General Overview – Foreign Investments

As world globalization expends, people from all over the world invest in foreign territories. Capitalizing on the desire to invest in attractive high-potential new markets on one hand and lacking the economic knowledge, legal know-how and logistic ability to carry such investments out on the other, foreign investments corporations round the world offer investors all necessary services in order to handle their money abroad.

One of the most successful fields of investments is of course real estate. The usual scheme in general terms is that investors unite forces under a single corporate as shareholders, the corporate purchases and manages lucrative real estate assets (or at least such assets which are presented as or seem to be lucrative at the time of purchase) abroad, and dividends are distributed to the shareholders pursuant to corporate resolutions as in all companies.

Normally a contract is being executed between the various investors and the company as well as among themselves. The company’s Articles of Association (or Articles of Organization in the case of LLCs) will usually also incorporate many aspects of the relations between the parties.

Foreign Jurisdiction Clauses

One of the most common clauses in such contracts is the foreign Jurisdiction clause, usually a mandatory and exclusive jurisdiction clause. More than often such clauses address both forum and material law. Foreign jurisdiction clauses may have various rationales: litigating disputes in the jurisdiction where business in actually carried out rather than in the jurisdiction where money is raised; litigating disputes in the jurisdiction with most contacts to the assets involved; litigating disputes in the jurisdiction of incorporation of the managing company, etc. However, and this is also true, in most cases the investors are citizens and domiciliaries of a jurisdiction, which has nothing to do with the competent jurisdiction for litigation. In such cases if disputes arise (and they mostly do when projects fail financially, or where the managing company’s actions were fraudulent) investors face a serious hardship in enforcing their rights: the travel expenses to the foreign jurisdiction, the lack of knowledge and acquaintance with the local culture, not knowing any lawyers and not knowing who is a good lawyer – all these factors are extremely detrimental to the investors and in many cases will determine the case and the parties’ rights without a true challenge. The investors will simply give up on any rights due to their (mainly financial) lack of ability to fight.

Foreign Jurisdiction Clauses – Israeli Case Law

A few court rulings issued in Israel as of late give investors a shot.

In Application for Leave to Appeal 20794-03-11 Doron et al. v. TGI Real Estate Investments Ltd et al. (Tel Aviv District Court) the question arose whether such an exclusive foreign judgment clause is indeed exclusive or merely parallel.

Following prior case law (e.g. CA 465/85, Villanova v. Nevron Ltd., Isr. SC 42(1), 705; CA 4601/02, RADA Electronic Industries Ltd. V. Bodstray Company Ltd., Isr. SC. 58(2), 465) the court in TGI case ruled that even though a foreign jurisdiction clause may seem to be exclusive, it can in fact be construed as merely parallel. The determination is to be made according to the general circumstances of the contract as well as to the wording of the clause itself.

It has been specifically ruled that “active” (though I would say “active-like”) wording (e.g., “actions shall be filed”) is more likely to infer exclusive foreign jurisdiction as opposed to “passive” (though I would say “passive-like”) wording (e.g. “the court shall have jurisdiction”), which leaves room to construction of merely parallel – not exclusive – foreign jurisdiction (CA 65/88, Aderet Shomron Ltd. V. Hollingswoeth GmbH, Isr. SC 44(3), 600).

In the TGI case the court further ruled that the lack of wording explicitly excluding other courts’ jurisdiction should under the circumstances be construed as awarding parallel jurisdiction, rather than exclusive.

Three other important rules to note when drafting a foreign jurisdiction clause in a contract related in any way to, especially when the investors are from, Israel:

• When concerning real estate placed in jurisdiction A, determining forum and/or material law of Jurisdiction B as “exclusive” may well lead to a ruling construing it as a parallel jurisdiction clause.
• When conferring the right to choose the jurisdiction to one of the parties, the “exclusive” jurisdiction is not so exclusive…that is especially the case when such choice is conferred to the drafter.
• When parties want to set an exclusive jurisdiction, they should do so explicitly, something along the lines of: “No other court/forum shall have jurisdiction”. All ambiguity will be usually construed against drafter.

Exclusive Jurisdiction as Depriving Conditions

The ancillary question which arose in Israeli case law was whether an exclusive jurisdiction clause determining foreign jurisdiction constitutes a depriving condition in a standard contract (under Israeli law such term may be revoked by the court and the contract enforced in all other aspects).

Under Israeli law, a term in a standard contract excluding the Israeli Court’s jurisdiction or awarding the supplier the right to choose the jurisdiction is a depriving condition. Note: It is the choice of jurisdiction (forum), not the choice of law, that makes such clause a depriving condition.

In the TGI case the court ruled that the term was designed to deter parties from enforcing their rights, making it a depriving condition in a standard condition, and therefore voidable by the court (see also CC 14281-05-10 (Centre District Court), Goldschmidt v. TGI et al.).

Conclusion

In a global world where people make international investments, foreign jurisdiction clauses are common and necessary. However it is important to make sure – to the extent possible – that such clause will actually be enforced in due time. As demonstrated above, what is declared “exclusive foreign jurisdiction” may (or might) be construed as merely a “parallel foreign jurisdiction” if drafted the wrong way. The natural inclination is to cut down expenses and use the legal advice of the local forum attorney. For those engaging in business in Israel, it is best to consult with an Israeli lawyer as well, preferably one with knowledge in both Israeli and the relevant foreign law, with respect to prospective contracts, even when the contracts refer to foreign assets or corporations.

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