Formation

In the Supreme Court	CA 7996/11
Sitting as a Court of Civil Appeals

 

 

Before:	Justice E. Rubinstein Justice Y. Danziger Justice Z. Zylbertal
The Appellants:	1. Safecom Ltd 2. David Zilberberg
v.
The Respondent:	Ofer Raviv
	Appeal against the Haifa District Court's judgment of August 28, 2011 in CF 542-04-09, given by His Honor Judge Dr. A. Zarnakin
Date of session:	Cheshvan 6, 5774 (October 10, 2013)
On behalf of the Appellants:	Adv. Nahum Gabrieli
On behalf of the Respondent:	Adv. Tamir Afori

JUDGMENT

 

Justice Y. Danziger

 

This is an appeal of the judgment of the Haifa District Court (His Honor Judge Dr. A. Zarnakin) of August 28, 2011 in CF 542-09-09, dismissing the Appellants' claim against the Respondent for the infringement of copyright in their technical drawings.

 

Factual Background

 

1.         Appellant 1, Safecom Ltd (hereinafter: "Safecom"), develops and markets products for the electrical backup of cable TV broadcasting systems, and the Appellant 2, David Zilberberg (hereinafter: "Zilberberg") is its manager and one of its shareholders. Zilberberg became acquainted with the Respondent when the latter sought to market Safecom's products to a company for which he worked, and he also connected Zilberberg to an American company, Innovative Solutions 21, Inc. (hereinafter: "the American company"), which led to the marketing of Safecom products in the USA. On June 18, 2002, an agreement was made between Safecom and the American company according to which the American company would be the exclusive distributor of Safecom products (hereinafter: "the Agreement"). The Agreement provided that ownership of all copyright, patents and other intellectual property rights connected with the products, including graphics, sketches and models, that were developed by Safecom would be retained by it. The Respondent had no formal status in the American company, but he was involved in the technical matters associated with marketing Safecom's products in the USA, and, in that context, he also took part in the preparation of technical drawings of Safecom products. In May 2005, the Agreement was terminated by Safecom, and in 2008, it learned of the filing of a patent application in the USA by the Respondent together with the American company's president, which concerned a voltage backup system for cable systems. In view of Safecom's complaint that the drawings underlying the patent application infringed its copyright in the drawings of its products, it filed suit in the District Court. By consent of the Respondent, the court awarded a provisional injunction. An objection filed against the registration of the American patent registration was dismissed.

 

2.         Safecom asserted that the Respondent had copied 14 original drawings that Zilberberg had prepared as part of a presentation for the Safecom products, which was furnished to the Respondent in 2003, when the agreement was still in force. According to it, the drawings that Zilberberg prepared were protected by copyright and owned by it, while the Respondent's drawings were absolutely identical and had been copied "one to one" and, as such, constituted an infringement of its right of reproduction. In order to emphasize the copying, Safecom pleaded that its drawings contained a mistake in the presentation of the switch box, and that mistake had been copied by the Respondent.

 

3.         The Respondent, for his part, asserted that the claim was governed by American law because the alleged infringement had been committed in the USA, and since that law had not been proven, the claim should be dismissed. According to him, under American law the claim would be dismissed because of the applicable American rules of fair use. In regards the very infringement, the Respondent pleaded that since the act was governed by the Copyright Act, 1911 (hereinafter: "the Old Law") it was first necessary to prove that the alleged infringement also constituted an infringement under the Copyright Law, 5768-2007 (hereinafter:  "the New Law"). According to him, under section 21 of the New Law, the copying of a work that is deposited for public inspection constitutes permitted use and no infringement is therefore involved. As regards the alleged copying, the Respondent pleaded that there was no relevant similarity between the Safecom drawings and his drawings, either visual or substantial. According to him, there are approximately 32 elements in the patent application drawings, while in the presentation there are only 19. This is because of the difference between the technology used in order to manufacture Safecom's products and that presented in the patent application. The Respondent further pleaded that the similarity between the drawings lay in their common functionality in a manner that does not afford protection. The Respondent also pleaded that he was party to making the drawings and therefore had a right of ownership in the Safecom drawings, and that the Agreement did not apply to him because he was not an employee of the American company. The Respondent also filed a counterclaim, but since no appeal has been brought in respect of it, we need not refer to it here.

 

The District Court's Judgment

 

4.         The District Court first dismissed the Respondent's claim that the matter is governed by American law. The court held that the Respondent had received the presentation in Israel.  It was therefore reasonable to assume that the act of copying had also been performed in Israel, and it had not been proven otherwise. In any event, the court held that the Respondent did not dispute the court's jurisdiction to try the matter in accordance with domestic law when the provisional injunction application had been considered, and he was therefore estopped from pleading the same. As regards Israeli law, the court held that the Safecom drawings do indeed amount to a protected work, according to both the Old Law and the New Law. The court dismissed the Respondent's claim that the use he had made was permitted use under section 21 of the New Law since the section treats of  the use of works that have already been deposited for public inspection and not use which itself constitutes deposit for public inspection.

 

5.         As regards the alleged copying, the District Court first held that the Respondent was not a joint owner of the rights in Safecom's drawings, because, even if he was not one of the American company's formal officers, he did substantially function as such and the agreement should therefore be applied to him. The court nevertheless dismissed Safecom's claim that the Respondent had admitted copying the drawings. The court emphasized that the Respondent's claim with respect to the difference in the number of elements between Safecom's drawings and the drawings in the patent application had not been rebutted, and a visual similarity had therefore not been established. The court dismissed Safecom's claim with respect to copying the mistake in its drawings because, according to it, no mistake was in fact involved. Finally, the court held that because of the great functionality of the Safecom drawings, some similarity was obliged between drawings that sought to present a similar product, and Safecom's drawings, or a substantial part of them, had therefore not been copied.

 

            Hence, the appeal.

 

The Grounds of Appeal in Brief

 

6.         The Appellants – through their attorney, Adv. Nahum Gabrieli – argue that the District Court erred            when it held that there had been no copying in the instant case. According to them, they did not have to adduce direct evidence of copying the drawings because the law makes it possible to suffice with circumstantial evidence to prove copying. The Appellants assert that the access that the Respondent had to the drawings, which is not in dispute, together with the substantial similarity between their drawings and his, leads to the sole conclusion that there was copying. The Appellants emphasize the identical elements between their drawings and those of the Respondent that do not derive from the functional presentation of the products, like the same twists and turns in the lines that are shown on them. According to them, the Respondent himself admitted that there are many ways to draw the products concerned, and he even showed example drawings of similar systems that were different from the drawings in the instant case. Moreover, in principle it cannot be held that when functional technical drawings are involved, copying cannot necessarily be inferred. The Appellants add that the finding that the similarity between the drawings was not the result of copying is inconsistent with the relationship between the parties, as described above. Finally, the Appellants aver that the court was mistaken when it reviewed the substantial similarity on the basis of the number of elements appearing in each of the drawings, rather than a general impression of the substance of the part copied, which according to them, obliged the conclusion that there had been prohibited copying.

 

The Respondent's Reply in Brief

 

7.         The Respondent – through his attorney, Adv. Tamir Afori – argues that the District Court rightly distinguished between proving a visual similarity and establishing a substantial similarity. According to him, in the instant case there has not been copying, as a matter of fact, because even if it were established that he had access to Safecom's drawings, the court found, as a matter of fact, that there was no visual similarity between the works. According to him, in order to establish such a similarity, the Appellants should have produced an expert opinion insofar as the matter concerns a technical drawing. In any event, the Respondent asserts that there had been no copying of a substantial part that was original to the Appellants, and that the copying of parts of the work that are not original in any event does not amount to copying and to an infringement of any right of the work's owner. According to him, in the instant case works are involved, only parts of which are original, and it is necessary to carefully analyze whether the original parts that were copied constitute a substantial part of the Plaintiff's work. Since, in the instant case, functional works are involved, the respondent argues that only the identical copying of original parts should be regarded as an infringement of copyright. The Respondent emphasizes that after filtering out all the non-original parts of Safecom's drawings, what remains is at most a "copy" of curved lines that do not constitute a substantial part of the work.

 

8.         The Respondent adds that it was inappropriate to deny his rights in Safecom's drawings since he was a joint author of them because of the Agreement between Safecom and the American company to which he was not party, and it should therefore be held that he is a joint owner and joint author of the Safecom drawings. Furthermore, the Respondent asserts that it was inappropriate to hold that the law governing the infringement is Israeli law since the Appellants had not established that the infringement asserted by them was committed in Israel, and that burden rested with them. According to him, his agreeing to the award of a provisional injunction does not attest to his agreeing to conduct the principal case in accordance with Israeli law. Finally, the Respondent argues that even if he is not the owner of the Safecom drawings, he is still their joint author, and the use that he made of them is therefore a permitted use under section 27 of the New Law, which permits the author of an artistic work to make works that constitute a partial copying or derivative of it, even if he is not the owner of the right. Moreover, according to him, the use that he made of the drawings is also protected by virtue of section 20 of the New Law because it was done in legal administrative proceedings or, in the alternative, it was fair use under section 19 of the New Law.

 

9.         In the hearing before us an attempt was made to bring the parties to an overall understanding that would make the need for our ruling unnecessary, but that attempt was unsuccessful.

 

Discussion and Ruling

 

10.       This appeal raises questions at the very heart of copyright law, and that, essentially, address the foundations upon which the protection of works is based, and in particular, the matter of the author's originality; the distinction between idea and expression; and infringement of the right to copy the work. These questions are highlighted with regard to the protection of functional works, and they require elucidation and clarification. Having read the parties' summations and listened to their oral arguments in the hearing before us, I have reached the overall conclusion that the appeal should be allowed and the case should be remanded to the District Court in regard to the matter of relief. I shall also recommend that my colleagues do the same.

 

The Basis of the Protection of Works – Originality

 

11.       The requirement of originality has been recognized by this Court as a threshold for the existence of copyright in a work [for more on the originality requirement, see: Michael Birnhack, “The Requirement of Originality in Copyright Law and Cultural Control,” 2 Alei Mishpat 347, 352-355 (2002) (Hebrew) (hereinafter: "Birnhack")]. The development of the requirement in Israeli case law has been based on the provisions of the Old Law, despite the fact that the Hebrew version did not mention "originality", whereas the binding English version provides, in section 1, that copyright will be granted in respect of:

 

            "every original literary, dramatic, musical and artistic work…" [emphasis added  – YD].

 

            The requirement of originality was anchored in the New Law in section 4(a), which provides:

 

            "Copyright shall subsist in the following works:

            (1) original works that are literary works, artistic works, dramatic works or musical works, fixed in any form"  [emphasis added – YD].

 

12.       This Court reviewed the case law relating to the elements underlying the requirement of originality at length in CA 8485/08 FA Premier League Ltd v.  Israel Sports Betting Regulation Council (March 14, 2010) (hereinafter:  the Premier League case) [http://versa.cardozo.yu.edu/opinions/fa-premier-league-v-israel-sports-b.... It was held that the requirement of originality is analyzed on the basis of two main criteria – investment and creativity.

 

            In the scope of the investment criterion, the author must have invested certain labor in the work in order to gain the right to its rewards, similar to the theoretical basis for recognizing the right to "corporeal" property [see: the Premier League case, para. 26; CA 513/89 Interlego A/S v. Exin-Lines Bros SA, IsrSC 48(4) 133, 164 (1994) (hereinafter referred to as the Interlego case)]. This criterion is based on the labor approach and the theory of natural rights based on the teachings of the philosopher John Locke as theoretical justification for the grant of property rights generally and copyright in particular [for a broader discussion, see: Birnhack, pp. 373-375; Guy Pesach, “The Theoretical Basis for the Recognition of Copyright,” 31 Mishpatim 359, 386-391 (2001) (Hebrew) (hereinafter: "Pesach"); Justin Hughes, “The Philosophy of Intellectual Property,” 77 GEORGETOWN L.J. 287, 297-98, 302-10 (1988); Wendy J. Gordon, “A Property Right in Self-Expression: Equality and Individualism in the Natural Law of Intellectual Property,” 102 YALE L.J. 1533 (1992)].

 

            In the context of the creativity criterion, which is based on the rationale according to which the purpose of copyright law is to enrich the creative world and the range of expressions available to the public, the nature of the investment, independently of its quantity, must be considered in order to show that it contributes to that purpose [see: Premier League, para. 27; Interlego, pp. 164-165]. This approach is based on a more social concept of copyright but, nevertheless, also on a utilitarian-economic approach, according to which a balance should be made between the cost – the incentive to be given to the author in the form of the monopoly granted to him in respect of the use and control of his work -- and the benefit of safeguarding the public domain for future work [see: Pesach, pp. 361-374; William M. Landes & Richard A. Posner, “An Economic Analysis of Copyright Law,” 18 J. LEGAL STUD. 325 (1989)].

