Writing an agreement that will include all the important and acceptable conditions for the parties is a complicated and important work which requires understanding and consideration. Sometimes, consent regarding too many restrictions and/or obligations as conditions whose breach constitutes a fundamental breach can become a double-edged sword…
What does it mean?
In Israel, Clause 7(a) of the Contracts Law (Remedies for Breach of Contract) – 1970 (hereinafter: “Contract Law“) states that a fundamental breach of one of the terms of the agreement allows the injured party to cancel the agreement immediately and without allowing the offending party the possibility to remedy the breach.
What is a fundamental breach?
A fundamental breach is one of the following:
- A breach for which a reasonable person would not have contracted if he had foreseen the breach and its consequences.
Or;
- A breach which the parties agreed to consider as fundamental. That is a breach on which the agreement “arises and falls”, meaning a breach whose existence does not allow the execution of the agreement, or a breach which significantly harms one party of the agreement.
The effectiveness of defining conditions as fundamental breach is obvious and therefore it is being widely used in many agreements. This wide use is allowed by using the second type of fundamental breach, meaning a clause defined in advance by the parties as a fundamental breach while the parties are aware of the consequences of such breach.
However, it is not possible and not recommend to define every breach of the agreement as a fundamental breach. In this context the law states that “a sweeping stipulation in a contract which defines breaches as fundamental breaches without any distinction between them is not valid unless it was reasonable at the time the contract was signed” (clause 6 of the Contract Law). The purpose of the law in this clause is to avoid any possibility that the stronger party, who has a lawyer, will bond the weaker party to a draconian agreement in which any act of the weaker party can be interpreted as a fundamental breach and thus impose compensation on him.
The question is, what is the reasonable quantity of conditions that constitute a fundamental breach, and is there any quantitative measure?
The law does not define a quantitative test or the exact number of conditions that constitute a fundamental breach that the parties can include in the agreement without this being considered unreasonable. However, the law does clarifies that extensive use of conditions as fundamental breach will be considered unreasonable.
This extensive use of defining many conditions as fundamental breach is common in lease agreements. In a case that was recently adjudicated in a small claims court in Tel Aviv Jaffa, 54227-11-15 Bar Finkelstein V. Vectel, the court discussed the validity of a lease agreement that includes more than 20 conditions defined as fundamental breach, all of which entitle the injured party to an agreed compensation. It seems that when it comes to highly demanded asset, the landlord has stronger bargaining power than the tenant, and in many cases the tenant signs the lease agreement without any possibility of making any corrections or changes that would benefit him. Moreover, the landlord is sometimes in a hurry to plant fundamental breaches of the agreement without taking into account the validity of these conditions, given that the parties’ relations will run aground and reach the court.
A similar case was discussed in the Vectel case above. The landlord filled the agreement with fundamental breaches which entitle him to a high agreed compensation. The court ruled that “in accordance with my authority under clause 6 of the Contract Law – these provisions should not be given any validity, as far as a sweeping determination of fundamental conditions which are not really fundamental is concerned, and it can be assumed that a reasonable person would not have defined these clauses as main clauses on which the contract will arise and fall”. The consequence of this determination is that no act of the tenant was considered a breach of the agreement.
As suggested by the court, the use of fundamental breach conditions should be done sparingly, while examining whether such a condition is important enough until it is clear to every reasonable person that this is a fundamental condition. Furthermore, such a determination undermines the possibility of a landlord to recover from breaches supposedly committed by the tenant, as long as he has not proven in the necessary level of proof that he suffered damage.
The court added that it is possible that such agreements, which are prepared in advance and signed by any tenant, will be considered as uniform contracts. The contract can be considered as uniform contract as long as the landlord gets the tenants to sign on the same agreement, and insofar as this is an agreement that places the tenants in severe market constraints in a way that deprives them.
From the information above it can be also concluded that landlords who have stronger bargaining power should be careful in their actions and act first and foremost in good faith. Even though they have the power to write the agreement and include conditions that best serve their interests, sometimes a situation may arise where they will remain “bald from all sides”.
The above mentioned is correct for any other commercial agreement which is being signed between the parties. It is important to understand that sometimes if “you got much, you got nothing”. Too harsh limitations and gaps in bargaining power between the parties to the agreement, while the stronger party exploits it in his favor when he defines various obligations as conditions whose beach will constitute a fundamental breach, might create a reverse effect.
Therefore, it is highly recommended for parties who are negotiating in order to reach an agreement, and specifically for tenants and landlords, to consult a lawyer before entering into contractual agreements. Both the stronger party and the weaker party need a professional legal consulting in order to best safeguard their interests, by anchoring legal provisions to protect their rights that will pass the test of law and ruling.
