As it emerges from this section, if there is a Fundamental violation - The injured party is entitled to cancel the contract; However, if it has been fulfilled Non-Fundamental Violation, the injured party is subject to two conditions in order to be able to cancel the contract - the obligation to give the violator an extension for a reasonable period of time in order to fulfill the contract, and subject to considerations of justice (Shalev and Adar, at p. 576). Therefore, as a rule, the classification of the breach is of great importance, since this classification has an impact on the manner in which the injured party must act, insofar as it wishes to cancel the contract.
- In our case, as stated, this is a fundamental breach - and therefore the seller had the right, prima facie, to cancel the agreement immediately, without granting an extension of its existence (section 7(a) of the Drugs Law). However, this is not the end of the story. As is well known, the case law has determined that "there may be cases in which insisting on the right to cancel the contract due to its breach will be considered an act of bad faith. Even when it is a fundamental breach, the cancellation of the contract may be considered an act tainted by bad faith, but this is only in exceptional cases" (Civil Appeal 7379/06 M.H.L. Construction Company 1992 inTax Appeal v. Tehulian, para. 62 [Nevo] (September 10, 2009)). In other words, like any other contractual right available to the injured party, the exercise of the right of cancellation is subject to the principle of good faith; Thus, even when we are dealing with a fundamental breach (as stipulated in section 39 of the Contracts Law - General Part, 5733-1973 (hereinafter: the Contracts Law)), "in the fulfillment of an obligation arising from a contract, one must act in an acceptable manner and in good faith; the same applies to the use of a right deriving from a contract"; the matter of Shema, at paragraph 9; Shalev and Adar, at pp. 667-668; Gabriela Shalev and Effi Tzemach Contract Law 86 (4th edition 2019) (hereinafter: Shalev and Tzemach)).
Indeed, as a rule, the action of a party to a contract that seeks to exercise an explicit right that has been agreed upon, and in particular such "It is not hidden between the two" or based "On an artificial interpretation of this word in a contract" - does not, in itself, constitute an action done in bad faith, even if it causes damage to the violating party or brings benefit to the injured party (Matter Hello, at p. 812. See also: Friedman & Cohen, at pp. 367-368). Therefore, and as stated, only in cases Exceptions It will be determined that insisting on the right of cancellation in a situation of a fundamental breach will amount to an action contrary to the principle of good faith (see, Many: Civil Appeal 1368/02 Cement B. Kotik BTax Appeal v. State of Israel - Ministry of Construction and Housing, IsrSC 57(1) 516, 523 and 525 (2002) (hereinafter: The Cement Matter); Civil Appeal 8741/01 Micro Balanced Products v. Halabin Industries Ltd., IsrSC 57(2) 171, 177 (2003) (hereinafter: Micro Matter); Civil Appeal 2080/09 Sharbat Brothers Building Company BTax Appeal v. State of Israel - Ministry of Construction and Housing and Israel Lands Administration, paragraph 29 [Nevo] (June 23, 2013)). The reason for this is simple: the contract is a legal instrument for the distribution of risks, and the court's intervention in the system of rights set forth in it is, to a certain extent, contrary to the principle of freedom of contract - and may even erode the legal certainty on which the parties rely (Civil Appeal 467/04 Yitach v. Mifal HaPais, paragraph 12 [Nevo] (September 1, 2005) (hereinafter: The Matter of 188); Civil Appeal 1966/07 Ariel v. Egged Members Pension Fund Ltd., paragraph 46 [Nevo] (9.8.2010) (Hereinafter: The Ariel Matter)). In particular, the right to cancel a contract, which is available to a party who has been injured by a fundamental breach, expresses the freedom of that party to be released from the contract - and thus it protects its interests, and even sends a deterrent message to the violators by force, in a way that may prevent future breaches (Civil Appeal 512/08 Shufersal on appeal Taxes v. Muhammad Abdel Qader & Co. Ltd., paragraph 14 [Nevo] (16.5.2011)).