 

            I would add that, in my opinion, in the scope of the originality requirement three subordinate elements should be identified, and in addition to the investment criterion and the creativity criterion, the origin criterion should be analyzed. By this I mean a requirement that the work should originate in the author and that it should not be based on another work – or in the words of my colleague Justice E. Rubinstein "original, meaning independent" [see: CA 3422/03 Krone AG v. Inbar Reinforced Plastic, IsrSC59(4) 365, 378 (2005); CA 360/83 Strosky Ltd. v. Whitman Ice Cream Ltd., IsrSC 40(3) 340, 346 (1985) (hereinafter: the Strosky case). For further on originality as origin, see Birnhack, p. 355-372].

 

13.       This Court has also considered the question of the nature and quantity of the originality requirement's elements that suffice to realize it. In respect of the investment criterion, it has been held that all that needs to be proven is a minimal investment of some human resource [see: Interlego, p. 173; Premier League, para. 34]. On the other hand, a quantitative definition of the requisite creativity is somewhat more complex and it appears that this Court has not yet fashioned a single formula for its realization.  Nevertheless, the definition of the requisite creativity for the protection of a work has been delineated in case law by a process of elimination. Thus, it has been held that the creativity criterion does not impose a particularly high threshold for the author, and that slight and even worthless creativity might sometimes suffice [see: Interlego, p. 173; CA 23/81 Hirschco v. Orbach, IsrSC 42(3) 749, 759 (1988) (hereinafter: the Hirschco case); CA 2687/92 Geva v. Walt Disney Co., IsrSC 48(1) 251, 257 (1993) (hereinafter: the Geva case)]. It has also been held that the work need not be novel in comparison with existing works in the same sphere [see Strosky, p. 257; Geva, p. 257].

 

14.       Because of the lack of any cohesive definition of the creativity requirement, and because of the absence of any controversy with regard to the definition of the investment necessary for the protection of a work, the possibility has been raised that a substantial investment in a work can compensate for a lack of creativity in such a way as will meet the requirement of originality and establish protection for the work. However, that approach was rejected by this Court long ago in Interlego, in which the approach of American law was adopted, as expressed in the American Supreme Court's judgement in Feist Publications, Inc. v. Rural Telephone Service Company, Inc., 499 US 340 (1991) (hereinafter: the Feist case), according to which mere investment is not sufficient for the copyright protection of a work [see: Interlego, p. 165, 169; Premier League, paras. 36-38].

 

15.       To sum up the foregoing, the case law laid down by this Court is that for the grant of copyright protection in respect of a work, it must be established that an original work is involved, three subsidiary elements being analyzed – the origin criterion, the investment criterion and the creativity criterion – the existence of only one element being insufficient for the purpose of establishing originality.

 

The Protected Part of the Work – The Idea/Expression Dichotomy

 

16.       Before I move on to discuss the originality required for the protection of functional works, I wish to consider another basic rule concerning the copyright protection of works – the distinction between idea and expression. A basic principle of copyright law is that the idea that underlies a work will not be protected by the right, and that the protection is afforded only to the way in which it is expressed. This rule is embodied in section 7B of the Copyright Ordinance, which governs the instant case, and was subsequently anchored in section 5 of the New Law, which provides:

 

            "Copyright in a work as provided in section 4 shall not extend to any of the following, but copyright shall apply to the way in which they are expressed:

 

            (1)       an idea …"

 

17.       This Court has consistently emphasized the said distinction in its case law [see, for example: CA 10242/08 Mutzafi v. Kabali, (October 10, 2012), para. 24 (hereinafter:  the Mutzafi case); CA 2173/94 Tele Event Ltd. v. Golden Channels & Co., IsrSC 55(5) 529, 544 (2001) (hereinafter: as the Tele Event case); Strosky, p. 346; CA 139/89 Harpaz v. Achituv IsrSC 44(4) 16, 19 (1990)]. This distinction is based on the concept that the grant of protection to mere ideas would frustrate one of the major purposes of copyright law – the encouragement of creation and leaving sufficient "raw material" in the public domain [see: Tony Greenman, Copyright, vol. I, 75 (second ed., 2008) (hereinafter:  "Greenman")]. The distinction between idea and expression, in the context of textbooks for example, has sometimes led to the conclusion that the author's right has been infringed because of the fact that the expression of the method of study created by him (which constitutes a mere idea) has been copied [see, for example: Hirschco], but also sometimes to the opposite conclusion that all that has been "copied" is the actual idea that underlies the work [see, for example: Mutzafi].

 

18.       The rule that an idea is not protected and only the way in which it is expressed is protected overlaps the rule that facts per se are not protected. This rule finds expression when compilation works are involved, and it has been held that such works will only be protected insofar as the choice and arrangement of the raw materials – which constitute unprotected facts – meet the requirement of originality (see: Interlego; CA 2790/93 Eisenman v. Kimron, IsrSC 54(3) 817 (2000); Tele Event]. This requirement is  expressed in section 4(b) of the New Law, which provides:

 

            "… originality of a compilation means the originality of the selection and arrangement of the works or of the data embodied therein".       

 

            However, in view of the rising status of the creativity requirement and the determination that investment does not suffice to prove originality, it has been held that, in certain cases, a "compilation work" will not be sufficiently original and will therefore not gain protection [see: Premier League, paras. 51-54]

 

19.       We can see that the distinction between idea and expression is of major importance in copyright law, and that, in certain senses, it also overlaps the requirement of originality that underlies the copyright protection of works. The overlap between these two basic principles of copyright law is particularly relevant when functional works are involved, as will be explained below.

 

The Merger Doctrine and Functional Works

 

20.       Having regard to the distinction between idea and expression, the concept has developed whereby, insofar as a particular idea can be expressed in only a single way, then protection will not be given to a work that constitutes that expression. This concept has been called the "merger doctrine". The merger doctrine has received little reference in the case law of this Court [see: Geva, p. 262; CA 2682/11 Petach Tikva Municipality v. Zissu (May 20, 2013), para. 49]. The doctrine originates in American law, and its application in modern case law is based on the judgement in Baker v. Selden, 101 US 99 (1880) (hereinafter: the Baker case). In the Baker case, consideration was given to whether a book that presents a new method of bookkeeping and also includes blank forms that make it possible to implement the method, grants its author an exclusive right to use the actual method. The American Supreme Court laid down a rule in that case for use in analyzing works, the only or main use of which is utilitarian. The Court in that case held that:

 

            "… where the art it teaches cannot be used without employing the methods and diagrams used to illustrate the book, or such as are similar to them, such methods and diagrams are to be considered as necessary incidents to the art and given therewith to the public" [ibid., p. 103].

 

            The federal courts in the USA have relied on this statement in order to develop the merger doctrine. The best-known judgment, which most broadens that doctrine, is Morrisey v. Procter & Gamble Co., 379 F.2d 675 (1st Cir. Mass. 1967) (hereinafter: the Morrisey case). In that case, it was held that when a single idea has a very narrow range of possible expressions, a work that constitutes one of the expressions is not to be granted copyright protection (ibid., pp. 678-679)]. Numerous federal courts have supported the rule in Morrisey, but dissenting opinions have also been aired [see: Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 2.18[C] (2002) (hereinafter: Nimmer)].

 

21.       Baker and its development in case law have been strongly criticized [see: Nimmer, § 2.18[C]. Firstly, it has been argued that in Baker itself, the American Supreme Court restricted the rule cited above solely to the right to use the method or idea given expression in the work, and that the use of the expression in order to present the method will constitute an infringement of the copyright, or in the words of the American Supreme Court:

 

            " The use by another of the same methods of statement, whether in works or illustrations, in a book published for teaching the art, would undoubtedly be an infringement of copyright" [ibid., p. 103].

 

            Secondly, it has been argued that the distinction between copying the expression for the purpose of using the method (or idea), compared with copying the expression for the purpose of showing the method (or idea) is artificial. It has therefore been proposed to determine that copying for the purpose of using the idea will also constitute copyright infringement, and that all that should be permitted is the use of the method or idea for functional needs [see: Nimmer, § 2.18[C]-[D]]. This proposal is based on the understanding that copyright does not preclude reliance upon a work that constitutes a certain expression of an idea and presents a particular method in order to turn the method into a product. Such protection is only granted by patent law. For the purpose of demonstration, let us assume that a company manufactures a particular electrical product that is not per se protected by copyright. For the purpose of manufacture, the company produces drawings that constitute a protected work (as detailed at length below). In view of the proposition presented above, a competing company will not be able to copy the drawings, but assuming that the product itself is not protected by a patent or design, the competing company will be able to manufacture the product on the basis of the drawings without infringing copyright. I would immediately say that I accept this latter distinction, and in my opinion, it should be adopted.

 

22.       Despite the criticism that has been presented, it does appear that when there is a complete merger between the idea and its expression, and when there is only one way to express the idea, a consensus does exist that the work that gives expression to that idea will not gain copyright protection [see: Greenman, p. 83; Nimmer § 2.18[C][2]; Paul Goldstein, Copyright § 2.3.2 1 (1989)]. However, opinions are divided on the question when there are just a few possibilities of expressing the idea. According to one approach, as held in Morrisey, in such a case, copyright protection should also not be granted, but according to another approach, the work will be granted copyright, but it will only be infringed when there is absolute or almost absolute similarity between the works [see: Greenman, p. 83; Geva, p. 262]. This controversy is relevant, because, in the instant case, it is asserted by the Respondent that Safecom should have proven exact copying because its drawings constitute an idea that can only be expressed in limited ways (para. 12 of the Respondent's summations). In order to decide this controversy, in my opinion, reference may be made to the fundamental rule of copyright law presented above – the requirement of originality.

 

23.       Issues concerning the merger doctrine arise in many cases in respect of certain types of work. Thus, in the modern era, the question arises in respect of computer programs [see: Greenman, p. 81]. In addition, it has been asserted that the courts in the USA are expanding the application of the doctrine to visual works [for more on this, see: Michael D. Murray, “Copyright, Originality and the End of the Scenes a  Faire and Merger Doctrines for Visual Works,” 58 BAYLOR L. REV. 779 (2006)]. Another area in which the work, by its nature, raises issues concerning the merger doctrine is that of functional works. The instant case involves a functional work that is also a visual work. In fact, the merger doctrine can be well understood not only on the basis of the distinction between idea and expression, or to be more accurate, the merger between them, but also on the basis of the originality requirement, in particular insofar as it concerns functional works.

 

24.       In Interlego, President M. Shamgar considered at length the difficulties that the requirement of originality raises as regards functional works. One of President Shamgar's most important findings in this respect was that, in principle, a work is not to be denied copyright protection merely because it is functional [ibid., p. 160]. Nevertheless, President Shamgar held that in respect of these works the Old Law applies a filter in addition to the requirement of originality, which he called "the artistry criterion" [ibid., p. 173]. I would immediately explain that President Shamgar based the reference to that criterion on section 35(1) of the Old Law, which defines artistic work as works of painting, drawing, sculpture and artistic craftsmanship, and architectural works of art, and engravings and photographs [emphasis added – YD]. In the instant case, Safecom's drawings meet the exact definition of a "drawing" as an artistic work in accordance with section 35(1) of the Old Law, and on the face of it, the artistry criterion therefore does not apply to them directly. However, in my opinion, inspiration may be drawn from that criterion in order to interpret the application of the merger doctrine to Safecom's drawings, and to analyze their originality as a functional work.

 

25.       In Interlego, the difficulty that functional works pose for the requirement of originality was described in a way that very much brings to mind the principles of the merger doctrine. In President Shamgar's words:

 

            "When the form is dictated by the function, namely when the function limits the possible forms in which the product can be designed, then there is no justification for granting copyright to the form that is a product of functional-artistic judgement, since the protection that is given protects the function, not the author's original choice of the specific form. This is a circumstance in which the product's form is determined because of its functional task" (ibid., p. 177) (emphasis original – YD).

 

In fact, the words "function" and "form" can be substituted for the words "idea" and "expression". In order to resolve this problem, President Shamgar proposed six possible criteria for identifying the "artistry" of a work: the choice criterion; the author's intention criterion; the public acceptance criterion; the public's willingness to pay criterion; the minimal aesthetic standard criterion; and the art for art's sake criterion (ibid., p. 179). After a detailed discussion, President Shamgar proposed the "choice criterion" as the test appropriate to the examination of whether or not a work's expression derives solely from its functionality. He defined the criterion as follows:

 

            "The choice criterion: one of the characteristics of art is that it reflects the ability to express an idea in a variety of ways. As far as we are concerned here, this is a very broad criterion since it will be fulfilled whenever the creator of the functional product has the ability to choose between several options (ibid., p. 179).

