Civil Case (Rishon LeZion) 41151-07-21 Shufersal Ltd. v. Mishkenot Geshem Haaretz Ltd.

Before

The Honorable Judge Sarit Abdian

Plaintiff

 Shufersal in Tax Appeal

 By Adv. Oded Gross and Matan Ben Shemesh

Against

Defendants

1. Haaretz Rain Housing in Tax Appeal

By Attorneys Roy Shoshani and Avishai Yehuda

2. Rani Zim Shopping Centers in Tax Appeals

By Adv. Israel Uziel and Gur Tenenbaum

Judgment

1. Two large and experienced commercial companies negotiated the lease of a property. At a certain point, they signed an "interim document" on the way to signing a detailed contract.  Does this document amount to a binding agreement? This question, which arose in the proceeding before me, raises a number of issues, the main of which relates to the manner in which sophisticated parties are required to draft a memorandum of understanding in order for it to be binding.
2. Summary of the Judgment
3. I have before me a claim for declaratory relief, whereby a binding lease agreement was signed between the plaintiff, Shufersal Ltd., which calls itself "the largest and leading retail group in Israel" (hereinafter: Shufersal), and defendant 1, Mishkenot Geshem Haaretz in a tax appeal (hereinafter: Geshem), an entrepreneurial company for construction projects throughout the country, including a project for the construction of commercial and residential areas in Or Yehuda (hereinafter: the project).
4. In summary, negotiations were conducted between the parties for the lease of land in the project for the purpose of establishing a supermarket by Shufersal. At some point in the negotiations, Geshem signed a one-page document, which was drafted by Shufersal, entitled "Commercial Terms - The Geshem LaMishtaken Or Yehuda Project" (hereinafter: the Commercial Terms Document).  The commercial terms document detailed material commercial conditions for renting a building for the purpose of operating a supermarket, including the lease period, the rental fee, the size of the leased property, and more.  Alongside the commercial terms document, Geshem signed a two-page technical specification.  About a year and a half later, the parties exchanged detailed drafts of an agreement that were not signed, and on February 6, 2021, a final draft was exchanged between the parties.  The parties disagree as to why this draft was not signed.
5. About three months after the exchange of the last draft between the parties, Geshem entered into an agreement with Defendant 2, Rani Zim Shopping Centers (hereinafter: ZIM), a public company, in an agreement whereby ZIM would acquire 50.01% of the rain rights in the commercial part of the project. After the purchase, Geshem informed Shufersal that it did not consider itself bound by any agreement with Shufersal and that it had no intention of entering into a lease agreement.  It was later learned that Geshem and Zim had entered into an agreement to lease a supermarket in the project, a factor in which Rani Zim's son (the controlling shareholder and chairman of Zim) was a partner.
6. Hence, the lawsuit before me in Gedera Shufersal petitions for enforcement of the commercial terms document and a declaration that it constitutes a binding agreement between the parties. On the other hand, Geshem and Zim claim that this is a memorandum of understanding that was formulated during negotiations and does not constitute a binding agreement between the parties.
7. I will already point out that deciding this question is not simple. This is both because the language of the commercial terms document is not unequivocal on the question of its binding legal validity, and because in the conduct of the parties after the signing of the commercial terms document, it is possible to find various indications as to the legal significance that the parties gave to this document in real time.
8. In analyzing the evidentiary fabric that the parties placed before me, I was guided by a number of rules of interpretation in contract law, as will be detailed later in detail.
9. The commercial terms document was formulated between two sophisticated and experienced business entities, who are expected to invest time and resources in drafting the contracts in which they are engaged. These business entities are aware of the applicable rules of interpretation and have the resources and the ability to shape the contract as they wish in a manner that will at least significantly reduce the need for the court to try to trace their intention (see: Civil Appeal 7649/18 Bibi Roads Dirt and Development in the Tax Appeal v.  Israel Railways Ltd., paragraphs 2-6 of the opinion of the Honorable Justice Grosskopf (November 20, 2019) (hereinafter: the Bibi Roads case)).
