JERUSALEM (VINnews) — On Monday night, a historic amendment to the “Contracts Law” was approved in the Knesset’s second and third readings, thereby abolishing the “Apropim Doctrine” that was established 30 years ago. This doctrine was one of the rulings that most strongly symbolized the “constitutional revolution,” at the heart of which stood the judicial activism led by former Supreme Court President Aharon Barak. The amendment enacts a change in the way contracts are interpreted by the courts, and the weight given to the wording of the contract in the interpretive process.
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On April 6, 1995, then–Supreme Court President Barak ruled in a landmark decision on contract interpretation in Israeli law, known as the “Apropim Doctrine,” that the Contracts Law does not require a two-stage interpretation, first examining the contract’s wording and only then, if necessary, examining the external circumstances in which it was drafted. Instead, both processes must be carried out simultaneously. As Barak ruled, one must seek out “the true and shared intention of the parties without being limited to the expressions or terms they used. Where there is a conflict between the wording of the contract and the intent of its makers, the latter prevails.”
That ruling became binding precedent, but has now been overturned 30 years later.
The historic ruling, which became binding law, caused an uproar in Israel’s business sector at the time, on the grounds that it undermines the principles of commercial certainty. It has been argued that the criticism is shared by the majority of lawyers. According to this critique, whereas prior to the ruling a party could rely on clear contractual language, following the Apropim decision even this certainty became subject to interpretation, as the ruling grants a very broad range of interpretive possibilities and great flexibility beyond the written text. Some have argued that people are reluctant to turn to the courts to enforce contracts because it is difficult to predict the outcome due to the Apropim Doctrine.
One of the prominent critics was former Justice Minister Professor Daniel Friedmann. According to him, the theoretical principles underlying the Apropim Doctrine are correct; however, the expansive application of these principles transformed rules intended for exceptional cases into rules governing the norm, in a way that “created a sense that no contract is clear, that everything is open, and that any outcome can be achieved through interpretation.”
Additional and more general criticism was expressed by Professor Gabriela Shalev and Dr. Efi Tzemach. According to them, the Apropim Doctrine harms the proper allocation of power between the courts and the contracting parties and deviates from the fundamental purposes of contract interpretation law. They stated:
“One cannot ignore the fact that the Apropim Doctrine assigns an important—too important—a role to the judge and the interpreter in shaping the parties’ intent… and gives excessive weight to the principle of good faith in the processes of interpretation and gap-filling. It is worth recalling that the principle of freedom of contract is—still—the most important principle in contract law. This principle determines not only the freedom to enter into contracts and shape their content, but also the validity and binding force of contracts and the protection afforded to them by the legal system. The principle of freedom of contract… requires refraining from interference in a contract entered into of [free] will… Through purposive interpretation, the powers of the court to intervene in contracts are expanded and even to reshape their terms, at times contrary to the clear will of the parties. A contract created by the parties is no longer under their control.”
Now, in accordance with the amendment approved yesterday by the Knesset, it has been determined that the manner in which a contract is interpreted will be “as agreed by the parties.”
At the height of efforts to advance the judicial reform legislation, on September 11, 2023, one day before a Supreme Court hearing on the abolition of the reasonableness doctrine, Justice Minister Yariv Levin presented the proposal to amend the Contracts Law. Together with Constitution Committee Chairman Simcha Rothman, he proposed that both the method of interpreting a contract and the admissible evidence for its interpretation be subject to the agreement of the parties, unless they are unrepresented or the contract is a standard-form contract.
It was determined that if the parties do not agree on the method of interpretation, different interpretive rules will apply depending on the type of contract. A business contract will be interpreted solely according to its wording, unless such an interpretation leads to an absurd result or if contradictions arise between different provisions of the contract.
Alongside the basic rule of interpretation by agreement, the amendment specifies how a contract should be interpreted when no such agreement exists. Two different interpretive rules are proposed: one for business contracts and another for other types of contracts. Non-business contracts, employment contracts, collective agreements, and standard-form contracts, even if they include a different interpretive agreement, will be interpreted according to the inferred intent of the parties, as derived from the contract and the surrounding circumstances.
It was further determined that the relative weight of the contract’s wording and the surrounding circumstances will be based, among other things, on factors such as: the relationship between the parties (including information gaps or special trust relationships), the level of detail in the contract, the parties’ professional experience, and the degree of legal representation they received when drafting the contract.
The explanatory notes accompanying the approved bill stated: “The purpose of the proposed amendment is to establish interpretive rules tailored to business contracts as opposed to other contracts, in line with judicial trends that distinguish between different types of contracts, in order to provide greater certainty in the business world and help reduce the burden on the courts.”
Justice Minister Yariv Levin, who initiated the amendment, argued that it constitutes a “historic breakthrough for the business world that will provide certainty.” According to him, “The Apropim Doctrine established by former Supreme Court President Aharon Barak created a reality of absolute uncertainty in contract interpretation, in which judges retroactively determined what the parties intended, contrary to what was written in the contract, and sometimes even contrary to what the parties themselves claimed. This led to uncertainty, excessive litigation, higher transaction costs, and even the inclusion of jurisdiction clauses outside Israel in order to reduce uncertainty. The move will also prevent unnecessary litigation and reduce the burden on the courts.”
Constitution Committee Chairman Simcha Rothman stated: “A perfect contract does not exist, and probably neither does a perfect law. The sword of the Apropim Doctrine and its various expressions has hovered over contract law in the State of Israel for many years. Even previous attempts to remove it did not approach the depth, length, and level of detail of the discussion held on this proposal, including public participation and the involvement of all relevant professional bodies. Until now, the courts intervened and denied the parties’ basic freedom of contract. The debate between ‘truth’ and ‘certainty’ will continue, but the Knesset’s determination that the parties are sovereign and have the power, ability, and authority to decide will grant them control over defining their relationship.”