The Ministry of Justice published a new legislative memorandum (Draft Bill) for public comments a few days ago, which seeks to regulate the application of Israeli law to foreign dealers who target customers in Israel. The memorandum seeks to anchor the trend that has emerged in Supreme Court rulings in recent years in primary legislation, and to establish clear rules whereby Mandatory Israeli legal provisions will also apply to corporations whose centers of activity are outside of Israel, when their activities actually target the Israeli market.
Underlying the proposed memorandum is the recognition that international trade patterns have created a reality in which foreign dealers conduct extensive business activities with customers in Israel, largely through standard contracts that include foreign law stipulations (terms of use or website regulations). The purpose of the memorandum is to eliminate the legal uncertainty and ensure that when a business actively targets the Israel market and generates economic benefit from it, it will be subject to local protective norms and the consumer protection laws in Israel.
When will Israeli law apply? The “Directing Activities” Test
The memorandum’s main innovation is the adoption of a substantive test for the applicability of the law, which focuses on the connection that the foreign dealer creates to the Israeli market. According to the memorandum, Israeli law will apply to a foreign dealer if it “directs its activities” towards customers in Israel. The extent of this direction will be examined according to the entirety of the dealer’s actions, with the memorandum listing a series of indications attesting to this:
- The dealer adapted its website and legal documents to the Hebrew language;
- It displays prices and collects payments in Israeli currency (ILS);
- Its marketing and advertising activities specifically target the Israeli market;
- It offers a customer service system in Hebrew;
- It executes transactions with real estate located in Israel.
Expanding exposure: from private customers to micro-businesses
The memorandum is designed to protect customers who have entered engagements characterized by built-in power disparities. Accordingly, protection is granted to a “customer,” which is defined as a person residing in Israel who purchases an asset or service for personal or household use.
However, the memorandum also extends the protection to the business sector and also includes “micro-business” in the definition of “customer” (a business employing up to five employees or whose annual turnover does not exceed ILS 2 million) when it engages in a standard contract with a foreign dealer. This means that also B2B transactions with micro-businesses in Israel will also be subject to the limitations of the proposed law and Mandatory law.
Nullification of choice of law clauses in standard contracts
The memorandum also attaches a schedule to the law, which lists mandatory laws that will apply to foreign dealers, notwithstanding any waiver or contradictory agreement in the engagement contract. The list of mandatory laws currently includes:
- The Consumer Protection Law
- The Standard Contracts Law
- The Privacy Protection Law
- The Payment Services Law
In addition, the memorandum proposes an indirect amendment to the Standard Contracts Law, which establishes a legal presumption whereby any standard contract containing a choice-of-law clause other than Israeli law, or that grants the supplier an exclusive right to choose the applicable law, is an unduly disadvantageous condition. By doing so, the legislature is seeking to prevent the common practice of applying foreign law to consumer contracts and to ensure Israeli customers’ right to litigate according to familiar local laws.
Procedural duties: appointing a representative and service of process
At the procedural level, the memorandum imposes an obligation on foreign dealers whose activities target Israel customers to prominently publish on their websites either the address of their representative in Israel, or a designated e-mail address for service of process. This provision is intended to remove technical obstacles that had prevented customers from exercising their rights in the past, and to simplify the procedure for service of process abroad, which may facilitate the filing of lawsuits and class actions in Israel.
Implications and recommendations for international companies
The memorandum reflects the shift from a policy of honoring contractual stipulations to a policy of regulating and protecting local consumers in the digital age. For international companies operating in the Israeli market, the implications of this memorandum of law are heightened exposure to Israeli regulations and the risks they entail. Therefore, we recommend that foreign dealers and international companies should:
- Review their terms of use and operating models
- Adapt their privacy policies to provisions of the Israeli law
- Map existing engagements with micro-businesses.
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