10. Therefore, there is an expectation that sophisticated parties who wish to enter into an "interim document" before signing a binding contract will draft the document in a clear manner that is not open to interpretation, especially with regard to the question of its validity. This expectation will increase legal and business certainty and allow the parties to conduct the negotiations within a clear legal framework.  This expectation is also consistent with the principle of good faith, as it prevents sophisticated parties from deliberately drafting a memorandum of understanding in a vague manner that will allow claims to be raised at a later stage regarding its validity, in accordance with their interests and the development of the negotiations.
11. Another rule of interpretation that guided me is the well-known rule in the interpretation of contract law, according to which the interpretation of the contract will be made against the drafter.
12. In the case before me, the person who drafted the commercial terms document was Shufersal, which has the resources to design the document as it wishes and in a way that reflects the unequivocal agreement of the parties to enter into the transaction. In any event, ambiguity as to the binding validity of the commercial terms document supports an interpretation that gives it rain according to which binding validity should not be attributed to it.  This is based on the assumption that if it wanted to, Shufersal could have drafted the document in a way that leaves no doubt as to its binding validity.
13. Moreover, as we shall see below, even an examination of the conduct of the parties after the formulation of the commercial terms document does not raise unequivocal indications that they believed that this document was binding.
14. Therefore, and as will be detailed below, after considering all the evidence placed before me and also giving my opinion to the rules of interpretation outlined in the law and case law, I have reached the conclusion that Shufersal has not proven that the commercial terms document constitutes a binding agreement between the parties.
15. Before going into detail, I will add a comment regarding the framework of the discussion before me. As stated, Shufersal demanded only the enforcement of the commercial terms document.  Therefore, in order to decide the disputes before me, I am not required to ask who is responsible for the failure to sign a detailed agreement between the parties and whether this party acted in bad faith.  In addition, I am not required to ask whether the late drafts between the parties amounted to a binding agreement.  The "narrow" question that I have to decide is whether the commercial terms document constitutes a binding agreement between the parties that can be enforced, as Shufersal requests.
16. The proceeding before me
17. The proceeding began with a request filed by Shufersal for temporary relief that prevents the defendants from entering into an agreement with a third party that contradicts Shufersal's alleged rights or from acting to promote such an engagement. This request was rejected in the decision of the Honorable Judge   Firer of August 29, 2021, after a hearing in which the declarants on behalf of the parties were questioned.
18. As part of the main proceeding , affidavits of the main witness were submitted. On behalf of Shufersal, Mr. Shlomi Navon, who was the manager of the Initiation and Betterment Department at Shufersal at the relevant dates of the lawsuit (hereinafter: Shlomi), and Ms. Yael Barak, an external consultant to Shufersal who handled the transaction (hereinafter: Yael).
19. Yosef Haim Mizrahi, owner and manager of Geshem (hereinafter: Yossi) and Mr. Guy Gotson, project manager on behalf of Geshem (hereinafter: Gutsson), testified on behalf of Geshem. It should be noted that in the framework of the application for temporary relief, Mr. Shamgar Vaknin (hereinafter: Shamgar), Yossi's partner, testified on behalf of Geshem.
20. On behalf of Zim, Mr. Benny Khalif (hereinafter: Benny), VP of Property Marketing at ZIM, testified.

• Factual Background

19. The plaintiff, Shufersal, is a public company that operates a retail chain for the sale of food and other products throughout the country. Geshem is a private company, initiating residential and commercial construction projects, and it is the one that initiated the project.  ZIM, a public company, entered into an agreement with Geshem to acquire 50.01% of Geshem's rights in the commercial part of the project.
20. As part of the negotiations that took place between Shufersal and Shem in connection with the lease of space in the project for the purpose of establishing a supermarket from the Shufersal chain, on May 8, 2019, Geshem signed the commercial terms document, which was drafted by Shufersal. This document details a list of commercial terms in relation to the lease of a property for the purpose of establishing a supermarket by Shufersal, and at the end it is written as follows:

"16.  This summary is subject to an examination of economic feasibility and a feasibility study by Shufersal

17. This summary is subject to the approval of Shufersal's management
18. This summary is also subject to the approval of the Antitrust Commissioner.

