Controlling Standard Contracts – The Israeli Version
Sinai Deutch*
The diverse attempts to regulate standard form
contracts within the confines of a given legal
tradition have not been very successful. In
consequence, there has been a greater readi-
ness to take a comparative approach in this
area of law than in others. This article takes
such a comparative approach to standard form
contracts. Special attention is given to the
1982 amendments to the Israeli Standard
Contracts Law with the aim of suggesting it
as a model for adoption, especially in juris-
dictions which lack a policy of administrative
control.
La r~glementation de contrats-types dans le
cadre d’une tradition juridique a fait l’objet
de plusieurs tentatives sans toutefois offrir de
veritable solution. Face a cette situation,
l’examen de ce domaine de droit sous l’angle
du droit compar6 se r6v~le tout i fait appro-
pri6. L’auteur adopte une telle approche dans
l’6tude des contrats-types. I1 porte une atten-
tion particulire i rendroit des amendements
A la Standard Contracts Law israblienne dans
le but de retenir cette derni~re comme un
module pour lesjuridictions qui ne possadent
pas de politique en mati~re de contr6le
administratif
*Of the Faculty of Law, Bar-Ilan University, Israel.
McGill Law Journal 1985
Revue de droit de McGill
1985]
CONTROLLING STANDARD CONTRACTS
459
Synopsis
Introduction
I. The Definition and Scope of Standard Contracts Under Israeli Law
A. The Definition
B. Analytical Background
C. Broadness of the Definition
D. Elements not Required Under the Definition
E. *Negotiated Terms
E Terms not Subject to Control by the Statute
II. Judicial Review and Abstract Pre-Screening of Standard Contracts Under
Israeli Law
A. The Purpose Clause
B. The Broad Scope of Application
C. Presumptive Unenforceability
D. Abstract Pre-Screening by the Tribunal
Conclusion
Introduction
The use of standard form contracts is wide-spread in the modem mar-
ketplace.1 Although the standard form is more than a hundred and fifty
years old,2 its recognition as a special type of contract in case law and
‘See W.D. Slawson, “Standard Form Contracts and Democratic Control of Lawmaking Power”
(1971) Harv. L. Rev. 529, claiming that “more than ninety-nine percent of all contracts now
made are probably standard form contracts”. But see T.D. Rakoff, “Contracts of Adhesion:
An Essay in Reconstruction” (1983) 96 Harv. L. Rev. 1174 at 1189 n. 57 to the effect that
such a claim is not necessarily accurate. Rakoff nevertheless “speculates” that standard form
contracts constitute a majority. See also S. Deutch, Unfair Contracts: The Doctrine of Un-
conscionability (1977) at 1 n. 1. Almost all cases dealt with under the doctrine of unconscion-
ability have involved standard form contracts.
2See generally P.S. Atiyah, The Rise and Fall of Freedom of Contract (1979).
McGILL LAW JOURNAL
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legislation began a mere twenty-five years ago. 3 This fact is the more re-
markable when it is noted that legal scholars have dealt with this issue from
the very beginning of this century.4
Despite efforts to regulate this area,5 a general feeling of dissatisfaction
exists with what little has been achieved. 6 The lack of a coherent legal
tradition on the subject, together with the conviction that more can be done
to regulate it, has led to a greater readiness to take a comparative approach
in this area than in others.7 Some of the solutions adopted by case law and
legislation were undoubtedly influenced by foreign legal systems. The Israeli
innovations on this subject deserve serious consideration as a model for
adoption.
The 1982 Israeli Standard Contracts Law8 is not entirely new legisla-
tion. 9 Rather, it is an amended version of the 1964 Standard Contracts Law0
which provides for major changes in concept, theory and practice. The 1964
Law was a pioneering statuteI which regulated standard contracts directly
through legislation and by imposing a dual layer of judicial and adminis-
trative control. The Israeli legal system was able to deviate at a relatively
early stage from the traditional attitude to standard contracts because at
that time Israeli contract law was in a stage of transition from the influence
3See, e.g., Henningsen v. Bloomfield Motors Inc., 161 A.2d 69 at 86 (N.J.S.C. 1960).
4Beginning with R. Saleilles, De la declaration de volonte (1901) at 229.
-In Europe, regulation has been achieved by statutory intervention. See E.H. Hondius, “Un-
fair Contract Terms: New Control Systems” (1978) 26 Am. J. Comp. L. 525. In common law
countries control has been accomplished primarily through the implementation of judicial
doctrines such as those of unconscionability under U.S. law and “unequal bargaining power”
under English and Canadian law.
6Many articles support this viewpoint. See for example A.L. Rotkin, “Standard Forms: Legal
Documents in Search of an Appropriate Body of Law” [1977] Ariz. St. L.J. 599; R. Dugan,
“Standardized Form Contracts – An Introduction” (1978) 24 Wayne L. Rev. 1307; Rakoff,
supra, note 1. For criticism of European approaches, see Hondius, supra, note 5, and of the
English Unfair Contract Terms Act 1977, see S.M. Waddams, “Legislation and Contract Law”
(1978-79) 17 U.W.O.L. Rev. 185 at 193-8.
7Many comparative publications deal with this subject. See 0. Prausnitz, The Standardiza-
8Sefer HaHukin No. 1068 (7 December 1982) at 8 [hereinafter cited as 1982 S.C.L.]. The
official translation of the Law into English has not yet been published. I therefore use the
unofficial translation of the Ministry of Justice, incorporating changes based on the official
translation of the 1964 version.
tion of Commercial Contracts in English and Continental Law (1937) and later works.
9See the introduction of the 1981 Draft of the Standard Contracts Law, prepared by the
Ministry of Justice, Hatza’ot Hok 5742-1981 at 29.
105724-1964, Laws of the State of Israel, vol. 18 at 51 [hereinafter cited as 1964 S.C.L,].
“With the exception of the Italian law (Italian Civil Code (1942) ss 1142 and 1361). See G.