 

            And following:

 

                        "It appears that in view of the purposes of copyright as indicated, and in light of the principles for the solution as formulated, the choice criterion should be regarded as a proper one in the context of examining the final product. That is to say, as long as the form obtained is one of several alternatives. The alternatives should be effective. An effective alternative is one that not only performs the functional task of the product but also meets the limited options of form existing in respect of future works deriving from the connection between function and form. There should be alternatives which, in addition to the functional task, meet the restriction of form that derives from the product's functional task or in other words, there should be several alternatives that all meet the restrictions of form that derive from the functional task" (ibid., p. 181).

 

26.       Applying the choice criterion can be of help in determining the proper protection of work regarding which it is asserted that its great functionality limits the ways for expressing the idea it represents. According to the choice criterion, the function or purpose for which the work is intended should be sought and an examination made as to whether the form of presenting that purpose – the expression – is accompanied by the author's choice from among several options that could achieve the same purpose. The application of this criterion might certainly lead to different conclusions with regard to different elements of the work. One can think of a functional work, some of the elements of which constitute essential expression of the purpose for which it has been created and therefore do not require the author to choose from alternatives when creating them, while at the same time, other elements are not dictated by its purpose, and it is clear that the author had a large range of possible choices with respect to the mode of expression. In view of this, one can again enquire into the controversy existing with regard to the relevance of the merger doctrine. As aforesaid, in my opinion when there is a solitary option for the expression of a particular idea, it is inappropriate to grant protection to that solitary mode of expression. However, when there are several possible expressions of a particular idea, even if they are very few, then in my opinion, having regard to the choice criterion, the author does have a choice among those possible expressions, and it is therefore inappropriate to deny copyright protection to the expression chosen. Nevertheless, I am willing to accept the approach that in such cases, when the number of options is very limited, then in order to prove copyright infringement, it will be necessary to apply the copying criteria strictly, and require that the work that is alleged to be an "infringing work" be almost absolutely the same as the protected work [see: Geva, p. 262; Strosky, p. 357; Greenman,  p. 83].

 

Copying a Functional Work

 

27.       The question of the criteria for copying in copyright law is an elusive one. Nevertheless, in the early 1970s, this Court laid down standards for the test in CA 559/69 Almagor v. Godik, IsrSC 24(1) 825 (1970) (hereinafter:  the Almagor case). The standards that were laid down in Almagor are still in use and were recently summed up by Justice Y. Amit in Mutzafi as follows:

 

            "(–)     It has to be proven that the defendant copied real and substantial parts of the plaintiff's work, the quality rather than the quantity being decisive.

            (–)       Copying can be inferred when the defendant had access to the plaintiff's work and the similarity between the works is of such an extent that it is unreasonable to suppose that it is the hand of chance.

            (–)       The accumulation of points of similarity is of importance. The more there are, the greater the concern that copying is involved.

            (–)       The question whether the similarity between the two works is sufficient to determine that copying of a real and substantial part is involved is one of fact and degree. The answer to the question should be given not on the basis of a mechanical comparison of a number of words or lines that are similar in the particular works, but in accordance with the judge's impression of the works as a whole" (ibid., para. 26).

 

28. Do these standards change when the protected work is a functional one? In my opinion, that question should be answered in the negative. As I have described above, functional works raise various difficulties at the stage of analyzing the requisite originality for the purpose of recognizing them as copyrighted works. However, once a functional work has passed the originality requirement stage and the choice criterion, it is a protected work in all respects, and substantial parts of it may not be copied. In this respect, even if only some of the elements that make up the functional work have passed the "choice filter", that does not affect their being work protected against copying.

          The only consequence of a work being functional concerns the standard for the analysis of copying when the protected elements constitute an idea that can only be expressed in a limited number of ways.. In such a case, a higher threshold will be necessary to establish copying, and almost absolute similarity between the protected elements and the allegedly copied elements will be required in order to establish that substantial similarity.

 

 

Were Safecom's Drawings Copied?

 

29.       Having considered the elements necessary to establish the protection of a work and prove its protection when the emphasis is on functional works, I shall now analyze whether, in the instant circumstances, Safecom's drawings amount to protected works, and whether the use that the Respondent made of them amounted to copying in infringement of the copyright.

 

30.       Firstly, it should be noted that drawings do generally meet the definition of an artistic work under section 35(1) of the Old Law, and, in any event, the Respondent does not assert that Safecom's drawings do not fall within the scope of the works to which protection is granted. Consequently, an analysis has to be made of whether the drawings meet the requirement of originality and, in such event, because they are functional works, whether they also meet the choice criterion. It is not without reason that it is said that a picture is worth a thousand words, and I shall therefore first present one of the parties' drawings as they appear in the comparative table that the Appellants filed (Exhibit 1 of their exhibits).

 

*  On the left – the Safecom drawing; on the right – the respondent's drawing

 

            The Safecom drawings portray an electrical product whose purpose is to provide electrical backup when there is a malfunction. The drawings show an illustration/photograph of the product with boxes at its sides in which there is text that expresses some electrical function, each of the drawings showing – on the product and between it and the boxes – lines and arrows that describe the electrical function that the drawing seeks to describe by visual expression. I would first state that I accept the Respondent's argument that the boxes, per se, like the text within them, do not amount to protected works. I also accept his argument that his drawings show a photograph of a product that is different from Safecom's, and that it is therefore not a copy. Nevertheless, that does not suffice as regards the question of the drawings' originality and the question of copying.

 

31.       It should first be noted that even if each of the elements of the Safecom drawings does not, per se, amount to an original work, that does not negate the possibility that the combination of the elements into a single visual work does amount to a compilation that affords protection to the way in which the elements are arranged, as opposed to the protection of each element individually [see: Greenman, pp. 119-124]. Nevertheless, even without finding that the Safecom drawings amount to an original compilation, in my opinion it can be found that they do constitute a sufficiently original artistic work.

 

32.       From looking at Safecom's drawings there appears to be no doubt that their purpose is to demonstrate the electrical process and the functions performed by the product that it manufactures. For the purpose of that demonstration, there is no doubt that it is necessary to use predefined expressions, such as the text that describes common electrical functions and such as showing the actual product to which the text relates. Together with that, Safecom's drawings also include lines and arrows that demonstrate the flow process described in the drawing. From looking at the drawings, it appears that this demonstration, which has a functional task, can be expressed in a large number of ways that can achieve the purpose, while Safecom chose a particular means of expression according to which the lines and arrows would be of a certain length and certain thickness, taking a winding course appropriate to the way in which it chose to position the product and the text boxes on the drawing. It is my opinion that Safecom's said choice affords it copyright protection in respect to the particular visual element that seeks to "correspond" with those elements that do not amount to a protected work.

 

33.       Having found that some of the elements of Safecom's drawings do amount to copyrightable artistic work, it remains to determine whether the Respondent's drawings constitute a reproduction of its drawings. I stated above that when a functional work is involved, insofar as there is a limited number of ways in which to express the underlying idea, it will be necessary to show that the work that is allegedly an infringement is almost completely the same as the protected elements in the functional work. I am prepared to assume, for the purpose of the discussion, that whether Safecom's drawings in whole constitute a protected compilation, or whether some of the elements are protected separately as an artistic work, the number of ways to give expression to a demonstration of the product's electrical process is limited. Nevertheless, even working on that assumption, from a comparison between Safecom's drawings and the respondent's drawings it appears that as regards the drawings marked Fig. 2 to Fig. 13, and Fig. 15 and Fig. 16 (Exhibit 1 of the Appellants' exhibits), the Respondent did make an identical (or at least almost identical) copy of the protected elements of the Safecom drawings in the form of the lines that describe the flow process.

 

34.       The Respondent asserts in this regard that filtering out the photograph of the product that was not copied and the elements that are not protected in the form of the boxes and the text on them, "at most what are left are… certain curved lines that describe the connections between the parts of the system. Curved lines in a drawing are not a 'substantial part' of the work. Real de minimus is involved" (para. 14 of the Respondent's summations). I cannot accept that argument. The fact that certain elements of the work are not copyrighted, whether because they are unprotected works, mere ideas or a complete merger between idea and expression, leaves those elements in the public domain and thereby permits their free use by anyone so desirous. However, when other elements of the work are copyrighted, it cannot be said that the fact that other elements of the work are not protected makes copying them insubstantial. Such a finding would negate the very protection of those elements, and that cannot be accepted. In my opinion, specifically when substantial elements of the work do not gain copyright protection and remain in the public domain, then copying all those protected elements will attest to the copying of a substantial part of the work, a fortiori when there is absolute, or almost absolute, similarity [on the substantiveness of the reproduction having regard to the amount of the copying, see Mutzafi, para. 91). This is especially so since there is no dispute that the Respondent did have full access to Safecom's drawings. It should be borne in mind that the Respondent could have made use of those unprotected elements of Safecom's drawings and added different visual descriptions to them that demonstrate the functionality of the drawings, and he could also have arranged the elements of the drawing differently, which would have achieved the functional purpose as well. Since the Respondent made exact use of Safecom's protected visual resources, he infringed its copyright in those elements.  Justice's Netanyahu's statement in Strosky is apt in this regard:

 

            "A general inverse relationship equation may be appropriate inasmuch as the less originality and intellectual effort in the work, the more exact the copying that is needed for its copyright infringement. According to this equation, it can be said that the originality and effort in the sign are modest, while the copy is almost exact. That suffices for infringement" (ibid., p. 357).

 

Permitted Uses

 

35.       Having found that the Respondent did infringe Safecom's copyright in its drawings, it remains to discuss the Respondent's arguments that his actions and the drawings that he made constitute permitted use according to the New Law and therefore do not amount to infringement. The Respondent bases his arguments on section 78(c) of the New Law, according to which an act that does not constitute an infringement of copyright in accordance with that Law will not constitute an infringement of copyright under the Old Law, despite its application in the circumstances. In view of that argument, it should first be determined whether the use of the work, in accordance with the uses that are defined in chapter four of the New Law as "permitted uses", constitutes copyright infringement. In my opinion, the answer to that is in the negative. In CA 5097/11 Telran Communications (1986) Ltd v. Charlton Ltd. (September 2, 2013) (hereinafter referred to as "Telran"), my colleague Justice Z. Zylbertal expressed the opinion that use in accordance with the uses defined in chapter four of the New Law cannot amount to a contravention of that law (ibid., paras. 28-30). That opinion is based both on the wording of the Law and on the perception that there are certain uses that, according to the purposes underlying copyright, amount to a right of the user and not merely a defense against contravention of the Law [for further, see Niva Elkin-Koren, “Users' Rights,” in Michael Birnhack & Guy Pesach, eds., Copyright (2009) 327 (Hebrew)]. I accept this position both as regards the finding that permitted use, as defined in chapter four of the New Law, does not constitute a contravention of the law, and as regards the finding that permitted use in fact constitutes a right that is granted to the user to make certain types of use of a work. I am conscious of the fact that this position is contrary to the holding of Deputy President E. Rivlin in CA 9183/09 Football Association Premier League Ltd. v. Anonymous (May 13, 2012) (hereinafter: the Anonymous case), para. 18 of his opinion, and in view of the existing disagreement, the time may have come for an extended bench to address this issue.

 

36.       Having found that permitted use does not amount to a contravention of the New Law, consideration should be given to the types of permitted use that are asserted by the Respondent in the instant case.

 

            Firstly, the argument Respondent raises avers that his use of Safecom's drawings is permitted use under section 20 of the New Law, which permits the use of a work in legal administrative proceedings to the extent justified having regard to the purpose of the use. I cannot accept that argument. I am prepared to assume for the purpose of the discussion that using the work for the purpose of presenting it to the registrar of patents in a particular country does constitute use in legal administrative proceedings, despite the fact that such a finding is not free of difficulties. However, the main element of this permitted use is the extent of the use, having regard to its purpose. In the instant case, the purpose of using Safecom's drawings and presenting them to the American Registrar of Patents in the patent registration application was the registration of a patent in respect of a product that competes with the one that Safecom markets. My opinion is that such use by a direct competitor, using the copyrighted work for the purpose of direct competition with the owner of the work, cannot amount to permitted use under section 20 of the New Law.

