Article Israel: Supreme Court Rules Israeli Courts May Void or Change Choice of Law Provisions in Standard Contracts Between Global Companies and Small Businesses

In a precedent-setting decision rendered on July 26, 2022, Israel’s Supreme Court held that a stipulation in a “standard contract” between Israeli consumers and small businesses requiring  adjudication under foreign law constituted a “depriving condition” under the Standard Contracts Law, 5743-1982 (the law), and is therefore void. The majority opinions were written by Justices Ofer Grosskopf and Yael Willner, with Justice Neil Hendel writing an opinion in dissent. (CivA Request 1901/20 Troim Miller Ltd. v. Facebook Ireland Limited.)

Facts of the Case

The applicants engaged in initiating and producing fashion fairs in Israel. They filed a lawsuit in an Israeli magistrate’s court against Facebook, alleging that the number of their followers on the social network had significantly decreased because of Facebook’s negligence, resulting in meager attendance at their fairs and in the cancellation of another planned event.

In response, Facebook filed a motion to dismiss the applicants’ claim outright because of a stipulation in the parties’ services agreement that any dispute between them would be adjudicated under the law of the state of California in the United States. According to Facebook, the claim had to be summarily rejected because the applicants did not refer to California law in their statement of claim and did not attach an expert opinion regarding it.

Relevant Legal Provisions

The law defines a “standard contract” as “a version of a contract whose terms, in whole or in part, are predetermined by one party to serve as conditions for many contracts between it and unspecified persons in number or identity.” (Standard Contracts Law § 2.)

The law requires a court to “cancel or change … a condition in a standard contract that – taking into account the totality of the terms of the contract and other circumstances – constitutes deprivation of customers or an unfair advantage of the supplier that may lead to deprivation of customers” (i.e., “depriving conditions”). (Law § 3.)

Section 19 states, “If a court finds, in a proceeding between a supplier and a customer, that a condition is depriving, it will cancel the condition in the contract between them or change it to the extent necessary to eliminate the deprivation.

Opinions of the Court

According to the majority opinions, Facebook’s standard terms of service agreement, which provides that claims against the company in Israel must be adjudicated in accordance with California law, constituted a “depriving condition” with regard to small businesses that purchase advertising services from Facebook.

According to Justice Grosskopf, the sweeping attempt of a global corporation that chooses to conduct business activities in Israel to renounce the application of Israeli law toward customers who consume its services or purchase its products, through a stipulation of choice of law in a standard contract (whether the client is an individual or a small business), should not be legitimized. The stipulation constitutes an attempt to gain excessive protection beyond what Israeli law is willing to allow and should therefore be considered a “depriving condition.” (Grosskopf opinion para. 33.)

Both Groskopf and Willner differentiated between the current case and the case in the 2018 Supreme Court decision CivA Request 5860/16 Ben Hamo v. Facebook Inc. In Ben Hamo the court rejected a claim that a similar choice of law clause directing to application of the law of California in a standard contract between the parties was a “depriving condition.” According to Groskopf, this distinction may be explained by the context of the latter case, which involved “a claim in respect of the Facebook privacy policy” (Grosskopf opinion para. 31); according to Willner, unlike in the current case, the claim in Ben Hamo was made in a class action and involved a very large amount of money (Willner opinion para. 11).

Both justices agreed that to determine whether the applicants in the current case were a small business so that the “depriving condition” could be voided would require the adjudicating court to consider relevant facts that might indicate the existence of a power gap between the advertiser and Facebook. These might include the economic status of the advertiser, the number of employees it employs, its access to legal support, the decree to which the advertiser’s activity depends on Facebook advertising, the amount of the claim, and the degree of deprivation posed to the advertiser, which is inherent from the requirement to litigate under foreign law. Willner explained:

For example, the owner of a homemade baked goods business who employs two employees and advertises its products solely on Facebook will be considered a small advertiser and consumer on Facebook. The same applies to the owner of a falafel stand, which employs five employees and advertises himself on Facebook and in the local newspaper. On the other hand, a chain of supermarkets operating nationwide, with a legal department and an advertising department, which advertises itself on Facebook, television and other internet platforms … is not a small business. Neither is a solid chain of restaurants that enjoys ongoing legal support, employs hundreds of employees, and files a lawsuit against Facebook in the amount of millions of shekels. The power and information gaps between such chains and Facebook, even if they exist, do not justify defining them as consumers for our purposes. (Willner opinion para. 27.)

Decision of the Court

The court held that the choice of law stipulation in the contract that is the subject of the current request protected Facebook Ireland’s interest above what was appropriate in the circumstances. The interest of the applicants therefore exceeded that of Facebook. The court returned the case to the magistrate’s court to determine whether the applicants could be classified as a small business.  If the magistrate’s court determined it could be so classified, the choice of law provision in their contract with Facebook would be voided in accordance with section 19 of the law. (Willner’s opinion paras. 35–36.)

Commenting that her decision was based primarily on the particular circumstances of the case, Willner stated that “it was impossible to ignore the fundamental aspects” of the issue presented. She added:

[I]n view of the nature and breadth of the effects inherent in a principle decision on these [fundamental] aspects, the appropriate authority to [regulate the law that would apply to Israeli consumers’ transactions with international companies] is the legislature or the regulators concerned. … It appears that the relevant authorities have begun to examine aspects relevant to the issue … and we call on them to complete the regulation in the context in question. (Willner para. 37; see also Ministry of Justice, Call for Proposals: Examining the Regulation of the Law Applicable to Consumer Transactions vis-à-vis International Companies, Feb. 22, 2022.)

Commenting on the court’s decision, Advocate Liad Wertzheiser, who represented the requesters, stated that there was

no justification for allowing any tactical advantages to the internet giants operating in Israel vis-à-vis their millions of customers, and that the barriers to litigation with those companies that maintain interfaces in Hebrew, provide customer service in Hebrew, retain legal advice in Israel, and earn huge sums of money from Israeli users should be removed.

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