IsraelLaw
Foreign companies that end up in Israeli arbitration over a failed supply contract or a licensing dispute usually have a clear sense of what they lost. The harder part is knowing how an Israeli tribunal translates that loss into an award: which heads of damage survive, what evidence the arbitrator actually needs, and which arguments cut the recovery even when the breach is not contested.
Israeli damages law for contract breach is largely statutory. It is not the American punitive-damages system and it is not English common law. It is a single modern statute — the Remedies Law — built in the 1970s and designed to be applied predictably. A foreign practitioner who reads it can understand the framework in an afternoon.
1. The Legal Framework
Israeli contract law was codified in the 1970s, replacing the Ottoman Mejelle, English-era ordinances, and accumulated common-law precedent with two coordinated statutes. The Contracts (General Part) Law, 5733-1973 governs formation, interpretation, validity, and the general duty of good faith. The Contracts (Remedies for Breach of Contract) Law, 5731-1970 — the Remedies Law — governs what happens when a contract is breached.
Both statutes apply in domestic Israeli arbitrations as the default substantive law. An international arbitration conducted under the International Commercial Arbitration Law, 5784-2024 — Israel's implementation of the UNCITRAL Model Law — follows the same framework when the parties have chosen Israeli law to govern their contract. Parties who agree to different substantive law take their agreed choice with them into the arbitration, but must still contend with Israeli mandatory rules where Israeli courts will later confirm or enforce the award.
The Remedies Law provides five distinct responses to breach: enforcement in specie, damages, restitution, cancellation, and reduction of counter-performance. In practice, damages are the primary remedy sought in commercial arbitration, with the others deployed tactically alongside or in the alternative.
A claimant's statement of claim in an Israeli arbitration should plead each available remedy separately and in the alternative. If the primary claim is for expectation damages under Section 10, add a restitution claim under Section 9 for the value of any performance already rendered, a Section 13 claim for non-pecuniary loss, and a Section 39 good-faith claim if the conduct warrants it. The arbitrator cannot award what was not pleaded, and in a dispute managed under the Israel Centre of Commercial Arbitration (ICCA) rules there is typically no right to amend once the hearing starts. On a NIS 3,000,000 expectation claim, a Section 39 good-faith add-on for bad-faith exercise of a termination right can add NIS 300,000–500,000 in reliance expenditure the claimant would otherwise lose.
2. Expectation Damages: Sections 10 and 11
Section 10 of the Remedies Law states the baseline: where the breach caused loss, the injured party is entitled to compensation measured by that loss. The measure is the expectation interest — the difference between the claimant's position had the contract been performed and its actual position after the breach. That difference covers direct loss (the cover cost minus the contract price), money the claimant spent preparing to perform that is now wasted, downstream harm like lost customer revenue and third-party penalties, and lost profit on the contract itself after direct costs are deducted.
Section 11 applies the foreseeability filter. A claimant cannot recover for a type of loss that the breaching party could not reasonably have foreseen at the time the contract was made as a probable result of this kind of breach. The question is what a reasonable person in the defendant's position would have anticipated at contract formation, not at the date of breach and not with the benefit of hindsight. A distributor that never disclosed the end-customer relationship cannot later claim the consequential loss of losing that customer. A supplier who knew the buyer needed components for a fixed delivery slot has a much harder time arguing the downstream contract loss was too remote.
Israeli arbitrators require that lost-profit claims be supported with reasonable certainty, not merely alleged. An established business can rely on historical revenue and margin data from its accounting records plus expert analysis of the counterfactual. A newer venture or a project that never started needs a credible financial model — typically a discounted-cash-flow analysis prepared by a CPA or financial expert — that the arbitrator can interrogate. Claims of NIS 1,000,000 or more in lost profit almost always require expert financial evidence; without it the tribunal will reduce the award to what it can verify from the documents, which is usually a fraction of the pleaded sum. File your expert's report at least 30 days before the hearing so the other side can respond.
3. Foreseeability and the Duty to Mitigate
Section 14 of the Remedies Law contains Israel's statutory duty to mitigate. It provides that the injured party shall not recover compensation for loss it could have avoided by taking reasonable steps, and that where it incurred costs in taking those steps — even if unsuccessful — those costs are themselves recoverable.
The duty arises at the moment the breach is known or ought to have been known. A claimant who discovers a repudiatory breach in January and waits until December to seek an alternative supplier will have its recovery cut to the loss it could not have avoided in a reasonable period. The standard is objective: what would a reasonable business have done in the same circumstances, with the same information and market access?
Mitigation does not require accepting an inferior substitute or dealing with the breaching party again. No arbitrator will expect a claimant to renegotiate with someone who has already proved unreliable, or to take steps that are commercially impractical. But the arbitrator will expect to see documentary evidence that the claimant looked for alternatives and moved promptly once the breach was clear.