The agreement is valid for 90 days." [Thus in the original - S.A.]

21. Alongside the commercial terms document, Geshem signed a two-page document entitled "Outline Definitions for a Shufersal Store Shell Specification" that included technical specifications regarding the leased property (hereinafter: the first specification).
22. After Geshem signed the commercial terms document and the first specifications, Shufersal and Geshem began negotiations in order to reach agreements, mainly regarding the technical specifications for the property, and even disputes arose between them. Shufersal and Geshem conducted oral and written contacts regarding these disputes, as a result of which Geshem signed two additional specifications, one on April 27, 2020 (hereinafter: the second specification) and the other in September 2020 (hereinafter: the third specification).
23. About a year and a half after Geshem signed the commercial terms document, on January 6, 2021, Shufersal's attorney sent Geshem's attorney a detailed draft agreement (Appendix 9 to Shlomi's affidavit). Geshem's counsel replied to the draft on January 11, 2021, and on January 18, 2021, Shufersal's attorney sent Geshem's attorney an amended draft.  A number of correspondences were conducted between the parties regarding the draft that was sent, and on February 6, 2021, Geshem's attorney submitted an amended version of the draft, which included changes in the notes of the edition (Appendix 11 to Shlomi's affidavit).
24. After the aforementioned drafts were exchanged, the professional bodies on behalf of the parties continued to correspond with each other regarding the leased planning (between February 10, 2021 and February 17, 2021), with the last correspondence between the parties being on February 17, 2021.
25. On May 13, 2021, a conditional agreement of principles was signed between Geshem and ZIM, according to which ZIM will purchase 50.01% of Geshem's rights in the commercial center of the project.
26. On June 6, 2021, after Shufersal learned of the agreement between Geshem and Zim, Yael wrote to Geshem and asked for her approval that at the same time as the sale of the rights to Zim, "Shufersal's lease agreement in the commercial center will also be finalized, and the lease agreement will be signed (its legal and commercial version has already been approved)..." (Appendix 13 to Shlomi's affidavit). On June 9, 2021, a meeting was held between Shlomi and Yossi, the purpose and content of which the parties disagree.
27. On June 17, 2021, Shufersal contacted Shem in another letter, in which Geshem was required to clarify that a binding agreement had been perfected between the parties. Following this request, on July 7, 2021, a meeting was held between Shufersal representatives, including Shlomi and Mr. Rani Zim.  After this meeting, additional correspondence was exchanged between the parties.
28. The parties' arguments
    • 1. Shufersal Claims
29. In the statement of claim, Shufersal petitioned for declaratory relief instructing that the commercial terms document together with the second specification constitute a binding agreement between the parties. According to her, the commercial terms document together with the second specification include all the material conditions for the purpose of perfecting a binding agreement.  Later in the proceeding , Shufersal added that as far as it is concerned, there is no material difference between the second and third specifications, and that it is indifferent to the question of which of the two will be enforced.
30. According to Shufersal, it is possible to learn from the commercial terms document itself, as well as from the behavior of the parties after signing it, that Shufersal and Geshem have a clear intention to enter into the agreement. Shufersal claims that the commercial terms document constitutes an offer on its behalf, as the one that sent it to Shem, and that Geshem's signature on the document constitutes acceptance on its part.  Alternatively, it is claimed, even if we see the bidder in the rain, there are indications that Shufersal and Sheshem considered themselves committed to the document.
31. In this regard, Shufersal raises a number of indications that indicate that the parties believed that the commercial terms document is a valid agreement that binds the parties, including: the commercial terms document does not include a relationship formula, so that the parties' agreements are not contingent on the signing of a detailed agreement; The parties began working on the planning of the leased property and its suitability to Shufersal's needs, including signing the second and third specifications; media publications on behalf of Geshem in which Shufersal's name is used; and a presentation from November to December 2020 sent to Shufersal, in which Shufersal was presented as a tenant in the project.
