Civil Case (Tel Aviv) 17456-12-18 Yonit Werber v. Shmuel Froimovich - part 10

These are parts of the long and comprehensive conversation that took place, but the general impression that emerges from the conversation is clear: it was made clear to Lorber that this is a venture that means a significant investment of work for a long period of time, on their part. You can also get the impression from the conversation that there was no pressure on Werber to enter into a deal - in the same conversation Shmulik says to them, "Look what you say, yes, if yes then how, if it is relevant give us an offer, if not, it's also okay, okay, we love you anyway" (p. 32 of the transcript of paras. 17-19).

The understanding that a substantial investment by Werber is required was also reflected in the division of duties between the parties at the meeting of the Board of Directors held on May 15, 2018, in which responsibilities in the company were distributed to each of the parties (Appendix 35 to the Werber evidence).

There is substance to Froimovich's claim that it is not possible to accept the testimony of Yonit and Tzachi in the cross-examination - which was not raised in the affidavits of the main witness - that they requested access to the system prior to entering into agreements in which they entered into agreements in which they entered into as partners in the venture but were not given access (pp. 89-90 of the transcript, 162 s. 6-11, p. 164 s. 25-33 of the transcript). I will note, in this context, that in the affidavits of the main witness, Yonit and Tzachi (paragraph 93 of Yonit's affidavit, paragraph 91 of Tzachi's affidavit) stated that they had requested that they be given access as users to the system in order to fundamentally examine what problems might arise (and they were given access on May 4, 2018), but did not mention the version claimed in the cross-examination that they had requested prior access to the agreements and that they were denied such access.

Interim summary and main factual findings arising from the analysis of the evidence

200. Following the analysis of the above evidence, in the balance of probabilities in a civil trial, the main factual findings are as follows:
201. Werber and Froimowitz had a friendly relationship. Werber greatly appreciated Shmulik and placed great trust in him, as they testified and as evidenced by external evidence (such as a video of Yonit praising Shmulik, in which Shmulik used his website; p. 169 of the transcript). Both Shmulik and Keren have education, knowledge and experience in software development and entrepreneurship. Werber, on the other hand, have experience in business, while Yonat also has an understanding of websites (p. 161 of the transcript of s. 31 to p. 162 s. 3).
202. During the period from January 2018 to the end of April 2018, during which Werber was intended to take part in the project as lecturers, they invested efforts in developing courses and collaborating with other lecturers in order to make the project a significant source of income for them (paragraphs 39 of their affidavits and the appendices that were attached).
203. Throughout this period - starting in January 2018 - Shmulik presented Lorber, as well as other designated lecturers, with a false picture of reality in several respects.
204. First, Shmulik presented the "site" as almost ready and as if it had been worked on for a year and that "final retouching" was required starting in early February 2018. In practice, the substantial work on the site began only in January 2018. Significant components of the system were developed only at the end of April by the programmer Michal, who began working at KSI only on April 22, 2018. A few days before the launch, it was clear to Shmulik that the site was unstable and that there were problems with development, as evidenced by the evidence detailed above and from a real-time correspondence with Alexandra (after she stopped working on the venture) - which has significant weight - in which Shmulik wrote to her, as mentioned, "The site stabilizes (every day new things are discovered that don't work, but we will come with it to launch one way or another)." Additional real-time evidence of the site's instability prior to the launch date is found in an email sent by Shmulik about three weeks after the launch, on May 27, 2018, in which he relates, inter alia, to the need to stabilize the system before massive customer acquisition; Implementation and testing of a mechanism for transferring money to partners and the implementation of a customer service and management system.

Second, Shmulik presented the website and the system as having invested "a lot of money" - and in a way that gave the listeners the feeling that serious development work had been done - when in fact the financial investment in the development was minimal and the impression is that Froimovich made (very, very hard) to save any financial investment out of their own pockets. In a conversation with Werber on April 25, 2018, Shmulik also recounts that they had "many investments in the company" (p. 33 of the transcript of Q. 2-4) in a way that implies a significant financial investment and not just an investment of time by him and Keren (in the cross-examination, Shmulik admitted that there were no significant financial investments and that the main investment was their time). It should also be noted that in the letter of their counsel dated August 20, 2018, Froimovich repeats the baseless claim that they invested a lot of money in the venture, with paragraph 3 talking about "a significant investment of knowledge, time, effort and money [my emphasis - L. C]" (Appendix 1 to Froimovich's evidence).

