Introduction:
In the last 25 years, the common ruling in Israeli courts was the judgment in the Apropim case1 by retired Chief Justice Aharon Barak, according to which the interpretation of a contract shall be done by a purposeful interpretation, namely by inquiring the intention of the parties to the contract, which can be learned from a combined study of both the language of the contract and the external circumstances leading to the contract, without separating the two (hereinafter: "the Apropim Judgment").
In 2011, the Contracts Law (General Part), 5733-1973 (hereinafter: "the Contracts Law") was amended in order to change the Apropim Judgment and to grant commercial and legal certainty to the parties engaging in a contract, by stating in the law that the language of the contract is the first one to be examined. Despite the amendment, the Apropim Judgment has continued to apply and was even ratified by the Supreme Court in a number of judgments2.
Recently, a new judgment was issued by the Supreme Court, which some argue that it undermines, at the very least, and nullifies, at most, the Apropim Judgment, mostly in light of the legal analysis given by honorable justice Stein (hereinafter: "the Israel Railways Judgment")3. In this article, we will examine the Israel Railways Judgment and whether the Apropim Judgment is indeed minimized or nullified in light of it, and mostly we shall attempt to understand how contracts shall be interpreted by the courts from now on.
The State of Affairs Prior to the Israel Railways Judgment – the Apropim Judgment and Amendment 2 of the Contracts Law:
The guiding ruling with regards to the interpretation of contracts is the Apropim Judgment, which provides that a contract must be interpreted, first and foremost, according to its subjective purpose, namely according to the joint intention of the parties to the contract as it arises from its language and from the circumstances of its signing, which must be considered jointly and not separately. Thus, there is no room to first examine the language of the contract and only then (if necessary) the intention of the parties, but rather both should be considered together. In addition, the Apropim Judgment has provided that when it is not possible to determine the subjective purpose of the contract in accordance with the intentions of the parties, the contract must be interpreted according to its objective purpose, namely in a way which combines the language of the contract and its implied goal, along with considerations of the duties of fairness and good faith which apply to the parties.
The Apropim Judgment was a breakthrough ruling, since it was part of the "judicial activism" trend which the Supreme Court had taken at the time, and since some felt that it undermines the stability and certainty to which parties aspire when engaging with each other in a contract, since it combines the examination of external parameters apart from the language of the contract.
Following the alleged uncertainty created by the Apropim Judgment with regards to the manner of interpreting a contract, the legislator has decided to amend Article 25a of the Contracts Law, so that precedence shall be given once again to the language of the contract. In actuality, the amendment has not weakened the Apropim Judgment and it is still applied by the courts.
The foregoing was correct until the end of last November, when the words of Honorable Justice Stein in the Israel Railways Judgment were interpreted by many as minimizing or refining the Apropim Judgment, while there are a few that have perceived his words as completely nullifying the judgment.
The Rulings Made in the Israel Railways Judgment:
It appears that all 3 judges who have discussed the Israel Railways Judgment have expressly stated that the Apropim Judgment is still applicable. However, it seems that Justice Stein's words slightly minimized the ruling.
We shall briefly state that the Israel Railways Judgment discusses the manner in which an agreement should be interpreted, which was signed between the parties in order to perform works on the Israel railways train tracks by the appellant, in the framework of a tender which it has won to perform those works. The appellant (Bibi Roads Dirt and Development Ltd.) has argued that this was an open relational contract, meaning: a contract which is intended to remain open for completion of details pursuant to the duty of good faith and based on standards of fairness and reasonableness. Such argument was to support its requests to receive further payments which were not included in the contract, such as changes to the works it had to perform, additional required works, financial damages as a result of delays and such. From the other hand, Israel railways argued that this was a closed contract which binds the parties to act in accordance with its expressed provisions and therefore there is no basis for the additional payment request of the appellant.
Justice Stein has ruled that "the Apropim Judgment applies to each and every contract, but not all contracts were created equal". Stein distinguishes between relational contracts (open contracts), which are phrased in general lines only and are usually relevant when dealing with long term contracts, and closed contracts which exhaust all terms agreed upon between the parties to the contract in a clear manner, and which do not require creative interpretation. Stein continues to rule that when dealing with a closed contract, the duty of the court is to interpret and to apply its terms as they are written, without having to inquire what the parties had deliberated when signing the contract. Therefore, the conclusion from the foregoing is that according to Stein, when dealing with closed contracts, the language of the contract is primary and therefore immune to the introduction of value considerations, which are external to the contract, by the court. Stein adds and states that there is a wide range of cases between these two types of contracts, which will be interpreted by the court using the rules which apply to the two foregoing types of contracts.
The significance in the ruling of Justice Stein is that in closed contracts, the language of the contract is sufficient in order to interpret it. Thus, it is possible to argue that Stein has somewhat minimized the boundaries of the Apropim Judgment so that it does not apply when dealing with a closed contract.
How will Contracts be interpreted from Now on by the Courts?
On the one hand, most legal experts, in the area of contract laws in particular, argue that the ruling of Justice Stein in the framework of the Israel Railways Judgment does not nullify the Apropim Judgment, but rather only refines it by exceeding from it a certain type of contracts.
On the other hand, few believe that the judgment of Justice Stein has in fact nullified the Apropim Judgment and that allegedly we have reverted to a situation where the purposeful interpretation will only be applied in case the language of the contract is insufficient for the purpose of interpreting it.
In light of the foregoing, it is difficult to determine how the courts will interpret contracts which will be brought before them. Probably, there will be no choice but to wait for future judgments issued by the Supreme Court in order to see whether the words of Justice Stein will be implemented in the future as well.
Summary:
The Apropim Judgment has created clear camps in the legal world, between those who see it as a necessary and efficient ruling, and those who see it as introducing uncertainty to the world of contracts. It seems that every few years a judgment is issued which causes people to argue that it nullifies or detracts from the Apropim Judgment, and this time it was the Israel Railways Judgment.
Only in a few years, in retrospect, we will be able to certainly know the influence the Israel Railways Judgment had on the manner of interpreting contracts by the courts in Israel, if it had any at all. In any case, it seems that for the time being the Apropim Judgment is still alive and kicking.
Footnotes
1. Civil Appeal 4628/93 the State of Israel vs. Apropim Housing and Entrepreneurship (1991) Ltd. (published on Nevo 06/04/1995)
2. Civil Further Discussion 2045/05 the Vegetable Grower Association - Cooperative Agricultural Association Ltd. vs. the State of Israel (published on Nevo 11/05/2106); Civil Leave for Appeal 3961/10 the National Insurance Institute vs. Sahar Claims Company Ltd. (published on Nevo 26/02/2012).
3. Civil Appeal 7649/18 Bibi Roads Dirt and Development Ltd. vs. Israel Railways Ltd. (published on Nevo 20/11/2019).
Originally published December, 2019
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