During 2022, the legal landscape in the State of Israel underwent significant developments and experienced trends in many areas, both by way of substantial changes in civil legislation and by precedent-setting judgments issued by the Supreme Court of Israel. In this article, we will refer to three key areas, as follows:
Significant Reform of the Civil Procedure Regulations
In 2021, a constitutional reform of the Israeli civil law began to take shape with the coming into effect of the New Civil Procedure Regulations (the “New Regulations”), which replaced the previous Civil Procedure Regulations that were enacted in 1984 (the “Old Regulations”). The purpose of the New Regulations was to effectuate a change in the way in which the civil law was being administered, with the view that it would be administered based on general principles and judicial discretion instead of specific, detailed rules. Accordingly, the New Regulations comprise only 180 procedural rules, instead of the roughly 550 previously enacted, and begin with a chapter titled “Basic Principles” which prescribes the interpretative criteria when exercising judicial discretion.
One of the key changes the Israeli legislator sought to effectuate by establishing basic principles was to instil the notion of “balanced interests” in the legal system, based on the notion that the panel deliberating a certain case should not only take into account the specific issues privy to the litigants, but also consider public interest. Accordingly, a balance should be struck between the private interest of litigants in exercising their rights in court and public interest considerations with respect to optimal management of the limited judicial resource. Therefore, the regulations require, on the one hand, that the deliberation be quick and efficient while saving time and costs and on the other, that it be just, and prevent contradictory rulings and abuse of the legal process.
The aforementioned standards have already found expression in decisions of the Israeli courts. For example, in a case recently brought before the Israeli Supreme Court (the E Sig Ltd case), it was held that when examining the conditions for approving a request to dismiss a claim, the court must take into account the considerations specified in the New Regulations. The Supreme Court clarified that in every claim that is brought before a court, an additional party that is obscured from view – the public – is implied as a litigant. Accordingly, the final reasons for the decision as presented in this ruling concerning the criteria to be presented for the dismissal of a claim are based on the basic principles – “which constitute the pillar of fire walking ahead of the New Regulations” – and particularly, the public interest.
Material changes in the realm of private international law, both in the New Regulations and in case law
A key change that was effectuated in light of the New Regulations, and which was accorded recognition in Israeli case law in 2022, concerns the service of pleadings on foreign defendants. The New Regulations expressly clarify the conflict between the procedural service requirement and the fact that the defendant is aware of the proceedings being filed, and held that the service requirement prevails with respect to service of the Statement of Claim. The foregoing is based on a normative outlook that this rule establishes much greater procedural certainty. Accordingly, the manner of service has been re-characterised in a way that will significantly and fundamentally impact the realm of private international law.
Therefore, just like the Old Regulations, the New Regulations similarly allow for the service of pleadings intended for a foreign defendant on an “authorised” person on their behalf situated within the borders of Israel. However, according to a ruling recently handed down by the Israeli Supreme Court (the Taro Pharmaceutical Industries Ltd case), the new regulation regarding an authorised person should be interpreted in the spirit of the principle that the service rule is preferable to that of knowledge, such that the “authorised person” serving as a representative on behalf of a foreign defendant in Israel is in ongoing contact with the foreign defendant and has acquired authority to receive pleadings on their behalf. As was held, it will not suffice that the person in Israel merely manages the business of the foreign defendant within the borders of Israel or engages in “fleeting” contact with them. Accordingly, in the ruling in question, it was held that service on a foreign subsidiary through the Israeli parent company will not necessarily be regarded as lawful service, since the Israeli company does not necessarily represent the business matters of the foreign company within Israeli borders.
In addition, the New Regulations contain other provisions that may attest to an expansion of the limits of the jurisdiction vested in the Israeli court. Thus, for example, the New Regulations have changed the manner of service on a foreign defendant outside the borders of the state — a change that has not yet been tested by the courts in terms of interpretation and the testing of which may well keep the courts occupied in the coming years. It should be noted that, according to the Old Regulations, a litigant wishing to initiate legal proceedings against a foreign defendant was required to first petition the court seeking leave of service outside the jurisdiction conferred on it. On the other hand, according to the New Regulations, if one of the grounds enumerated in the regulation addressing the subject is met, a litigant may submit a request to determine the manner of service of court pleadings on the foreign defendant, and consequently serve the pleadings outside the borders of Israel without the necessity of obtaining leave from the court in advance. In this way, leave of service of pleadings outside the borders of the state has become the default. Israeli case law addressed this regulation in a decision rendered in 2022 by the Tel Aviv-Yafo District Court (the Michael David Ben-Ari case), in which it was clarified that if one of the grounds allowing granting of service outside the jurisdiction is met, this will be recognised as lawful service. Nevertheless, the court emphasised that discretion in this regard is still vested with the court. Thus, for example, if Israel is not deemed a convenient forum for hearing the proceedings, then recognition of the service outside the jurisdiction should not be granted, even if one of the grounds allowing service is met. In addition, it is still unclear how the previous case law, pursuant to the Old Regulations, will be implemented in cases in which the foreign defendant contests the jurisdiction of the Israeli court.