Alpa, “Protection of Consumers Against Unfair Contract Terms: Legislative Patterns of Con-
trolling Adhesive Contracts in Europe” (1979) 15 Willamette L. J. 267 at 270-2.
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CONTROLLING STANDARD CONTRACTS
of English common law to a more original statutory pattern,’ 2 and therefore
was not bound by traditional concepts. Once the need for special control
was recognized,13 it was quickly implemented through a novel form of
legislation.
Initially, the 1964 Law had little success. Since it was a pioneering legal
device, there were no case law precedents to follow and no other statutes
with which it could be compared. Caution was inherent in its drafting,
primarily due to lack of experience. As a result, some of the potential ad-
vantages of such legislation were not realized. 14 Two decades of conservative
interpretation by the courts almost reduced the statute to a “dead letter”.
Meanwhile, during the 1960’s and 1970’s, recognition of standard forms
as a separate type of contract grew in both case and statutory law in many
countries, 15 and by the 1980’s the time was ripe for substantial amendment
to the Israeli Law. 16 Academic criticism of the statute and its interpretation
by the courts finally led to a new draft17 which was enacted in December
1982 and came into force in June 1983.
The innovations and amendments to the Standard Contracts Law were
based on experience gained from fifteen years of practice with the original
version, and a new conceptual framework. The new Law provides for a
system of guided judicial review instead of regular judicial review, and
strengthens the device of pre-screening standard contracts in the Tribunal
established for this purpose. The definitions in, and scope of, the statute
are clarified to facilitate application of its provisions.
I. The Definition and Scope of Standard Contracts Under Israeli Law
One of the contributions of the Israeli Law to the area of standard
contracts is the clear definition of the subject, and the precise delineation
of the scope and purpose of the Law. The definition is of great importance
12See A. Bin Nun, “The Israeli Law on Standard Contracts” in Israeli Reports on the Eighth
International Congress on Comparative Law (1970) 107 at 108.
13G. Tedeschi & A.W. Hecht, “The Problem of Standard Contracts” (1959) 16 HaPraklit 132
[a report of the Committee appointed by the Ministry of Justice in Hebrew].
14See S. Deutch, “Standard Contracts Act: Failure and Recommendation” (1980) 1 Bar-Ilan
Legal Stud. 62 at 65-8 [in Hebrew].
IsSee supra, note 5.
‘6See Deutch, supra, note 14; D. Friedman, “Reflections on the Topic of Standard Contracts”
(1979) 6 Iyunei Mishpat 490 [in Hebrew]; D. Kretzmer, “Notes on the Standard Contracts
Law, 5724-1964, in View of its Amendment” (1970) 3 Mishpatim 414 [in Hebrew]; G. Shalev,
Exemption Clauses (1974) at 36-44 [in Hebrew].
17The influence of the above articles on the new Draft were mentioned in the official intro-
duction to the Draft. See supra, note 9 at 28. Such an acknowledgement by the Ministry of
Justice is quite rare in Israeli legislation.
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in statutory law,18 because only those agreements defined as standard con-
tracts will be subject to the special rules, while other contracts will continue
to be subject to the general contract doctrines. 19 The definition must there-
fore reflect the special nature of standardized agreements. 20
There is a considerable difference between the-statutory attitude towards
definition and the case law approach to it. Statutory provisions designed to
protect against unfairness in standard contract terms can establish clearly
the parameters of the subject. Conversely, under case law, there is no precise
definition of the term; there is not even agreement as to which term should
be used to identify this type of agreement. And although many scholars
prefer the term “adhesion contracts” to “standard contracts”, there is no
agreement as to what “adhesion contracts” are. While some consider them
to be identical to standard contracts, others consider them to be only one
type of standard contract. 21
The confusion is possible under a case law doctrine which is still evolv-
ing. However, such problems need not occur under a statutory definition,
where simplicity and consistency can be achieved through careful drafting.
A. The Definition
The term “standard contract” is defined in Section 2 of the Israeli 1982
Standard Contracts Law as follows:
Standard contract means the text of a contract, all or part of the terms of which
have been determined in advance by one party in order to serve as conditions
IsUnder U.S. law there was no clear definition of either standard contracts or adhesion
contracts, since the principal doctrine in this area – unconscionability – was never confined
to standard agreements. For support for the view that standard contracts are part of the doctrine,
see Dugan, supra, note 6 at 1308; E.A. Dauer, “Contracts of Adhesion in Light of the Bargain
Hypothesis: An Introduction” (1972) 5 Akron L. Rev. 1; Deutch, supra, note 1 at 56-7; D.
Yates, Exclusion Clauses in Contracts, 2d ed. (1982) at 271-5. But see A.A. Left, “Uncons-
cionability and the Code – The Emperor’s New Clause” (1967) 115 U. Pa L. Rev. 485.
Materials, 2d ed. (1982). About a third of the casebook is devoted to this subject.
19For a variety of such controls, see J. Swan & B.J. Reiter, Contracts: Cases, Notes and
20See infra, notes 26-34 and accompanying text.
21See the variety of conificting definitions in both academic writings and case law: E Kessler,
“Contracts of Adhesion – Some Thoughts About Freedom of Contract” (1943) 43 Colum. L.
Rev. 629; A. Lenhoff, “Contracts of Adhesion and the Freedom of Contract: A Comparative
Study in the Light of American and Foreign Law” (1962) 36 Tulane L. Rev. 481; I. Macneil,
Contract Exchange Transactions and Relations, 2d ed. (1978) at 445-7; Rakoff, supra, note 1
at 1177; Henningsen v. Bloomfield Motors Inc., supra, note 3; Neal v. State Farm Insurance
Co., 188 Cal. App.2d 690, 10 Cal. Rptr 781 (1961); Graham v. Scissor-Tail Inc., 28 Cal.3d 807,
171 Cal. Rptr 604, 623 P.2d 165 (S.C. 1981).
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CONTROLLING STANDARD CONTRACTS
of many contracts between him and persons unidentified as to number or
identity.