- Given the aforesaid, the question arises as to when insisting on the right of cancellation will be considered as a strict insistence on a contractual right, and therefore as it is contrary to the duty of good faith? As the trial court also mentioned in its judgment, in the past it was held that in order to view the party seeking to cancel the contract as acting in bad faith, it must be shown that he acted in an active manner of deception, a failure of the other party. Taking a cunning way, and similar actions (see Shalom, at p. 812). This rule was called the "active rule", since according to which the person claiming a breach of the duty of good faith is required to show an improper active act taken by the other party to the engagement. However, adherence to the aforementioned rule was not always maintained in case law (see, for example, Miguel Deutsch, "Good faith in the use of rights - 'red lines' for the application of the principle?" Iyunei Mishpat 18 261, 271-273 (1993) (hereinafter: Deutsch); Menachem Mautner, "Good Faith and Implicit Conditions," Contract Law 3 350-351 (Daniel Friedman and Nili Cohen eds., 2003)), and in any event, it was softened by a later ruling of this court, in which it was held that the duty of good faith can be breached even in the absence of an active act. This, as explained by Justice Edna Arbel, since the principle of good faith is intended, inter alia, to soften the rigidity of the contractual relationship, against the background of the special circumstances relating to it (Yittach, at paragraph 13). See also: The Ariel case, at paragraph 41; Shalev and Maach, at p. 87; for more information, see: Shalev and Adar, at pp. 672-675; and compare to the rule according to which a breach of a duty of disclosure, even by way of omission, and not only by means of active deception, may constitute a breach of the duty of good faith under section 12 of the Contracts Law: Civil Appeal 7730/09 Cohen v. Bnei Gazit (2000) Ltd., para. 11 [Nevo] (June 6, 2011); Civil Appeal 7721/22 Walter v. Stebholtz, para. 69 [Nevo] (December 24, 2024))
This approach is also correct in my opinion. In my opinion, there is no room to limit and narrow the range of cases in which it will be possible to determine that the duty of good faith was breached, only in those cases in which there was an active act on the part of the injured party seeking to cancel the contract. It is possible, however, that when an active act takes place, the determination that it is a matter of bad faith will be easier from an evidentiary point of view; However, this does not justify, from a material standpoint, the exclusive need for the active rule in order to determine whether or not it is a matter of bad faith. In fact, there may even be cases in which the intensity of the "passive" bad faith exceeds the intensity of the "active" bad faith (see Deutsch, at p. 271).
- One of the situations in which the case law recognized that a party to an agreement cannot sit idly by, but is obligated to cooperate, by virtue of the principle of good faith, in order to deal with the difficulty involved in the performance of the contract (i.e., it recognized the possibility of "passive bad faith"), is when it was the actions of that party that created the said A judgment that illustrates this paradigm well is Civil Appeal 701/79 Shochat v. Lubiniker, IsrSC 36(2) 113 (1981) (for a discussion of the judgment, see: Daniel Friedman, "Performance of a Contract in Face of Concern Regarding the Receipt of Counter-Consideration," Iyunei Mishpat 10 165 (1984); Ariel Porat: The Defense of Contributory Fault in Contract Law 191-197 (1997)). In that case, the sellers undertook to transfer the ownership of the apartment to the buyers by a certain date, which falls before the date of delivery of possession and the completion of the payment of the balance of the consideration. Before the date for the transfer of ownership arrived, the buyers left for Australia, in circumstances that raised concerns that there was a rift between them, and the continuation of the contacts between the sellers and them was done through their representatives. As the date of the transfer of ownership approached, the sellers requested that additional collateral be provided in their favor in addition to what was stipulated in the agreement, due to the concern that arose among them following the developments that occurred among the buyers. Since the collateral was not provided, the sellers refrained from transferring ownership on the date they undertook. The court ruled that when a reasonable concern arose about the non-fulfillment of the contract by the sellers as a result of the conduct of the purchasers, the latter, by virtue of the principle of good faith, had a duty to act to remove the uncertainty by providing appropriate collateral for the performance of their part in the transaction. Since they did not do so, they acted in bad faith, in a manner that justifies changing the order of contractual performance (in that case, by combining the obligation to transfer ownership with the obligation to pay the balance of the consideration, in contrast to the arrangement set out in the contract).
