How to Protect Your Business from Non-Paying Israeli Partners

When dealing with international partnerships, one common challenge many businesses face is protecting themselves if their partner fails to meet financial obligations. This is especially true for companies with international partnerships. It is common knowledge that foreign counterparts will be reluctant to engage in legal debt collection proceedings in a jurisdiction which is not their own. As a result, Israeli companies tend to defer or withhold payments without facing immediate legal consequences. Accordingly, a clear understanding of the available legel mechanisms for safeguarding your interests is essential to mitigating rist and avoiding substantial financial and operational exposure and frustration.

The Problem with Jurisdiction Clauses in International Contracts

A common strategy for companies to ensure a clear path for legal recourse is the inclusion of a jurisdiction clause in their contracts. Typically, businesses from Europe and the US will incorporate provisions stipulating their domestic jurisdiction and governing law to be applicable. Often, such clauses are found in the general terms of contract. While this may appear to be a reasonable precaution, it can create significant challenges when dealing with Israeli partners or partners from other jurisdictions similar to the Israeli legal system.

A significant drawback of home jurisdiction clauses is that it may limit your ability to freeze or otherwise access the debtor’s assets in its country of domicile. Israeli companies are usually aware of the leverage this affords them when foreign claimants are bound by their own foreign jurisdiction clause and, if sued in Israel, will immediately raise the objection that the courts in Israel are incompetent to deal with the matter due to the contractual jurisdiction clause. Thus, they may use your own jurisdiction clause against you and avoid access to their assets in Israel. You will then have to conduct expensive and lengthy court proceedings in your own jurisdiction, will have to serve documents to Israel and, subsequently, may achieve a judgement which may or may not be enforced against the defendant in Israel in another time consuming process.

The Importance of Freezing Orders in Israel

The most critical disadvantage of using a home-country jurisdiction clause in contracts with Israeli partners is that you forfeit the option of placing a freezing order on the debtor's assets in Israel. Under Israeli law, freezing orders can be obtained even before a formal legal claim is filed and such orders can be granted at first ex parte - without hearing the debtor (the debtor will be heard later, after the freezing order is already in place).

This mechanism is exceptionally effective in safeguarding the interests of a creditor, as it prevents the debtor from transferring or concealing assets that may ultimately be required to satisfy a judgement. Unfortunately, foreign courts, whether in the US, Germany, or elsewhere, do not have the authority to impose freezing orders on assets located in Israel. Consequently, by excluding Israel as a competent jurisdiction in its contract, a creditor forfeits its access to this vital mechanism.

A Better Alternative:

Flexible Jurisdiction and Choice of Law Clauses

Rather than committing to an exclusive jurisdiction and applicable law in your home country, a far more effective strategy is usually to incorporate flexibility into your contracts. One of the most effective approaches is to grant the claimant (the creditor) the discretion to choose either the debtor's home jurisdiction or its own, along with the corresponding applicable law.

This flexibility will enable you to pursue legal action in the forum most advantageous to your interests and will put significantly more pressure on the debtor. It will also enable you to consider practical, real-time factors such as the amount of claim, the litigation costs in both countries and the likelihood of enforcement of your debt.

This flexibility can mean the difference between a quick, cost-effective resolution and years of costly, inefficient legal battles. It allows you to assess your options as they arise, rather than locking yourself into a strategy that may be less effective once the situation develops.

Conclusion:

Plan Ahead to Avoid Costly Legal Issues

In international business partnerships, carefully structured legal protections are crucial to safeguarding your interests. Jurisdiction and applicable law clauses can make a significant difference in how efficiently and effectively you can resolve disputes, especially when dealing with non-paying debtors.

Ultimately, it is far more effective and also much cheaper to establish the right legal framework at the outset of your partnership than to attempt corrective measures after financial damage is already in sight. Proactive planning not only mitigates risk but also provides much needed pressure on your counterpart and thus will secure timely and cost-effective solutions.