32. In addition, Shufersal claims that the commercial terms document together with the technical specifications (the second or third) meet the specific requirement and include all the conditions necessary for the transaction to take place. According to Shufersal, it has been proven that there is no impediment to the execution of the commercial terms document even without a detailed agreement being signed.  According to her, the parties acted to sign a detailed agreement in order to clarify the planning details, as opposed to the commercial terms of the transaction that had already been agreed.  Shufersal further argues that in any case, the parties reached an agreed and final version of a detailed draft agreement, and there are no issues on which there remains a dispute.
33. According to Shufersal, the "deficiencies" in the commercial terms document that the defendants pointed out can be completed. Thus, according to her, the parties agreed on the area of the rented property as well as on a sketch of the leased property, with the individual location within the building easily complete.  According to Shufersal, even the other details that are allegedly missing - the date of payment of rent, the index to which the rent will be attached, the amount of management fees, and sanctions for late delivery - can be completed.
34. Shufersal claims that the suspension conditions set out in the commercial terms document were met. According to Shufersal, the commercial terms document was approved by Shufersal's management at a management meeting on July 28, 2019, and this approval also includes approval regarding an examination of economic feasibility and feasibility.  Regarding the approval of the Antitrust Commissioner, it was proven according to Shufersal that this condition was "transferred" with the consent of the parties to the draft version of the detailed agreement, and that in any case the application to the Antitrust Commissioner is made close to the receipt of the property.
35. Shufersal further claims that there are no contradictions between the terms and conditions detailed in the commercial terms document and the wording of the detailed draft. In this context, it was argued that the claim that there is a difference in the lease period between the commercial terms document and the wording of the detailed draft agreement constitutes an extension of the façade, and in any case this argument benefits Rain since it shortens the lease period.
36. Shufersal claims that in practice, the parties reached a detailed and final agreement, which even Geshem's own attorney noted could be signed. According to her, there are no more disputes or gaps within the framework of the final draft, but this version was not signed due to Geshem's request to wait for relief from the local planning and building committee regarding the location of the individual gallery in the supermarket that will be built by Shufersal.  In this regard, Shufersal categorically denies Geshem's claim that it abandoned the negotiations.  On the contrary, Shufersal claims that Geshem was the one who breached its obligations due to extraneous considerations, in light of ZIM's desire to rent the leased property to the son of ZIM's controlling shareholder.
37. Finally, Shufersal claims that even after Geshem signed the agreement with Zim, in a meeting between Shlomi and Yossi on June 9, 2021, Yossi told Shlomi that while Zim "does not want Shufersal" as a renter, Geshem intends to insist on the fulfillment of the agreement between her and Shufersal.
    • 2. Rain Claims
38. According to Geshem, the parties did not see the commercial terms document as a binding agreement, but rather as a basic memorandum of understanding that leaves many open issues that must be agreed upon. Geshem claims that the fact that the parties negotiated for two years after the formulation of the commercial terms document and the first technical specifications indicates that these are not documents that meet the specific requirements of the final and specific requirements.
39. Geshem claims that Shufersal did not give a notice of acceptance to the proposal it drafted on behalf of Geshem. It was also claimed that Shufersal, which drafted the commercial terms document, explicitly stated that it was valid for 90 days only, and that the conditions suspended in the document had not been fulfilled to date.
40. According to Geshem, the commercial terms document and the second specification are devoid of material and essential details. The documents do not include the location of the property; the date of payment of the rent; the index to which the rent is attached; a compensation mechanism for late delivery of the property; And more.
