Israeli Contract Law, following European legislation and other Western legislation with centuries-old traditions, originally established that a contract must be interpreted first according to the intention of the parties arising from the contract, and only thereafter according to external circumstances.
In the 1990s, in a series of precedents (e.g., the Apropos rule or the Vegetable Growers Organization rule), the courts ignored the "two-stage approach" established by law and shifted to a "one-stage approach." Under this method, the court examines the contract and its circumstances together—an approach that drew significant criticism. Critics argued that this granted the court excessive interpretive freedom, fatally harming legal certainty. This meant, critics would say, that in practice, in certain cases, the judge first shoots the arrow according to what they deem correct and just, and only then draws the target around it. Did we say "correct and just"? Well, what is correct and just can be learned from the circumstances, yet each party views the circumstances differently, and it is likely that none of these perspectives represent the precise factual truth.
About a year ago, the legislature intervened and amended the Israeli Contract Law to clarify that contracts must be interpreted using the two-stage method. But have the courts accepted the legislature's position?
Amendment No. 2 to the Contracts Law (General Part), 1973, was adopted by the Knesset with great fanfare in January 2011. The purpose of the amendment, as explained by the legislature in the bill's explanatory notes, was to restore legal certainty. The legislature explicitly directed the courts to examine the intention of the parties in the first stage from the words and language of the contract itself; only where the first stage does not lead to a clear conclusion should one turn to the second stage, in which the parties' intention is learned from circumstances external to the contract.
About a year ago, we published an article discussing whether Amendment No. 2 would indeed overturn the Apropos rule. Over the past year, a long line of judgments was handed down in lower courts where it appeared that, in practice, the courts were ignoring the amendment.
On February 26, 2012, the first Supreme Court judgment on this matter was published (LCA 3961/10 The National Insurance Institute v. Sahar Claims Services Ltd.), performing an in-depth analysis of the amendment's impact on the Apropos rule. The Honorable Justice Neal Hendel ruled that the amendment was intended to change the Apropos rule and limit judicial discretion. However, Justice Hendel found himself in the minority. The majority opinion in the judgment ruled that despite the amendment by the Knesset, a contract is to be interpreted through a parallel and joint examination of the contract's language and the circumstances of the matter, subject to an interpretive presumption—which is rebuttable—that the interpretation of the contract is the one that aligns with the simple, ordinary, and natural meaning of the text. This presumption may be rebutted in cases where the circumstances show that the language is not clear and simple, and thus may be interpreted in ways other than those that seemed clear at the outset of the interpretive process.
In other words: The Supreme Court effectively ruled that the legislature's position, as implied by the amendment, is that the amendment does not bring about a real change in the method of interpretation established by the Court many years prior to the legislation. With all due respect, in our opinion, this interpretation by the Supreme Court majority explicitly contradicts the explanatory notes of the amendment and perhaps even the language of the Law itself.
It should be noted that these days, the Constitution, Law and Justice Committee is working intensively and thoroughly on preparing the "Property Law Bill" (the Civil Code) for its second and third readings. This is a bill comprising 542 pages aimed at a full civil codification, as is customary in Europe, of civil law, replacing a long list of existing laws. One can only hope that this legislative process will conclude as soon as possible and that its result will be a fluent and carefully drafted piece of legislation that will increase legal certainty and prevent the need for the extensive application of legal interpretation by the courts.
Until then, we can only reiterate our recommendation to draft contracts in clear, simple language, using lawyers specializing in this field.