It should be noted that in that same case, it was held that the governing law stipulation in the “Terms of Service” is not discriminatory, an issue which favoured the foreign defendants in terms of the governing law. Ultimately, in 2022, the Israeli Supreme Court clarified the matter by narrowing recognition of the governing law stipulation in the Troim Miller Ltd case, in respect of which it held that in “regular” claims in which the plaintiff is a “small business”, the governing law stipulation in a standard contract will not be recognised. This represents a departure from the situation in the Ben Hamo case in 2017, which concerned a motion seeking class action certification of a claim.
Having regard to the above, we are of the view that the realm of private international law in Israel – including with regard to service on foreign defendants and the questions of jurisdiction and governing law applicable in this regard – is currently being examined and tested by Israeli legislation and case law and, accordingly, is still under development.
Trends in Class Actions and Their Impact on the Israeli Insurance Market
The area of class actions is regulated in Israel in accordance with legislation enacted by the Knesset (the Israeli parliament) many years ago, and since then has gained considerable momentum. Class action suits are filed in all spheres of law – including consumerism, banking, privacy, cyber and securities, etc. From published studies, the State of Israel is the country with the highest number of class action suits per capita.
In an attempt to deal with this trend, the Israeli legislator began to implement measures in order to reduce the extraordinary scope of class action suits, and in 2018, it imposed specified fees in this regard, which led to a gradual reduction in the number of class action suits being filed.
One of the areas in which class action suits have not slowed down, however, is that of securities. According to research published by the Israeli Securities Authority in 2022, over the last decade there has been an almost 200% increase in the number of class action suits and derivative actions filed with the Israeli courts on issues related to the Securities Law and the Companies Law. For comparative purposes, in the years preceding the past decade, the aggregate number of class action suits filed annually totalled about 16 while, in the last decade, such average totalled about 46 class action suits a year. The research found that a significant share of the class action suits are already concluded by way of settlement at the initial stage of the proceedings, prior to actual certification of the motion, in substantial settlements amounting to dozens of millions of shekels.
Similarly, additional research demonstrates that an even greater upward trend is occurring, both in the number of derivative actions (proceedings in which a shareholder or director seeks to file a claim on behalf of the company) and in the number of requests seeking the disclosure of documents from a company prior to the submission of such derivative action.
This trend has materially impacted the Israeli insurance market, and has resulted in increased insurance premiums to an extent that has caused considerable concern in the Israeli economy of damage being caused to the directors and officers (D&O) insurance market. This matter has not gone unnoticed by the Israeli authorities, who are taking steps in order to restore an appropriate balance to the scope of private group enforcement and prevent a crisis in the Israeli insurance market.
Thus, within the ambit of a position recently provided by the Israeli Attorney General setting out its stance when considering a settlement submitted in a derivative action (the Aharoni case), the significant upheaval suffered by the Israeli insurance market due to the substantial increase in the scope of derivative actions is referenced. Against this backdrop, it was suggested that inspiration should be drawn from the applicable Delaware law regarding derivative actions and that one should refrain from setting a burden of proof that is too low and which might create an automatic parallel between an undesirable outcome in the company and breach of the officers’ duties. In this context, the Attorney General also proposed to apply the US Caremark doctrine in Israel which imposes a stricter burden of proof in proceedings in which a claim of breach of supervisory duty is raised against a company’s officers.
All of these measures are intended to mitigate the risks currently being faced by the Israeli insurance market owing to the unique trend of multiple class action suits and derivative actions being brought in Israel.
Litigation in the Infrastructures Arena – the Bibi Roads Ruling as a Case Study
In recent years, the State of Israel has witnessed significant growth in the infrastructures field that has truly given rise to an “infrastructure revolution”. This revolution is not positioned in a vacuum, and is fraught with many economic, environmental and legal challenges. Each year the Israeli government publishes an implementation plan based on a multi-year plan for infrastructure projects, detailing the national projects budgeted for that year. In January 2019, the Israeli government published the multi-year plan for infrastructure and development projects for the years 2020–2024, at an estimated cost of billions of dollars. This plan placed special emphasis on transportation and road infrastructure projects of substantial scope, including in the areas of ports, trains, light rails, etc.