22
This definition is completed by defining the word “term” in a standard
contract as follows:
“Term” means a term in a standard contract, and includes a term referred to
in the contract and any other term forming part of the bargain even where it
is not expressly stated to be so in the contract itself, but does not include a
term specially agreed upon by a supplier and a customer for the purpose of a
particular contract.
The three basic elements of a standard form contract are terms which
are: (a) fixed in advance by one party only; (b) intended to be used in many
future contracts; and (c) not subject to negotiation. A contract which does
not fulfil these three requirements is not subject to the statute. 23
B. Analytical Background
These three elements comprise the defining features of standard con-
tracts. The definition is not burdened with unnecessary details. The first
two elements are the tools by which the standard contracts market operates.
Contract standardization and advance preparation of terms by one party
facilitate the inclusion of harsh terms. Advance drafting permits the stip-
ulator to replace statutory and common law dispositive provisions with his
own privately-made law. The third element, lack of real choice, is the method
by which the public at large is compelled to adhere to the drafter’s will.
This third element is also the justification for intervention in such contracts.24
22The translation is based on the 1964 version and the unofficial 1982 translation. See supra,
23There is great similarity between the German definition and that of the Israeli statute. The
note 8.
German definition appears in Section 1 of the 1976 Standard Contract Terms Law.
(i) Standard contract terms are all those contractual provisions drawn up for a large
number of contracts which one contracting party (the proponent) presents to the
other contracting party for his assent. It makes no difference whether the stipulations
are contained in a separate instrument or included in the contract itself, what their
scope may be, what type of writing is used, or what the form of the contract may
be.
(ii) Standard contract terms are not involved when and insofar as the contractual
conditions are individually negotiated between the parties.
The text was translated by Nina Moore Labson. This translation has been used in every English
article on the subject. For the full translation, see, e.g., (1978) 26 Am. J. Comp. L. 568.
24This does not mean that there are no advantages or benefits to using standard contracts.
See Deutch, supra, note 1 at 1, 2 and 253 n. 46; Restatement (Second) of Contracts (1979) s.
211, Comment (a). Contra, Rakoff, supra, note 1 at 1204-6, 1226-8 and 1230-4. On the need
for control, see Kessler, supra, note 21; K. Llewellyn, The Common Law Tradition (1960) at
362; Deutch, ibid. at 7-10.
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The Israeli statute clearly acknowledges that the standard contract dif-
fers considerably from traditional types, but nevertheless is still a contract.
Section 24 of the Law stipulates that other laws which control contract terms
in general still apply. In the 1980 bill which proposed adoption of an Israeli
code of civil law, the Standard Contracts Law is regarded as one of the
contract statutes.2 5
C. Broadness of the Definition
The Law applies to standard terms, as well as to contracts which are
wholly standardized. 26 This approach prevents stipulators from circum-
venting the Law by drafting in advance the most stringent terms and leaving
only less important ones open to negotiation. The definition refers to the
“text of a contract”, even if not yet actually used. This clarification was
necessary to permit “abstract control” of standard contracts 27 even before
they have been used.28
The definition of “term” encompasses both the terms referred to in the
contract and other matters which form part of the bargain, even if they are
not mentioned in the contract. This part of the definition also encompasses
unsigned contracts29 such as guarantees 30 and ticket purchases. 31 The def-
inition embraces documents and terms which become part of the contract
by way of notice.3 2
25Hatza’ot Hok, Le-Arihat Kovetz Dinei Mamonot, 5740-1980 [in Hebrew]; an unofficial
translation is available, Codification of Civil Laws, 5740-1980. The 1964 Standard Contracts
Law appears among the list of other contract statutes. The list does not include consumer
protection statutes, since they are not considered to be part of the civil law.
26See supra, note 22 and accompanying text.
27For the meaning of “abstract control”, see infra, notes 75-9 and accompanying text. This
explanation was offered in the “Explanatory Note” to the Proposed Standard Contracts Act,
Hatza’ot Hok 5742-1981 at 30.
28Another possible interpretation is that the statute refers to the “text” of a standard contract
to indicate that, if the text of the contract is prepared in advance (even if typed or printed for
every transaction), it is still a standard contract –
thereby precluding any circumvention of
control by the statute. That situation is probably uncommon and had not been contested in
Israeli courts at the time of the drafting of the Law.
29See Rakoff, supra, note 1 at 1177. Only signed documents are included under his definition
30The guarantee becomes part of the bargain by way of notice. See Shalev, supra, note 16
of adhesion contracts.
at 52-8.
3’Israeli law, even after the enactment of the Contracts (GeneralPart) Law 5733-1973, Laws
of the State of Israel, vol. 27 at 117, generally follows the English law on the subject. See Deutch,
supra, note 14 at 73. The leading English cases on point are Parker v. South Eastern Railway
Co. (1973), 2 C.P.D. 416, 36 L.T. 540 (C.A.) and Thornton v. Shoe Lane Parking Ltd (1970),
[1971] 1 All E.R. 686 (C.A.). For U.S. Law, see Restatement (Second) of Contracts (1979) s.
211(1), Comment (d) and “Reporter’s Note” to Comment (d). For the Canadian viewpoint,
see Heffron v. Imperial Parking Co. (1974), 3 O.R. (2d) 722, 46 D.L.R. (3d) 642 (C.A.).
32See G.H. Treitel, The Law of Contract, 6th ed. (1983) at 150-6 regarding joinder of doc-
uments either by express reference or with no express reference.
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CONTROLLING STANDARD CONTRACTS
A different approach to this issue is taken by Section 2 of the German
Standard Contract Terms Act,33 which presents detailed rules as to when a
term becomes part of a standard contract. The rules require that there be
a reasonable chance to read and understand the terms before they are in-
corporated into the contract. This section is limited solely to consumers, 34
and the regular rules remain applicable to merchants.
