Has the “Apropim Doctrine” Been Overturned?
Is There Greater Certainty Today in Contract Interpretation?
Introduction
Several weeks ago, Amendment No. 3 to the Contracts Law (General Part), 1973 (the “Contracts Law”) entered into force, introducing a significant amendment to Section 25 of the Contracts Law.
Over the past several decades, the primacy of contractual language has been steadily eroded, with the watershed moment being the Apropim doctrine (CA 4628/93 State of Israel v. Apropim Housing and Development (1991) Ltd.), which was handed down in 1995 (the “Apropim Case”).
From that point onward and until today, courts have tended to focus on the objective purpose underlying the formation of the contract, while assigning limited weight to the parties’ intent at the time of execution, a process that has not contributed to legal certainty.
Over the years, diverse judicial rulings, together with various legislative actions, further increased uncertainty. Against this backdrop, Amendment No. 3 represents an attempt by the legislature to attribute greater weight to the parties’ intent, particularly where sophisticated and experienced parties are concerned.
Background
Approximately thirty years ago, in 1995, the Israeli Supreme Court ruled in the Apropim Case, per then President Aharon Barak, that a court is not limited to the literal wording of a contract or to the expressions set forth therein when interpreting it. Rather, the court must strive to ascertain the true intentions of the parties, which serve as the ‘guiding star’ for interpretation.
The Court further held that the parties’ intent is the guiding principle for interpretation and that, in the event of a conflict between the contractual language and the court’s conclusion regarding the parties’ intent, the latter shall prevail.
In other words, the final interpretation of a contract was to be determined in accordance with the parties’ presumed intent as reflected in the surrounding circumstances. Where the literal language contradicts the parties’ intent or the objective purpose of the contract, the latter would prevail.
From Then Until Today
Over a period of thirty years, the Apropim Case has had a significant impact on many and varied areas of law. As a result, substantial commercial contracts, private agreements and even short legal documents such as undertakings were, in some cases, interpreted in a manner inconsistent with their clear wording once disputes arose between the parties.
In many instances, courts attributed substantial weight to the parties’ subjective intent, even where such intent was not reflected in the contractual text.
This approach generated considerable criticism, with the most significant argument focusing on the harm to legal certainty, which plays a critical role in the commercial business world that seeks predictability and stability.
Another central argument concerned the infringement of freedom of contract. Contracting parties, particularly sophisticated and legally represented ones, are entitled to agree upon a contract based on their own discretion and the risk allocation they consider at the time of execution. When a court rules that the contract should be interpreted differently, this significantly undermines the contractual freedom of those parties.
The Identity of the Parties, the Nature of the Contract and Its Complexity
In legal discussions concerning the appropriate approach to contract interpretation, courts have repeatedly held that each contract must be examined individually, taking into account, inter alia, the circumstances of its formation, the level of professionalism of each party and whether either party was represented by legal counsel.
Accordingly, a private individual entering into a simple contract without legal representation cannot be treated in the same manner as a commercial entity entering into a complex and substantial agreement, one of many, while receiving extensive legal representation during the negotiation process.
Several years ago, in the “Bibi Roads” case (CA 7649/18 Bibi Roads Earthworks and Development Ltd. v. Israel Railways Ltd.), decided in 2019, the Supreme Court held that “not all contracts are created equal,” and that a distinction may be drawn between a relational contract, which allows for a broader interpretive margin departing from the contractual language, and a closed contract, in which the court is inclined to adhere more closely to the clear wording of the agreement.
In that case, an additional distinction was drawn between a consumer contract, where interpretation affords greater weight to the circumstances of its formation, and a commercial contract between experienced entities, where decisive weight is given to the contractual language.
Be that as it may, the Court has repeatedly stated that the foregoing rulings did not materially alter the Apropim doctrine, which already allowed for consideration of the circumstances under which the contract was formed, the nature of the contract and the identity of the parties.
Incidentally, this issue arose once again with particular force in CA 7/24 Moshe Levi v. Queen of Sheba Eilat Assets Ltd., decided several months ago (which we addressed in our recent December publication on Contractual Stability and Hotel Management in an Integrated Complex), in which the court likewise tended to refrain from adopting an expansive interpretation of the contract entered into by the parties, instead preferring the clear contractual language, inter alia in light of the identity of the parties and the complexity of the contract.
Amendment No. 3 to the Contracts Law
It appears that, through Amendment No. 3, the legislature once again seeks to narrow the scope of judicial discretion and reduce court intervention in the interpretation of contracts, in the process of identifying the parties’ presumed intent.
First, the amendment establishes a form of default rule, whereby the circumstances and evidence that may be relied upon by the court in interpreting a contract are limited to those agreed upon by the parties. This default rule constitutes a significant change, as it eliminates the courts’ automatic recourse to drafts, prior agreements, customary practices and similar materials.
Second, the court has effectively adopted and expanded the interpretive approach relating to the identity of the parties and the nature of the contract. The legislature expressly provides that a commercial contract shall be interpreted in accordance with its wording. Only in exceptional cases, where the result would be unreasonable or where there is an evident contradiction between its provisions, will the court broaden its interpretive inquiry.
In light of the above, our recommendations are clear and primarily concern commercial contracts:
- First, in the context of commercial agreements, it is more important than ever to ensure that the agreement is clear and that the parties’ intent is articulated in an explicit and unambiguous manner.
- Second, parties should ensure that documentation of the negotiation process can be presented in the future, should this be required for interpretive purposes.
- It is advisable to consider including a specific provision addressing the manner in which the contract is to be interpreted.
- Finally, in borderline cases, consideration should be given to expressly stating within the contractual provisions that the agreement constitutes a commercial contract, in a manner that limits expansive interpretation departing from the contractual language.
Conclusion
Amendment No. 3 to the Contracts Law, which was recently enacted, clarifies the appropriate interpretive principles applicable to contracts, within the tension between contractual language and the circumstances of formation.
The amendment takes a significant step away from the Apropim doctrine adopted nearly thirty years ago. It now remains to be seen how the courts will apply this amendment, what interpretation they will give to contracts in light of the amendment and whether it will indeed contribute to commercial stability and legal certainty within the Israeli business community.
For further information please contact:
Hanan Efaim, Adv. Aviad Bergrin, Adv.
Office: 03-691-6600 Office: 03-691-6600
Email: hanan@ekw.co.il E-mail: aviad@ekw.co.il