Recent Court Case – The Importance of Good Faith Also During Contractual Negotiations
Under Israeli law, not only must “an obligation or a right arising out of a contract be fulfilled or exercised in customary manner and in good faith” (s. 39 of the Contracts (General Part) Law, 5733-1973), but even “in negotiating a contract,” the parties “must act in a customary manner and in good faith” (s. 12(a) ibid); and “a party who does not act in customary manner and in good faith shall be liable to pay compensation to the other party for the damage caused to him in consequence of the negotiations or of the conclusion of the contract (s. 12(b)ibid).
The requirement of good faith not only in fulfilling the contract, but even at the negotiating stage – regardless of whether the contract materializes at all – was the most far-reaching innovation of the Israeli Contracts (General Part) Law, 5733-1973.
This principle was graphically illustrated in an important recent court case (Haifa District Court, Civil Case 10103-11-13, Shani Oliel v. Talya Zahava Adler et al).
The plaintiff located an apartment, owned by the defendant, in the Bat Galim neighborhood of Haifa. After speedy negotiations, the purchase price agreed for the apartment was NIS 1.16 million. The plaintiff’s attorney wrote to the defendant’s attorney, requesting him to send a draft contract – which he did the same day. Several days later, it was agreed that the parties would meet to sign the contract. However, one week before the scheduled meeting, the defendant met with another couple, and signed an agreement to sell the apartment for NIS 1.3 million.
The plaintiff therefore petitioned the Court for an order to enforce the draft contract with her, or, in the alternative, to compensate her in the sum of NIS 140,000 – the profit that the defendant had made from selling the apartment to the other purchasers.
The judge who heard the case, Ron Sokol, focused on the issue of “good faith” on the part of the seller – who, at the last minute, changed her mind. He noted that Israeli law attributed legal significance not only to documents that were written and signed documents, but also to statements made between the parties. According to Judge Sokol, statements such as “the matter is closed,” “congratulations” (mabruk), “I promise” etc., articulated before withdrawing from the negotiations, would justify a finding that the withdrawal was not performed in good faith. The same would apply to ancillary documents signed by the parties’ attorneys which would enable the purchaser to obtaining funding, signing a power of attorney etc. – essentially, any document which could attest to the formation of the contract. Withdrawing from the contract at such a stage would thus be regarded as a lack of good faith on the part of the seller.
The judge determined that the seller and her attorney had represented to the buyer that all of the details had been agreed and that nothing remained for negotiation. Although a contract for the sale of the apartment had not yet been signed, a time for signing the contract had been set and it was anticipated that the parties would sign the documents and complete the transaction. Therefore, the judge ordered the defendant to pay NIS 70,000 to the plaintiff together with her attorney’s fees.
The judgment clarifies the limits of negotiations. Negotiating with a number of potential buyers in tandem is not off-limits, in and of itself. However, a seller who does this must alert all bidders to the fact that he is conducting parallel negotiations or at least that he is not obligated not to do so. Failure to act in this manner may result in a judicial finding that the seller has acted not in good faith and must therefore pay compensation, which could potentially amount to the difference between the price at which he agreed to sell the property to one bidder and the price for which the apartment was eventually sold to another purchaser.