What Are the Conditions That Would Entitle a Contracting Company to Compensation of Nis 60 Million?

Published: 22 May 2020

Bibi Roads Earthmoving & Development Ltd. had won the Israel Railways tender for the expansion of the railways between Kibbutz Na'an and Beer Sheva.
Israel Railways paid Bibi Roads about NIS 104 million for its work on the project, but Bibi Roads claimed that it is entitled to payments for additional works, a delay in the commencement of the implementation of the project, flood damages, and funds that were offset by Israel Railways. For this, Bibi Roads claimed that it is entitled to an additional amount of NIS 60,000,000, payable by Israel Railways.

Israel Railways refused this demand, since, in its view, the agreement between the parties stipulates all the terms of the contract between the parties, for example, the mechanism of compensation for additional work is explicitly stated in the agreement, and because of the fact that Bibi Roads did not meet the conditions of this mechanism, it cannot receive any compensation beyond the consideration that was paid to it.
In other words, Israel Railways claimed that the agreement between the parties was a "closed" agreement and that the dispute between the parties should only be decided according to what is stipulated in the agreement. Israel Railways train also claimed that its approach is not unfair or in bad faith since the agreement between the parties is a detailed business agreement that had been made between two commercial companies, both experienced in their field.
Bibi Roads, on the other hand, claimed that the additional work and damages it had incurred in the project were not included in the agreement between the parties, and therefore due to the principles of good faith and fairness, it should be compensated in the amount required by it, i.e. NIS 60 million.
In other words, Bibi Roads argued that the agreement between the parties is an "open" framework agreement that can be completed and interpreted in accordance with the special circumstances of the case, to which the principles of good faith and fairness apply. Bibi Roads claims that the fact that it had sustained damages and losses which must be compensated for is undisputed by virtue of the principle of good faith and fairness.
The Tel Aviv District Court decided in favor of Bibi Roads and ruled that Israel Railways should pay Bibi Roads approximately NIS 42 million. In addition, the District Court required the railway company to pay the Bibi Roads legal fees and attorney's fees in the amount of NIS 1.6 million. The Tel Aviv District Court ruled that the agreement between the parties should be completed by imposing payment obligations on Israel Railways by virtue of the principles of good faith and fairness, as otherwise Bibi Roads would be deprived.
Both parties filed an appeal to the Supreme Court of Israel contesting the judgment of the Tel Aviv District Court.
In the appeal as well, Israel Railways argued that the agreement between the parties was a clear and detailed agreement from which no deviations are allowed - because the agreement between the parties determined the ways to compensate the contractor in the event of additional work, damages and the like.
In the appeal, Bibi Roads reiterated that the agreement between the parties did not address unexpected events, extra work, and faults that had occurred during the project and therefore the district court was correct in its ruling. Bibi Roads further claimed in the appeal, that it is entitled to receive more money from Israel Railways, beyond what was decided in its favor in the district court.
The Supreme Court ruled that the agreement between the parties was a detailed and clear agreement containing hundreds of pages, which was drawn up to cover the full range of scenarios and works required for the project. Therefore, in a "closed" agreement in which the parties set all the conditions for payment of compensation to Bibi Roads and therefore, the written language of the agreement must be adhered to.
The Supreme Court further ruled that the clauses of the agreement reflect how the parties chose to divide between them the business risks involved in carrying out the project and therefore they should not deviate from the explicit language of the agreement.
With regard to the additional works, the Supreme Court ruled that, according to the agreement, Bibi Roads had to come to terms with Israel Railways in real-time in order to formulate an agreement concerning the price of the work - an action not taken by Bibi Roads, and therefore Bibi Roads' demand could not be granted in this matter.
The court also held that even with regards to the remaining claims made by Bibi Roads, judgment should be made in accordance with the language of the agreement between the parties and that considerations of fairness should not be considered.
Therefore, the court ruled that Bibi Roads is entitled for a total of NIS 8 million to be paid by Israel Railroad rather than a total of NIS 43 million as ruled in the district court.
The judgment of the Supreme Court constitutes a principle precedent in contract law, as the ruling states that a business agreement between two companies, containing the rules of engagement between the parties, shall not be interpreted by the court according to principles of fairness, good faith and reasonableness, but only according to the language of the agreement.
This Supreme Court ruling is contrary to previous Supreme Court rulings, where the Supreme Court has ruled according to the circumstances, interpreting the agreement in accordance with principles of justice, fairness and good faith - even if the final result does not conform to the language of the agreement.
The Supreme Court's precedential ruling, in this case, establishes contractual certainty in commercial contracts - since interpreting the agreement solely according to its language will allow the parties to know exactly where they stand in this engagement and prevent a situation where the conditions of the agreement are modified by the Court.

• Case 7649/18 Bibi Roads Earthmoving & Development Ltd. Vs. Israel Railways Ltd., issued on November 20, 19, in the Supreme Court of Israel in Jerusalem.


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Eyal Soref

Firm: Soref & Co. Law Office
Country: Israel

Practice Area: Litigation

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