In the realm of Israeli contracts law, a proposed legislative amendment by the Israeli Ministry of Justice is poised to revolutionize the way courts interpret agreements. This amendment, if enacted, would shift the focus away from divining parties’ intentions toward a strict textual interpretation of contracts. This is a seismic shift that has ignited debate and promises to redefine the landscape of contracts law in Israel. In the below, we would briefly review some important phases in the development of contracts interpretation in Israel, as well as present the proposed amendment and its potential impact.

The landmark case of CivA 4628/93 The State of Israel v. Apropim Housing and Promotions (1991) Ltd. (1995) (“Apropim”) has long served as a foundational precedent for interpreting contracts. This judgment, issued under the leadership of then-Chief Justice Aharon Barak, introduced a dynamic approach to contract interpretation that emphasized discerning the parties’ intentions beyond the contract’s literal language. The decision held that in cases of ambiguity or conflicts between contract language and the parties’ intent, the latter should prevail. Furthermore, if the parties’ intent cannot be ascertained, the court may resort to industry norms and principles of reasonableness and good faith. Over the years, “Apropim” has been reaffirmed and strengthened by Supreme Court decision CivAH 2045/05 Organization of Vegetable Growers v. State of Israel (2005).

Despite the legislature’s attempt to address the principles laid down in “Apropim” by amending the law in 2011, the core approach to contract interpretation remained unaltered in practice.

However, in 2019, the Supreme Court issued another significant ruling in the case of CivA 7649/18 Bibi Roads, Soil and Development Ltd. v. Israel Railways Ltd. (2019) (“Bibi Roads”). Justice Alex Stein made a noteworthy statement, suggesting that “the Apropim doctrine applies to every contract, but not all contracts are born equal” (p. 12). He stated that contracts with clearly defined terms do not require creative interpretation, emphasizing that contracts should be interpreted based solely on their language.

While some legal scholars and practitioners initially interpreted Justice Stein’s remarks as a shift in the Supreme Court’s stance on contract interpretation, a subsequent case in 2020 clarified the Supreme Court’s position. President of the Supreme Court, Justice Esther Hayut, asserted that the “Bibi Roads” ruling did not alter the existing legal framework. Instead, it underscored the central role of the contract’s language in the interpretive process.

In light of the above, the Israeli Ministry of Justice has proposed on September 11, 2023, a legislative amendment to redefine the way contracts are interpreted by courts. Under the proposed amendment, courts would be required to interpret “Commercial Contracts” exclusively based on the contract’s literal language. “Commercial Contracts”, as defined in the proposed amendment, include agreements between parties engaged in selling property or providing services on a regular basis, with an annual turnover exceeding 4 million NIS, or contracts with a value exceeding 15 million NIS. It is further stipulated that the parties must have received legal counsel for the contract.

However, the proposed amendment contains several exceptions that allow courts to depart from strict textual interpretation. These exceptions include situations where the interpretation leads to an unreasonable result, where there are conflicting provisions in the contract, and where it is impossible to fulfill the contract according to its literal terms. Additionally, contracts between individuals and commercial entities, as well as standard form contracts, would remain exempt from the amendment’s provisions. Parties would also have the option to explicitly exclude the application of the proposed amendment in their contracts.

In summary, the proposed amendment seeks to establish a more rigid framework for contract interpretation in Israel, emphasizing a strict reliance on the contract’s literal language. The ongoing debate surrounding this proposed amendment will undoubtedly shape the future of contracts interpretation in Israeli law.

It should also be emphasized that the legislative process is still in its initial stage and has not yet reached the Knesset, the Israeli Parliament. Therefore, the legislative process is expected to continue for a while and the particulars of the amendment are likely to change to a certain extent during the process.