D. Elements Not Required Under the Definition
The definition is not limited to contracts entered into in a monopolistic
situation. 35 Nor is superiority of bargaining power required by the defini-
tion,36 although it probably exists in most instances. In one decision, 37 the
Israeli Supreme Court decided that courts should intervene in standard
contracts primarily when a monopolistic situation exists. In a later deci-
sion,38 however, this approach was not followed. 39
The definition does not mention elements such as small print, unin-
telligible language, the fact that the contract was not read, and related mat-
ters. Although these factors contribute to the problem, they are not the cause
of it. Reading and understanding the terms does little good if the adherent
party has no power to change them. It is clear from the definition of “term”
under the Israeli statute that only specific negotiations and agreement can
exempt a term from the application of the act, and mere knowledge of its
contents is insufficient.40
The statute is not limited to consumer transactions. 41 It is of a general
nature and covers commercial transactions as well. The term “consumer”
3 3See 0. Sandrock, “The Standard Terms Act 1976 of West Germany” (1978) 26 Am. J.
34Section 24 of the German statute.
35Nor does such a requirement appear in the German statute.
36See A. Corbin, Corbin on Contracts, Supp. ed. by C.K. Kaufman (1984), Part I, s. 559C
at 571-5 to the effect that bargaining power is useless unless there is a genuine opportunity to
use that power. Therefore, it is the nature of the agreement which is important, not the relative
power of the parties.
37C.A. 764/76 Shimoney v. Mifalei Rekhev Ashdod Ltd (1977), 31(3) P.D. 113.
38St C.A. 1/79 Keshet Cleaning Enterprises Ltd v. A.G. (1980), 34(3) P.D. 365.
39Ibid. at 374.
401n C.A. 280/71 Gidon v. Hebra Kadisha (1972), 27(1) P.D. 10, the adherent party knew
and understood the term later invalidated in court; he even tried to change it, but to no avail.
Under the facts of this case he had no real choice of applying to another supplier. Knowledge
of a term in an adhesion contract has little value if no alternative choice is open to the adherent.
41See G. Shalev, “Government as a Party to a Standard Contract” (1983) 12 Mishpatim 595
Comp. L. 551 at 558-60.
at 605-6 [in Hebrew].
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is not even mentioned in the Law. 42 Although the problem of standard
contracts is more critical in consumer transactions, it also exists in com-
mercial cases. 43
The 1982 statute removed two requirements which were included in
the 1964 version, where a standard contract was defined as “a contract for
the supply of a commodity or service”. The 1964 version proved to be an
obstacle because in several instances the contracts under consideration could
hardly be described as for either supply of a commodity or of a service. In
one of the early cases,44 the court decided that the sale of a lottery ticket
provided neither a commodity nor a service, and therefore the ticket’s ex-
emption clause was not subject to the Law’s control. In later decisions this
interpretation was overruled,45 and other problematic transactions were also
recognized as contracts for the supply of services. 46 It became evident, how-
ever, that the section caused unnecessary complications, and this part of the
definition was removed from the 1982 version.
Another element of the 1964 statute discarded under the 1982 Law was
the requirement that standard terms be fixed in advance “by the person
supplying the commodity or service”. This meant that terms which were
dictated by the purchaser rather than the supplier were not subject to the
Law.47 Accordingly, the case of a giant food-processing company which
presented its standard contracts to farmers who would then have to adhere
to the terms if they were to sell their products to industry48 would have
been exempted from the Law’s control. In order to avoid this result, the
1982 version defines a supplier as the person who proposes the standard
terms of the contract, regardless of his status as seller or purchaser.
42See the German statute which, although general in nature, includes several sections effective
only in consumer transactions. See in particular ss 2 and 10-2. And see Sandrock, supra, note
33 at 556.
43Under the U.S. doctrine of unconscionability a similar question arises. See S. Goldberg,
“Unconscionability in a Commercial Setting: The Assessment of Risk in a Contract to Build
Nuclear Reactors” (1983) 58 Wash. L. Rev. 343 at 346-9, strongly supporting the view that
unconscionability should also be applied in a commercial setting. See also Deutch, supra, note
1 at 57 and 70-1.
44C.A. 604/69 Green v. Mifal Hapais (1971), 25(1) P.D. 401.
45C.A. 508/71 Holawy v. Mifal Hapais (1972), 27(l) P.D. 38; C.A. 782/72 Naiem Fares v.
Mifal Hapais (1977), 32(1) P.D. 770.
a gravestone; “Zur” Hebra Lebituha v. Wesung (1971), 26(1) P.D. 190.
46See Gidon v. Hebra Kadisha, supra, note 40, regarding a form authorizing the erection of
47But see Rakoff, supra, note 1 at 1177 to the effect that according to his definition of adhesion
contract, the main obligation of the adhering party is the payment of money.
48That was the case in the landmark decision in Campbell Soup Co. v. Wentz, 172 E2d 80
(3d Cir. 1948).
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CONTROLLING STANDARD CONTRACTS
E. Negotiated Terms
The definition of “term” excludes from the scope of the statute those
terms “specifically agreed for the purpose of a specific contract”. The ra-
tionale behind this expression is evident: when a term is agreed upon be-
tween the parties there is no ground for deviating from traditional contract
law doctrines. 49 However, there is a danger that the definition might be too
narrowly interpreted. The Italian experience with standard contracts re-
vealed that the requirement that certain conditions are invalid unless spe-
cifically approved in writing was overcome by a simple signature of the
adherent party regardless of any real understanding or approval of the actual
terms. The result was that the Italian regulations were of little help to
consumers. 50
The reasonable interpretation of this definition is that only when a
meaningful alternative exists, and actual consent is reached, will the terms
be considered to be specifically agreed upon. If there is no possibility of
changing or negotiating a term in return for other concessions, it cannot be
considered a negotiated term. Some questions are still left unresolved. Who
must then prove that a term was negotiated? What alternatives must be
proven to have been available in order to exempt a term from control by
the statute?
