The Israeli Ministry of Justice recently published a memorandum of law amending the Contracts Law, which seeks to add unique rules of interpretation to business contracts. In the economic press, we saw dramatic headlines claiming Justice Minister Yariv Levin is trying to overturn the Supreme Court’s Aprofim ruling through this amendment. In practice, however, this amendment is not that dramatic. Rather, it aligns with logical reasoning and recent court rulings, thereby maintaining consistency in the legal landscape.
What Does the Legislative Amendment Say?
Section 25 of the Contracts Law addresses contract interpretations. If a dispute arises between the parties about the meaning of a particular clause in the contract, the court will interpret that clause according to the principles prescribed in section 25 of the Contracts Law.
Section 25(a) prescribes to interpret a contract according to the parties’ intentions, as implied by the contract and according to the circumstances. Since 2011, this clause further prescribes that if the language of the contract explicitly implies the parties’ intentions, the contract should be interpreted as written.
The proposed amendment seeks to stipulate that business contracts be interpreted, by default, according to the language of the contract (without giving weight to the parties’ intentions), unless one of the following three situations exists:
- Such interpretation will lead to an unacceptable result.
- Various provisions of the contract are contradictory.
- The contract cannot be executed according to this interpretation.
Within this context, it is important to keep in mind that the amendment applies solely to business contracts. A business contract is a contract that fulfills the following conditions:
- Either all parties to the contract are businesses (individuals/entities who sell assets or services) whose annual turnover exceeds ILS 4 million, or the value of the transaction in question exceeds ILS 15 million.
- All parties to the contract acted according to legal advice.
- It is not a standard form contract.
A Bit of History – Court Rulings Addressing Contract Interpretation
Initially, section 25(a) of the 1973 Contracts Law instructed contract interpretation based on parties’ intentions as implied by the contract or inferred from the circumstances. Before 1995, the prevailing interpretation was to derive the parties’ intentions from the contract’s language, and, only when unclear, to derive them from the circumstances.
In 1995, the Supreme Court handed down its ruling in the Aprofim case, stipulating that the interpretation of a contract should jointly consider the language of the contract and the circumstances. An expanded Supreme Court panel ratified in 2006 the Aprofim ruling in the Vegetable Growers Association case. In that ruling, the justices emphasized that the ultimate objective of contract interpretation is determining the intentions of the parties to the contract.
Considering the sentiments that this ruling might weaken the weight given to the language of the contract, the legislature amended the law in 2011. It stipulated that “a contract must be interpreted according to the parties’ intentions as implied by the contract and the circumstances, but if their intentions are expressly implied by the language of the contract, then the contract must be interpreted according to its language.” This is the wording of the law to this day.
In 2019, the Supreme Court handed down its ruling in the Bibi Roads case, in which the justices differentiated between various contracts and gave precedence to the language of the contract in particular types of contracts. In that case, the Supreme Court found that the contract in question was a closed contract regulating business relations and, accordingly, ruled to adhere to the language of the contract when interpreting it.
The current proposed amendment specifically distinguishes business contracts from other contracts and prescribes to interpret such contracts according to the language of the contract, with the goal of creating greater certainty in the business world.
Differentiation between Business Contracts and Other Contracts
The innovation in the proposed amendment to the Contracts Law is essentially its differentiation between business contracts and other contracts. After all, parties are constantly making written and oral contracts under various circumstances. However, business contracts have unique characteristics. They involve experienced individuals well versed in business operations who can fully appreciate the risks associated with their contractual engagements. Moreover, business contracts are usually signed after lengthy negotiations accompanied by attorneys who debate and quibble over the wording of the various clauses in the contract until the final wording is agreed upon. Consequently, the language of the contract accepted by the parties already reflects their intentions, and the contract creates legal certainty for the parties with regard to its terms. In this situation, it is quite logical to interpret business contracts according to their language.
Drafting of Contracts Prospectively
As stated, the legislative amendment is relevant solely to business contracts and changes nothing for other types of engagements.
If the legislative amendment passes and comes into effect, there will be less room for judicial intervention in the interpretation of business contracts, and the language of the contract will take precedence. Most business entities already know this and, in any case, retain attorneys to assist with the contract negotiations, preferring clear and explicit language to ensure business certainty.
Nonetheless, in some negotiations, disputes over specific conditions may intentionally lead parties to leave language vague. This allows them to revisit their arguments in the event of a future dispute. If the legislative amendment passes, it will become even more important to draft contracts explicitly and unambiguously.
So, What Is the Fuss About?
Absolutely nothing. The proposed amendment merely anchors in law the Supreme Court’s message in the Bibi Roads case and creates greater certainty for parties engaging in business contracts.