205. The evidence also shows that the development of the system was done at a very low level. The developers did not work professionally on basic matters that are essential to developing reliable software, including not working with code versioning; Didn't work with development versioning; Develop software code "in a product environment" rather than in a separate development environment; And they did not work with automated tests, which are an accepted professional standard, in order to make sure that the core of the system is working as required and that the maintenance is unprofessional. Everything - as indicated by the expert opinion and even from the real-time correspondence that was brought above between Alexandra and one of the freelance programmers. In his testimony, the expert described the system as an "atomic mess" and expressed his opinion that it would have been better to rewrite the code than to repair it, given the low quality and the low cost required for quality development (only 50 to 100 thousand NIS).

Given that Shmulik was responsible for the development and in light of his expertise in the field of software and his involvement in the details, as indicated by correspondence with the foreign programmers and with the programmers Alexandra and Michal (Appendices 32 and 34 to the Werber evidence), the reasonable conclusion is that Shmulik was also aware of all of this. Reinforcement for this conclusion stems from the fact that Froimovich did not summon the key witness, the programmer, Michal, who was well acquainted with the state of the system, as she was the responsible programmer at the time of the launch and prior to the launch; The one that Froimovich referred to in his supplementary affidavit as the planner of the system. To this must be added the conduct of Froimovich prior to the proceeding and in the proceeding itself with regard to the attempt to prevent a professional examination of the system by Werber - on baseless grounds (Froimovich's response of November 3, 2020). This conduct also reinforces these conclusions and the conclusion that Froimovich tried to hide the system's failures and low quality. This concealment is also reflected in Froimovich's unreliable version that there was no change tracking procedure (in GIT), from which the improbable conclusion is that Froimovich acted to conceal the documentation.

206. Although quite a few of Werber's claims regarding misrepresentations regarding the system examined by the expert were not accepted, as noted, it was found that the system that was developed lacked a number of components that were presented and were expected to be based on Shmulik's exchange of words with Werber and the lecturers: "distribution of leads to lecturers"; "Excess remuneration for lecturers"; Limit the use of two users at the same time (Single Session). Everything - as detailed above. It was also found that there was a material malfunction in the display to the marketers that misled the lecturers about a material matter, and that there was a loophole in the software that might have allowed free viewing of the content if it had been discovered.
207. There is also no dispute that in real time, after the launch, various technical malfunctions were discovered such as content that disappeared from the site, a malfunction in the mailing system that required its replacement, problems with clearing subscription fees, customers and lecturers to whom the site did not give access, customers who registered and did not receive access details or those who received a notification that access was blocked, the inability to watch the course again after the viewing ended, and more.

Shmulik testified (in his supplementary affidavit) that these were routine malfunctions that could be easily repaired, and that his job was to "stabilize and develop the technological system." However, against the background of the unprofessional development process and the low quality of the development, as well as the correspondence from real time in which Shmulik admits that "every day new things are discovered that do not work," the probable conclusion is that these are not "routine malfunctions," as he claims, but rather failures stemming from the low quality of the development, as well as failures in the quality control and testing of the system prior to launch, which were known to Shmulik. Indeed, it was not proven that the concrete faults that were discovered were with Shmulik's knowledge, but what he knew, and at least should have known, as a reasonable conclusion from the materials in the file, was that the system was "prone to disaster."

208. As for the nature of the deal, Werber entered as partners in a startup venture. The transaction was not limited to the purchase of software, but rather to the purchase of rights in the venture as a whole, which also included the software, which is the tool for realizing the venture. The attractiveness of the project was inherent in the idea behind it, and not in the software, which is relatively simple and does not innovate. The understanding between the parties was that this was not a passive investment by Werber, but that Schwerber would be active partners in the management and development of the venture; A commitment that will involve the investment of significant resources by all four - Shmulik, Keren, Yonit and Tzachi - for a considerable period of at least a year and a half, as appears from the transcript of the conversation that took place shortly before the engagement.

