Many of the online platforms operating in Israel regulate their relationships with their consumers through a user agreement which, in most cases, meets the definition of a ‘standard contract’ under the Israeli law. A standard contract is a contract with a uniform formulation intended for many engagements. Generally, the contract is drafted in advance, by one party in order to be used in agreements with its consumers, while the counterparty, the consumer, can only accept the contract in full or reject it, and has little or no ability to negotiate and change the contract.
For the most part, international platforms set in their user agreements foreign choice of law clauses (as well as foreign jurisdiction clauses, which are outside this article’s scope).
The Israeli Standard Contracts Law 5743-1982 was enacted to protect consumers party to a standard contract. The Law stipulates that in circumstances where – considering the entirety of the contract’s provisions and the context of the engagement – a specific clause is found to be oppressive or provides an unfair advantage to the service provider, the court is empowered to invalidate it.
The Law includes a list of instances which are presumed to be disadvantageous, among them, in the current context, is a clause that denies or restricts the consumer’s right to argue certain arguments in court.
Therefore, a choice of law clause that restricts the consumer’s right to argue certain claims on the basis of Israeli law, can be considered, and has been interpreted, as detailed below, as oppressive and as meeting the presumptions set forth by the law.
Hence, in almost all civil claims filed against foreign corporations which include in their user agreement a choice of law clause, including lawsuits alleging a violation of the Consumer Protection Law – it is argued by the plaintiff, that such a clause is an oppressive clause in a standard contract and is therefore void.
Choice of law clauses were characterised by Israeli courts as carrying unique difficulties in relation to other terms of standard contracts because a consumer who does not have expertise, cannot fully understand the meaning or the implications of the choice of law clause, such as whether the clause will prevent him/her from raising certain arguments in court due to the applied foreign law. The courts held that understanding the implications of said clause is impractical given the resources it would take.
In view of these difficulties, for many years the courts’ prevailing approach was that a choice of law clause included in a user agreement, of international companies targeting Israeli consumers, is void. The courts provided indications as to which companies should be classified as those who target Israeli consumers, such as: the platform display is in Hebrew, enabling the transaction in NIS. The scope of the company’s activity in Israel was also examined.
The change in the approach occurred following the Supreme Court’s ruling in CA No. 5860/16 Facebook Inc v. Ben Hamo (published in Nevo, 31 May 2018) (the ‘first Facebook ruling’), in which the Court examined Facebook’s user agreement which included a clause that stated that any dispute between Facebook and its users will be governed by the laws of the State of California. Contrary to the former approach, the Supreme Court ruled that Facebook’s choice of law clause does not constitute an oppressive clause.
The main rationale underlying the ruling was that the Californian legal system has similar characteristics to the Israeli one and is considered advanced in the field of class actions. The laws of the State of California are in English, a language understood by many Israelis, and are accessible through the internet. It was further held, that the choice of law clause’s purpose is to protect the legitimate business interest of the international company, that depends on the company being subject to a single legal system in order to arrange its operation wisely, particularly given its vast number of users around the globe. Additionally, the Court held the assumption that a consumer who files a class action for significant financial relief – will not be deterred from filing his lawsuit based on a foreign law.
One important issue remained unsettled within the first Facebook ruling: whether a choice of law clause could circumvent a mandatory law. Since the case of Facebook dealt with an alleged privacy infringement, the issue regarding the status of an Israeli mandatory law, did not arise.
Following the first Facebook ruling, a series of decisions adopted its rationale and adhered to foreign choice of law clauses. However, the aforementioned obiter opinion has not yet been discussed broadly or adopted as a binding Supreme Court ruling.
DISTRICT COURT RULINGS
Recently, several District Court decisions have been published which adopted the obiter opinion in the first Facebook ruling. These decisions are not precedent-setting.
In these cases, the foreign companies argued that the platforms’ servers and employees are not within Israel’s borders, therefore they have no activity in Israel, and Israeli law should not apply to them – this argument was rejected. The courts held that the fact that the platforms target Israeli consumers, operate their display in Hebrew, and enable the transaction to carry out in NIS, allows for the foreign companies to be considered as companies operating in Israel, and enables the application of the Consumer Protection Law in a non-extra-territorial manner.
Thus, mandatory provisions of the Consumer Protection Law cannot be conditioned, not even indirectly, by setting a foreign choice of law clause. The parties’ consent to apply a foreign law should not be complied in every case, regardless of mandatory law, as this may encourage foreign companies to set oppressive choice of law clauses in their user agreements, while leaving Israeli consumers without protection. These rulings, in practice, narrowed the first Facebook ruling.
Unlike the above-mentioned District Court’s decisions, there has been a District Court decision that expressed the view that the question regarding the status of the Consumer Protection Law on foreign companies was yet to be decided. In this case, the Court approved a settlement agreement in a class action that alleged the violation of the Consumer Protection Law by a foreign company. The Court emphasised that the legal standpoint was still unclear and acknowledged that the settlement contradicts the Consumer Protection Law. Nevertheless, the Court approved the settlement, holding that the settlement fulfils the purpose of the Class Action Law by allowing the parties to manage their risks related to the proceeding, including the risk that it may be determined that a choice of law clause can circumvent mandatory legislation. This ruling joined a number of other previous District Court decisions which expressed a similar position.
SUPREME COURT INVOLVEMENT?
The new ruling accentuates the confusion regarding this matter as this ruling may lead to a situation in which a class action will be governed by foreign law, whereas an individual lawsuit brought on the same cause of action will be governed by the laws of the state of Israel.
Although the new ruling does not directly address the status of an Israeli mandatory law when a choice of law clause is deemed valid, the Court addressed the importance of mandatory consumer protection legislation, and even referred to the fact that per the choice of law rules adopted in the EU and the USA, consumer contracts which refer to foreign law do not have the power to circumvent mandatory legislation.
Due to the decreased willingness to acknowledge choice of law clauses, there will also be fewer cases where the question of the applicability of a mandatory law will arise, since the choice of law clause will generally be deemed invalid.
To conclude, there are currently contradictory rulings on the question of whether the Consumer Protection Law applies, in circumstances where the choice of law clause was determined valid. This question, which has the potential to significantly affect foreign companies’ activities in Israel, remains unanswered and currently awaits a Supreme Court decision, or a resolution from the legislator, who was called by the Court in the new Facebook ruling to resolve this issue.
For more information, please contact:
Sivan Wulkan-Avisar, partner
Yigal Arnon – Tadmor Levy
5 Azrieli Center, The Square Tower
132 Begin Road, Tel Aviv 6701101
T: (+972) 74 7886148
Sivan Barasch, associate
Yigal Arnon – Tadmor Levy
1 Azrieli Centre, Tel Aviv 67021
T(+972) 3 608 7901