Legal Updates

When a party misunderstood the contract it may in some cases still be terminated even if it was not breached by the other party or fraudulently induced

April 5, 2020

A franchisee signed a contract with a coffee shops chain to operate a franchise. Although such were not set in the agreement, the parties agreed that the café be opened in a mall that was to be built and the chain was to be the lessor of the property from the owners. The mall was not built and the franchisee demanded repayment of the franchise fees.
The Court held that although there was no breach of the agreement by the chain nor fraudulent inducement of the franchisee by it, there are grounds to terminate the contract due the franchisee's mistake. Israeli Contract Law defines misrepresentation as non-disclosure of facts, which under law, practice or circumstances should have been disclosed to the other party, and states that a person who has been fraudulently induced has the right to terminate the contract. Here, the franchisee knew that the mall had not yet been built and that the lease contract had not yet been signed and thus no fraudulent inducement exists. However, even in the absence of misrepresentation, the law empowers one who entered into an agreement due to one’s misunderstanding to terminate it if one would not have entered the contract absent such mistake and the other party knew or should have known about this. Under exceptional circumstances, the right to terminate may exist even if the other party did not know or need to know about such mistake. The chain did not know about the mistake but commercial logic suggests that had the franchisee known that the construction process would take an unknown period of time, the franchisee would not have entered the agreement, and the damage caused to the franchisee if continuing to be tied to such agreement would be greater than the chain's damage in terminating the contract and repaying the funds and thus the contact should be terminated