Can the gas entrepreneurs sue Israel?

Dr. Uri Benoliel

The legal opinion on which the Sheshinkski legislation is based is questionable on several counts.

Immediately after the law enacting the provisions of the Sheshinski committee recommendation was passed, Minister of Finance Yuval Steinitz happily announced that, "This is a formative moment for Israeli democracy, in which the public interest has overcome the various pressures the Sheshinski committee members and public officials were subjected to."

A few weeks ago, we were informed that Dr. Yuval Steinitz's happiness might have been premature. A petition against Dr. Steinitz and the Knesset was filed in the High Court of Justice, asking the court to declare that the Sheshinski law does not apply to gas fields that were discovered before the Sheshinski committee was convened, among them the gigantic Tamar gas field. This petition hints at the possible colossal legal tangle that the State of Israel might find itself in: a huge compensation claim for breach of contract by the state with the oil entrepreneurs.

Minister of Finance Steinitz apparently believes a compensation claim against the state on the grounds of breach of contract, is unlikely to succeed. The reason for this is that, according to the opinion prepared by Deputy Attorney General for Economic and Fiscal Affairs Adv. Avi Licht, no contract exists between the state and the entrepreneurs.

However, upon a closer look at the opinion formulated by the Deputy Attorney General, it appears that Steinitz's basic assumption is rather shaky.

The main argument, which forms the basis of Adv. Licht's claim that there is no contract between the state and the entrepreneurs, is that a contract expresses a bilateral engagement based on an assumption of equality of the parties, whereas in a relationship between the state and the entrepreneurs, the state exercised unilateral governmental "authority" from a position of sovereignty when it gave the entrepreneurs exclusive rights to explore for oil and produce it.

This claim brings up a series of difficulties. Firstly, a contract is not necessarily two-sided, and the law recognizes the validity of one-sided contracts. The best known type of one-sided contract is the offering of a prize, where only the offerer is contractually obliged to a certain action, ie. to award the prize to the person who fulfills the requirements it set.

Moreover, in contrast to the position taken by Adv. Licht, a contract is not necessarily based on equality. For example, uniform contracts, formulated by the state, are often based on an understanding of inequality between the state and the other side.

Thirdly, Adv. Licht's claim that in the relationship between the state and the entrepreneurs, the state exercised unilateral government authority and seems to ignore the broader reality of the situation. A broader view of the relationship between the state and the entrepreneurs, shows that the authority exercised by the state was accompanied by free agreement by the entrepreneurs to search for and to produce oil, and they were not forced to do so.

Contract binds both sides

In an effort to strengthen his allegation that there is no contract between the state and entrepreneurs, Adv. Licht claims that the "lease," or the document that the state gave the entrepreneurs under the Petroleum Law, which awards them exclusive rights to search for and produce oil, is not inherently a contract.

For this purpose, Adv. Licht refers to a Supreme Court ruling involving Matav Cable Systems.

Adv. Licht's position here is not beyond criticism. Firstly, the ruling in the Matav case only determined -- and even this was beyond what was necessary -- that the rights that the state gave to certain corporations, in the circumstances of the case, according to the Bezeq Law, did not fall within the definition of a contract. The ruling does not demonstrate, and it cannot be deduced from it, that the lease that the state offered the oil entrepreneurs under the Petroleum Law, is not to be considered a contract.

Adv. Licht's claim that the lease is not inherently a contract raises another difficulty. A well-known principle in contract law is that a determination whether or not a legal document can be considered a contract cannot be made according to the title of the document; rather it must be decided according to whether the content of the document fulfills the principles of intention to create legal relations and certainty necessary for it to be considered a contract. Surprisingly, Adv. Licht's opinion does not explore this important question.

On the face of it, the content of the leases that the state granted the entrepreneurs, shows that they fulfill this principle of intention to create legal relations and certainty. From information that was published about the contents of the leases that were produced for the Tamar and Dalit oil fields, it appears that they are drafted in fairly legal language, they list the details of the commercial obligations incumbent upon the entrepreneurs towards the state, they include a description of the remedies that the state is entitled to if the law is broken or if the conditions of the lease are violated by the entrepreneurs, they include provisions concerning the guarantees that the entrepreneurs will provide to the state to ensure that they will fulfill all the obligations of the lease, and they include the signature of the state's Supervision of Petroleum. These facts show that the state had the intention of engaging in a contract with the entrepreneurs, according to the terms of the lease.

In order to bolster his claim that the lease given to the entrepreneurs is not to be considered a contract, Adv. Licht goes on to claim that the obligation on the part of the entrepreneurs to pay royalties from oil production does not amount to contractual "consideration" that the entrepreneur paid to the state, since this obligation is set by the law and not connected to the specific relationship between the state and the entrepreneurs.

This finding assumes, it seems, that a requisite condition for a contract to be considered valid is that signatory to the contract should provide monetary consideration to the other party. This assumption raises a difficulty, since it is well-known that there is no such requirement in Israeli law.

Finally, Adv. Licht claims that even if it were to be proven that there is in fact a contract between the state and the entrepreneurs, the state would still be able to impose a special levy on the entrepreneurs' profits.

Adv. Licht and others base these claims on sections 1 and 33 of the Tamar and Dalit leases, which stipulate that the royalty rates that the entrepreneurs need to pay the state are subject to legislative changes.

Basing claims on these sections raises questions. The language of the sections apparently allows the state to make changes to the royalty rates, but the wording of the sections does not give the state the right to impose a new, special tax on the entrepreneurs in addition to the royalty payments.

Lack of bona fides on the part of the state

Furthermore, even if Adv. Licht's claim that the state has the right to impose a new, special tax on the entrepreneurs is accepted, it would be advisable to examine this key question: Did the state use this right in good faith, as it is required to do? A thorough discussion of this question does not appear in Adv. Licht's opinion.

A discussion of this important question could reach the conclusion that the state did indeed use its legal right, assuming that it has one, but in bad faith.

Israeli law, comparative law and various theories of contract law all indicate that if one party of a contract uses his legal right in order to reap rewards that, according to the contract, belonged to the other party, then the first party is not acting in good faith.

The state's conduct regarding the Sheshinski report apparently shows that the state has chosen to impose a special tax on the oil entrepreneurs who discovered oil reserves before the Sheshinski committee was established, mainly in order to reap the rewards of their efforts, which the entrepreneurs were entitled to until the special tax was implemented.

The writer is a faculty member and lecturer at the law school of the Academic Center of Law and Business, and a lecturer on contract law. He does not represent the oil entrepreneurs.

Published by Globes [online], Israel business news - - on June 13, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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