 

37.       Secondly, the respondent raises an argument that the use that he made of Safecom's drawings amounts to fair use, as defined in section 19 of the New Law. Section 19(a) of the New Law comprises an open list of types of use of protected works that will be permitted and fair. Section 19 (b) of the New Law enumerates four non-exclusive factors that are to be considered in order to determine whether a particular use amounts to fair use, including:

 

            "(1) the purpose and nature of the use;

            (2) the nature of the work of which use is made;

            (3) the extent of the use, qualitatively and quantitatively, in relation to the work as a whole;

            (4) the effect of the use on the value of the work and its potential market".

 

            This Court has held that "these are not essential or cumulative factors but a non-exhaustive list of parameters that might indicate the fairness of a particular use that is made of a protected work" [Anonymous, para. 19 of the opinion of Deputy President Rivlin].

 

            The four subordinate criteria listed in section 19(b) of the New Law are based on the subordinate criteria that have been laid down in the American Copyright Act [see: 17 USC § 107]. Empirical research that has been conducted attests that although the fourth subordinate criterion – the effect on the potential market – is most often mentioned as the decisive factor regarding the fairness of use, the first subordinate criterion – the purpose and nature of the use – does in fact have the most marked effect on the decision, the most influential factors being the commerciality and transformativeness of the use [see: Barton Beebe, “An Empirical Study of US Copyright Fair Use Opinions,” 1978-2005, 156 U. PENN L. REV., 549 (2008); Neil Weinstock Netanel, “Making Sense of Fair Use,” 15 LEWIS & CLARK L. REV. 715 (2011)]. It appears that these factors were also the most influential in this Court's ruling in Anonymous [ibid., para. 20].

 

            In the instant case, it appears that the use that the Respondent made of Safecom's drawings did not meet the standard of fair use. Thus, in the scope of the first subordinate criterion, it is clear that the Respondent's use was commercial because its whole purpose was to bring about the registration of a patent in respect of his product that competes with Safecom's product. Moreover, on analyzing the question of transformative use, it does not appear that the Respondent's use of the Safecom drawings led to the creation of a new expression, different from the original expression embodied in them. As regards the third subordinate criterion – the extent of the use – I have already found above that the Respondent made an exact, or almost exact, copy of Safecom's drawings, and the extent of the use is therefore full. Finally, having regard to the fourth subordinate criterion, it is clear that since the product marketed by the respondent directly competes with Safecom's product, there is no doubt that the use affects the potential market for Safecom's drawings.

 

            Incidentally, I would mention that I cannot accept the Respondent's argument that the American Patent Office has expressed its opinion that the use of a protected work for the purpose of a patent application amounts to fair use. From studying the opinion (which was annexed as Appendix J to the Respondent's volume of supporting documents), it appears that the American Patent Office means that the use of protected works that the Office itself makes in its relationship with those filing patent applications amounts to fair use [see: United States Patent and Trademark Office, USPTO Position on Fair Use of Copies of NPL Made in Patient Examination (January 19, 2012)].

 

38.       Thirdly, the Respondent contends that the use that he made of Safecom's drawings is permitted in accordance with section 27 of the New Law. Section 27 of the New Law provides:

 

            "Making a new artistic work which comprises a partial copying of an earlier work, or a derivative work from an earlier work, as well as any use of the said new work, are permitted to the author of the said earlier artistic work even where said author is not the owner of the copyright in the earlier artistic work, provided the new work does not repeat  the  essence  of  the  earlier  work  or  constitute  an  imitation thereof".

 

            In order to fall within the scope of the section, the Respondent must show that he was at least a joint author of the Safecom drawings. The District Court found that the Respondent had waived his rights in the drawings in favor of Safecom in the scope of the Agreement. The Respondent argues in this connection that even if he had waived his rights in the drawings, as regards the New Law he is still the first joint author of them. In my opinion, there is no need to rule on this issue because even if the respondent is a joint author of Safecom's drawings, section 27 of the New Law does not work in his favor in this case because the use that he made of Safecom's drawings amounts to an absolute, or almost absolute, copy of them. It cannot, therefore, be said that "partial copying" of Safecom's drawings, or a work deriving from them, is involved, and it can easily be found that the Respondent's drawings "repeat  the  essence  of  the  earlier  work  or  constitute  an  imitation thereof".

 

39.       Before concluding, I shall briefly consider the Respondent's argument concerning the law governing this case. According to the Respondent, copyright law is naturally territorial, as is the application of the Old Law. Since Safecom's drawings were copied in the USA, the Respondent asserts that the law governing the case is American law, which was not proven by the Appellants, and the appeal should therefore be dismissed. The District Court considered the Respondent's said argument and held that the drawings were not only copied in the context of filing the patent, but that the Respondent had received the presentation containing Safecom's drawings in Israel and copied them on the computer at his home in Israel. Consequently, the District Court held that Israeli law could be applied to the case. Those findings of the District Court are findings of fact, in which I have not found it appropriate to intervene at the stage of appeal. I would merely state that even were it appropriate to find that this case is governed by American law, that would not necessarily lead to the dismissal of the appeal in the absence of proof of the foreign law. This is particularly so when a sphere is involved that is regulated by numerous international conventions, which lead to relatively great conformity among the different state laws [see, for example: CA 169/94 Werner v. Amorim, IsrSC 50(3) 119, 124 (1996); CA 1227/97 Red Rock Quarry and Stone Works Ltd. v. Ibrahim IsrSC 53(3) 247, 259 (1999); CA 7687/04 Sasson v. Sasson (February 16, 2005), para. 10].

 

40.       In conclusion, I would recommend to my colleagues that we find that certain elements of Safecom's drawings amount to protected work, that 13 of the Respondent's drawings amount to an absolute, or almost absolute, copy of Safecom's drawings, and that the use that the Respondent made of the drawings does not amount to permitted use. I would also recommend to my colleagues that we remand the case to the District Court for ruling on the appropriate relief in respect of those infringements, and that the Respondent pay the Appellants' costs in the amount of NIS 40,000.

 

 

 

Justice Z. Zylbertal

 

            I concur.

 

 

 

Justice E. Rubinstein

 

A.        I concur in the illuminating opinion of my colleague, Justice Danziger.

 

B.        My colleague gave thorough consideration to a broad picture of copyright law, with regard to originality as a condition for the protection of a work, the protection of the way in which an idea is expressed, as opposed to the idea itself, and the criteria concerning works of a functional character, which is a complex matter in itself.

 

C.        I would like to add another criterion to all these – the common sense criterion, which might sound too broad because it can be said that common sense should guide us in every case, and on the other hand it is not necessarily the same for everyone in individual matters. However, by saying "common sense" in the instant case, I mean the accumulation of all the overall facts before the court.  When a work is involved, appearance or the sight of the eyes ("better is the sight of the eyes than the wandering of the desire", Ecclesiastes 6:9) is also acknowledged to be a significant parameter in intellectual property law (and see: CA 3422/03 Krone v. Inbar, IsrSC 59(4) 365, in respect of drawings as well. See also, inter alia, CA 7125/98 Mipromal v. Kalil, IsrSC 57(3) 702, 710 et seq.). Incidentally, the expression "the criterion of common sense" (in a slightly different sense) can be found in case law. See the statement by then Justice Grunis in ALA 5454/02 Taam Teva v. Ambrosia, IsrSC 57(2) 438, 453 (2005) citing this criterion per the learned commentator Seligson (Trademarks and Similar Law, (5733), 80-81 (Hebrew)) as regards the comparison of a conceptual message. And in the instant case, in preparing the file, when we – the bench – inspected the drawings involved, in our eyes there was a great similarity that was immediately conspicuous. Consequently, as I see it, the result that we have reached was required not only by common sense but also by the sight of our own eyes.

 

D.        Intellectual property law does, indeed, in many cases involve subtle nuances in respect of which it is frequently difficult to separate the wheat from the chaff, and much has been written about the difficulties of litigation in this sphere (see: D. Freiman, Patents (second printing, 2008) 7); but in my opinion, the case before us is not one of the difficult ones and anyone looking at the drawings that my colleague presented in his opinion (para. 30) needs no arcane language and can take them at face value, almost like the well-known definition by US Supreme Court Justice Potter Stewart concerning pornography, who said that it is perhaps difficult to define but "I know it when I see it".

 

E.         As aforesaid, I concur with my colleague's review, together with his cataloguing and arrangement of the matter.

 

F.         Before concluding, I would mention that Jewish law, especially in its modern embodiment, but even long ago, has considered the matter of intellectual property rights; see my opinion in CA 9191/03 V&S Spirt Aktiebolag v. Absolute Shoes, IsrSC 58(6) 869, 888-892, which also discusses (at p. 890, para. 18(3)) the Jewish law foundations of enforcement in intellectual property matters, and I would here emphasize the approaches of Jewish law that concern a another’s craftsmanship, trespass and theft, and more; in Krone, supra (at p. 379), I also considered the matter of a graphic pattern (or drawings) as a cause of action in Jewish law, and also see my opinion in ALA 7774/09 Weinberg v. Weisshof (2012) paras. 9 to 12 and the authorities cited there.

 

 

 

            Decided as stated in the opinion of Justice Y. Danziger.

 

Given this 15th day of Kislev 5774 (November 18, 2013)

 

 

 

Justice

Justice

Justice

 

 

 

 

 

            

In the Supreme Court

Sitting As a Court of Civil Appeals

CA 1697/11

 

Before:	His Honor, Justice S. Joubran His Honor, Justice U. Vogelman His Honor, Justice N. Sohlberg
The Appellants:	1.  A. Gottesman Architecture Ltd 2.  Asaf Gottesman
v.
The Respondent:	Arie Vardi

 

Appeal against the judgment of the District Court of Tel Aviv-Jaffa (Her Honor Judge A. Baron) of January 17, 2011 in CF 1222/09

 

On behalf of the Appellants:	Adv. Hillel Ish-Shalom, Adv. Roy Kubovsky, Adv. Guy Lotem
On behalf of the Respondent:	Adv. Eran Presenti

JUDGMENT

Justice U. Vogelman

 

            An architect designed a unique house for a client and asked to photograph it in order to show it on his firm's website. The client refused. The architect published computer simulations of the client's house on the website, without giving details identifying the owner of the house. Does this case give rise to an infringement of privacy? That is the question that faces us.

 

The Main Facts and Proceedings

 

1.         The Second Appellant (hereinafter referred to as "Gottesman") is an architect who heads a firm of architects. At the beginning of the year 2000 the Respondent (hereinafter referred to as "Vardi") commissioned Gottesman's services for the latter to design his residence for him. The parties do not dispute the fact that the project was one of a kind and a house was ultimately built that was exceptional as regards its size, the type of materials used in its construction and its unique design. Despite the extensive scale of the project, no written agreement was ever made between Vardi and Gottesman, either with regard to the commissioning of the architectural work or concerning the possibility of documenting and photographing the building for Gottesman's purposes.

 

2.         Even before the construction was completed, Gottesman asked Vardi to photograph his house, as was his firm's practice. Vardi, for his part, made the photographs conditional upon Gottesman and the intended photographer signing a letter of commitment in respect of the photographs' use. According to the wording proposed by Vardi, Gottesman and the photographer would be obliged to apply to him in writing whenever they wanted to make use of the pictures and obtain his express consent. The two were also required to undertake to pay Vardi agreed damages without proof of loss for any breach of that undertaking: Gottesman - $500,000 and the photographer - $50,000 (hereinafter referred to as "the letter of commitment"). Gottesman asserted that the letter of commitment that Vardi proposed was a new requirement that was contrary to a previous understanding between the parties in respect of photographing the house. Vardi, on the other hand, expressed anger at the fact that Gottesman categorically denied the importance of protecting his privacy. No agreement was ultimately made between the parties and in the absence of any understanding, professional photographs of Vardi's house were not taken.

 

To complete the picture, it should be noted that at the relevant time photographs of Vardi's house were published in two places: firstly, pictures of the house exterior were published in a book that was printed in hundreds of copies, published by Apex Ltd (hereinafter referred to as "Apex"), which had installed windows and shutters in Vardi's house; secondly, pictures were published on the website of the carpenter who had done carpentry work in Vardi's house. Both Apex and the carpenter had signed a letter of commitment in favour of Vardi with regard to using pictures of his house in terms similar to those that Gottesman had been asked to sign.