The most damaging mitigation failures in Israeli arbitrations are ones the claimant cannot even reconstruct at the hearing. Keep a contemporaneous log: dated emails requesting market quotes, written records of supplier negotiations, internal memos on why a particular option was rejected. In a supply-chain dispute where the claimant claims NIS 800,000 in cover costs, the arbitrator will ask why the claimant chose the specific replacement supplier. If the answer is "we cannot locate those communications," the tribunal treats the mitigation effort as undocumented and risks discounting the cover-cost claim. Mitigation records are as important as loss records, and they need to be preserved from day one of the breach.
4. Non-Pecuniary Damages: Section 13
Section 13 of the Remedies Law authorises an award for non-pecuniary harm caused by the breach: distress, embarrassment, loss of time, inconvenience, harm to reputation, and similar non-financial injury. The tribunal sets the amount at its discretion, and the law contemplates that it will be proportionate rather than unlimited.
In Israeli commercial arbitration, Section 13 awards between businesses tend to be modest. The typical range for an ordinary commercial dispute — inconvenience, wasted management time, no physical harm — runs from roughly NIS 10,000 to NIS 80,000. Where the breach was deliberate, exposed the claimant to third-party criticism, or betrayed a professional relationship, awards in the NIS 100,000 to NIS 300,000 range are more plausible. Above NIS 300,000 under Section 13 alone is exceptional.
Israel does not have American-style punitive damages for breach of contract. The Section 13 award is compensatory, not deterrent. A claimant hoping to extract a punitive premium from a deliberate breach will not find it in Section 13; the closer equivalent is disgorgement of the defendant's profit from the breach, addressed below.
Section 13 is not self-executing. A claimant must plead it as a separate head of relief, identify the nature of the non-pecuniary harm, and provide some basis for quantum — typically a description of the management time lost, the nature of the reputational harm, and any contemporaneous evidence of distress or disruption. A bare prayer for "non-pecuniary damages in an amount the arbitrator deems fit" without any supporting narrative will produce a token award or nothing. Where the breach was deliberate — for example, a contractor who cancelled performance to take a more lucrative project elsewhere — document the disruption to your own operations and the management hours diverted from other work. The ICCA rules allow witness statements in lieu of oral testimony for this kind of evidence, which keeps the hearing time and cost proportionate.
5. Good-Faith Damages: Section 39
Section 39 of the Contracts (General Part) Law, 5733-1973, requires every party to perform and enforce its contractual rights in good faith and in a customary manner. A breach of that obligation gives rise to a damages claim that runs alongside the Remedies Law, not instead of it.
The good-faith claim matters most where the literal breach produces limited recoverable damages but the conduct was commercially oppressive. Israeli courts have applied Section 39 where a party timed a technically valid termination to block the other side from reaching a qualifying threshold, where a licensor withheld sublicense consent for no stated commercial reason, and where a buyer deferred acceptance of completed goods until accumulated storage costs made cancellation the cheaper option. In each case, Section 39 reached harm the Remedies Law alone would not.
The measure of Section 39 damages is flexible. The tribunal may award the claimant's reliance expenditure (money spent on the basis that the contract would be performed in good faith), a portion of the expected gain, or compensation for the specific harm the bad-faith conduct caused. Double recovery — compensating the same loss twice under both the Remedies Law and Section 39 — is not permitted, but where the two claims address different heads of loss they are cumulative.
Consider a foreign technology company that licensed software to an Israeli distributor for a five-year term. In year three, the distributor invoked a termination-for-convenience clause with 30 days' notice, just before a major customer renewal that would have generated NIS 600,000 in royalties. The Remedies Law expectation claim covers the royalties the licensor would have earned through the full term, less deductions for avoidable loss. The Section 39 claim adds the pre-termination costs the licensor incurred building the Israeli market — sales staff, localisation, marketing events — that are now worthless and that the expectation measure does not pick up if those costs would have been incurred regardless. With both pleadings, the claimant's case is materially stronger.
6. Disgorgement and Restitution
Where a party profits from its own breach at the claimant's expense, Israeli law provides a freestanding restitutionary remedy under the Unjust Enrichment Law, 5739-1979. Disgorgement strips the defendant's gain rather than compensating the claimant's loss — the two measures can differ significantly.
Disgorgement fits best in intellectual property or licensing disputes where the defendant kept using the claimant's rights after termination without paying. If the defendant sold at a higher margin than the claimant could have achieved — perhaps because of a better sales network or a different customer base — the gain from the breach exceeds the royalties lost. An Israeli arbitrator can award that difference, provided the claimant shows enrichment at its expense and that the enrichment has no legal justification. The Unjust Enrichment Law provides a defence where the defendant changed its position in good faith after receiving the benefit, but that rarely helps when the benefit came from a knowing, ongoing exploitation of the claimant's rights.