41. According to Geshem, during the negotiations between the parties, Shufersal raised new demands that did not appear in the commercial terms document, and this also indicates that it did not consider itself limited to this document. Thus, for example, it was claimed that Shufersal demanded that Shechem sign the second technical specification, the content of which was expanded and significantly different from the first specification.  In addition, it claims that there are material changes between the second and third technical specifications, and it is not possible to accept Shufersal's claim that it is indifferent to the choice between these specifications.
42. According to Geshem's claim about the draft of the detailed agreement that was exchanged between the parties, it was explicitly stated that these were drafts for the purpose of negotiations, and that "only an agreement that is approved by the authorized organs of Shufersal and signed by the authorized signatories will bind Shufersal." According to Geshem, this indicates that Shufersal views the act of signing as a material requirement for the creation of an undertaking.
43. Geshem claims that the negotiations conducted between the parties did not mature into a binding agreement, since it was Shufersal itself that abandoned it after it reached an impasse in February 2021. In this context, Geshem argues that Shufersal failed to prove its claim that the reason for which the detailed lease agreement was not signed was Geshem's request to wait for a response from the local committee for the request for relief.
44. Geshem further claims that Shufersal did not act in the manner required if and to the extent that it believed that the commercial terms document required it. Thus, even though the cumulative lease period in the document is 30 years (including the exercise of options), Shufersal did not report a real estate transaction to the tax authorities in accordance with tax laws.
45. In addition, Geshem argues that there are significant differences between the terms and conditions detailed between the commercial terms document and the second technical specification and the drafts that were exchanged between the parties, including: the lease period; the date of delivery of possession of the property; the leased area; the amount of the rent; management fees; And more. It was further claimed that there remained many planning gaps between the parties, for which a detailed agreement was not signed.
    • 3. ZIM's claims
46. Naturally, a significant part of Zim's arguments are essentially similar to Geshem's claims, and therefore I will note only the main points of Zim's arguments. ZIM clarifies that although it was not a party to the conduct between Shufersal and Shem, in its view, an examination of the evidentiary basis presented to the court shows that a binding agreement between the parties was not perfected.  According to her, Shufersal is a large and well-known public company, and therefore the burden of proof for the requirement of specificity and discretion is greater in its case (with reference to the Bibi Roads case).
47. ZIM claims that the commercial terms document was not signed by Shufersal at all and only reflects an engagement offer. According to Zim, the detailed draft agreement includes different terms from those specified in the commercial terms document, and this indicates that this document is not binding.  In this regard, ZIM emphasizes that according to the commercial terms document, the lease period is 30 years and therefore it is a "real estate transaction", with all the implications in tax matters deriving from it, while according to the detailed draft agreement, the engagement period is 24 years and 11 months.
48. ZIM also claims that on February 18, 2021, the first meeting was held between Geshem and ZIM. According to Zim, as part of the due diligence that preceded the transaction between it and Geshem, Geshem did not present it with the commercial terms document, which indicates that Geshem believed that this was not a binding agreement.  This is in contrast to other agreements with tenants, such as Shufersal's BE chain, which were presented to it before it entered into an agreement with Geshem.
49. Discussion and Decision
50. As stated, the relief requested in the framework of the lawsuit is a declaration that the commercial terms document and the second specification constitute a binding agreement between Shufersal and Shem. Therefore, I am not required to examine whether the drafts of the detailed agreement that were exchanged between Shufersal and Geshem at a later stage were formulated into a binding agreement.  In addition, I am not required to examine who is responsible for the fact that a detailed agreement was not signed between Shufersal and Geshem, and whether this party acted in bad faith.
