I promised, but did not promise to keep – the risk of contracting local authorities

I promised, but did not promise to keep – the risk of contracting local authorities

Yair Aloni, Adv.
January 10, 2021

A local authority receives a government grant to finance enrichment courses for students under a program built for that purpose by a contractor. Not only is the course successfully delivered, but the authority submits performance reports and receives government participation of 90% of the amount to be paid to the contractor. However, the authority refuses to pay the contractor that built and passed the course and pockets the money received from the government as a grant to finance the service given by the contractor. Sounds absurd? This is exactly the essence of a claim submitted by our firm on behalf of a company that performs such programs throughout the country and even gained achievements in a national competition for which the head of the authority boasted in various posts on social networks. And in the words attributed to the third Prime Minister of Israel, Levy Eshkol: "I promised, but did not promise to keep."
In order to preserve public funds and enable control and maintenance of the budget framework of local authorities, Israeli law stipulates that a financial obligation of a local authority is not binding unless signed on behalf of the authority by the head of the authority and the treasurer, who are the signatories of the authority. In the case of an authority where the Ministry of Interior appointed to it an accompanying accountant, his signature is also required.
The Courts have held that this requirement is not technical, but substantive. The significance of this is that a contract executed with failure to meet this requirement may be deemed illegal and unbinding and the Court may obligate the contracting party to repay the authority any illegally received funds. However, where service were provided or work performed and restitution is unjust or impossible, the Court usually weighs the various interests and, ordinarily, holding the authority accountable for the full agreed amount will be made only in very rare cases and only when: a. The contracting party acted in good faith, while the authority lacked good faith or acted with misrepresentation or negligence; b. The monetary charge had a budgetary source in the relevant period; and c. The defect created is marginal and not material (for example, there is no stamp next to the signatures of the signatories). The Court may use these considerations to completely disqualify a demand for payment but may also use them to reduce the ‘agreed’ contractual consideration.
Thus, for example, the Supreme Court significantly reduced fees of a lawyer who provided legal services to a local authority even though he worked for years and received a fee without a duly signed agreement, as he was well acquainted with local authority legislation and knew of the risk. In that case, the signatories did not deny the agreement for the provision of the services but contended that in the absence of an agreement, the authority was entitled to pay the lawyer as it saw fit - a contentions rejected by the Court deciding that reasonable remuneration should be paid. In another case, a local authority requested to extend the contract with a supplier without a written agreement but than refused to pay and the Court set the consideration due to the supplier at only 75%.
In another case, of April 10, 2020, heard at the Haifa Magistrate Court, a local authority ordered study courses from a company and only after the company preformed some of them, the authority began to raise obstacles on approving the contract between the parties and procrastinated again and again. In that case, the Court set the rate of consideration at 70% of the contractual amount because despite the lack of the signature of an accompanying accountant, the authority acted in bad faith, especially because the head of the council published a post in which he even announced the engagement with the company and boasted about it.
And what about the contractor we represent? Not only was the course completed in full, but the local authority duly signed motions for government grant and received funding at the rate of 90% of the debt to the contractor. There can be no doubt that 90% of the amount is held by the local authority in a statutory trust for the service provider and as for the additional 10%, the lack of good faith of the authority should cause the Court to order payment of the full amount plus collection expenses. However, only time will tell how the Court will decide.
In contracts with local authorities that were not duly signed, Court rulings vary from case to case and the consideration ultimately obtained is not guaranteed and may even be reduced in a way that jeopardizes profitability. Therefore, in any contract with a local authority, it is recommended not to take unnecessary risks and be accompanied by a lawyer with experience in the field of contracts with local authorities.