Legal Updates

A local municipality is liable, at least partially, for debts of a corporation that acts as its long arm

May 2, 2021

A company that provided landscaping services to a non-profit organization that served as the local municipality's "sports department" demanded that the municipality covera debt for work performed at the non-profit's request and relying on oral promises given to it in which the municipality would take care of payments if necessary.
The Court accepted the claim in part and held that the municipality is liable for the debt, but the consideration should be reduced by 50%. Israeli law enables piercing of the corporate veil towards a person who is not a member of a non-profit organisation but constitutes the "living spirit" and the actual controlling owner thereof, as well as a partial veil piercing for a specific issue under the Agency Law. In the case of a contract that was not duly approved by the authorized bodies in the municipality (such as: an accompanying accountant), the Court may reduce the amount of the contractual consideration. Here, the non-profit was in fact a proxy of the local authority as it was run as its long arm and the local authority created a representation that it guarantees its debts. However, becuase here there was not a direct contract with the municipality but with the non-profit and the company knew that an obligation of the municipality should be given in an orderly manner by the authorized signatories, it is not justified to charge the municipality the full contractual consideration and the amount was reduced by 50%.