 

3.         Since Gottesman had not been permitted to photograph Vardi's house he commissioned the services of a studio that specialised in the creation of computer simulations in order to create an artificial simulation of the architectural work in Vardi's house. Those simulations, which look very similar to actual photographs, were published on the website of Gottesman's firm (hereinafter referred to as "the website"). There were no details identifying the owner of the house or its address alongside the pictures. After Vardi discovered that the computer simulations had found their way onto the website, he filed a lawsuit in the Tel Aviv Magistrates Court against Gottesman and his firm, in which he applied for a permanent injunction restraining them from making any use of photographs or simulations showing his house. At the same time as bringing the action, a motion was also filed for the provisional relief of removing the simulations from the website. An order prohibiting publication of the existence of the legal proceedings, including any identifying detail in respect of any of the parties to the action, was also sought. On November 11, 2008, during a Magistrates Court hearing of the motion for provisional relief, the parties reached an understanding with regard to publicising Vardi's house on the website until the motion for provisional relief is heard on its merit. In that understanding it was provided that the simulations would be removed from the website and other pictures of the house, which had already been published in the Apex book with Vardi's consent, would be published instead (hereinafter referred to as "the procedural arrangement"). On September 24, 2008 the Court (Her Honour Judge Z. Agi) allowed the application for the award of an interim gag order. Nevertheless, the Court ordered the trial to be remitted to the Tel Aviv District Court because it was found that the relief sought in the action was within its residual jurisdiction since it was an application for a permanent mandatory order incapable of financial quantification. Both the procedural arrangement and the gag order remained in force during the trial of the action.

 

The Judgement of the Lower Court

 

4.         The District Court (Her Honour Judge A. Baron), to which the trial was remitted, allowed Vardi's claim and held that his privacy had been infringed as a result of the exposure of his home on the Internet. It was held that although the simulations did not include personal belongings or intimate items, they did make it possible to obtain an impression of the lifestyle in the house, the habits of its occupants and their financial position. On the other hand, the Court dismissed the plea that removing the simulations would infringe the freedom of occupation and intellectual property rights of Gottesman and his firm. Consequently, against the infringement of Vardi's privacy, the Court weighed the harm to the economic interest that Gottesman and his firm would sustain, if they could not use the simulations in order to attract potential clients. In balancing them, the Court held that Vardi's right of privacy outweighed Gottesman's economic interest. Alongside that, the Court held that Vardi had not expressly or impliedly agreed to publication of the pictures or simulations. It was found that even if there had been talk between the parties about publishing pictures of the house in some or other framework, no express agreement had been reached to take and publish photographs. It was also held that there was no implied agreement to publishing the pictures. Amongst other things, the Court declined to treat the working relationship between Gottesman and Vardi or the fact that Gottesman had designed and planned the house as implied consent to the use of the simulations. It was further held that Vardi's agreeing to allow Apex and the carpenter to make certain use of photographs did not constitute implied agreement to similar use by Gottesman. Finally, the Court stated that even had Vardi's agreement been obtained, the agreement was unenforceable by virtue of section 3 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970. A permanent injunction was therefore awarded restraining Gottesman and his firm from making any use of photographs or simulations showing Vardi's house, and the procedural arrangement that the parties had reached was annulled/rescinded. The sweeping gag order in the case was also removed and replaced by a mere prohibition of publishing the evidence.

 

The Parties' Arguments on Appeal

 

5.         In the appeal herein Gottesman and his firm reiterated their assertion that they should be permitted to publish the simulations on the website. At the outset, the Appellants dispute the lower court's finding that showing the computer simulations infringes "the privacy of a person's intimate life", within the meaning of the definition in section 2(11) of the Protection of Privacy Law, 5741-1981 (hereinafter referred to as "the Protection of Privacy Law" or "the Law"). Firstly, it was pleaded that showing the computer simulations of a house without specifying details identifying the owner cannot be construed as an infringement of privacy as defined in the Protection of Privacy Law. According to the Appellants, in order to prove an infringement of privacy as a result of the information published, it has to be shown that a link can be made between the information and a specific "person". In the instant case, it was argued, the computer simulations were shown in a "sterile" state, based on the planning position before the occupants entered the house and while making certain modifications. Alongside that, it was asserted that in any event there was no infringement of "the privacy of a person's intimate life" because the section relates to highly intimate information, such as a person's sexual proclivity or state of health. The same goes all the more so, according to the Appellants, in respect of the simulations that show the outside of the house and the spaces designated for hospitality. In the alternative, the Appellants plead that even if an infringement of privacy was caused, it did not give rise to a cause of action since it is a minor infringement "of no real significance", as defined in section 6 of the Protection of Privacy Law, because the simulations were published anonymously, without specifying personal details.

 

6.         Even if there was an infringement of Vardi's privacy, the Appellants plead that the defence of good faith applies in the circumstances prescribed in the Protection of Privacy Law. In particular, it was pleaded that the Appellants did not imagine that the publication would infringe Vardi's privacy and they are therefore entitled to the defence prescribed in section 18(2)(a) of the Law ("he did not know and need not have known that an infringement of privacy might occur"). It was further pleaded that the publication was intended to serve Gottesman's moral right to obtain fitting credit for his work, which he has by virtue of an architect's copyright in his work (section 4 of the Copyright Law, 5768-2007 (hereinafter referred to as "the Copyright Law")). According to the Appellants, this entitles them to the defence under section 18(2)(c) of the Protection of Privacy Law ("the infringement was committed in defence of a legitimate personal interest of the infringer") because, according to them, the moral right should enable the architect to publish computer simulations of his work.

 

7.         The Appellants further argue that it was inappropriate for the lower court to find that the element of "absence of consent" necessary to establish an infringement of privacy had been fulfilled. The Appellants first protest the finding that Vardi's consent was necessary in this context. Such consent, according to them, would only be necessary if Gottesman had sought to enter Vardi's house and photograph it in the private domain. However, they assert, it is unnecessary to obtain consent when involved is the use of the architectural plans and simulations created on the basis of them. Secondly, they argue, Vardi had originally agreed to the house being photographed and in any event his implied agreement to publishing the simulations could be inferred from the agreement that he had given to publish pictures of the house in the Apex book and on the carpenter's website, and also from the principle agreement to the procedural arrangement. Therefore, the Appellants maintained, Vardi's attempts to procure Gottesman's signature to the letter of commitment should be construed as an attempt contrary to a previous understanding between the parties. Such being the case, it should be held that Gottesman's refusal to sign the said document is irrelevant. Finally, the Appellants argue that it should be presumed that had Vardi wished to limit the use of the work, he would have done so from the outset in an express agreement.

 

8.         Vardi, for his part, endorses the lower court's ruling. According to him, publishing the simulations on the website constitutes an infringement of his and his family's privacy. According to Vardi, the fact that simulations, rather than actual pictures, were published on the website was aimed at circumventing the Protection of Privacy Law because the simulations show the house almost exactly as it really is and it is easy to link them with it. In view of that, Vardi seeks to adopt the District Court's finding that publishing the simulations on the website should be treated as publication of a matter relating to a person's "intimate life", as provided in section 2(11) of the Protection of Privacy Law and it therefore involves an infringement of privacy. According to Vardi, the Appellants cannot benefit from the defences prescribed in the Law: as regards the defence under section 18(2)(a) of the Law, which deals with the absence of knowledge of an infringement of privacy, it is asserted that Vardi emphasised to Gottesman that he jealously guards his privacy, and his attorney also demanded that the Appellants remove the pictures from the website immediately; as regards the defence under section 18(2)(c) of the Law, it was pleaded that the Appellants were not protecting a "legitimate personal interest" by publishing the simulations but merely sought to produce an economic gain. In any event, Vardi argued, the essential requirement of good faith to establish the said defences was not fulfilled in the present case because the Appellants had failed to remove the pictures at his request.

 

9.         Furthermore, according to Vardi, the case herein does not give rise to a clash between copyright law and protection of privacy law. An architect, according to Vardi, has no copyright in a house that was built but at most in the two-dimensional plans of the house and even those, it is argued, cannot be published by the architect without the client's consent. Consequently photographing the house and circulating the photographs, including by way of simulations, is not an inherent right of the architect. Even were copyright involved, Vardi asserts, it is an economic right which does not supersede the right to privacy. In this context, Vardi emphasizes that the lower court was not moved to award relief that would preclude the Appellants from showing the project to customers and in professional circles; instead an injunction restraining publication at large, on the Internet, or in a book or magazine, was sought. Such being the case, according to Vardi, the Appellants' freedom of occupation or copyright was not infringed. Finally, Vardi maintains that the plea of copyright infringement was merely made by Gottesman incidentally and in an unspecified manner at the trial in the lower court and it is therefore a prohibited "amendment of pleadings" on appeal.

 

10.       The parties also took issue with regard to the formation of consent to publish the simulations. Vardi asserts that his agreement to the publication of the simulations was not obtained. According to him, during the years of the relationship between the parties, his confidence in Gottesman had lessened and he had therefore chosen to ask for any understanding in respect of photographing his house and using the pictures to be put in writing. A written undertaking along those lines did not come about and, such being the case, according to Vardi, no agreement was consummated between the parties in respect of publication. In that connection Vardi rejects the Appellants' argument that agreement to publication could be inferred from the procedural arrangement that the parties reached or from the agreement that was given to the carpenter and Apex for publication. According to him, a person is entitled to control his privacy so that consent to waive privacy should be made knowingly and expressly.

 

The Procedural Progression

 

11.       On April 2, 2012 we had an appeal hearing in the presence of the parties before a bench headed by the (now retired) Deputy President, Justice E. Rivlin. At the hearing we believed that it would be best for the dispute between the parties to be resolved in mediation. The parties accepted our proposal and agreed to go to mediation. Unfortunately, the mediation did not prove successful and the parties notified us on July 27, 2012 that they had not reached an overall understanding. Prior thereto, in May 2012, the Deputy President retired and he was replaced by my colleague, Justice N. Solberg (as decided by the President, A. Grunis on August 13, 2012). In view of the change to the bench since the hearing, the parties were permitted to supplement summations in writing. The time for a ruling has now been reached.

 

Discussion and Ruling

 

The Right to Privacy

 

12.       The right to privacy is one of the most important human rights in Israel. It is one of the freedoms that mould the character of the regime in Israel as a democratic one (HCJ 6650/04 Jane Doe v. The Netanya Regional Rabbinical Court, para 8 (May 14, 2006) (hereinafter referred to as "Jane Doe")). Since the Basic Law: Human Dignity and Liberty was passed, it is even vested with constitutional status (section 7 of the Basic Law). Privacy enables a person to develop his selfhood and to determine the degree of society's involvement in his personal behaviour and acts. It is his "proprietary, personal and psychological castle" (Crim. App. 5026/97 Gilam v. State of Israel, para 9 (June 13, 1999) (hereinafter referred to as "Gilam")). The right to privacy therefore extends the line between the private and the public, between self and society. It draws a domain in which the individual is left to himself, to develop his "self", without the involvement of others (HCJ 2481/93 Dayan v. The Jerusalem District Commander, PD 45(2) 456, 471 (1994) (hereinafter referred to as "Dayan"). It "embodies the individual's interest not to be bothered by others in his intimate life" (CA 8825/03 Clalit Health Services v. The Ministry of Defence, para 21 (April 11, 2007)).

 

Infringement of Privacy – Section 2(11) of the Protection of Privacy Law

 

13.       The prohibition of infringing privacy is currently embodied in the Protection of Privacy Law. Section 1 of the Law provides that "no person shall infringe the privacy of another without his consent". As has already been held, the definition of "privacy" is not simple (HCJ 6824/07 Manna v. The Tax Authority, para 34 (December 20, 2010); CA 4963/07 Yediot Aharonot Ltd v. John Doe, para 9 (February 27, 2008) (hereinafter referred to as "Yediot Aharonot")). Section 2 of the Protection of Privacy Law prescribes what an infringement of privacy is. In his claim, Vardi referred to section 2(11) of the Law, which concerns "publishing any matter relating to a person's intimate life, including his sexual history, state of health or conduct in the private domain". Of the three alternatives mentioned in the section, the most relevant herein is "publishing any matter relating to a person's intimate life" and also, to some extent, "publishing any matter relating to [a person's] conduct in the private domain". In order to delineate the expression "any matter relating to a person's intimate life", two matters should be clarified: firstly, what is a matter relating to a person's "intimate life"; and secondly, whether the information published indeed makes it possible to identify a "person".

