Contract interpretation: the rules the court applies

Service page: Commercial contracts lawyer: drafting, review and enforcement.

You signed a contract, got into a dispute, and each side reads the same line differently. Who is right? Under Israeli law, the tools a court uses to interpret a contract can decide which side wins.

The first question: what did both parties want?

Section 25 of the Contracts (General Part) Law, 5733-1973, was amended in January 2026, and the rule now depends on the type of contract and on when it was made. A contract made up to 6 January 2026, as well as a contract that is not a business contract, a standard-form contract, an employment contract or a collective agreement even after that date, is interpreted according to “the intention of the parties, as it appears from the contract and from the circumstances of the case” (in an old contract: and if the intention appears expressly from the wording of the contract, according to its wording). By contrast, a business contract made or renewed on or after 7 January 2026 that does not include provisions on how it is to be interpreted “shall be interpreted according to its wording alone”, unless its wording alone leads to an unreasonable result or to a contradiction between different provisions in it (section 25(a)(2)). The Law does not define what a “business contract” is, and the question of which contracts will count as such will be decided by the courts. What is clear is only that an employment contract and a collective agreement are, as a rule, interpreted according to the parties’ intention, and that a standard-form contract is interpreted that way even if it provides otherwise (section 25(a)(4)). The parties may also set in the contract itself how it is to be interpreted and which evidence is admissible (section 25(a)(1)).

In a contract interpreted according to the parties’ intention, if both parties agreed orally on something that did not make it into the written text, the court may rely on external evidence to establish their real intention. In a new business contract interpreted according to its wording alone, an understanding that was not written down will not be used to interpret it, unless one of the exceptions applies, so every important understanding should go into the wording.

What happens when there is no clear intention: the Law’s supplementary rules When it is impossible to establish what the shared intention was, the Law provides tools: an interpretation that keeps the contract valid is preferred to one under which it is void (section 25(b)); expressions and terms commonly used in contracts of the same kind are interpreted according to the meaning they have in those contracts (section 25(c)); and details not set in the contract are set according to the practice between the parties, and where there is none, according to the usual practice in contracts of the same kind (section 26).

Which rule of interpretation applies to your contract: a five-step check

1. When the contract was made: a contract made up to 6 January 2026 and not renewed since then is interpreted according to the parties’ intention, and if the intention appears expressly from the wording of the contract, according to its wording (section 25(a) as previously worded).
2. Standard-form contract: interpreted according to the parties’ intention, even if it was agreed otherwise in it (section 25(a)(4)).
3. An interpretation provision in the contract: the way of interpreting and the admissible evidence will be as the parties agreed (section 25(a)(1)); but parties who were not represented by a lawyer when the contract was drawn up are treated as not having agreed on this (section 25(a)(5)(a)). Even when interpretation by the wording alone was agreed, the exceptions in step 4 apply (section 25(a)(3)).
4. No interpretation provision: a business contract is interpreted according to its wording alone, unless the wording leads to an unreasonable result or to a contradiction between its provisions, and then according to the other provisions of the Law (section 25(a)(2)–(3)); a contract that is not a business contract, an employment contract and a collective agreement are interpreted according to the parties’ intention (section 25(a)(4)).
5. On every route: ambiguity is read against the party that had the upper hand in shaping the terms (section 25(b1)), and in a contract made from 7 January 2026, an agreement to the contrary is void (section 25(a)(5)(b)).

Ambiguity in a contract: whoever wrote it loses

Section 25(b1) of the Law provides: in a contract open to different interpretations, where one of the parties had the upper hand in shaping its terms, an interpretation against that party is preferred to one in its favor. If a company wrote a standard contract and it contains a term that can be read in two ways, it will be read in favor of the party that signed and did not draft it. In a contract made from 7 January 2026, an agreement of the parties that contradicts this rule is void (section 25(a)(5)(b)).

This is especially true in consumer contracts: unclear clauses, small print and complicated legal language all work against the supplier that wrote them.

What external evidence may a court examine?

In contracts that are interpreted by the parties’ intention (a contract that is not a business contract, a standard-form contract, an employment contract, and any contract made before 7 January 2026), a court can rely on circumstances outside the text of the contract to understand what the parties intended (in a new business contract, only when one of the exceptions in section 25(a)(2) applies, or when the parties provided for this in the contract):

• Correspondence before signing: emails, price quotes, minutes of meetings.
• Proposals rejected in negotiations: what was rejected shows what was not agreed.
• The parties’ conduct after signing: if you paid at the end of every month for a whole year, it is hard to argue suddenly that the contract meant the start of the month.

Make sure to keep all correspondence related to the contract: it may become evidence.

How are exemption and limitation of liability clauses interpreted?

Courts in Israel interpret clauses exempting from liability narrowly, and when the clause is ambiguous, against the party that had the upper hand in drafting it (section 25(b1)). In a business contract that is not a standard-form contract, made or renewed on or after 7 January 2026, the starting point is the wording of the clause (section 25(a)(2)), so clear wording will be read as written. If it says “the supplier will not be liable for indirect damage”, this does not automatically include every kind of damage. If in doubt, a narrow interpretation applies.

Also important: a limitation clause that a reasonable person would not expect to find in a contract of this kind will be examined strictly. A supplier should highlight unusual terms, not bury them on page 14.

What does this mean for you when you sign a contract?

Four practical points follow from the rules of interpretation:

• Any ambiguity you sense before signing: add a clarifying paragraph now.
• Keep all the correspondence that led to the signing.
• If the other side drafted the contract, ask for changes in clauses that seem unclear to you.
• Exemption clauses that look “standard”: read them. The court will not always interpret them as broadly as the supplier expects.