Israel: Illegal Voluntary Collecting By The Authority And Its Consequences

Summary

It is a well known rule that the municipal authority may not assume authority which was not specifically instilled upon it by law. An act of a governmental authority without the explicit authorization by law constitutes an exceeding in authority: meaning, an illegal act¹, and when collecting mandatory payments from the citizen, even unconstitutional².

At times, collecting mandatory payments (levies, fees or other taxes) without the said explicit authorization by law, is conducted without the citizen's knowledge of the demand's illegality (such as collecting excess municipal tax), however, at times, it is conducted with the citizen's knowledge and even with its explicit consent under the framework of a contractual obligation towards the authority.

This is possible when the citizen is granted with a different benefit. For example, winning a tender which its terms include payment to an authority that has no legal authorization to impose such payments, or expanding building rights as a condition to the authority's support in the bettering plan, etc.

In Israeli case law, the result of an illegal contract is VOID. Section 30 to the Contracts Law determines that "A contract which its execution, contents or purpose are illegal, immoral or which is contrary to public policy – is VOID"³.

But whilst the result of a contract declared as VOID is to obligate restitution from each party to the other according to what it has received under the contract, and if restitution is impossible or unreasonable- to pay the party the worth of what it has received, in the event of an illegal contract, the court is entitled to exempt from the restitution obligation or any part of such⁴.

Similarly, the Unjust Enrichment Law allows claiming restitution from whomever received an asset or right unlawfully on account of the plaintiff, but on the other hand, the law grants the court discretion in allowing an exemption from restitution under just cause⁵.

Background

One of the areas of friction between the municipal authority and the individual is in the field of planning and construction. At times, the authority publishes a tender which grants building rights in the land, at times, the developer is requested to bear development levies and fees beyond those who are required by law and at times, the authority requests to impose upon the developer certain public assignments in return for providing building permits or for its support in the benefiting plan of the existing rights.

Under the framework of the natural development of a municipal authority, there is, at times, a combined need for a swift development of infrastructures, and formulating agreements with the Israel Land Authority, entities which specialize in the development and building of infrastructures and developers, all in order to considerably spare time resources and spare exhausting bureaucracy.

In order to achieve swift development of neighborhoods and cities and to save significant time, which constitutes a substantial obstruction in the probability of large projects, there is a need to conduct combined agreements which purpose is to benefit the parties. However, faults in the transaction are often revealed when shortcuts are made.

"Luxury Apartments" Judgment and its implications

In the matter of Luxury Apartments⁶, the Supreme Court discussed the event by which triangular agreements have been signed between a developer, the Israel Land Authority and the Municipality, according to which, the developer undertook to pay betterment levy (which it is not obligated to by law) to be calculated from a building plan which was yet to be approved, a fortiori, the realization of rights have yet to be approved, and additionally, the developer was to conduct the development works in return for an exemption from development levies. Under the circumstances of such instance, the contractual execution phase has not yet commenced.

The Supreme Court determined, in principal, that contractual engagement between a local authority and a developer, which imposes obligations on the developer that are not set under the law, constitute a wrongful engagement.

It was further determined that the developer's conscious consent to such illegal aspect does not cure the fault in its illegality. It was determined that in cases by which the authority is unauthorized to demand an individual to pay certain mandatory payments, the authority is also not authorized to engage into an agreement that regulates this payment with such individual. The illegality is not cured by the individual's consent to take upon itself the required payment, which contradicts the law, even if in return for such payment, the individual receives benefits it is interested in. In that same matter, the court ordered nullification of the agreement and mutual restitution of the consideration paid to each party.

"Dimri" Judgment and its implications

In the matter of Dimri⁷ a similar question was discussed in the subject of connecting water fees. A developer was announced the winner in a bid submitted by it, under which development works were conducted by a private company for the Israel Land Authority, this- instead and on behalf of the local council. The developer paid the company development costs and in return, received an exemption from the council relating to fees and levies of development. However, the developer was required to pay fees for connecting water to the private water source. After execution of such payment, it was claimed that the water fees were collected illegally and should be returned.

In this instance too, the argument that the developer's consent to the illegal payment, knowingly, cures the fault in its illegality, was dismissed. It was determined that prior consent does not prevent a bidder in a tender the right to claim restitution of the monies collected from him illegally, even if such bidder did not raise this claim against their legality prior the tender.