 

(a)       A Person's Intimate Life

 

14.       Firstly, as regards the expression "a person's intimate life": what can fall within that definition? "Intimate life" is also a vague expression, the boundaries of which are unclear (Eli Halm, Protection of Privacy Law, 148 (2003) (hereinafter referred to as "Halm")). It is therefore clear that the answer to the question as to what will be regarded as a matter relating to "a person's intimate life" is not plain and simple and that "like many expressions that we encounter in the law books and ordinary life, their interpretation depends on the context and the purpose for which the interpretation is needed (see and compare the opinion of Justice T. Strasburg-Cohen in CA 439/88, The Registrar of Databases v. Ventura, PD 48(3) 808, 835 (1994) (hereinafter referred to as "Ventura"); also compare the opinion of Justice G. Bach in the same case, p 821). In this respect I would mention that I do not accept the interpretation that a high threshold of intimacy needs to be crossed – for example matters relating to a person's sexual history – in order to establish infringement of "a person's intimate life". That interpretation, which Gottesman propounded, relies on the fact that section 2(11) provides that infringement of privacy is "publishing any matter relating to a person's intimate life, including his sexual history" (emphasis added – UV). However, studying the legislative history of the Protection of Privacy Law indicates that the ending, after the word "including", was added to the section merely to clarify that "a person's sexual history" is also a matter relating to his "intimate life" (see the Explanatory Notes on the Draft Protection of Privacy (Amendment No. 8) (Prohibition of Publishing a Matter of Sexual History) Law, 5766-2005). In that sense the addendum is merely to clarify and elucidate (see ALA 2985/96 Medalsi v. Goni PD 50(2) 81, 86 (1996). See also: Aharon  Barak, Legal Interpretation, Volume II, Legislative Interpretation 137-138 (1993)).

 

15.       Having said all that, the first issue to clarify is whether the phrase "a person's intimate life" also embraces publications concerning a person's home. A person's home is not one of those concrete matters that are mentioned in section 2(11) of the Protection of Privacy Law – "a person's state of health" and "his conduct in the private domain". Nevertheless, information relating to a person's home might certainly fall within the scope of "a person's intimate life". Indeed, a person's home gains a place of honour in the case law relating to privacy. Thus, for example, in Dayan, His Honour the Deputy President (as he then was) A. Barak held that:

 

            "The constitutional right to privacy extends, inter alia […] to a person's right to conduct the lifestyle that he wants in his own home, without interference from outside […] The right to privacy is therefore intended to ensure that a person will not be a prisoner in his own home and will not be forced to expose himself in his own home to interference that he does not want" (ibid, p 470; see also Jane Doe, para 10; Gilam, para 9).

 

Nevertheless, as I see it, these statements are not to be understood literally as relating merely to the physical aspect of the home. As President A. Grunis noted in respect of the statement cited above from Dayan, "it should be understood more broadly, metaphorically, along the lines of the expression coined by Warren & Brandeis, 'the right to be let alone'" (HCJ 8070/98 The Association for Civil Rights in Israel v. Ministry of the Interior PD 58(4) 842, 856 (2004); see also Yediot Aharonot, para 9). It should therefore be said that information relating to a person's home will not necessarily always be included in the scope of the matters concerning a "person's intimate life". For the publication of information relating to a person's home to be construed as an infringement of privacy, as defined in the Law, it is necessary to see whether it is such as to cross that threshold of intimacy, beyond which it may be said that "a person's intimate life" was infringed. In the instant case, reviewing all the circumstances leads to the conclusion that publishing the simulations of Vardi's house interior does indeed involve infringement of "a person's intimate life". The interior of a person's home is his castle and he is entitled to be let alone in it. Inside a person's home he exercises his right to privacy in the clearest form. A person therefore has a reasonable expectation that pictures of the interior of his home will not be published at large without his consent. In the instant case, studying the simulations of Vardi's home as published on the website shows that, despite the fact that they are computer simulations, the impression gained from them is very tangible. In this respect I accept the findings of the trial instance that "since the simulations show Vardi's house as it really is, it matters not whether they are the result of computer work or a camera" (p 13 of the lower court's judgement). And note, although the simulations do show the house in a "sterile" condition, namely without Vardi's personal belongings appearing in them, the items of furniture in them are very similar indeed to the existing furniture; they expose "personal" spaces in the house, like the bedroom and bathroom; and they are such as to attest to Vardi's lifestyle and also demonstrate, in the words of the section, "his conduct in the private domain".

 

16.       The simulations of the house exterior should be treated differently. Ordinarily, the front of a house is exposed to passers-by. It is in the "public eye". Consequently, insofar as the front of a house is visible from the street, it is clear that showing its picture or simulation will not give rise to any infringement of privacy (see also CF (J'lem District) 7236/05 Levin v. Ravid Stones, para 14 (May 15, 2006)). The right of privacy does not extend to information that is already in the possession of the public. Therefore, when certain information is in any event in the public domain, the view that the right of privacy is not howsoever infringed is appropriate. (For similar statements in American law, see Jackson v. Playboy Enterprises, Inc., 547 F. Supp. 10, 13 (S.D. Ohio 1983); Fry v. Ionia Sentinel-Standard, 101 Mich. App. 725, 731 300 N.W. 2d 687 (Mich. Ct. App. 1980); Reece v. Grissom, 154 Ga. App. 194, 196, 267 S.E.2d 839 (Ga. Ct. App. 1980).  See also David A. Elder, Privacy Torts 3-45, 3-44 (2002) (hereinafter referred to as "Elder"); James A. Henderson, Richard N. Pearson and John A. Siliciano, The Torts Process 930-31 (4th ed. 1994).)

 

17.       According to Vardi, a distinction should be made between the situation described above, in which the front of the house as visible from the street is shown, and the simulations published by Gottesman on the website. Vardi asserts that the simulations of the house exterior that Gottesman posted on the website of his firm show the house from an angle that necessitates access to the grounds of the house, from which passers-by cannot obtain an impression of it. In that sense, Vardi pleads, a photograph from "the public domain" is not involved. Even if Vardi is right in that plea, there is no question that portraying the front of a person's house in public does not give rise to an infringement similar in extent to that caused by displaying the interior of his house. Whilst the interior of a person's house is visible only to his invited guests, the front of his house is less "private". The front of a person's house does not have the same "intimacy" that is characteristic of the intimate rooms of his home. In that sense, the simulations of the house exterior are not "information" that is sufficiently close to the nucleus of the interest protected by section 2(11) of the Law. Hence, whilst the simulations that portray the internal spaces of the house might infringe "a person's intimate life", publishing simulations of the house exterior does not give rise to such an infringement.

 

(b)       "A Person's" – the Requirement of Identification

 

18.       The wording of section 2(11) of the Protection of Privacy Law shows us that in order for the publication of a matter to constitute an infringement of privacy, it has to be established that the information published makes it possible to identify a person. When can it be said that information published does indeed make it possible to identify a person so that an infringement of privacy does arise?  Essentially, it appears that the answer is that an infringement of privacy will not arise where the requirement of "identification" is not fulfilled, namely insofar as a reasonable person would be unable to connect the information published with a specific person. On this point I would immediately clarify, ex abundanti cautela, that we might in future come across cases in which it will be possible to consider making that requirement more flexible. Those will be the exceptions in which particularly sensitive information is published to the point that even if it cannot be connected with someone, the very publication will create in the one to whom the information relates a serious sense of his privacy's violation, so that its protection will be justified. We shall leave discussion of such matters for when they arise since that is not the case herein.

 

19.       In order to comprehend the nature of the identification requirement, recourse may be had, by way of analogy, to defamation law that we can use as an aid to interpretation and source of inspiration (see CA 723/74 Haaretz Newspaper Ltd v. The Israel Electric Corporation Ltd, PD 31(2) 281, 293 (1977); Dan Hay, The Protection of Privacy in Israel, 91-97 (2006) (hereinafter referred to as "Hay") and the references there). This is because in many senses an infringement of privacy is similar to the damage caused to reputation as a result of publishing defamatory information. Even before the enactment of the Defamation Law, 5725-1965 (hereinafter referred to as "The Defamation Law"), this Court insisted that in a claim on a cause of defamation it has to be established that the focus of the publication is a specific person. It was therefore held that the plaintiff on such a cause will be obstructed by the fact that he cannot be identified in the picture that was published (CA 68/56 Rabinowitz v. Mirlin PD 11 1224, 1226 (1957)). This requirement was intensified after the Defamation Law was enacted. Indeed, a question similar to that facing us was considered at length in the context of defamation law in CA 8345/08. Ben Nathan v Bachri (July 27, 2011) (hereinafter referred to as "Jenin Jenin "). In that case the Court considered the criteria whereby it could be held that defamation addressed at a group defames its members (ibid, para 18). The Court held in that case that "[…] For cause to arise to take proceedings in respect of the publication of defamation it has to be shown that it relates to an individual or certain individuals and when the proceedings are taken by the injured party, he must show that the statement relates to him" (ibid, para 32. Emphasis added – UV). What is important with respect to the instant case is that the inference was drawn, inter alia, from the fact that the section of the relevant statute (section 1 the Defamation Law) provides – as in the case herein – that the subject of the statement must be a "person" (ibid).

 

20.       By way of comparison, in American law a similar criterion is also accepted in respect of the infringement of privacy. According to the case law there, the requirement of identification has been recognised as an essential one that confronts anyone seeking to assert the infringement of his privacy. Such being the case, where the plaintiff's image or name was not used, the courts in the USA have held that in practice no infringement of privacy arises (see: Branson v Fawcett Publications, 124 F. Supp. 429, 431-32 (E.D. III 1954); Rawls v. Conde Nast Publications, Inc. 446 F. 2d 313, 318 (5th Cir. 1971) (hereinafter referred to as "Rawls"). See also: Elder, pp 3-40). Consequently, as regards publications such as a photo of a person's house, car, dog or more, that are made without mention of some or other person's name, it has been held that they do not constitute an infringement of privacy, even if subjectively a person feels that his privacy has been infringed (Rawls, ibid; Samuel H. Hofstadter and George Horowitz, The Right of Privacy, 44 (1964)).

 

21.       From the aforegoing it prima facie appears that it suffices for the information published to be shown anonymously in order to avoid the possibility of infringing privacy. However, in this respect it should be taken into account that even information that is shown anonymously might establish a connection with a specific person. In other words, even if the name of the person is not expressly mentioned alongside the information, it has to be ensured that he cannot be identified by other means, for example: if in the publication numerous identifying details are given from which it might be possible to deduce with whom the publication is dealing (see: Hay, p 115). If we treat the prohibition as merely the specification of a person's name, "it would make a mockery of the Law because it is enough to mention numerous identifying details in order to make it clear in many cases who is involved" (Zeev Segal, The Right of Privacy against the Right to Know, Iyunei Mishpat  IX 175, 190 (1983) (hereinafter referred to as "Segal)). As held in Jenin Jenin, "the requirement of identification is substantive, rather than technical. The question is not whether the name of a person is expressly mentioned in the statement published […] The requirement of identification will be fulfilled in those cases where what is published is attributable to the individual who asserts damage implied from the publication or as a result of extrinsic circumstances or a combination of the publication and the extrinsic circumstances" (ibid, para 34).

 

22.       In order to analyse whether it is possible to connect a person with particular information, a criterion of "de-anonymising" has been proposed in the literature. According to the criterion, if anyone has a key that will make reverse engineering possible, namely to attribute the information published to a particular person, then it can be said from the outset that the information is identifying (Michael Birnhack, Private Space – Privacy, Law & Technology, 191-193 (2010)). As aforesaid, it is therefore not necessary for a person's name or picture to appear alongside the publication; it suffices for it to be possible by some means to connect the information with a specific person by "reverse engineering". Clearly, such "reverse engineering" is mainly likely to occur when the information published includes clear and unique characteristics (cf: Motschenbacher v RJ Reynolds Tobacco Co., 498 F.2d 821, 827 (9th Cir. 1974)).

 

23.       In the instant case, is the requirement that the publication deal with a "person" fulfilled? To that end it is necessary to substantiate the conclusion that despite the anonymous publication of the simulations on the Gottesman website, they can be linked with Vardi. In the case herein we have reached the conclusion that although Vardi's name is not mentioned in the publication, the simulations' publication is likely to make it possible to identify him by other means in view of those unique characteristics relating to Vardi's house. As the lower court held, Vardi's house is a "project of a unique type". In this connection the lower court described Vardi's house as "spectacular and extraordinary as regards its size, the type of materials used in its construction, its unique design and also as regards the investment in each one of the architectural details that make it up". Gottesman himself attested to the project as a "one-off project" and in his appeal he described the house as "a spectacular, extravagant and extraordinary residence […] one of the largest houses in Israel and the largest designed by the Appellants". On the Gottesman website the unique design of the house is described as including the use of special materials like blue glass, unique metal, illuminated gardens and more. All these constitute distinctive construction characteristics that distinguish Vardi's house from others. These indicate that Vardi's house is unlike any other; it is an extraordinary, unique work of architecture. In view of that, it appears that recourse may be had to the simulations published on the Gottesman website for the purpose of that "reverse engineering" that will make it possible to deduce that the simulations shown on the website in fact simulate Vardi's house.

