On May 31, 2015, an Israeli District Court issued a ruling that could have a profound effect on Israeli facing e-commerce activity. In a nutshell, the Court ruled that despite a clear section in the terms and conditions of PayPal as to the jurisdiction in which any legal dispute between PayPal and any of its clients should be adjudicated, such a dispute can nevertheless be handled by a different court – which, in this matter, was an Israeli court.

 The Case at Hand

In this matter, the plaintiff filed a class action against PayPal. The action arose from PayPal’s treatment of transactions whereby a client had a foreign currency account with PayPal, and that client requested to withdraw funds from that account to his or her Israeli bank account. In such transactions, PayPal performed a mandatory conversion of the withdrawn funds, as well as charged a commission in connection with that conversion. The plaintiff argued that such mandatory conversion and the commission charged have no basis whatsoever in the terms and conditions of PayPal (although later on PayPal amended its terms and conditions to clearly provide for such mandatory conversion and associated commission). The plaintiff sought the return of the conversion commission to the clients of PayPal that had paid such commission.

One of the arguments raised by PayPal in order to reject the law suit was that the terms and conditions of PayPal's services included a jurisdiction clause that provided for the sole jurisdictions of the courts of Singapore or the jurisdiction of residence of the defendant; in addition, this clause stated that any dispute will be adjudicated in accordance with the laws of Singapore. Therefore, PayPal argued that the Israeli court lacked jurisdiction to hear this matter.

The Court's Ruling

The Court found that PayPal's terms and conditions are a standardized contract, and as a result the jurisdiction clause is void; the reason for that being that the jurisdiction clause attempted to block PayPal's Israeli clients' right of access to court and file a law suit against PayPal. The Court reasoned that as PayPal provides its services to hundreds of thousands of Israelis, operates a Hebrew website and provides customer support services to Israeli clients, requiring the Israeli clients to file lawsuits in Singapore subject to Singaporean law is clearly aimed at blocking access of the clients to file lawsuits against PayPal.

The Court opined that it cannot accept a situation in which an international corporation that is focusing on the provision of its services to the Israeli market prevents its Israeli clients from accessing Israeli courts and adjudicating their dispute in accordance with Israeli law.

The Court made reference to other multinationals, naming Microsoft, Facebook and Google, and stated that where a multinational markets its products to Israeli clients, it should expect to be subject to the jurisdiction of Israeli courts. The Court stated that the mere fact that most or all of the activities of such multinationals is performed via the internet does not provide them with immunity from being dragged to court in Israel and subject to Israeli law.

The Repercussions

There is no doubt that this court ruling may have a significant effect on the jurisdictional legal aspects of e-commerce activity in Israel, as it suggests that providing products and services online to Israelis, may subject the online merchant to the jurisdiction of Israeli courts, regardless of the merchant's attempt, via its terms and conditions, to subject its relationship with its clients to the jurisdiction of foreign courts. The District Court suggested that one should not focus on the formality of the jurisdiction clause, but rather look into the substance; the Court clearly referred to the issue of whether the jurisdiction clause was drafted so as to prevent or substantially impair the ability of the Israeli clients to file a law suit against the merchant. Another consideration of the Court seemed to be the scope of commercial activity of such a merchant with Israeli clients; there is no doubt that where such a scope is substantial, the tendency of the court would be to allow Israeli jurisdiction, but it is not clear what the court would rule should the relationship between the merchant and Israeli clients be of limited scope or where the number of Israeli clients will be low.

This recent development seems to be in line with other developments relating to foreign e-commerce activities in Israel, with one of them being the recent draft circular of the Israeli Tax Authority, seeking to expand the scope of Israeli corporate tax and VAT in respect of online merchants and the revenue generated by them.

It follows that any e-commerce merchant that has Israeli clients or is operational in any other form or manner in Israel should review carefully the scope of legal exposure it may have as a result of its Israeli activities and clients, and seek legal advice so as to limit such exposure by properly structuring its business.