- And what is the remedy for the use of the right to cancel a contract in bad faith? Section 39 of the Contracts Law does not prescribe any provision in relation to the consequences arising from its breach, and the meaning is that these results are not uniform but vary from case to case according to the circumstances of each case (Hermetic case, in paragraph 31 and the references therein). As I have noted in the past, as a rule, the court must order, by virtue of its broad discretion in determining the remedy for a breach of the duty of good faith, "[e]a remedy that will lead to the correction of the lack of good faith" (Civil Appeal 2794/20 Levy v. Malatia Vittorio et Fadlon Ltd., in my opinion [Nevo] (November 6, 2023)). Thus, for example, a violation of section 39 of the Contracts Law may lead to a determination that the action (which was carried out in breach of the duty of good faith) is not at all sophisticated (see: Civil Appeal 59/80 Public Transportation Services Beer-Sheva in Tax Appeal v. The National Labor Court in Jerusalem, IsrSC 35(1) 828, 838-839 (1981); Civil Appeal 9784/05 Tel Aviv-Yafo Municipality v. Goren, para. 32 [Nevo] (August 12, 2009)). Another consequence of a breach of the duty of good faith, in the framework of the exercise of the right of cancellation (even when there is a fundamental breach), may be the imposition of a duty to grant an extension before it is exercised - as in our case.
- It should be noted that the demand to grant an extension before the cancellation of the contract by virtue of the duty of good faith, even in the event of a fundamental breach, does not lay the groundwork under the implications of the distinction between a fundamental breach and a non-fundamental breach; and it does not change the classification of a fundamental breach into a non-fundamental one. As noted, there are two main differences between these types of breaches (fundamental and non-thorough) - one, the obligation to grant an extension before the cancellation of the contract; andsecond, the subordination of the use of the right of cancellation to considerations of justice. Therefore, in a case where a demand arises to grant an extension, only one difference between these two does not exist (granting an extension) - while the other remains the same (subject to considerations of justice). Accordingly, even when a duty arises to grant an extension in the case of a fundamental breach, it is not necessary to examine on the merits whether the cancellation of the agreement is indeed justified (Civil Appeal 187/89 Rubin v. Zohar, IsrSC 45(5) 824, 836 (1991); Civil Appeal 11386/05 Sharbat Malkiel & Sons Building for the People in Tax Appeal v. Almog, para. 13 [Nevo] (July 24, 2007). It should be noted that his scholars and Adar argue that to a certain extent, even in a fundamental breach, considerations of justice are examined, but only those that can be anchored under the duty of good faith. See: Shalev and Adar, at pp. 670-672. See also: Civil Appeal 2825/97 Abu Zeid v. Mekel, IsrSC 35(1) 402, 413-414 (1999)).
In fact, imposing the obligation to give an extension even when a fundamental violation has occurred is not such an exceptional act in nature, since in any case sometimes a fundamental violation "behaves" like a non-fundamental violation (Matter Micro, at pp. 175-176). Thus, for example, when the reasonable time to give a notice of cancellation following a fundamental breach has passed, the injured party is required to give the breach an extension before he can cancel the contract (See, of many kinds: Civil Appeal 464/81 Baruch Shamir Factories Construction & Investment CompanyTax Appeal v. Hoch, IsrSC 37(3) 393, 403-405 (1983); Interest Margaliot, at pp. 657-658; Civil Appeal Authority 7956/99 Housing and Development for Israel on Appeal Taxes v. Ma'ale Adumim Municipality, IsrSC 56(5) 779, 786-787 (2002). For more information and review, see: Shalev and Adar, at pp. 601-607). In addition, and in contrast to our case, there may be cases in which a breach that has been agreed to be fundamental will become a non-fundamental breach by virtue of the conduct of the parties, or with their consent.Friedman & Cohen, at p. 325).