 

Section 6 of the Protection of Privacy Law –Infringement of No Real Significance

 

24.       Even if the information published does indeed relate to "a person's intimate life", the Protection of Privacy Law requires it to be established that the infringement was not of "no real significance" (section 6 of the Protection of Privacy Law). In this connection, it has to be shown that the infringement of privacy was not done as a "trivial act" because such an infringement vests no right to relief (The Association for Civil Rights, p 863). The intention of the section is to do away with vexatious lawsuits, in respect of which no reasonable person would take the trouble of going to court (cf section 4 of the Civil Wrongs Ordnance [New Version]; see also CF (TA Magistrates) 199509/02 Tzadik v. Haaretz Newspaper Publishing Ltd, para 10 (January 22, 2014); Hay, p 124).

 

25. In the instant case, the publication of the simulations is not "a trivial act". The simulations that appeared on the Gottesman website tangibly show the interior of Vardi's home and in that way enable the public at large to gain an impression of the home owner's lifestyle and manners. There is no doubt that when any clear image of a person's home is made visible, and especially his intimate rooms – the bedroom, bathroom etc. – the publication is likely to give him an intense feeling of discomfort. The nature of those rooms is that they are concealed from the eye, and usually from the eyes of invited guests as well. That is where a person expects more than anything that he will be secluded from the public eye. Such being the case, bringing the lawsuit herein seems to be in good faith on the face of it and it is certainly not a frivolous or vexatious claim. It is such as to express the deep sense of discomfort caused to Vardi by the publication – which to my mind also has objective foundation in the circumstances. However, that is not the case with regard to the publication of the simulations of the front of the house. As I mentioned above, in that connection I tend to believe that even if publication of the simulations of the house exterior might cause some infringement, it is minor and trivial, in respect of which there is no cause for the grant of relief.

 

Defences to a Plea of Privacy Infringement (Section 18 of the Law)

 

26.       Another element necessary for the award of relief on a cause of infringement of privacy is negation of the existence of the circumstances of one of the defences prescribed in section 18 of the Law. Those defences demonstrate that the Protection of Privacy Law does not make the right of privacy an "absolute" one (CA 1928/93 The Securities Authority v. Gibor Sabrina Textile Enterprises Ltd, PD 49(3) 177, 193 (1995)). The defences prescribed in the Law might therefore bar a civil claim or criminal proceedings in respect of the infringement of privacy. Nevertheless, a party seeking to shelter behind those defences must show that he acted in good faith. Good faith is "like a gate and only if it is traversed will the circumstances in which the specific infringement of privacy was committed be examined" (Gilam, para 8). It should be noted that the case law has interpreted this as a requirement of subjective good faith. It is therefore necessary to prove that the person committing the infringement acted in the belief that the infringement was in the scope of the defences prescribed by the Law (Jane Doe, para 24). In order to prove good faith, the defendant or accused can have recourse to the presumption mentioned in section 20(a) of the Protection of Privacy Law, according to which:

 

            "20.     (a)       Where the accused or defendant proves that he committed the infringement of privacy under any of the circumstances referred to in section 18(2) and that it did not exceed the limits reasonable under those circumstances, he shall be presumed to have committed it in good faith."

 

In this connection the court will review "the form, substance and extent of the publication in order to see whether the publisher has fulfilled his duty, for which the defence extends to him, or went beyond that and exceeded the 'limits reasonable' in connection with which the legislative norm was framed" (Segal, p 199).

 

Against that presumption that is available to the defendant or accused, the plaintiff or prosecutor can have recourse to the presumption mentioned in section 20(b) of the Law:

 

            "20.     (b)       The accused or defendant shall be presumed not to have committed the infringement of privacy in good faith if in committing it he knowingly went further than was reasonably necessary for the purposes of the matters protected by the section."

 

In this respect, proving that the publisher knew that he had exceeded the reasonable is equivalent to establishing the absence of the publisher's subjective good faith because it will demonstrate "his indifference to the consequence involving infringement more than  necessary to protect the value recognised by the Law" (Segal, ibid).

 

27.       In his appeal Gottesman relied on two defences – those prescribed in sections 18(2)(a) and (c), which provide as follows:

 

 

            "18.     In any criminal or civil proceedings for infringement of privacy, it shall be a good defence if one of the following is the case:

 

                        […]

 

                        (2)       the defendant or accused committed the infringement in good faith in any of the following circumstances:

 

                                    (a)       he did not know and need not have known that an infringement of privacy might occur;

 

                                    […]

 

                                    (c)       the infringement was committed in defence of a legitimate personal interest of the infringer;

 

                                    […]"

 

28.       We shall therefore review whether the infringing act was committed in one of the circumstances mentioned in section 18(2) – and in our case, the circumstances prescribed in section 18(2)(a) or 18(2)(c)            of the Law. As regards the defence prescribed in section 18(2)(a) of the Law, as the lower court held, before publication Vardi repeatedly emphasised to Gottesman that he jealously guarded his privacy and he was resolute in his refusal to publicise the house or parts of it. Consequently, from such time as Vardi made it perfectly clear to Gottesman that he strongly objected to publication without the latter signing the letter of commitment, it is difficult to conceive that the infringement was committed without Gottesman "knowing […] that an infringement of privacy might occur", as the section requires. Clearly, therefore, the plea with regard to the defence under that section cannot be upheld.

 

29.       We should now examine whether Gottesman has available the defence under section 18(2)(b), which concerns an infringement committed in order to protect a "legitimate personal interest" of the infringer. The section necessitates a balance to be made between the right of privacy and other conflicting values, and the expression "legitimate personal interest" should be construed "by making a balance between the desire to protect the interest of the injured party and safeguard his privacy, on the one hand and the contrary interests of the infringer, on the other hand" (Crim App 1132/96 Hatuha v. State of Israel, para 8 (January 20, 1998)). In the instant case, Gottesman and his firm have a twofold interest in publishing the simulations: both a creative interest and a business interest. It cannot be disputed that Gottesman has the moral right in his architectural work. Such being the case, he is entitled to the work being credited to him, namely to his work being identified with his name. This expresses recognition of the author's personality and the attempt to respect the personal connection between the author and his work (sections 45 and 46 of the Copyright Law; see also: Tony Greenman, The Moral Right – From Droit Moral to Moral Rights, Authoring Rights – Readings on the Copyright Law 439, 439-440 (Michael Birnhack & Guy Pesach, Editors, 2009)). The desire to safeguard the freedom of creative expression means that the transfer of an architect's economic rights in his work will not preclude his expressing himself in the same artistic style and motifs in other works (cf Sara Presenti, Copyright Law, vol. II (3rd edition, 2008)), and in the instant case, that the work can be exposed to other circles. Consequently, on the artistic-creative level, one can understand Gottesman's desire to expose to the public Vardi's house, a work that is unquestionably of unique quality and size. In addition, there is nothing wrong in Gottesman's desire to publicise his work for economic reasons as well because displaying the work might certainly enable its author to establish a reputation and attract clients. Nevertheless, as we have mentioned, in the scope of the defence under section 18(2)(c) a balance needs to be made between the infringement of Vardi's privacy and the legitimate personal interest of Gottesman. As mentioned above, as I see it, showing the interior of Vardi's home gives rise to a considerable infringement of his privacy. On the other hand, the harm to Gottesman's legitimate personal interest is limited. This is because Vardi's request was limited to precluding publication of the simulations on the website and, such being the case, there is nothing to stop Gottesman from making use of simulations for his business purposes, exposing them on a more limited scale, for example by showing them to clients in his office or to professional circles, a matter to which Vardi has himself agreed in writing (paragraph 23 of his summations). In this connection, certain weight should also be given to the fact that Gottesman could have given full expression to his interest in publishing the simulations by making an express agreement in such respect with Vardi in real time. To this should be added the fact – as explained above – that Gottesman can also show the simulations of the house exterior on the website. In the overall balance between the competing rights and interests, the outcome is therefore that it is inappropriate to apply the defence of section 18(2)(c) to publishing simulations of the interior of Vardi's house. Having found that publication of the simulations does not fall within one of the circumstances mentioned in section 18(2) of the Law, we have no need to consider the question of good faith or the application of the presumptions prescribed in section 20 of the Law.

 

Absence of Consent to Infringement of Privacy

 

30.       Having reached the conclusion that that there is an infringement, of real significance, of Vardi's privacy, in respect of which it cannot be said that it is covered by one of the defences prescribed in the Law, we must rule whether Vardi's consent was given to the publication discussed herein. The Protection of Privacy Law provides that an infringement of privacy will not occur where there is consent to the infringement (section 1). Such consent can be expressed or implied (section 3 of the Protection of Privacy Law; Jane Doe, para 20). The reason for that requirement is that "the right of privacy is to protect the individual, and as a rule society cannot protect an adult against his will" (Crim App 4463/93 Birav v. State of Israel, PD 49(5) 447, 458 (1996)). And note, consent is not cause to justify an infringement of the rights of privacy. Consent itself is an inherent part of the right so that if it is given, a right of action does not arise (Halm, p 41). Although consent for the purpose of infringement of privacy can be inferred from a series of cases and modes of behaviour (Hay, p 122), it is best to exercise extreme care in determining that consent to publication has been obtained. "Care should be taken not to apply the justifying force of consent to cases in which it is clear that there is no real consent and the use of the consent is therefore constructive and fictitious" (Ruth Gavison, Prohibiting Publication That Infringes Privacy, Human Rights in Israel – Collection of Articles in Honour of Haim H. Cohn, 177, 199 (1982)). It has been held along these lines that from the fact that an individual agreed to disclose certain particulars to one person or several persons, it cannot be inferred that he is precluded from objecting to the publication of those particulars to the public at large (Ventura, p 822); and that even the existence of a close relationship such as marriage does not per se indicate implied consent to one partner's infringement of the other's privacy (Jane Doe, para 20).

 

31.       From the general to the particular – in the instant case it appears that such consent was not obtained. I would mention at the outset that I do not accept Gottesman's claim that Vardi's consent to the publication was not necessary because all that was published were the simulations based on the architectural plans. Insofar as that publication causes an infringement of privacy, then it is subject to the principle that "no person shall infringe the privacy of another without his consent" (section 1 of the Protection of Privacy Law). In the instant case, it would appear that such consent was not consummated. As the lower court held, the relationship between Vardi and Gottesman was conducted on the basis of oral understandings, without the issue of consent to publication reaching exhaustive discussion between the parties. Vardi's requirement that photographs of his home could only be taken subject to signing the letter of commitment that he proposed therefore did not constitute a departure from a previous understanding between the parties but an unsuccessful attempt to reach an understanding. Since that agreement was not signed, express consent to publication was not obtained. Indeed, as aforesaid, the existence of consent can also be inferred. However, we have not found substance to the plea that Vardi's agreeing to the publication of other pictures of the house infers that implied consent was also given to Gottesman. Actually, the fact that other publications were specifically made subject to signing the said letter of commitment is such as to demonstrate the absence of consent in the instant case. Our conclusion is therefore that consent to the infringement of privacy was not obtained.

 

Conclusion

 

32.       In conclusion, we have found that publishing the simulations showing the front of Vardi's house does not give rise to an infringement of privacy and in any event not an infringement of real significance, as defined in section 6 of the Law. On the other hand, we have reached the conclusion that the simulations showing the interior of Vardi's house do infringe "his intimate life" and that despite their anonymous publication, it is possible to connect them with Vardi. It has also been found that it is not an infringement "of no real significance" and that the defences prescribed in section 18(2) of the Protection of Privacy Law are inapplicable. Because the infringement of Vardi's privacy was made without his consent to the publication, there is no alternative but to find that publication of the simulations of the interior of his home on the website cannot be permitted.

 

I therefore suggest to my colleagues to allow the appeal in part to the effect that the injunction remains in force in respect of publishing the simulations of the house interior on the website. The meaning of this is that there is no bar to simulations of the house exterior being published on the site. In view of that result, I suggest to my colleagues to set aside the liability for costs at first instance and make no order for costs in the current instance.

 

 

 

Justice S. Joubran

 

I concur.

 

 

 

Justice N. Sohlberg

 

I concur with the judgement of my colleague Justice U. Vogelman. The distinction that he made between the front of the house and the house interior, has deep roots in Jewish law. The Torah forbids a creditor to enter his fellow's home in order to collect his debt: "When you make a loan of any kind to your neighbor, do not go into his house to get what he is offering as a pledge.  Stay outside and let the man to whom you are making the loan bring the pledge out to you" (Deuteronomy 24:10-11). Although a lender and borrower, rather than strangers, are involved, the respect of privacy requires that the house not be entered; the homeowner brings the pledge outside. Despite the fact that the borrower has a debt to the lender and the lender's prima facie moral right to enter the borrower's house in order to take steps to secure repayment of the debt, the Torah prohibits entry to the borrower's house. The Torah did not make do with a moral provision but prescribed a legal right for the protection of privacy (see: N. Rakover, The Protection of Privacy (5766-2006) 265).

