A Revolution in Israeli Contract Interpretation? Not Quite

On January 5, 2025, the Knesset enacted Amendment 3 to the Contracts (General Part) Law, which defines specific contract interpretation rules while differentiating between types of contracts. Newspaper headlines presented the amendment as a “revolution” that overturns the Supreme Court’s Aprofim ruling. In practice, however, this is not the case. Rather, the amendment aligns with existing trends in case law and enshrines them in legislation.

What Does Amendment 3 Say?

Section 25 of the Contracts Law addresses contract interpretation. When a dispute arises  between parties about the meaning of a particular contractual clause, the court interprets that clause according to the principles prescribed in Section 25.

Under the law, a contract must be interpreted according to the parties’ intentions, as implied by the contract itself, and the surrounding circumstances. Since 2011, this section further prescribes that if the parties’ intentions are explicitly implied by the wording of the contract, then the contract will be interpreted solely as written, without any expansive interpretation.

Amendment 3 to the Contracts Law empowers the parties themselves to decide how the contract will be interpreted, as well as differentiates between business contracts and other types of contracts:

Business contracts – The amendment stipulates that if parties have not set rules of  interpretation in the contract, then, by default, business contracts are to be interpreted according to their wording, unless one of two situations exists:

• The actual wording of the contract leads to an unacceptable outcome.
• Various provisions in the contract are contradictory.

Other types of contracts – The amendment stipulates that non-business contracts are to be interpreted according to the parties’ intent, as implied by the contract, and the surrounding circumstances. The relative weight given to the wording of the contract and the circumstances should be based on such considerations as the parties’ relations, including information disparities or special fiduciary relations, the degree of detail in the contract, the parties’ professional experience, and the legal representation available to them at the time of drafting the contract.

A Brief History: Court Rulings Addressing Contract Interpretation

In 1973, the original wording of Section 25 of the Contracts Law prescribed that contracts should be interpreted according to the parties’ intent as implied by the contract and, if such intent is not implied by the wording of the contract, then according to the circumstances. Until 1995, the prevailing interpretation of Section 25 was that the parties’ intent must first be ascertained from the wording of the contract. Only if the wording does not elucidate the parties’ intentions should the contract then be interpreted according to the relevant circumstances.

In 1995, the Supreme Court handed down its ruling in the Aprofim case. The court held that the interpretation of a contract should jointly consider the wording of the contract and the circumstances, i.e., a broader interpretation than in the past. In 2006, an expanded Supreme Court panel ratified the Aprofim ruling in the Vegetable Growers Association case. In that ruling, the justices emphasized that the ultimate objective of contract interpretation is to ascertain the parties’ intent.

In 2011, and considering the sentiments that this ruling might weaken the weight given to the wording of the contract, the legislature amended the law and prescribed that “a contract must be interpreted according to the parties’ intent as implied by the contract and the circumstances, but if the intent is expressly implied by the wording of the contract, then the contract will be interpreted according to its wording.”

In 2019, the Supreme Court handed down its ruling in the Bibi Roads case. The justices distinguished between different types of contracts and gave precedence to the wording of the contract in particular types of contracts. In that case, the court found that the contract in question was a closed contract regulating business relations and should therefore be interpreted strictly according to its wording.

In 2025, the Supreme Court continued this trend in its ruling in the Queen of Sheba Hotel case. The court found that for a closed contract between commercial-business parties, interpretation must adhere to the wording of the contract without room for deviation. The court emphasized the importance of adhering to the wording of the contract to ensure business stability in Israel.

What Does Amendment 3 Change Compared to the Previous Ruling?

Amendment 3 anchors in legislation the Supreme Court’s rulings and an interpretive trend ongoing for quite some time: differentiating between business contracts and other types of contracts and interpreting a business contract according to its wording. The objective here is to ensure certainty and stability in the business world.

Business contracts are characterized by the fact that they are concluded between businesspeople accustomed to doing business and drawing up contracts and who can fully appreciate the risks associated with their contractual engagements. Moreover, business contracts are usually signed after lengthy negotiations, with attorneys debating and quibbling over the wording of each clause, until a final, agreed text is reached and the parties sign the contract. Consequently, the wording of the contract accepted by the parties already reflects their intent, and the contract provides legal certainty to the parties with regard to its terms. In this situation, it is quite logical to interpret business contracts according to their wording.

In contrast, non-business contracts are interpreted according to the parties’ intent in light of a gamut of considerations. The same considerations listed in the legislative amendment actually reflect the considerations that courts apply when interpreting a contract.

Consequently, Amendment 3 to the Contracts Law makes no dramatic changes, but rather anchors the trend and the Supreme Court’s position on contract interpretation in legislation.

Its innovation lies in granting parties additional control to stipulate the rules of interpretation in the contract itself.

So What Is the Real Innovation?

Amendment 3 does not focus on the question of whether a contract should be interpreted according to its wording or the parties’ intent. Rather, its innovation lies in granting parties additional control to stipulate the rules of interpretation in the contract itself. The amendment also clarifies that if the parties had no legal representation at the time the contract was drafted, they will be deemed as not having agreed on the mode of interpretation.

This innovation, which applies solely to new or renewed contracts after the amendment takes effect, further reinforces the principle of freedom of contract, a fundamental principle in Israel’s legal system.

How Should Parties to Business Contracts Proceed from Here?

Amendment 3 emphasizes the practical importance of precise and informed drafting of business contracts, and increases parties’ ability to control in advance how the contract will be interpreted in the event of a dispute.

Considering the clear distinction between business contracts and other types of contracts, and given the new ability to stipulate a mutually agreed upon interpretation mechanism in the contract itself, we recommend that parties to commercial contracts scrutinize the wording of the contract, its degree of closure, and its compatibility with the nature of the engagement and the associated business risks. Explicit rules of interpretation may contribute to legal certainty, reduce exposure to future disputes, and strengthen contractual stability, provided they are adopted with a full understanding of their implications and with the assistance of professional and experienced legal counsel already at the drafting stage.

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Adv. Gal Livshits is a partner in Barnea Jaffa Lande’s Litigation Department.

Our Litigation Department represents local and international corporations and individuals in complex commercial disputes involving substantial financial exposure. The team provides end-to-end litigation support, from strategic planning and pleadings to representation before courts and in arbitration, mediation, and settlement proceedings, with deep expertise in contract disputes and a broad range of commercial, corporate, banking, real estate, infrastructure, antitrust, and technology-related matters.