The German statutory approach to these questions provides some di-
rection. The burden of proof that the terms were “individually negotiated”
lies with the proponent. In order to exempt individually negotiated terms
from the statute, it must be proven that the other party had an opportunity
to change them. It is possible that interpretation of the Israeli statute will
resemble that of the German one, as the definitions contained in the two
are quite similar 5 1
F Terms Not Subject to Control by the Statute
Section 23 of the Israeli statute exempts four kinds of terms from the
act. Where a term: (1) determines the monetary consideration which the
customer must pay, (2) conforms with conditions laid down or approved
by an enactment, (3) confirms an international agreement to which Israel
49See K.E Berg, “The Israeli Standard Contracts Law 1964: Judicial Controls of Standard
Form Contracts” (1979) 28 Int’l & Comp. L.Q. 560 at 566.
5OFor criticism of the Italian approach to standard contracts see G. Gorla, “Standard Con-
ditions and Form Contracts in Italian Law” (1962) 11 Am. J. Comp. L. 1 and Alpa, supra,
note 11.
51See supra, note 23, regarding the similarity of the second part of the German definition to
the latter part of the Israeli definition of “term”. This issue was never raised in the courts
under the 1964 statute, which is identical to the 1982 version on this point.
McGILL LAW JOURNAL
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is a party, or (4) forms part of a collective labour agreement, it is not subject
to the Law. The latter three exceptions are not of major significance. A
collective labour agreement is negotiated by representatives of both parties
and therefore cannot be regarded as a standard contract. When a contract
conforms to legislation or formally approved international agreements, it
is not a normal case of standard terms being imposed by one party.
The first provision is, however, of great importance, since it draws a
clear line between standard terms and visible terms. The monetary term is
distinguishable from other standard contract terms by its greater visibility.
It is one of the few terms in a contract about which the customer will
normally be knowledgeable, and also one of the few in respect of which
competition exists between different sellers. Even when the price is fixed in
advance, the contractor knows exactly what he is entering into. His assent
is real, and there is no surprise with regard to this provision. This does not
mean that price cannot be unfairly imposed on a party to a contract, but
such imposition is not part of the phenomenon of standardized contract
terms and should therefore be dealt with under other contract doctrines.
II. Judicial Review and Abstract Pre-Screening of Standard Contracts Under
Israeli Law
A. The Purpose Clause
The first section of the 1982 Standard Contracts Law states: “The pur-
pose of this law is to protect customers from prejudicial terms in standard
contracts.” It apparently adds nothing to the Law’s detailed provisions, and
one might ask, therefore, what objective is served by this purpose clause.
The answer can be found in the history of the judicial application of the
1964 Law.
The difficulties encountered in the application of the 1964 Law also
serve as a good example of the problems involved in regular judicial review.
The 1964 statute empowered the courts to invalidate a restrictive term 52 in
a standard contract when it appeared to be “prejudicial to customers or
gives an unfair advantage to the supplier (which is) likely to prejudice cus-
tomers”. 53 A similar provision also exists under the 1982 version.54 The
52Under the 1964 Law not every term was subject to judicial intervention, only those defined
as “restrictive terms”.
531964 S.C.L., supra, note 10, s. 14.
541982 S.C.L., supra, note 8, s. 3.
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CONTROLLING STANDARD CONTRACTS
term “prejudicial” is essential in both Laws 55 and parallels the uncons-
cionability clause of America’s U.C.C.
Of seventeen cases reported on the subject 56 up to 1980, in only two
instances5 7 was a standard contract clause invalidated as “prejudicial”. 58
The court in most cases preferred to resort to other doctrines, such as in-
sufficient notice, 59 public policy 60 and good faith,6′ to aid customers, rather
than rely on the statute specifically enacted for the purpose.
The case law under the 1964 Standard Contracts Law exposed some
of the basic deficiencies of non-guided judicial review of standard contracts.
Those decisions are evidence of inconsistent application of the doctrine,
preference for other doctrines, adherence to obsolete ideas on freedom of
contract, and a clear trend towards conservatism. Statutory guidelines can-
not replace judicial discretion, but a declaration of the Law’s purpose can
at least eliminate some of these problems. The purpose clause clarifies for
the courts the need to concentrate on the fairness of the transaction.
B. The Broad Scope of Application
Part of the conservative attitude revealed by the case law under the
1964 Standard Contracts Law was due to various restrictions governing the
application of judicial review. Under the 1964 Law not every term was
subject to judicial intervention. Section 15 enumerated under the title “re-
strictive terms”, a list of nine types, and only those terms which fit into one
of the listed types was subject to judicial review. This limitation was de-
signed to assure suppliers that not every term in a standard contract would
be subject to examination. However, this resulted in the exemption from
control of some harsh terms. This enumeration of types of terms was se-
verely criticized by several commentators, 62 and it was removed from the
text of the 1982 Standard Contracts Law.
5SThe term “Mekapeah” which can be best translated in English as “prejudicial” appears in
ss 3, 4, 12, 14, 16, 17, 19, 20 and 21 of the 1982 S.C.L., ibid.
56See Deutch, supra, note 14 at 86-102.
57Mo. 545/67 Ornan v. Israel Lands Administration (1968), 67 P.M. 284; C.A. 280/71 Gidon
v. Hebra Kadisha, supra, note 40. In three other cases it was relied on as one of the grounds
for invalidation. Deutch, ibid. at 86 n. 96.
58Even more surprising is that in both instances, the invalidated terms attempted to limit
freedom of religion, which is certainly not normally an object of standard contracts.
59C.A. 285/73 Lagil Trampolin v. Nahmias (1974), 29(1) P.D. 63.
60For example, C.A. 493/69 State oflsrael v. Hadad (1970), 24(1) P.D. 7; C.A. 764/76 Shimoni
v. Mifalei Rekhev Ashdod Ltd, supra, note 37.
