender. Against this backdrop, and given the precedent of the ruling, the Supreme Court determined that the fact that the exemption was requested and granted to CRTG after it won the tender does not undermine its validity. However, the ruling determined that in future cases, there would presumably be a basis for judicial intervention in the results of a tender in which the winner was not entitled to an exemption at the time of submitting its proposal or before its win was announced.

It should be noted that according to the ruling, the central reason for rejecting the petition is based on the delay in submitting the petition and not on the reasons we have addressed concerning the exemption from entry in the contractors’ register. On this matter, the ruling determined that the petitioner expedited the submission of legal proceedings. A subjective delay, therefore, cannot be attributed to it. However, the Supreme Court adopted Mekorot’s claims regarding the severe implications of accepting the petition on the project’s timetable and, as a result, on the timetables of other significant projects of national importance. Therefore, the court ruled that the petition should be rejected for reasons of objective delay.

Read the Article at Lexology >>

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