On January 5, 2026, Amendment No. 3 to the Contracts Law (General Part), 5733-1973 (the “Contracts Law” and the “Amendment”) was approved by the Knesset in the second and third readings. As part of the Amendment, Section 25 of the Contracts Law, which addresses the manner in which a contract is to be interpreted, was amended.
As reflected in the explanatory notes and the deliberations in the Knesset, Amendment No. 3 was intended to restore legal certainty regarding the manner in which a contract is to be interpreted and, seemingly, to reinstate the traditional approach with respect to the concept of “freedom of contract”, while in effect anchoring in primary legislation the legal approach articulated in the Bibi Roads judgment (as defined below).
It should be recalled that in recent decades, case law was dominated by the “Apropim doctrine” (CA 4628/93 State of Israel v. Apropim Housing and Initiatives (1991) Ltd., PD 49(2) 265 (1995)), which constituted a significant milestone in the method of contract interpretation and held that a contract is interpreted in accordance with the parties’ presumed intent, as derived from the language of the contract and the external circumstances. This interpretive approach often led to commercial uncertainty.
It appears that the key “harbinger” preceding this Amendment was the judgment in Bibi Roads (CA 7649/18 Bibi Roads Earthworks and Development Ltd. v. Israel Railways Ltd. (published in Nevo, 20 November 2019) (“Bibi Roads”)) – a landmark decision that marked the beginning of the shift. In that judgment, it was held that not all contracts are created equal, and a distinction was drawn between open relational contracts (Relational Contracts) (which empower the court to read into them new terms and obligations that were not agreed in advance) and closed commercial contracts that are to be interpreted according to their language.
The Amendment grants the parties substantial control over how the contract will be interpreted and provides that they are free to determine the method of interpretation and the evidence that will be admissible for purposes of interpretation. If the parties do not agree among themselves, the contract is to be interpreted in accordance with the provisions of the law (Section 25(a)(1) of the Contracts Law).
The Amendment also reflects a clear distinction between consumer and private contracts, on the one hand, and commercial contracts, on the other – i.e., contracts entered into between sophisticated parties represented by legal counsel.
In commercial contracts, the court will be almost entirely precluded from relying on external circumstances, and will instead rely on the language of the contract. Accordingly, a commercial contract that does not set out provisions regarding the method of interpretation will be interpreted based on its language alone. This is subject to the exception that, from the language of the contract, an outcome arises that is inconceivable/unacceptable, or a contradiction exists between different provisions thereof (Section 25(a)(2) of the Contracts Law).
By contrast, in contracts that are not commercial contracts (for example, a standard form contract, an employment contract, or a collective agreement), the contract will be interpreted in accordance with the parties’ presumed intent, as implied from the contract and the circumstances of the matter (Section 25(a)(4) of the Contracts Law). It was further provided that, in such cases, the relative weight to be given to the language of the contract and to the circumstances of the matter will be based on: the relationship between the parties (including information asymmetries or special relationships of trust); the level of detail in the contract; the parties’ professional experience; and the legal representation they had in connection with drafting the contract. It is also important to note that the Standard Contracts Law, 5743-1982 (the “Standard Contracts Law”) will continue to serve as a “safeguard” against exploitation of weaker parties, and that the Amendment does not derogate from the court’s authority to cancel an unfair/abusive term in a standard form contract even if its wording is entirely clear (Section 3 of the Standard Contracts Law).
Accordingly, the purpose of the Amendment appears to be to balance the need to restore legal certainty for commercial parties – who have the tools and resources (including legal representation) to determine for themselves the interpretive method that will govern the contracts they enter into – against private and other parties who are inexperienced and unrepresented, for whom the Apropim doctrine will continue to apply in order to afford them optimal protection (subject, of course, to the criteria set in Section 25(a)(4) of the Contracts Law).
It is also important to note that it was provided that parties who are not represented will not be able to define the manner in which the contract will be interpreted, and that it will not be possible to exclude a contract from Section 25(b1) of the Contracts Law, which provides that where multiple interpretations are possible and one party had an advantage in shaping the contractual terms, the interpretation against that party will be preferred – all for the purpose of protecting parties to a contract between whom there are significant disparities in bargaining power.
The Amendment will apply to contracts signed after January 6, 2026 (the date of its publication in the Official Gazette), as well as to contracts renewed after that date. This means that contracts signed prior to that date will, in all likelihood, continue to be interpreted in accordance with the Apropim doctrine and Bibi Roads. Although the Amendment does not apply retroactively, it is possible that the courts will adopt the “spirit” of the Amendment when interpreting older contracts as well, particularly closed commercial contracts, in a manner consistent with the trend that began in Bibi Roads.
As to the practical implications – which mostly concern commercial contracts:
- It is very important from now on to ensure, when drafting the contract, that any understanding between the parties, appendix, or oral undertaking is documented in writing (since the courts are now instructed under the Amendment to prefer the written word over any other circumstantial interpretation (subject to the foregoing)).
- It is also advisable to include an explicit clause in contracts specifying the desired method of interpretation.
- Commercial contract declaration – it is also advisable to include an explicit clause stating that: “This agreement is a commercial contract within the meaning of Amendment No. 3 to the Contracts Law” and that “the parties agree that its interpretation shall be based on its language alone.”
- Maintaining records of the parties’ negotiations is important (in case the language of the contract is deemed unclear).
- Use clear definitions to the extent possible and reduce the use of open-ended terms (such as “reasonable time”, “to the satisfaction of the parties”, etc.).
In summary, Amendment No. 3 to the Contracts Law constitutes a positive change as it relates to the commercial arena, while also preserving the necessary balance and leaving broader discretion to the court in interpreting contracts where there are disparities in power between the parties or in other special circumstances.
To view the amendment to the law, click here.
The content in this update is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis.
