© 2016 Sherby & Co., Advs.
Israeli law regarding the exercise of personal jurisdiction has long been characterized by the dichotomy between the conservative approach dictated by the Supreme Court and the more liberal approach practiced by the lower courts. The recent decision in IRS Group Ltd. v. Simon Katan et al (Haifa District Court) seems to have taken that schism to a new level.
IRS Group involved an oral contract to distribute goods in the United States. The defendants were (a) an Israeli-Turkish citizen who resided in the United States, and (b) a limited liability company, established in the United States after the alleged oral contract was arrived at.
Background: Before describing the circumstances concerning the alleged oral agreement, we set forth a brief summary of the relevant portion of the (multi-prong) Israeli long-arm jurisdiction rule and some basic principles of Israeli jurisdiction:
- An Israeli plaintiff may not serve process upon a foreign defendant absent court permission;
- An Israeli court may exercise jurisdiction over a non-Israeli defendant with respect to a contract claim if that contract was “made” in Israel (the long-arm does not use the term “signed” in Israel);
- A motion for such permission is routinely filed on an ex parte basis and granted on an ex parte basis – with the defendant’s right to move for vacatur being reserved;
- In order for this prong of Israel’s long-arm to be met, there is no need that the intended place for performance be in Israel;
- Israel’s Supreme Court has long held that any doubt as to whether the alleged conduct of the non-Israeli defendant falls within the scope of the long-arm rule is to be construed in favor of the foreign defendant.
See Encyclopedia of International Commercial Litigation (Israel Chapter) § A4.3-§ A4.9.
Analysis of Factual Allegations Relating to Jurisdiction: In IRS Group, the plaintiff asserted both a claim for breach of (an oral) contract and a claim for copyright infringement.
The Breach of Contract Claim:
Both with respect to the circumstances of reaching the agreement and the terms of that agreement, the decision in IRS Group is sparse. The alleged oral agreement was arrived at in the Israeli office of an accounting firm (presumably the accountants of the plaintiff, IRS Group).
The court added the following observation regarding the chronology of the contractual relationship (as per the plaintiff’s factual contentions):
The principles were agreed upon, in the presence of the parties, at a meeting . . . . [and] the defendant [Simon] requested to prepare the agreement in Israel due to costs considerations, and it was agreed to form a joint company in Dallas Texas for tax purposes.
The parties began their cooperation, even though the defendant [Simon] put off the signing of the contract . . . .
The above description – specifically the statement that the defendant put off the signing of a written contract – raises a fundamental question as to whether the execution of a written agreement was intended to be an integral part of the parties’ alleged meeting of the minds. In essence, the court raised the issue but then dropped it – which seems inconsistent with the Supreme Court’s admonition to construe all doubts in the defendant’s favor.
Moreover, the court in IRS Group glossed over the fact that the corporate defendant did not even exist at the time the alleged oral contract was made in Israel. In a case in which the lone jurisdictional basis is that an agreement was “made in” the forum state, it is difficult (to say the least) to justify exercising jurisdiction over an entity that did not even exist at the time of such alleged agreement.
Thus there are two grounds for questioning the court’s conclusion that the “contract made in Israel” prong was satisfied – (a) a serious doubt as to whether the parties intended there to be a binding contract absent a signed document, and (b) the lack of any basis for tying the corporate entity, which had not yet come into existence, to the oral contract.
The Copyright Claim:
As indicated above, the plaintiff also asserted a claim for copyright infringement. The plaintiff claims to have sent photographs (for catalogue use) to defendant Simon, and both defendants are alleged to have used those photos to market goods other than those of the plaintiff. From the description in the court’s decision, it appears that the alleged acts of copyright infringement occurred entirely outside of Israel.
Yet as a general matter, an Israeli court will be very hesitant to exercise jurisdiction over a non-Israeli defendant for infringement that is alleged to have taken place entirely outside of Israel.
Moreover there is no indication from the court’s decision that the issue of use of the photos was a term of the alleged oral agreement (and even if it had been a term of the agreement, as noted above, the corporate entity could not have been a party to any agreement before it was incorporated).
If the contract did not deal expressly with the issue of the use of the photos, then the plaintiff is left with a claim for copyright infringement against two non-Israeli entities relating to conduct entirely outside Israel. In other words, if the contract did not deal expressly with the photos, then the existence of an alleged copyright claim would not appear to salvage the jurisdictional problems relating to the contract claim.
Considerations of Convenience:
The court’s jurisdictional analysis did not stop with the conclusion that the “contract made in Israel” prong of the long-arm was satisfied. Rather, based upon case law from Israel’s Supreme Court, the district court was required to, and did, consider whether Israel would be a convenient forum for adjudicating the claims.
One of the factors to be considered regarding the issue of the convenient forum is the reasonable expectation of the parties as to the forum for the adjudication of disputes. On this issue, the court’s analysis was remarkable:
I accept the contention of [the plaintiff’s owner] that he thought that he was doing business with an Israeli citizen, who has a close connection to Israel. The mother of [defendant Katan] had been living in Israel, and the defendant habitually visited her, and he also came here in order to sit shivah [the traditional Jewish seven-day mourning period] when she passed away. The defendant [Katan] told [the plaintiff’s owner] that he gets dental treatments in Israel and comes [here] for that purpose every few months. It can be assumed that the reasonable expectation of the plaintiff was that the place for adjudication in the event of a dispute would be in Israel and that Israeli law would apply to a deal made in Israel.
Although the Israeli dentistry industry might be flattered by such analysis, IRS Group is probably the first time that an Israeli court, in considering the appropriate forum for adjudicating a business dispute, relied upon sitting shivah or sitting in a dentist’s chair.
In deciding that the personal visits to Israel of Katan rendered it reasonable for the plaintiff to expect to litigate in Israel, the court essentially ignored all of the business factors – not the least of which were that (a) the parties agreed to establish a limited liability company in the United States, and (b) the territory for marketing the products was the US.
Take-Aways From This Case: Arguably the outcome in IRS Group was not surprising – Israeli courts hold plaintiffs to a relatively low evidentiary standard when deciding issues of personal jurisdiction. But a low evidentiary threshold does not mean that factors weighing against the exercise of jurisdiction may be ignored – even when the court adjudicates a jurisdictional motion on an ex parte basis.
As indicated above, a non-Israeli defendant is given the opportunity to seek vacatur of such an ex parte order after having been served with the court papers. But that fact alone does not absolve a court from taking into consideration obvious factors that weigh against the exercise of jurisdiction over non-Israeli defendants.