61C.A. 148/77 Rot v. Yeshufe (1979), 33(1) P.D. 617.
62See Deutch, supra, note 14; Friedman, supra, note 16; Berg, supra, note 49.
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The breadth of judicial review under the 1982 Standard Contracts Law
gives it a considerable advantage over legislative control, which is limited
solely to a list of forbidden terms.63 Section 3 of the 1982 Law empowers
the judiciary and the Tribunal to invalidate or change terms prejudicial to
customers, but when doing so they must also take into account other terms
of the contract and all related circumstances.
Section 3, which is the general provision of the 1982 Standard Contracts
Law, 64 centers attention on one basic phrase, “prejudicial to customers”.
The same phrase was used in Section 14 of the 1964 Standard Contracts
Law and therefore judicial interpretation of that Law is relevant to the new
statute. In one decision, the term “prejudicial” was interpreted as follows:
The word “prejudicial” is a degrading word. It includes the requirement that
the limiting of a contractual right will be distasteful. There is a need that the
exemption be unjustifiable and especially a provision which does not come to
protect legitimate economic interests of the other party –
the supplier.65
In the past, a question which caused considerable dispute in the Israeli
Supreme Court66 was whether such a term necessarily had to be unfair to
customers at large, or whether it was sufficient for the unfairness to be caused
to a single customer. Today, this issue is specifically dealt with by Section
19, which covers judicial review. Section 19(b) indicates that courts should
take into account the special circumstances of the case at issue, a clear
indication that a clause which is prejudicial to an individual customer under
the circumstances of the transaction should be invalidated even when not
prejudicial to customers at large. In the Tribunal, specific circumstances
cannot be considered because only abstract control is involved, and the test
to be applied is whether the term is potentially prejudicial to customers.
The power of the courts and the Tribunal to review terms in standard
contracts is now both general and virtually unlimited.
C. Presumptive Unenforceability
Section 4 of the 1982 Standard Contracts Law, which provides that ten
types of terms are presumptively unenforceable, is one of the most striking
innovations in the new Law. It does not resort to a list of forbidden clauses,
63See Ministry of Justice of Israel, HokHaHozim HaAhidim 5743-1982: Divrei Hesber (1984),
an unoffical explanation of the Law at 25-6 [hereinafter cited as the 1984 Memorandum]. A
translation is also available, Standard Contracts Law 5743-1982: Memorandum.
courts (s. 19) to invalidate prejudicial clauses. See supra, note 8.
64There are special provisions which specifically empower the Tribunal (ss 17-8) and the
65Green v. Mifal Hapais, supra, note 44 at 401 per Justice Witkon [translated from the
66See Deutch, supra, note 14 at 96-8.
Hebrew, emphasis added].
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CONTROLLING STANDARD CONTRACTS
which precludes flexibility and discretion in judicial decisions. Instead, it
clearly indicates which terms are unenforceable in the absence of special
circum,stances. The transfer of the burden of proof should avoid some of
the problems encountered under the old Law, where, for example, arguments
that a standard term was unfair were rejected because the buyer could not
provide sufficient evidence in support of his claim.67
Section 4 outlines ten types of term which are prima facie prejudicial.
These, in turn, are divided into two categories. Some terms are presump-
tively unenforceable per se, others only when unreasonable. The first group
includes subsections 4(1), 4(4), 4(6), 4(7), 4(8) 4(9), 4(10) or portions of
them. The second group includes subsections 4(1), 4(2), 4(5), 4(6), 4(9) or
portions of them. All these provisions primarily concern three sorts of terms:
(1) those which limit the supplier’s liability or limit the customer’s rights
under law or contract, (2) clauses limiting a customer’s right to resort to
the courts and terms which would restrict his reliance on the rules of evi-
dence, and (3) terms which limit the customer’s freedom to contract or
permit the supplier to change the contract unilaterally.
Subsections 4(1) and 4(6) are of special interest.68 These subsections
presumptively invalidate clauses which exempt the supplier from liability
under the law or which limit a customer’s right to remedies. This means
that limitations on statutory dispositive provisions in standard contracts
are presumptively unenforceable. 69 For instance, under the Israeli Contracts
(Remedies for Breach of Contract) Law7 the injured party has the right to
specific enforcement or to rescind the contract together with the right to
compensation. When a supplier includes in a standard form a provision
invalidating one of those remedies, it will be prima facie invalid.
The 1982 Standard Contracts Law does not specifically explain how
these presumptions can be overcome. The courts must undertake this duty.
There are, however, some guidelines in the Law. Section 3 states that each
term should be examined in light of “the terms of the contract in their
67See Deutch, ibid. at 88 to the effect that in six cases this claim was rejected because it was
not properly presented in court.
68See supra, note 8. Another interesting provision is subsection 4(3), which deals with a term
transferring the supplier’s liability to a third party. In recent years some building construction
enterprises have transferred their liability to unknown contractors. In many of these instances,
such a clause will also be classified as an exemption to statutory liability and therefore also
subject to subsection 4(1).
69See 0. Lando, “Standard Contracts: A Proposal and a Perspective” (1966) 10 Scandinavian
Stud. in Law 129 at 136 to the effect that as early as 1964 a German decision stated that “a
rule belonging to the jus dispositivum or private law becomes a required part of the contract,
jus cogens, when it is a question of a contract of adhesion”. This approach was later adopted
by the German legislature. Under Israeli law, however it would only be presumptively unenforceable.
705731-1970, Laws of the State of Israel, vol. 25 at 11.
Mc GILL LAW JOURNAL
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entirety and of all other circumstances”. This points to two methods for
repudiating the presumption of unenforceability. One is to prove that the
circumstances of the case justify the term in question. For example, a term
limiting the liability of merchantability in used goods can be justified be-
cause the goods are used and the exemption clause is known to the purchaser.
