Israel’s supreme court’s judgment further undermines the validity of applicable foreign law clauses in contracts between global corporations and Israeli consumers

7 August, 2022

In a recent judgment (CA 1901/20 Troym Miller Ltd. v. Facebook Ireland Ltd. (July 26th, 2022)), Israel’s Supreme Court has ruled that the applicable law clause set forth in Facebook’s Terms of Service stipulating the laws of the state of California as the governing law, was, in fact, an unconscionable term in a contract of adhesion and therefore null and void; and in its stead, Israeli law shall apply to the parties’ relationships and the dispute at hand.

This judgment presents caveats with regards to previous rulings made by the Supreme Court, which affirmed foreign applicable law clauses and provides guidelines as to the circumstances in which foreign choice of law clauses will be enforced.

The new Miller judgment broadens the scope of protection granted to Israeli customers while protecting small-scale businesses as well.

The appellants, a local small business and its owner, using Facebook’s advertising services as their main advertising platform, filed a lawsuit against Facebook, claiming that negligence on the latter’s part had severely hampered Facebook users’ exposure to appellants’ advertisements, resulting in severe damages to the appellants.

Both lower instances of the Court had accepted Facebook’s assertation that due to the applicable law clause contained in the Terms of Service agreed to by the appellants, the dispute should be adjudicated according to the laws of California; hence, the appeal to the Supreme Court.

The majority opinion (Justice Willner joined by Justice Grosskopf) ruled that by choosing a foreign law to govern its relationships with customers in Israel, rather than the Israeli law, Facebook had granted itself and its interest to litigate all disputes worldwide according to the law of California, an unfair, improper, and overbroad protection at the expense of its Israeli customers.

Thus, the applicable law clause, was, according to the majority opinion, an unconscionable term in a contract of adhesion according to Israeli law and therefore – void. 

The Court expressed the opinion that by conducting business in Israel, a company implies, and its Israeli customers can reasonably expect, that the Israeli law will govern the company’s relationship with its Israeli customers.

Those global entities conducting business in Israel should not be allowed to stipulate in their contracts that foreign law will apply to the transactions between the parties, be the local party an individual consumer, or a small-scale business.

The Court then further set forth a non-exhaustive list of indications of when a business would be considered a small-scale one for the purpose of determining the validity of an applicable foreign law clause.

The Miller judgment supplements earlier rulings by the Supreme Court, including CA 5860-16 Facebook Inc. v. Ben-Hamo, which, despite annulling Facebook’s venue clause and allowing a class-action lawsuit against Facebook to be litigated in Israel, did enforce its applicable law clause.

The Supreme Court did not rule on whether the new Miller judgment, which was made within the scope of a private action, applies to class action lawsuits as well. 

While global entities conducting business in Israel should take note of this new judgment when drafting terms and conditions applying to consumers and small businesses, we would stress that as a general rule, Israeli law provides that contracting parties are free to choose the applicable law governing their agreement, when speaking of a commercial agreement that is not a contract of adhesion. 

This summary provides general information on the topic. It does not, and is not intended to, constitute legal advice or a substitute for legal advice.

For further information on this topic please contact Dror Versano or Gabriel Focshaner at Yigal Arnon – Tadmor Levy.

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