51. The commercial terms document is an "interim document" that was formulated by the parties on the way to signing a detailed agreement. As is well known, such a document is often referred to as a memorandum of understanding.  Has the commercial terms document been perfected into a binding agreement?
52. Memorandum of Understanding between Sophisticated Parties - A Normative View
    • 1. Between a memorandum of understanding and a binding agreement
53. As is well known, in many transactions, it is customary to agree at the initial stage on the material details of the transaction, with the understanding that they will then reach a detailed contract. The interim document signed by the parties at this stage, which is often referred to as a "memorandum of understanding", may in some circumstances constitute a binding contract, and in other circumstances indicate that this is only an interim stage of negotiations that does not bind the parties to the agreements contained therein (see: Civil Appeal 158/77 Rabinai v.  Man Shaked Ltd., IsrSC 33(2) 281, 286 (1979) (hereinafter: the Rabinai case); Civil Appeal 5332/03 Ramot Arazim, Construction and Investment Company in Tax Appeal v.  Shiran, IsrSC 59(1) 931, 937 (2004)).
54. The starting point in the case law is that one should not accept a formal approach according to which a memorandum of understanding is always without legal validity. Under this approach, case law has adopted a substantive approach, which seeks to examine whether the memorandum of understanding meets the requirements for concluding a contract (see: Daniel Friedman and Nili Cohen Contracts,   1, 334-337 (Second Edition, 2018) (hereinafter: Friedman and Cohen)).
55. In order for a memorandum to be given the force of a binding agreement, two cumulative elements must exist at the moment of conclusion: one, the parties' willingness to enter into a binding contract; and second, the agreement must be sufficiently necessary (see: sections 2 and 5 of the Contracts (General Part) Law, 5733-1973 (hereinafter: the Contracts Law); Civil Appeal 7193/08 Adani v. David, paragraphs 8-9 (July 18, 2010) (hereinafter: the Adani case)).
56. The intention of the parties to create a binding contractual relationship is learned from the totality of the circumstances of the matter, including the language of the document, its content, and the conduct of the parties before drafting it, at the time of signing it, and afterwards. In the meantime, the language and format of the "relationship formula" between the memorandum of understanding and the agreement that is supposed to be signed in the future should be examined, and whether it attests to the fact that the parties viewed the preliminary agreement as a binding agreement (Rabinai, at pp.  287-288; Civil Appeal 8320/09 Elhadad v.  Shamir, para.  25 (March 29, 2011) (hereinafter: the Elhadad case); Friedman and Cohen, at pp.  339-341).  In any event, even if there are indications in the language of the agreement of a formula for a relationship, "the intention of the parties is not only learned from the language of the formula of the relationship, but also from the content of the memorandum and from the conduct of the parties before, during, and after the agreement" (see: Civil Appeal 9247/10 Rosenberg v.  Saban, paragraph 12 (July 24, 2013) (hereinafter: the Rosenberg case); Civil Appeal 7591/13 Anonymous v.  Anonymous, paragraph 16 (January 25, 2016)).  In the absence of a conspiracy formula, the court will follow the intention of the parties by means of other expressions of their discretion (see: Civil Appeal Authority 3160/08 Mazar v.  Gaon Building and Investment Company in a Tax Appeal (June 28, 2009)),
57. It is not superfluous to note that recently there have been voices according to which the substantive approach in the interpretation of the binding validity of a memorandum of understanding should be moderated. See the words of the Honorable Justice   Grosskopf in Civil Appeal 1456/22 Ajami v.  Wahat al-Salem Neve Shalom (Neve Shalom Local Committee), paragraph 25 (February 28, 2024) (hereinafter: the Ajami case)):

"The truth must be told, if only as a warning note for the future - the pendulum between the formal pole and the substantive pole is moving in this matter in our case law excessively in the direction of the substantive pole.  It is very possible that in the future there will be room to significantly moderate the swing of the pendulum, especially with regard to real estate transactions, and to establish stricter rules for recognizing the binding validity of an interim document.  Thus, both in order to give the parties to the negotiations more certainty with respect to the point in time at which the threshold of engagement was crossed; They are in order to provide the contractors with proper legal protection against problems that may arise in a transaction that is economically weighty and legally complex."