Alternatively, other terms in the contract may justify the exemption clause.
It is unclear, however, whether every term must be considered, or only those
which are subject to control by the 1982 Standard Contracts Law. 7’ On the
other hand, Section 3 specifically refers to contract terms in their entirety,
thereby permitting consideration of every term, even those not subject to
the Law.
Other terms of a standard contract can certainly be taken into account
when judging the validity of standard terms. Such other terms should be
considered when they provide customers with benefits not available under
existing law and those benefits constitute a fair equivalent for the displaced
protection. 72 For instance, when a supplier displaces a customer’s right to
repudiate the contract by giving him the right to free repairs for a year and
such a right does not exist under the relevant law, it is possible that the
limitation will be upheld. But a right to free repairs scarcely justifies exclu-
sion of consequential damages if there is not proportional value between
the right conferred and that taken away. In exceptional cases, even the
exclusion of consequential damages may be justified. For example, in a
commercial setting where there is no equivalence between the value of the
transaction and possible damage, an exemption can be justified. 73 This will
depend upon reasonable commercial usage and the existence of a com-
mercial rather than a consumer setting. It is clear, however, that the pre-
sumption cannot easily be rebutted. The supplier must prove that the standard
form is reasonably balanced in order to displace the presumption of
unenforceability.
It is possible to overcome the presumption of unenforceability in gov-
ernment contracts when the purpose of an exemption clause is to protect
legitimate state interests. For example, subsection 4(4) deals with a term
which allows the supplier to change the terms of the contract after it has
been signed. The right of government to renegotiate contracts has been
upheld in American courts and can be equally justified under this Law when
71See supra, note 52 and accompanying text.
72See Dugan, supra, note 6 for a similar text.
73See Photo Productions Ltd v. Securicor Transport Ltd (1980), [1980] A.C. 827, [1980] 1 All
E.R. 556 (H.L.).
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CONTROLLING STANDARD CONTRACTS
the term is a necessary outcome of economic reality.74 When such a com-
mercial practice is based on reasonable economic interests it may possibly
overcome the presumption.
The second category of provision under Section 4 presumptively in-
validates specific terms when certain rights or duties are unreasonably re-
stricted. For instance, in subsection 4(1), a term which unreasonably limits
the liability of the supplier under the contract is presumed to be prejudicial.
The reason for the distinction between limiting statutory dispositive rights
and limiting contractual rights is quite evident. There is an obvious differ-
ence between taking away statutory rights enacted to achieve a balance
between the parties and restricting rights created by the contract itself In
the latter case, unless the restriction is unreasonable the contract should be
regarded only as creating more restricted rights, rather than as one without
this limitation.
D. Abstract Pre-Screening by the Tribunal
The most original innovation of the Israeli Standard Contracts Law is
the power of a Tribunal to approve or invalidate standard contract terms.
This method of control was originally provided for by the 1964 Standard
Contracts Law. However, it was unsuccessful, and substantial amendments
were introduced in the 1982 Standard Contracts Law. The basis of the
control system under both acts is the power of the tribunal (in the past a
Board 75) to approve a standard contract and thus immunize it from judicial
intervention, or to disapprove a term and thus invalidate it. The exami-
nation takes place in the abstract. In a 1969 amendment to the Law,76 the
Attorney General was authorized to challenge prejudicial terms before the
Board, but this power was never used.
The theoretical benefits of pre-screening standard terms via a Tribunal
are evident with regard to both suppliers and customers. The advantage for
suppliers is that once a contract is approved by the Tribunal it is immunized
from judicial scrutiny. The Tribunal can also guide suppliers in advance as
to which terms are valid and which are prejudicial, thus saving them from
future uncertainty in court proceedings. For customers, the Tribunal is po-
tentially of even greater importance, because a term annulled by a Tribunal
protects all customers who adhere to the contract, whereas a judicial decision
would be res judicata only between the parties.
74For additional examples, see Shalev, supra, note 41 at 611.
75See infra, note 81 and accompanying text.
76Standard Contracts (Amendment) Law 5729-1969, Laws of the State of Israel, vol. 23 at
151.
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Unfortunately, the 1964 Board did not operate as well as expected.
Only about sixty standard contracts77 were submitted for its scrutiny during
the 18 years of its existence. This was generally 78 attributed to the voluntary
nature of the scheme. However, that was not the only reason for its lack of
success. Imperfect drafting of the original version, flaws in the procedure
followed by the Board,79 the restricted scope of application of the Law and
the limited power to intervene granted to both courts and the Board all
weakened the effectiveness of the Law.
The 1982 Standard Contracts Law was enacted with the intention of
remedying the deficiencies of the 1964 Law. The amendments concerning
administrative control had a three-fold purpose. Judicial control was sub-
stantially strengthened, increasing the incentives for voluntary submission
of contracts to the Tribunal; the structure and proceedings of the Tribunal
were greatly improved; and greater emphasis was placed on the power to
challenge prejudicial terms in standard contracts. 80
Chapter two of the 1982 Standard Contracts Law sets out the structure
of the new Tribunal. Section 6 establishes a Tribunal for Standard Contracts,
a body designed to handle this subject exclusively. Under the 1964 Law,
standard contracts were examined by a Board originally established to con-
trol antitrust cases. Only a negligible amount of the Board’s time was de-
voted to standard contracts.81 This resulted in delays and superficial handling
of the cases. 82
The Tribunal consists of 12 members, 83 headed by two District Court
judges. 84 Other members of the Tribunal are appointed by the Minister of
Justice for a period of three years, and at least two representatives of con-
sumer organizations are selected for appointment.8 5 Proceedings before the
Tribunal are conducted by a bench of three members.8 6 Every bench must
be headed by a judge and also include at least one representative of a con-
sumer organization. 87 Thus, two panels can sit at the same time.
1980 to 1982, a few additional applications were submitted to the Board.
