The duty of good faith in contracts: principles and case law

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

You read the contract line by line, everything looks fine, and still the other side behaves in a way that feels unfair. There may be no formal breach of any written term, but something in the way they act is not right. This is exactly what the duty of good faith is for: one of the strongest principles of Israeli contract law, which protects you even beyond the wording.

What the duty of good faith is, and why it is so powerful

The duty of good faith is not written in a single section: it rests on two pillars. Section 12 of the Contracts (General Part) Law, 5733-1973, imposes it at the negotiation stage, and section 39 applies it to performing the contract and to exercising a right arising from it. Together, they create a comprehensive duty that accompanies every deal from the first moment to the last.

What is special about Israeli law: the duty of good faith here is mandatory (cogent), and it cannot be waived in a contract. Even if the parties wrote “waiver of all good faith claims”, the court will not respect it.

The three most common breaches

Hiding material information: a party that knows something the other side does not know, and that is relevant to the decision to enter into the contract, must disclose it. An apartment with a known leak? A supplier who knows the product is intended for an old version? These are breaches of the duty of disclosure that derives from good faith. And this duty also has an express anchor: “deception” under section 15 of the Contracts (General Part) Law includes non-disclosure of facts that the other party should have disclosed by law, by custom or under the circumstances, and a person who entered into a contract because of a mistake caused by such deception may rescind the contract by notice to the other party within a reasonable time after learning of the ground for rescission (section 20).

Arbitrary use of a contractual right: you have a contractual right, but not the right to use it in a way that harms more than necessary. A classic example: a lender who demands early repayment precisely at a time that will disrupt a large deal of the borrower, without any objective justification.

Failure to cooperate: contracts sometimes require active cooperation. A party that deliberately undermines the other party’s ability to do its part breaches the duty of good faith even if it did not breach any written term.

What the courts in Israel say

The wording of section 39 expressly applies also to “exercising a right arising from a contract”, so technical compliance with a clause of the contract does not protect against liability if the right was exercised not in an acceptable manner and not in good faith.

At the same time, in interpreting the contract itself, the wording carries more weight: a business contract made or renewed on or after 7 January 2026 that does not set how it is to be interpreted will be interpreted according to its wording alone, unless the wording of the contract alone leads to an unreasonable result, or there is a contradiction between its provisions (section 25(a)(2), as worded in Amendment No. 3, 5786-2026). The amendment did not change section 39.

What the remedy is when the duty is breached

A breach of the duty of good faith opens three main routes to a remedy: damages for the harm caused, rescission of the contract in full, or enforcement of part of it on different terms. In addition, the court can apply the principle of estoppel, to bar a party from relying on a right it waived by its conduct.

At the negotiation stage, a breach of good faith, such as conducting sham negotiations with no intention of entering into a contract, gives a right to damages for the harm caused as a result of the negotiations (section 12(b)): usually the expenses incurred in reliance on them, and in suitable cases even expectation damages (CA 6370/00 Kal Binyan Ltd. v. A.R.M. Ra’anana Construction and Rental Ltd.).

What to do to protect yourself, in practice

Keep records of every stage of the negotiations: emails, meetings, proposals. When you send information, send it in writing. When you receive information, record that you received it. A waiver or a change of agreement: always in writing.

The clause that is almost always included but rarely understood: “any change to the agreement must be made in writing only”. It does not protect against good faith claims that arise from actual conduct. The court may interpret a change in conduct as agreement even without a document.

Frequently asked questions

Can the duty of good faith be waived in a contract?

No. Under Israeli law the duty of good faith is mandatory (cogent), and it cannot be waived in a contract. Even if the parties wrote “waiver of all good faith claims”, the court will not respect it.

The other side negotiated with me with no intention of signing. What am I entitled to?

Damages. Conducting sham negotiations, with no intention of entering into a contract, gives a right to damages for the harm caused as a result of the negotiations (section 12(b) of the Contracts (General Part) Law): usually the expenses incurred in reliance on them, and in suitable cases even expectation damages (CA 6370/00 Kal Binyan Ltd. v. A.R.M. Ra’anana Construction and Rental Ltd.).

The other side hid information from me before signing. Can I cancel the contract?

Yes, if you entered into the contract because of a mistake caused by deception. “Deception” under section 15 of the Contracts (General Part) Law includes non-disclosure of facts that the other party should have disclosed by law, by custom or under the circumstances, and rescission is made by notice to the other party within a reasonable time after you learned of the ground for rescission (section 20).

I have a right under a contract. May I exercise it in any way I like?

No. Section 39 expressly applies also to “exercising a right arising from a contract”, so technical compliance with a clause of the contract does not protect against liability if the right was exercised not in an acceptable manner and not in good faith, for example a lender who demands early repayment precisely at a time that will disrupt a deal of the borrower, without objective justification.

Does a clause saying “any change must be made in writing only” protect against good faith claims?

Not always. Such a clause does not protect against good faith claims that arise from actual conduct, and the court may interpret a change in conduct as agreement even without a document.