The obligation of restitution is the rule and exemption from such is exceptional in a few cases. According to clause 2 of the Unjust Enrichment Law, the court is provided with broad discretion in considering different considerations in order to achieve the result which reflects proportionate justice between the parties. Among these considerations are, inter alia, the parties' good faith, change in circumstances in the authority's state in such a way that restitution shall be unjust and the balance of damage, meaning, if the damage in obligating the authority in restitution is more severe than the damage caused to the developer if its payment shall not be restored.

In this instance, the court determined that there was no explicit consent to collecting illegal mandatory payments, however, in light of the change in circumstances of the authority, it was obligated to provide only partial restitution of the monies.

The Judgment in the matter of "Ramat Nili"

In the matter of Ramat Nili⁸ the developer submitted a motion for change of Zoning Plan (constructing a neighborhood of single-family townhomes) whereas the local committee approved it provided that the local council signs such motion. The local council held negotiations which eventually led to the signature of an agreement by which the developer undertook to conduct different development works in the public areas in the project's area and to bear different expenses. Upon completion of construction, the developer requested that the development payments paid by it according to the agreement, be restored. In the matter of legality of the agreement and the obligation of restitution, the court noted that it will be unjust to allow the developer to dip into public funds and claim restitution, after the developer realized all of its rights in the development agreement and after building a prestigious neighborhood of townhomes and producing profits. It was determined that this is a clear case to apply clause 2 to the Unjust Enrichment Law, 5739-1979, which allows the court to exempt from restitution under just cause.

Conclusion

In several case laws set by the Supreme Court and which were implanted in later District Court case laws, it was determined that the municipal authority may not charge mandatory payments beyond the payments set by law. Engagements with developers, which impose mandatory payments or additional public assignments onto the developer, are illegal. The developer's awareness and consent to such does not validate this wrongful act under the engagement.

On the one part of the interest map, is the need for the existence of justice and equality towards the remaining bidders in the tender as well as delay, economic efficiency and bad faith relating to the timing of raising the argument by the developer. On the other part, principles of rule of law, legality of administration and legality of the tax regime. The court has determined that the legality of administration and legality of the tax regime prevail.

The court balances the scope of restitution of monies taken unlawfully. In accordance with clause 31 to the Contracts Law and clause 2 to the Unjust Enrichment Law, the court activates its discretion in accordance with the concrete circumstances and may fully or partially exempt from the obligation of restitution⁹.

An issue which considerably affects the interference of the court relating to the exemption from the obligation of restitution is associated with the developer's conduct from the time of execution of the illegal agreement and during the contractual stage to which the parties have arrived. Thus, whilst a petition to restore illegal mandatory payments which were paid near after the payment was executed and when the parties have yet to implement their contractual obligation, might be granted, a petition to restore payments after a long while and after each of the parties fulfilled their parts in the agreement, might be dismissed.

Footnotes

[1] HCJ 9488/11 Meatrael Ltd. v. The State of Israel – Ministry of Agriculture and Rural Development.

[2] Section 1(a) to Basic Law: The State Economy, HCJ 1640/95 Ilanot Hakiria (Israel) Ltd. v. Mayor of Holon, PDI 49(5) 582.

[3] Contracts Law (General Part), 5733-1973.

[4] If the court determines that it just to do so and under the terms it deems fit, clause 31 to the Contracts Law.

[5] Unjust Enrichment Law, 5739-1979.

[6] C.A. 7368/06 Luxury Apartments Ltd. v. the Municipality of Yavne.

[7] C.A. 4708/14 Y.H. Dimri Building and Development Ltd. v. Gan Yavne Local Council.

[8] C.A. 974/13 Ramat Nili Ltd. v. Zichron Yaakov Local Council.

[9] Cases in which the court exempted the authority from the obligation of restitution: C.C(central) 45870-05-13 Clalit Health Services v. the State of Israel (Ministry of Construction and Housing, Israel Land Authority); C.A. 974/13 Ramat Nili Ltd. v. Zichron Yaakov Local Council; O.A. 50755-11-11 Landco Israel Entrepreneurship and Management Ltd. v. Municipality of Yahud and others; C.C(central) 982-01-10 the State of Israel v. Beit Dagan Local Counsel; C.C(Tel Aviv-Yafo) 17307-11-10 Kohavi v. Tel Aviv-Yafo Municipality.

For cases in which a partial exemption from restitution was given:

See matter of Dimri and also O.A. 50755-11-11 Landco Israel Entrepreneurship and Management Ltd. v. Municipality of Yahud and others.

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