Israel’s Supreme Court: travel agencies may not deduct fees from airline refunds

A new ruling on Israel’s Aviation Services Law treats travel agencies as a mere “conduit” for refunds. Foreign carriers that sell through Israeli agencies should now review their agency agreements and refund records, and expect agencies to reprice handling costs.

What led to the case?

An Israeli passenger bought a flight ticket to Warsaw through Issta, a major Israeli travel agency, for NIS 1,087. The airline cancelled the flight. Issta passed on the refund but kept USD 30 as a handling fee, relying on its terms of service, which allowed fees of up to USD 60 on any cancellation, including one initiated by the airline. The Small Claims Court dismissed the passenger’s claim. The District Court refused leave to appeal, relying on the Gulliver precedent, which was decided under a COVID-era temporary provision. The Supreme Court nevertheless granted leave for a “third-instance” appeal. It noted that lower courts had reached conflicting results and that class actions had ended without a ruling on the merits.

What did the Court have to decide?

The Court asked whether a travel agency may deduct a handling fee from a refund owed to a passenger when the airline has cancelled the flight, if the passenger agreed to the fee in advance. It considered this question under the Aviation Services Law (Compensation and Assistance for Flight Cancellation or Change of Conditions), 5772-2012.

Why did the Court prohibit the deduction?

The Court ruled unanimously that the deduction is prohibited. Its reasoning rested on four points:

• Section 3(a)(2) requires the airline to refund the full amount paid for the ticket.
• Section 15 requires the agency, at the passenger’s request, to approach the airline to secure that refund.
• Section 17 prohibits contracting out of the Law except in the passenger’s favour. The question was therefore not whether the passenger consented, but whether the fee reduces a statutory entitlement.
• The 2020 temporary provision expressly allowed agencies to deduct agreed fees, but it expired on 31 March 2021. The Court held that the provision had changed the law rather than clarified it. Once it lapsed, the Law’s silence operated as a negative arrangement, meaning the permission no longer exists.

On the consumer-protection purpose of the Law, the Court described the agency as a “conduit” for refund money, and held it may not “puncture” that conduit. The agency does not guarantee that the airline will pay. However, once it receives the refund, it must pass it on in full. The respondent was ordered to repay the fee with interest and to pay NIS 5,000 in costs.

What does the ruling mean for foreign carriers?

The ruling binds agencies directly, but it also affects airlines:

• Claims risk. The ruling gives a clear basis for small claims and class actions over past deductions. Passengers and agencies may dispute who received which amount and when. Carriers should therefore keep refund records that show what was paid to agencies and on what date.
• Shifting costs. Justice Barak-Erez noted that agencies may build the cost of handling cancellations into the original booking price. Carriers should expect agencies to reprice bookings and may face pressure to renegotiate commission or handling arrangements.
• Contract review. Carriers should review their agency and GSA agreements, as well as their refund-flow procedures, to make sure they comply with Section 17.