The other party is in breach of the sale agreement. What are the options?

Three remedies, and how they combine

Section 2 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970, provides that where a contract is breached, the injured party is entitled to claim its enforcement or to rescind the contract, and is entitled to damages in addition to, or instead of, either of those remedies.

The important word is "or". Enforcement and rescission do not go together: either the contract stands and you demand that it be performed, or it is rescinded and you demand restitution. Damages, by contrast, can accompany either of them.

Enforcement, and the four exceptions

Under Israeli law, enforcement, not compensation, is the primary remedy. Section 3 provides that the injured party is entitled to enforcement unless one of four exceptions applies: the contract is incapable of performance; enforcement would amount to compelling the performance or acceptance of personal work or personal service; carrying out the order would require an unreasonable degree of supervision by the court or the Execution Office; or enforcement would be unjust in the circumstances of the case.

In real estate transactions this is usually the remedy sought, because the property is unique and compensation does not put the injured party where he would otherwise have been. Section 4 adds that the court may make enforcement conditional on the injured party performing his own obligations, or on other conditions, so anyone claiming enforcement must be ready to show that he has performed his own part.

Rescission: what is fundamental, and when an extension must be given

Section 6 defines a fundamental breach as one in respect of which it may be assumed that a reasonable person would not have entered into the contract had he foreseen the breach and its consequences, or a breach that the contract stipulates is to be regarded as fundamental. A warning about blanket clauses: the section provides that a stipulation making breaches fundamental indiscriminately is invalid, unless it was reasonable at the time the contract was made.

Section 7(a) permits rescission for a fundamental breach. Section 7(b) provides that where the breach is not fundamental, the contract may be rescinded only after the party in breach has been given an extension to perform it and the contract has not been performed within a reasonable time thereafter, and even then not if rescission would be unjust in the circumstances of the case.

Hence the practical rule: where the position is not clear-cut, give an extension in writing. An extension given when none was needed does no harm. A rescission made without an extension when one should have been given can turn the rescinding party into the party in breach.

How to rescind, and when

Section 8 provides that rescission of the contract shall be by notice from the injured party to the party in breach, given within a reasonable time after the injured party learned of the breach, and where an extension was given, within a reasonable time after the extension expired.

This is the most common point of failure. An injured party who sits on the fence for months, continues to correspond as if the contract were in force and only then gives notice of rescission may discover that the time has passed and that the right to rescind has been lost. After rescission, section 9 applies, which concerns mutual restitution.

Damages, and agreed compensation

Section 10 provides that the injured party is entitled to damages for the loss caused to him by the breach and its consequences which the party in breach foresaw, or ought to have foreseen, at the time the contract was made, as a probable consequence of the breach. It is this foreseeability test that limits the scope of damages in practice.

Section 15(a) deals with agreed compensation: the parties may fix an amount in advance, and it will be awarded without proof of loss. However, the section itself adds a power to reduce: the court may reduce the compensation if it finds that it was fixed without any reasonable relation to the loss that could have been foreseen at the time the contract was made.

Two consequences follow. First, inflated agreed compensation is not necessarily what will be awarded. Second, under section 15(b) agreed compensation is not a ceiling: the injured party may instead claim damages for the loss actually caused, if that loss is greater. Section 15(c) adds that sums paid before the breach which were agreed in advance to be forfeited are treated as agreed compensation, so they too are open to reduction.

The mistakes that keep recurring

• Waiting too long before giving notice of rescission, until the reasonable time has passed.
• Rescinding without an extension where the breach is not fundamental.
• Conduct inconsistent with rescission: continuing to accept payments, or handing over possession, after notice of rescission has been given.
• Relying on high agreed compensation as if it were guaranteed.
• Neglecting documentation: telephone calls instead of letters, so there is no evidence of exactly when the breach became known.
• Demanding enforcement without being prepared to prove that the claiming party has performed its own obligations.

Bottom line

In a breach of a sale agreement, the sequence matters no less than the substance: what the breach is, whether it is fundamental, whether an extension is required, and when the notice was sent. A correct decision made too late is worth less than a reasonable decision made in time.

Nothing in this article constitutes legal advice or a substitute for it, and every case is assessed on its own circumstances.