Quick Answer: Israeli contract law is codified, mainly in the Contracts (General Part) Law 1973 and the Contracts (Remedies for Breach of Contract) Law 1970. Three features surprise foreign businesses most. A statutory duty of good faith applies in negotiations (Section 12) and performance (Section 39). Enforcement of the contract (specific performance) is the injured party's right, not an exceptional remedy. And courts can reduce agreed damages and strike unfair terms in standard-form contracts. Most commercial contracts need no particular form, English-language contracts are common, and parties are generally free to choose the governing law and arbitration.

1. The Israeli contract law framework

The core statutes are:

  • Contracts (General Part) Law 1973: formation (offer and acceptance), form, interpretation, conditions, defects in consent (mistake, deception, duress, exploitation), illegality and good faith.
  • Contracts (Remedies for Breach of Contract) Law 1970: enforcement, cancellation, restitution, damages, agreed compensation and frustration.
  • Standard Contracts Law 1982: control of unfair terms in standard-form contracts.
  • Specific contract laws: among others, the Sale Law 1968, the Contract for Services Law 1974, the Agency Law 1965 and the Guarantee Law 1967. These supply default rules for particular contract types.

The system is often described as a mixed one. The vocabulary will be familiar to common-law lawyers, but the approach is closer to continental law: general statutory principles, a strong good-faith duty, and courts willing to look beyond the words of the contract.

2. The good faith obligation: a critical difference

Negotiations (Section 12). A party must negotiate in customary manner and in good faith. A party who breaches this duty owes damages for the loss caused by the negotiations or by the conclusion of the contract, even if no contract is ever signed. Typical risk situations are breaking off advanced negotiations without a real reason after inducing the other side to incur costs, negotiating with no intention of closing, and concealing material facts.

Performance (Section 39). Obligations and rights under a contract must be performed and exercised in customary manner and in good faith. Section 61(b) extends this to other legal acts. Courts use it to restrain the abusive exercise of a contractual right, such as a termination that is technically allowed but used opportunistically. They also use it to require reasonable cooperation, and sometimes to imply duties the contract does not spell out.

These duties cannot simply be drafted out. A clear, well-drafted contract still narrows the room for argument about what good faith requires. See our guide to good faith in Israeli contract law.

3. Formation, form, interpretation and standard terms

Formation. A contract is formed by offer and acceptance. An offer must show an intention to contract and be definite enough for the contract to be concluded by acceptance. An acceptance that adds or changes terms is a new offer. A signed memorandum or term sheet can be binding if it shows an intention to be bound and contains the essential terms. If it is not meant to bind, it should say so expressly.

Form. Under Section 23, a contract may be made orally, in writing or in any other form, unless the law requires a particular form. Important exceptions include undertakings to carry out a transaction in land, which require writing under Section 8 of the Land Law 1969, and arbitration agreements, which must be in writing. Electronic signatures and documents are generally recognized under the Electronic Signature Law 2001. There is no requirement that a contract be in Hebrew.

Interpretation. Under Section 25(a), as amended in 2011, a contract is interpreted according to the parties' intention as it appears from the contract and, where appropriate, from the circumstances. Where the intention is clear from the contract's language, the language governs. Custom can fill gaps (Section 26). An integration clause and clear definitions remain worth having.

Standard-form contracts. The Standard Contracts Law 1982 applies to any contract whose terms one party set in advance for use in many contracts. That includes business-to-business terms, not only consumer terms. A court can void or amend a term that is unduly disadvantageous to the customer or gives the supplier an unfair advantage. The law lists terms presumed to be unfair, such as broad exclusions of liability and one-sided termination or amendment rights. A special Standard Contracts Tribunal can also approve or annul standard terms.

Defects in consent. A party who signed because of a mistake the other side knew of, or because of deception, duress or exploitation, may cancel the contract (Sections 14–18). Notice must be given within a reasonable time after the ground becomes known (Section 20).

4. Breach and remedies

Under Section 2 of the Remedies Law, the injured party may claim enforcement or cancellation, and in either case also damages.

  • Enforcement is a right (Section 3). It is refused only where the contract cannot be performed, where it would force a party to provide personal work or services, where it would require an unreasonable degree of court supervision, or where it would be unjust. This is very different from US and English law, where specific performance is exceptional.
  • Cancellation (Sections 6–8). A breach is fundamental if a reasonable person would not have entered the contract had they foreseen the breach and its results, or if the contract designates it as fundamental, provided the designation is not unreasonable. For a fundamental breach, the injured party may cancel by notice. For other breaches, it must first give an extension to cure. Notice of cancellation must be given within a reasonable time after learning of the breach.
  • Restitution (Section 9). After cancellation, each party returns what it received, or its value.
  • Damages (Section 10). These are awarded for damage the breaching party foresaw, or should have foreseen, at signing as a probable result of the breach. The injured party must take reasonable steps to mitigate (Section 14).
  • Agreed compensation (Section 15). Agreed damages are payable without proof of loss. A court may reduce them only if they were set without any reasonable relation to the damage that was foreseeable at signing as a reasonable consequence of the breach.
  • Frustration (Section 18). A party is excused where the breach results from circumstances it did not know of or foresee, could not reasonably have foreseen or prevented, and that made performance impossible or fundamentally different. Courts apply this narrowly, so a written force majeure clause matters. See force majeure in Israeli contracts.

Limitation. Under the Prescription Law 1958, a contract claim must generally be filed within seven years of the cause of action (longer periods apply to some land claims).

5. Drafting cross-border contracts with Israeli parties

  1. Governing law. Israel has no general codified conflict-of-laws statute for contracts. Israeli courts generally respect an express choice of law in a commercial contract, subject to public policy and to protective rules that apply anyway, notably employment and consumer protections. If your counterparty, assets and performance are in Israel, consider whether Israeli law is the more predictable choice.
  2. Forum. Exclusive jurisdiction clauses are generally respected but remain subject to the court's discretion. A foreign judgment against an Israeli party has to be enforced in Israel under the Foreign Judgments Enforcement Law 1958, which adds time and cost. See enforcing foreign judgments in Israel.
  3. Arbitration. International commercial arbitrations seated in Israel are governed by the International Commercial Arbitration Law 2024, based on the UNCITRAL Model Law. Domestic arbitration remains under the Arbitration Law 1968. Israel is party to the New York Convention, so awards are enforceable across borders. Name the seat, the institution, the language and the number of arbitrators. See drafting an arbitration clause.
  4. Liability caps and exclusions. Negotiated, mutual caps between commercial parties are generally upheld. One-sided exclusions in your standard terms are exposed under the Standard Contracts Law. If you use templates in Israel, review them for that risk.
  5. Agreed damages. Set them at a defensible estimate of foreseeable loss and explain the basis in the contract. An inflated figure invites reduction under Section 15.
  6. Termination. List the breaches you want treated as fundamental, set cure periods for the rest, and specify how notice is given. Exercise termination rights for a genuine commercial reason and document it, because the good-faith duty applies.
  7. Currency, linkage and interest. State the currency, the exchange-rate date, any linkage to the consumer price index, and the interest on late payment. Otherwise a court will apply statutory defaults.
  8. Language. English contracts are common and valid. If there is also a Hebrew version, state which language prevails.
In Practice: Section 12 liability is not theoretical. A foreign company that runs an exclusive negotiation, asks the Israeli side to invest in pilots, integration or due diligence, and then walks away without a real reason may face a claim for wasted costs, even though no contract was signed. If you want freedom to walk away, say so in a signed term sheet. Keep the costs each side bears clear, and record your reason when you end talks.