In Israeli arbitration, disgorgement works alongside the Remedies Law rather than in place of it. A claimant can seek expectation damages for the royalties lost and a disgorgement top-up for any additional profit the defendant made from the breach. The combined claim cannot leave the claimant better off than performance would have, but it can prevent the defendant from keeping any surplus it extracted from the breach.
7. Quantum in Practice Before Israeli Tribunals
Quantum in Israeli commercial arbitration is a document-intensive exercise. The arbitrator needs a financial model, typically built by an expert, that accounts for each head of loss. A few issues come up in almost every case.
For damages claims above about NIS 1,000,000, expert testimony is effectively required. The Israel Centre of Commercial Arbitration (ICCA), which administers institutional arbitrations in Israel, expects expert reports to address: the counterfactual (what would have happened without the breach); the causation link between breach and loss; the mitigation steps actually taken; and the quantum computation with reference to primary source documents. An expert report that skips mitigation will be challenged on that gap, and some tribunals reject the quantum entirely rather than fill in the gaps themselves.
Interest on an Israeli arbitration award follows the Adjudication of Interest and Linkage Law, 5721-1961: CPI linkage from the date the debt arose, plus interest at either the ordinary or the arrears rate depending on whether the debtor is in genuine default. The award should state the accrual date explicitly. Where it does not, an application under Section 22 of the Arbitration Law, 5728-1968 can ask the arbitrator to complete or correct the award, but that window closes within weeks of the award being given, and some tribunals default to the award date if the prayer for relief was ambiguous.
Where the contract has a liquidated damages clause, Section 15 of the Remedies Law governs enforceability. An Israeli arbitrator applies it unless the agreed sum is wholly disproportionate to the actual or reasonably anticipated loss — the Israeli equivalent of the penalty-clause doctrine. Where the clause is disproportionate, the tribunal adjusts it to a reasonable sum rather than striking it out entirely.
The arbitrator's power to award costs — including attorneys' fees and arbitrator fees — is separate from the damages analysis. Under the default rules of the Arbitration Law and the ICCA rules, costs generally follow the event, so a successful claimant can expect to recover a portion of its legal costs in addition to the damages award. Tactical choices during the arbitration (unreasonable refusals to mediate, inflated pleaded sums) can be reflected in a costs order that cuts the overall recovery.
In a commercial supply dispute with a NIS 4,000,000 pleaded claim, a realistic breakdown might look like this: direct cover cost NIS 1,200,000; lost profit on the unfulfilled quantity NIS 900,000; wasted expenditure on preparatory work NIS 400,000; Section 13 non-pecuniary NIS 60,000; interest accrual from breach date to award (24 months at a blended rate) NIS 350,000. After the arbitrator applies a 15% mitigation reduction to the direct and consequential heads — because the claimant took two months longer than reasonable to source a substitute — the net award comes to roughly NIS 2,400,000 before costs. The lesson is that the mitigation haircut, the foreseeability filter, and the certainty requirement together commonly reduce a pleaded claim by 30–50% before a single contested point of law is decided. Pricing the exposure from the start prevents settlement mistakes in both directions.
Frequently Asked Questions
The primary measure is expectation damages under Section 10 of the Contracts (Remedies for Breach of Contract) Law 5731-1970: compensation that puts the claimant where it would have been had the contract been performed. This covers direct loss, consequential loss, and lost profit, subject to the foreseeability limit in Section 11 and the duty to mitigate in Section 14. Israeli arbitrators apply this framework in the same way a court would.
Yes. Lost profit is recoverable under Section 10 as part of the expectation measure, provided the claimant shows with reasonable certainty that the profit would have been earned and that the loss was foreseeable under Section 11. Speculative claims fail on certainty; a track record of prior earnings or a credible financial projection supported by expert evidence usually satisfies the standard.
Section 14 of the Remedies Law bars recovery for any loss the claimant could have avoided by taking reasonable steps after learning of the breach. A claimant that sat on its hands for months before seeking an alternative will have its award reduced to what it could not have avoided. Mitigation costs actually incurred — even if the steps were unsuccessful — are recoverable in addition to the underlying loss.
Not in the American sense. Israel has no punitive damages regime for contract breach. Section 13 awards non-pecuniary damages — distress, inconvenience, reputational harm — but they are capped and typically modest in business disputes. Good-faith damages under Section 39 of the General Contracts Law can add a further layer, but they compensate actual harm rather than punishing the defendant.
Yes. Section 39 of the Contracts (General Part) Law 5733-1973 operates alongside the Remedies Law. A claimant can pursue expectation damages under Section 10 and separately claim for harm caused by the other party exercising its contractual rights in bad faith. The two heads are additive where they cover different loss. Both must be pleaded and supported by evidence; the tribunal will not award the same loss twice.