A large infrastructure project, and perhaps the most significant being carried out in Israel today, is the construction of a new light-rail mass transit system in the Gush Dan area. This constitutes the most densely populated area in Israel, being the location of the metropolitan area of Tel Aviv and the city centre, as well as the seat of Israel’s core trade and business.
Generally speaking, Israel does not have an existing mass transit system servicing the area and therefore, the project (which includes the design and construction of a number of light-rail networks – including underground works) is a first in Israel, due to the complexity of creating a system such as this in an already populous and built-up urban area. This far-reaching project, the value of which is estimated at dozens of billions of US dollars, is expected to completely alter the entire cityscape of Gush Dan, provide better access to Israel’s key commercial centre and alleviate the national level of traffic congestion due to the surplus number of vehicles currently traversing Israeli roads.
“The infrastructure revolution”, in its various aspects and challenges, has also begun to be reflected in Israeli law and particularly, within the parameters of the courts where exactly three years ago, in November 2019, prior to the eruption of the global COVID-19 pandemic, a ruling was rendered by the Supreme Court in the Bibi Roads case. The focus of the ruling deliberated on interpretation of the question of an “all-inclusive contract” (as worded in the ruling) that was signed between the contractor – Bibi Roads – and the developer of the project, a government company – Israel Railways – following award to the former as the successful bidder in a tender published by the latter. This concerned a contract for the execution of comprehensive construction and infrastructure works – encompassing the expansion and upgrading of railroads – in a scope of millions of shekels. The Israeli Supreme Court rejected most of the contractor’s claims seeking receipt of additional payment with respect to additional works that were carried out as well as for damages related to this, such as a delay in commencement of the project due to the conduct of Israel Railways. One of the reasons for the court’s decision was the manner of classification of the contract between the parties as “a closed contract with full stipulation”, in other words, a formal contract the terms of which are clearly defined. When interpreting it, the court focused on determination of the contractual works and refrained from introducing value considerations external to the contract, based on the focused approach outlined in the Apropim doctrine. In the Apropim case, the Israeli Supreme Court held that a contract should be interpreted based on its subjective purpose, as emerges from its deemed wording coupled with the reasons for entering into it, while only in those circumstances in which the parties’ intention cannot be ascertained, will an approach be made to the court to interpret the contract based on its objective purpose, composed of value considerations recognised in both contract law and the general legal system.
The ruling in the Bibi Roads case in contemporary case law/the impact of the ruling in the Bibi Roads case upon litigation proceedings today
Subsequent to the court’s handing-down of the ruling, feelings of fear and concern began to emerge among contractors and infrastructure companies with regard to the way in which the courts or other tribunals might entertain, among other things, claims for additional costs that might be submitted by a contractor selected as the successful bidder in a public tender. The concern was that the contract to be signed as a consequence of the public tender would be classified as a “closed contract with full stipulation” that cannot be deviated from even if the parties did not foresee a change in circumstances. Moreover, many employers have relied on the ruling in the Bibi Roads case in order to reject claims for additional costs filed by contractors in reliance on procedural arguments outlined in the ruling. As a consequence, many contractors sought to obtain additional legal services throughout all stages of the project being carried out by them, beginning with the earliest stages.
However, in April 2020, Acting President of the Supreme Court, Justice Esther Hayut, rejected a motion for an additional hearing in the Bibi Roads case, over which she was presiding, clarifying that the ruling in the Bibi Roads case did not establish a new doctrine regarding the classification of contractor contracts that are signed as a consequence of a public tender. This was largely because, in that case, the parties expressly agreed to a pricing mechanism for performing the additional works, and therefore this does not concern a situation in which a change in circumstances during the life of the contract is not foreseen by the parties. In so holding, the court paved the way for claims to be filed in cases where the parties did not foresee a change in circumstances.
Litigation in the State of Israel is developing and creating fundamental trends in the Israeli legal landscape. In the past two years, the State of Israel has experienced a fundamental reform in the field of civil procedure. As mentioned, this reform will also affect the view towards foreign defendants. In addition, the State of Israel is one of the pioneers and leaders in the field of class and derivative actions, as well as in the infrastructure field, and we anticipate that these areas will continue to occupy a prominent place in Israeli jurisprudence in 2023.
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