On July 24, 2015, Shahal entered into an ILS 440 million merger agreement with the Chinese company.

The parties agreed, among other things, that the Chinese company will transfer a “signature deposit” to a trustee, in a sum of 20% of the deal’s value, in two parts. The parties furthermore agreed that their duty to execute the companies’ merger and perform all other actions due under the agreement is subject to the fulfillment of several conditions. The conditions included, among other elements, the lack of an Order that may render the merger illegal, and obtaining permission to remove foreign currency out of China from the People’s Republic of China. It was stipulated that obtaining a permit from the People’s Republic of China is a suspending condition to complete the deal, provided that the Chinese company will take all “reasonable effort” to obtain the permit.

The Agreement furthermore stipulated that Shahal may rescind the agreement if the Chinese company will fail to transfer the signature deposit on time, and receive liquidated damages in a sum of 10% of the deal’s value – i.e., ILS 44 million in damages.

The Chinese company did indeed transfer the first half of the signature deposit, but it failed to deposit the second half, even after receiving multiple extensions from Shahal. Eventually, after Shahal made several demands to transfer the second half, and after the Chinese company failed to do so, Shahal notified the rescission of the parties’ agreement.

On December 20, 2015, Shahal lodged a lawsuit at the Tel Aviv District Court, demanding to charge the Chinese Company with the liquidated damages, in the amount of ILS 44 million.

It is worth noting, at this point, that liquidated damages are not subject to proof of damage, hence, in the event of a breach that entitles the injured party to liquidated damages, the liquidated damages will be paid to the injured party, subject to the Court’s discretion regarding the amount.

In this case, the liquidated damages amount was ILS 44,000,000 (!) – a substantial sum by any measure. Did the Court award the liquidated damages, and did it reduce them in this case?

Shahal argued that the failure to make the payment is a material breach of agreement that entitles it to the liquidated damages, and that the signature deposit was not conditioned upon a suspending condition, and it ought to have been made to the trustee on the stipulated dates. Shahal also argued that even in the event a determination will be made that the deposit payments are subject to the suspending condition, the Chinese company has not taken “all reasonable efforts” as required in the agreement.

On the other hand, the Chinese company argued that the failure to make the payment is not a material breach of agreement, as the deposit’s transfer is subject to the suspending conditions. The Chinese company further argued that although it made every effort in its power, it could not obtain the Chinese authorities’ permission to transfer foreign currency from the country. In addition, it argued that should it be found to be in breach of agreement with Shahal, the liquidated damages’ amount (ILS 44 million) ought to be reduced, as the damages are disproportional to the harm.

The Court ruled that the answer lies in the interpretation of the parties’ agreement. In the present case, the parties’ agreement is not all that “cut and dry”, and it contains contradictions. For example, on one hand, it determines that the Chinese company must transfer the deposit funds on specific dates regardless of the suspending condition, while on the other hand, it stipulates that the parties’ undertaking to perform any of their respective duties is subject to the fulfillment of the suspending conditions. Hence, the agreement ought to be interpreted while “examining its phrasing, structure, and the relation between its sections; the parties’ intentions; the agreement’s purposive interpretation; its underlying logic and the parties’ behavior since they entered into the agreement”.

The Court ruled that after reading the agreement thoroughly, its phrasing is more consistent with Shahal’s interpretation than with the Chinese company’s interpretation. Hence, it ruled that the agreement ought to be interpreted to mean that the deposit funds’ transfer is not subject to any suspending condition, and in any event, the Chinese company was unable to prove that it took “all reasonable efforts” to meet the suspending condition and obtain all required permits from the Chinese authorities.

As for the liquidated damages, the Court ruled that courts ought to intervene with liquidated damages clauses rarely and with caution. In the present case, the Court ruled that this situation is not unusual, as liquidated damages mechanisms are very common in such deals, and their percentage out of the total deal is standard as well.

Accordingly, the Court accepted the claim in full and charged the Chinese company with liquidated damages in the sum of ILS 43,869,477, as well as costs and attorney’s fees in a sum of ILS 250,000.

• Case 40469-12-15 SHAHAL TELEREFUA LTD V. SHANGHAI JICHUAN INVESTMENT CO. LTD (awarded on June 18, 2017, at the Tel Aviv District Court).