Attorney Gil Nadel, Gilad Paz
When entering a contract, many parties will add a clause dealing with a settled compensation sum, whereby the party in breach of contract will pay a sum that has been predetermined, without proof of damage, should the contract be breached.
This system of a settled compensation is defined in clause 15 of the Contract Law (remedies for breach of contract)- 1970, which determines thus:
"Should the parties settle upon a compensation sum in advance (hereinafter- settled compensation), the compensation will be as settled, without proof of damage; however the court is entitled to reduce the compensation should it find that the compensation was settled unreasonably out of proportion to the damage that could have been foreseen when entering the contract as a probable result of the breach".
In other words, the clause in the law determines that the compensation sum will be paid in default, unless the court will determine this sum to be unreasonable.
Of course, in most cases the party in breach of contract will not pay the settled compensation on his own initiative, and therefore there is no choice but to submit a lawsuit against him, which would include the demand to enforce the settled compensation clause.
Usually, courts will not interfere with a clause that had been agreed upon between the parties, but a few months ago, a verdict was given where the court made a significant reduction of the settled compensation, and granted the party which suffered the damage with less than a sixth of the sum that had been settled upon.
The case of the Italian shading products venture:
The case deals with a venture between two companies dealing with the import of shading products from an Italian supplier, which fell through, and each company blamed the other for the venture's failure.
The court accepted the lawsuit, but, as mentioned before, significantly reduced the compensation deserved by the party who suffered the damage as a result of the breach of contract.
Summarily, Sohahey Tevel imported shading products from an Italian company called Gibus into Israel for quite some time, but without an exclusivity agreement.
Another company, Sohahey Hamerkaz, also wanted to start importing these products to Israel, and towards this end they approached Sohahaey Tevel, and the two of them set up a joint venture which permitted Sohahaey Hamerkaz to import on its own behalf, but also obligated them to sell a portion of the imported products to Sohahey Tevel, at cost + 7%. The two companies also informed the Italian supplier of this venture.
According to the prosecutor's claim, as soon as the venture was consolidated, the defendant began directly importing from the supplier without bothering to sell a portion of the products to the prosecutor, in direct opposition to the contract. In light of this, the lawsuit was submitted, in which the prosecutor demanded a compensation fee of NIS 300,000, in accordance with the settled compensation clause that was included in the contract between the two parties.
The lawsuit was submitted against Sohahey Hamerkaz and its manager.
The defendant claimed that the contract had not even come into effect since they had not received the approval of the Italian importer, and since the prosecutor misled them into believing they were the exclusive distributors of the Italian supplier.
The court deferred the defendant's claims that the contract signed between the two parties had not come into effect. The court determined that contract had not been stipulated upon the Italian supplier's approval, and there had been no deception on the part of the prosecutor since they had not claimed to be the exclusive distributor.
And yet, regarding the compensation sum that had been settled upon in the contract, the court found this sum (NIS 300,000) to be disproportional to the damage that had been caused, and fixed the compensation fund on only NIS 45,000, plus expenses and attorney fees at a sum of NIS 10,000.
The court requested the prosecutor to explain this matter, how it came to be that the compensation had been settled at NIS 300,000. The prosecutor claimed that the compensation was based upon an estimation whereby a large number of awnings would be sold over the course of a year, but the court noted that the prosecutor ordered only 2-3 awnings from the defendant since signing the contract, and this contradicts their claims for the reasonability of the high rate of compensation.
The lawsuit against the defendant's manager was postponed, due to the fact that the court did not find a suitable reason to differentiate between the company and its manager.
[Civil Suit (Tel Aviv Magistrates Court) 13693-06-10 Sohahey Tevel Ltd. vs. Sohahey Hamerkaz Shading Solutions Ltd., Judge Sharon Geller, vedict of June 18, 2012. Party representatives- on behalf of the prosecutor (Sohahey Tevel)- Attorney Ekler; on behalf of the defendant (Sohahey Hamerkaz)- Attorney Atias].
Notes:
Usually, the courts tend not to interfere with contractual agreements that have been signed between parties.
In this case, although the parties had agreed upon a compensation of NIS 300,000 should the contract be breached, the court decided to interfere in this settled clause, and determined that this is an unreasonably high compensation and that the appropriate compensation is only NIS 45,000.
In this case, the court also noted in its verdict that according to the Supreme Court's ruling on the matter [Civil Appeal 300/77 Rosner vs. Binyaney T.L.M. Construction and Development Ltd.] when interfering with the compensation sum as settled upon by the parties within a contract, a court will take the smallest steps that are necessary for ensuring the reasonability of the settled compensation. In the case at hand, Sohahey Tevel claimed that the compensation that had been setteled upon in the contract had been derived from the extent of its annual sales.
However, the court determined that since they had not presented any proof as to the extent of Sohahey Tevel's annual sales, the settled compensation of NIS 300,000 was an extravagant compensation and thus, the court decided to reduce the sum of the settled compensation in this case to only NIS 45,000.
In light of this verdict, it can be concluded that when parties agree upon the settled compensation, they must base this compensation upon logical calculations based upon facts, which can then convince the court, should the need arise.
And yet, the court's interference in the matter of the perfect settled compensation for a breach of contract is rare. In another case that had been tried this year in the Petah Tikvah Magistrate's Court, the court decided not to interfere in the settled compensation fee of an astronomical NIS 1.7 million, which had been determined in a contract which dealt with the distribution of imported Nile perch that had been imported to Israel. The court accepted the claim that the contract had been breached, and yet, it ruled that the party who had committed the breach must pay the party that had suffered the damage the full compensation fee as agreed, without interfering with the sum that had been settled [Civil Suit (Petah Tikvah Magistrate's Court) 4368-08 Elgrissi Group Ltd. vs. Kafu Zan Food Industries Ltd.].
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