Lorber has grounds for canceling the deal due to deception

209. Against the background of the factual findings, it is now necessary to address Werber's claim that Froimovich misled them about the real state of the system while presenting false representations about its readiness and features. In this context, Werber argues that Froimovich breached an contractual duty of disclosure towards them under clause 2.2 of the founders' agreement, according to which "there is no detail or information relating to him, the non-disclosure of which would be misleading in the circumstances of the case, or the disclosure of which would have caused a reasonable person to refrain from entering into this agreement", as well as a breach of the duty to disclose by virtue of the duty to negotiate in good faith under section 12 of the Contracts Law. They further argued that Froimovich should not be allowed to be built on the AS-IS stipulation , both in view of section 16 of the Sale Law and in view of the alleged duty of the seller to disclose basic facts that may prevent an engagement in the agreement, the failure of which negates the reliance on an exemption clause.

Canceling an Agreement Due to Deception: The Normative Basis

210. The main ground on which Werber seeks to rely in their petition to cancel the transaction is the cause of deception enshrined in section 15 ofthe Contracts Law (General Part), 5733-1973 (hereinafter - the "Contracts Law"), which reads as follows:

211. In order for a cause of action to arise for the cancellation of an agreement due to deception, the existence of an error by one of the parties to the agreement caused by the other party must be established, which is reflected in the gap between reality as perceived in the contractor's consciousness and the actual reality. In addition, a "dual" causal connection is required: between the deception and the mistake, i.e., that the deception of the other party is what caused the mistake; And between the mistake and the engagement in the contract, that is, if it were not for the mistake, the party who made the mistake would not have entered into the agreement. The causal connection is examined according to a subjective test in the sense that it is necessary to examine the specific effect of the mistake on the specific contractor, and where the mistake had no effect on the engagement in the agreement, then no ground arose for cancelling the contract due to deception (see, Civil Appeal 5328/21 Abu Rakiya v. Handkalo, paragraph 59 (January 3, 2023)).
212. Deception may be by act or omission. In other words, deception may be expressed in the presentation of an incorrect representation. The misleading representation may also be in conduct or implicit (Daniel Friedman and Nili Cohen Contracts Volume 2 (2nd ed., 2020)) (hereinafter - "Friedman and Cohen (Volume 2)"; Gabriela Shalev and Effi Tzemach Contract Law, 367 (4th edition, 2019) (hereinafter - "Shalev and Tzemach")). "By default" deception is expressed in the failure to disclose a given or material data. A deep-rooted rule is that "proper rules of conduct are not only silence and refraining from lying [...], but they are the same honesty and decency that require in a given circumstance to take action where 'the wicked would sit and remain silent'" (Additional Hearing 7/81 Fender, Open and Building Investment Company in Tax Appeal v. Castro, IsrSC 37(4) 673, 696 (1983)). Indeed, "when, according to the circumstances, it can be expected that in addition to the things and descriptions that were said, there was room to say things that are important from the point of view of the transaction, then it is possible that the silence and non-disclosure of all the details distort the picture as a whole, and the concealment of those details by silence creates a false representation" (Civil Appeal 494/74 Beit HaHasmonean Company Nos. 96-97 inTax Appeal v. Aharoni, IsrSC 30(2) 141; 144 (1976)).
213. The scholars, Prof. Friedman and Cohen, outline criteria for examining the question of whether a duty of disclosure arose in the circumstances of a particular case, and point to three main relevant considerations that found expression in the case law (Friedman and Cohen (vol. 2), 190; see also Civil Appeal 2274/21 Mor v. Elad Israel Residences Ltd., paragraph 80 of the judgment of Judge E. Stein and paragraph 7 of the judgment of Justice G. Kanfi-Steinitz (January 1, 2023) and the references therein).

The first consideration concerned knowledge and experience gaps between the parties in a way that places one of the parties at a significant disadvantage when it comes to access to information. This does not mean that the other party cannot necessarily disclose the information. It is also possible to impose a duty of disclosure where there is an inferiority that is expressed in the fact that one party to the transaction is aware of the information, while the other party is required to invest effort and resources in order to disclose it.