Who Breached the Contract? part 3 | Beit Din Eretz Hemda - Gazit | Beit Midrash

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Case: The plaintiff (=pl) owns a chain of eateries, who made a franchise agreement with the defendants (=def) to open a branch in a region in Israel. Def was to receive, among other things, use of the chain’s trademarks and experience and pl’s commitment to rent a place to open the branch and receive a license. Pl and def were each to own 50% of the branch. Def were to pay 300,000 NIS under a payment plan, including 25,000 NIS to be paid directly and 100,000 NIS put into an escrow account, both soon after signing. The contract stated that any side who would breach the contract would have to pay 150,000 NIS. Def did not make the initial payments. Each side is suing based on the breach of contract clause, pl, because def did not pay, and def, because pl did not rent a place for the branch. [We will deal with various claims in installments.] Def claim that when pl explored with them the alternative of taking over the branch in Gush Dan, before payment, he showed that he waived the right to receive payment before finding a branch for def. Also, def’s lawyer told pl that he had until January to complete his side, after which def would not be bound to the check they gave him to hold.

Ruling: The claim of learning from the Gush Dan offer breaks into two: 1. It can be a waiver of early payment. 2. Since it is a departure (at least based on location) from the original agreement, it causes a reset of the whole agreement.
We see that as soon as the Gush Dan idea fell through, pl sent email demands about the money due. Apparently, pl saw the Gush Dan possibility as a different situation – a branch that already existed, making it easier to give over and more important to keep. When the franchisee there decided to stay, pl went back to the original deal with def. Regarding def’s lawyer’s ultimatum, changes in the agreement cannot be made unilaterally, even more so since the agreement states that any changes must be done in writing with the sides’ signatures. Therefore, according to the majority, def have to pay for breach of contract.
According to the minority opinion, while formally def breached the contract, from the record of the communication between them, it is apparent that the delay of payment was not the reason for pl’s retreating from the deal. On can infer from the contract, that it is only when the breach of contract was the cause of the undoing of the agreement, that the significant penalty is called for. According to the majority, the lack of payment did indeed set into motion the dynamics through which the agreement ended.
What remains to be determined is whether the full penalty amount found in the contract is to be applied, and, if not, how much should def pay.