77Deutch, supra, note 14 at 112-7 describes fifty-one applications from 1964 to 1979. From
78See, e.g., Kretzmer, supra, note 16.
79See Deutch, supra, note 14 at 117-25.
8 See the 1984 Memorandum, supra, note 63 at 42-3.
B1See Deutch, supra, note 14 at 115.
82See Deutch, ibid., schedule 1 at 113-4.
83Section 6(b) of the 1982 S.C.L., supra, note 8.
84Section 6(c) of the 1982 S.C.L., ibid. The District Court is a High Court in Israel. At present
two judges of the Jerusalem District Court are serving on the Tribunal.
851bid., ss 6(d) and (e).
86Ibid., s. 7(a).
87Ibid., s. 7(b).
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CONTROLLING STANDARD CONTRACTS
In order to permit it to function with discretion and flexibility, the
Tribunal is exempt from the rules of evidence and civil procedure. 88 The
Tribunal’s decisions can be appealed to the Supreme Court 89 and are open
to inspection by the public. 90 When the Tribunal annuls or varies a term it
must publish its decisions in at least two daily newspapers. 91
The old system of voluntary submissions was changed to one incor-
porating both voluntary and involuntary features. The voluntary proceed-
ings are detailed in Chapter Three of the 1982 Standard Contracts Law. A
supplier may apply for approval of his standard contracts, 92 and the Tribunal
has broad powers to permit individuals and groups to participate as re-
spondents. 93 A contract can be approved for a period of up to five years, 94
and during that period a plea against the contract because of a prejudicial
term will not be heard by the Tribunal or a court. The Attorney General
can, however, apply for annulment even within that period if circumstances
have changed. 95
The power of the Tribunal to amend or annul prejudicial terms is de-
tailed in Chapter Four of the Law.96 Annulment usually affects contracts
made after the date of the decision,97 but the Tribunal has the power to
decide whether a decision should affect contracts already entered into al-
though not fully performed.98 Several changes were introduced in the an-
nulment power of the Tribunal. Section 3 of the 1982 Law states that the
Tribunal should annul or amend prejudicial terms, thus emphasizing the
power of annulment rather than that of approval. In addition, under the
1964 Standard Contracts Law, the Board could only annul the challenged
term. 99 Under the 1982 version, when it is possible to vary a term to avoid
the unfair results the Tribunal has the power to amend it.
881bid., s. 9. See also the explanatory note to s. 7 of the original bill, supra, note 10 at 32.
89Ibid., s. 10.
9OIbid., s. 11(a).
9 Ibid., s. I I(b).
92Ibid., s. 12(a). Under the 1982 version the whole contract must be approved, rather than
only the “restrictive terms” of the 1964 version. The Tribunal must therefore carefully examine
every term and consider the contract as a whole before approving it. This attitude also prevents
confusion among customers, who can rarely distinguish between approved terms and other
terms. See the 1984 Memorandum, supra, note 63 at 53.
93Ibid., s. 12(b). A similar provision existed under s. 5 of the 1964 S.C.L.
94Ibid., s. 14.
95Ibid., s. 14(c).
96Ibid., ss 17 et seq.
97Ibid., s. 18(a).
98Ibid., s. 18(b). See M.A. Eisenberg, “The Bargain Principle and Its Limits” (1982) 95 Harv.
L. Rev. 741 on the distinction between “half-completed bargain promises” and “executory
contracts”. This distinction resembles that in s. 18(b), although the sections are not identical.
99An example of the dilemma under previous versions is described in the 1984 Memorandum,
supra, note 63 at 62.
McGILL LAW JOURNAL
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Another change in this area was the authorization for various groups
to apply for annulment of a standard term by the Tribunal. Section 16(a)
of the Law states:
The Attorney General or his representative, the Commissioner of Consumer
Protection under the Consumer Protection Law, 5741-1981, any consumer or-
ganization and public authority designated by regulations or customer orga-
nization approved by the Minister of Justice for a particular matter may apply
to the Tribunal for the annulment of a prejudicial term of a standard contract.
It is questionable whether the Attorney General’s representative will
use his power to intervene; it is far more likely that the Commissioner of
Consumer Protection and the two leading consumer organizations will take
action. Since the Law includes various terms of presumptive unenforcea-
bility, at least in this area, some action will probably follow.
An anticipated change to the Law is provision for mandatory submis-
sion of standard contracts to the Tribunal where a monopoly exists. This
has been proposed and will almost certainly be approved under the new
Restrictive Trade Practices Bill.100
The drafters of the statute clearly preferred control of standard contracts
by the Tribunal to control by the courts. Only the Tribunal can approve a
contract or invalidate a term; and only the decisions rendered by the Tri-
bunal are binding before both courts and the Tribunal. The Tribunal is
empowered to continue with its proceedings even when the same contract
is under consideration by a court; and when a court decision is given it is
not binding on the Tribunal. However, in the case that the Tribunal disre-
gards a judicial decision, an appeal can be made to the Supreme Court for
a final resolution of the case.
Conclusion
The problems involved in regulating standard contracts are too com-
plicated to be solved by the use of a single device. There is no consensus
as to which are the best means to control this area of the law. The Israeli
version can serve as a model for adoption, especially in those jurisdictions
where a policy of administrative control does not exist. Other doctrines used
for the purpose of controlling this area such as unconscionability or “ine-
quality of bargaining power” are of limited value and are not directly related
to the problem of standard contracts.
IOHatza’ot Hok, no. 1647 of 5744-1983 at 39, s. 28(a)(1).
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CONTROLLING STANDARD CONTRACTS
477
The 1982 Israeli statute presents a balanced approach to regulating
standard contracts. It rejects long lists of forbidden clauses. It still acknowl-
edges the value of judicial review, but emphasizes more administrative
action. The burden of proof is transferred to the supplier, who is better
equipped to deal with it. The tribunal may examine closely the whole spec-
trum of economic and moral issues involved in standard contracts.