 

Jewish law protects a person's privacy not only by precluding admittance to the private domain but also by precluding "damage by sight" [hezek reiyah] from outside. As we know, Bilam sought to curse the Children of Israel when he saw them dwelling in the desert according to their tribes but he found himself blessing, instead of cursing, them and he said "How goodly are your tents, O Jacob, your dwelling places, O Israel" (Deuteronomy 24:5). This is interpreted by the Talmud as follows: "What did Bilam see? He saw that the openings of their tents did not exactly face each other, whereupon he exclaimed, worthy are these that the divine presence should rest upon them". That is to say that when Bilam saw that the tents of the Israelites were positioned so that their openings did not face each other and were directed in such a way as to ensure the privacy of everyone, he was filled with admiration and said: "How goodly are your tents, O Jacob, your dwelling places, O Israel!" (N. Rakover, ibid, pp 269-272). The Code of Jewish Law [The Shulchan Aruch] (Choshen Mishpat, 154:3) lays down the rule: "A person shall not open a window onto his neighbour's courtyard. And even one of the people who share the courtyard and has sought to open a window in his house onto the courtyard shall be restrained by his partner because he can see him from it. And if he has opened one, it shall be blocked. And if the people who share the courtyard with him have given him permission to open a window or door, he may, but he shall not open a door opposite a door or a window opposite a window and shall distance them from each other. And if it is to another courtyard, onto which he has been given permission to open a door or window, he should distance it from his neighbour's door or window until he cannot see in it at all". This is not the place for details of the Jewish law (see at length, Rakover, ibid) but merely for the principle of respecting a person's privacy. That is how God [HaKadosh Baruch Hu] acted when he called to Adam from the entrance to the Garden of Eden, from which we shall learn: "A person should never suddenly enter his neighbour's house. And every person shall learn the appropriate mode of behaviour [derech eretz] from God, who stood at the entrance to the Garden of Eden and called upon Adam, as it is said: "But the Lord God called to the man and said 'where are you'?" (Genesis 3:9; Derech Eretz Raba, Chapter 5).

 

We can therefore see the distinction between the interior and exterior back from ancient times. A few years ago I heard the lawsuit of a man and his wife who had built a rounded wall of unique design, made of basalt manufactured by Ravid Stones Ltd, at the front of their house. In order to promote its sales, the company published a photograph of the front of the house in the press, on the Internet and in a catalogue. The plaintiffs asserted infringement of their privacy, amongst other things. I stated there that the list of acts in section 2 of the Protection of Privacy Law, 5741-1981, that involve an infringement of privacy, does not contain "a prohibition against publishing the front of a person's home; and not without reason. A person's home – on the inside – is his castle. The front of it that faces outward is naturally exposed to the whole world. Any person passing by may savour the outer beauty of the house. A photograph of the front of the house from the public domain does not involve an infringement of privacy" (CF (J'lem) 7263/05 Levin v. Ravid Stones, para 14 (May 15, 2006)).

 

I therefore concur with my colleague's judgement, on the basis of its reasoning.

 

 

 

Held as stated in the opinion of Justice U. Vogelman.

 

January 23, 2013

 

 

 

 

LCA 4716/04

Hotels.com

v

1.       Zuz Tourism Ltd

2.       Hotels Online Ltd (formal respondent)

 

 

The Supreme Court sitting as the Court of Civil Appeals

[7 September 2005]

Before Vice-President M. Cheshin and Justices A. Grunis, E. Arbel

 

Application for leave to appeal the decision of the Jerusalem District Court (Judge M. Drori) on 4 April 2004 in CApp (Jer) 1929/02.

 

Facts: The applicant and the first respondent entered into an exclusive marketing agreement in February 2000. This agreement contained an arbitration clause stating that disputes between the parties would be resolved by arbitration which shall take place in Texas. In June 2002, the first respondent filed an action in Israel against the applicant and the second respondent, on the grounds that the second respondent was marketing the services of the applicant contrary to the agreement. The applicant filed a motion for a stay of proceedings on account of the arbitration clause in the agreement. The District Court denied the application, and the applicant applied for leave to appeal the District Court’s decision. The application was heard as an appeal.

 

The main question before the Supreme Court was whether the joinder of the second respondent, who was not a party to the agreement containing the arbitration clause, justified refusing a stay of proceedings on the ground that otherwise the litigation would be split between two proceedings. Under Israeli law, the court has discretion to refuse a stay of proceedings in such a case with regard to domestic arbitration agreements. The question before the court was whether the court had such discretion in a case of an international arbitration agreement that is subject to an international convention. The parties agreed that the arbitration clause was subject to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958. This convention, known also as the New-York convention, was ratified by Israel in 1959.

 

Held: The Israeli court does not have the same discretion to stay proceedings under s. 6 of the Arbitration Law regarding an international arbitration agreement as it does under s. 5 of the Arbitration Law regarding a domestic arbitration agreement. Under s. 6 of the Arbitration Law together with art. 2(3) of the New York Convention, the court is required to stay proceedings unless it finds that the arbitration agreement ‘is null and void, inoperative or incapable of being performed.’ It cannot refuse a stay of proceedings on additional discretionary grounds. The existence of a litigant who is not a party to the arbitration agreement does not make the agreement ‘null and void, inoperative or incapable of being performed.’ Consequently, the court is required to order a stay of proceedings in such circumstances.

 

Application granted. Appeal allowed.

 

Legislation cited:

Arbitration Law, 5728-1968, ss. 5, 6.

 

Israeli Supreme Court cases cited:

[1]  CA 6796/97 Yaakov Berg & Sons (Furniture) Ltd v. Berg East Importers Ltd [2000] IsrSC 54(1) 697.

[2]  LA 201/85 Nitzanei Oz Workers Cooperative Agricultural Settlement Ltd v. Balhassan [1985] IsrSC 39(3) 136.

[3]  LCA 985/93 Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [1994] IsrSC 48(1) 397.

[4]  CA 307/71 Unico Reutman Public Works Co. Ltd v. Shimshon Insurance Co. Ltd [1972] IsrSC 26(1) 368.

[5]  CA 4601/02 Rada Electronic Industries Ltd v. Bodstray Co. Ltd [2004] IsrSC 58(2) 465.

[6]  LCA 1407/94 Mediterranean Shipping Co. S.A. v. Crédit Lyonnais (Suisse) S.A. [1994] IsrSC 48(5) 122.

[7]  CA 778/03 Inter-Lab Ltd v. Israel Bio Engineering Project [2003] IsrSC 57(5) 769.

 

Israeli District Court cases cited:

[8]  CC (TA) 842/87 General Electric Corp. of New York v. Migdal Insurance Co. Ltd (unreported).

[9]  CApp (Hf) 213/99 Egnatia Shipping Limited v. Israel Discount Bank Ltd (unreported).

[10]  CA (TA) 3060/03 University of Leicester v. Cohen (unreported).

 

American cases cited:

[11]  Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974).

[12]  Mitsubishi Motors Corporation. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985).

[13]  Riley v. Kingsley Underwriting Agencies Ltd., 969 F. 2d 953 (1992).

[14]  Intergen N.V. v. Grina, 344 F. 3d 134 (2003).

 

Canadian cases cited:

[15]  City of Prince George v. A.L. Sims & Sons Ltd. (1995) 61 B.C.A.C. 254 (B.C.C.A.).

[16]  BWV Investments Ltd. v. Saskferco Products Inc. [1995] 119 D.L.R. (4th) 577 (Sask. C.A.).

[17]  Kaverit Steel and Crane Ltd. v. Kone Corp. (1992) 120 A.R. 346.

 

English cases cited:

[18]  Lonrho Ltd v. Shell Petroleum Company Ltd, unreported decision of High Court of Justice, Chancery Division, on 31 January 1978; see Yearbook, Commercial Arbitration, vol. IV–1979, 320.

[19]  Etri Fans Ltd v. NMB (UK) Ltd [1987] 2 All ER 763.

 

For the applicant — E.A. Naschitz.

For the respondents — D. Eidelaman, R. Preiss.

 

 

JUDGMENT

 

 

Justice A. Grunis

1.    This is an application for leave to appeal the decision of the Jerusalem District Court of 4 April 2004 (the honourable Judge M. Drori), in which the applicant’s motion for stay of proceedings in an action filed by the first respondent against the applicant and against the second respondent, was denied.

The factual background

2.    The applicant (hereafter — hotels.com) is a foreign company registered in the United States. Its business is marketing tourism services, and especially hotel rooms, on the Internet. It should be noted that the former name of hotels.com was Hotel Reservations Network Inc. The first respondent (hereafter — Zuz) and the second respondent (hereafter — Hotels Online) are Israeli companies that do business in the field of tourism. On 29 February 2000, hotels.com and Zuz entered into an agreement in which it was stated that Zuz would market in Israel the tourism services offered by hotels.com, in return for a certain commission (hereafter — the agreement). Clause 11 of the agreement includes an arbitration clause, according to which disputes between the parties with regard to the agreement shall be decided within the framework of an arbitration proceeding, which will take place in the State of Texas in the United States (hereafter — the arbitration clause). Because of the importance of the arbitration clause for our purposes, we shall cite it in full:

‘The parties agree that any dispute under this agreement will be subject to binding arbitration under the commercial rules of the American Arbitration Association. The arbitration shall be conducted in Dallas County, Texas, before neutral arbitrators.’

The agreement does not include an express provision with regard to the law governing the agreement or the arbitration proceeding, but refers to the rules of the American Arbitration Association. In clause 12 of the agreement, it is stated that the Internet site that Zuz will maintain under the agreement shall be the only site in Israel in the Hebrew language through which hotels.com will market its services during the term of the agreement:

‘Zuz Tourism Ltd will be the only Internet site in Hebrew in Israel that we will sign on to integrate with per length of contract [sic[. This is from date of signed contract 29.2.00.’

3.    According to Zuz, it discovered in May 2002 that the services of hotels.com were being marketed on the Internet site of Hotels Online. Consequently, on 10 June 2002 Zuz filed an action in the Jerusalem District Court against hotels.com and against Hotels Online, in which it petitioned for declaratory relief that the aforesaid marketing activity constitutes a breach of the agreement. Zuz also petitioned for the relief of specific enforcement and for a permanent injunction prohibiting the marketing of the services of hotels.com on any Internet site other than that of Zuz. On the same day, Zuz also applied for temporary relief according to which, inter alia, the marketing of the services of hotels.com on the Internet site of Hotels Online be prohibited. For its part, hotels.com filed an application for a stay of proceedings on account of the arbitration clause in the agreement. On 4 April 2004, the District Court denied both the application for temporary reliefs and the application for a stay of proceedings. In the decision it was stated that a stay of proceedings against hotels.com was likely to result in an undesirable procedural split, in view of the fact that Hotels Online was not a party to the arbitration clause and thus no stay of proceedings could be ordered with regard to it. This split and the concern that conflicting findings would be reached in the two different proceedings, led to the decision of the District Court not to grant the application for a stay of proceedings. Admittedly, the lower court emphasized that the relevant provision of law in this case was s. 6 of the Arbitration Law, 5728-1968 (hereafter — the Arbitration Law or the law). This is because of the application of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, enacted in New York in 1958. Notwithstanding, it was held that, like s. 5 of the Arbitration Law, s. 6 of the law also gave the court discretion not to stay the proceedings in cases like this one. The application for leave to appeal is directed against the denial of the application for a stay of proceedings. Within the application, hotels.com also requested a stay of proceedings against Hotels Online. In August 2004, after the application for leave to appeal was filed, hotels.com applied to the American Arbitration Association in the United States with a request to file an action against Zuz under the arbitration clause (hereafter — the arbitration request). On 19 September 2004, the District Court gave temporary relief, according to which hotels.com was prohibited from continuing the arbitration proceedings in the United States. On 14 October 2004, this court (Justice Y. Türkel) issued an order that the aforesaid relief would remain in force until the decision was given in the application for leave to appeal, and that Zuz’s action would be stayed until then. We decided to hear the application as if leave had been granted and an appeal had been filed pursuant to the leave granted.

The legal framework

4.    The rule is that consent to submit any matter to arbitration does not negate the subject-matter jurisdiction of the court to hear the matter (CA 6796/97 Yaakov Berg & Sons (Furniture) Ltd v. Berg East Importers Ltd [1], at p. 706; LA 201/85 Nitzanei Oz Workers Cooperative Agricultural Settlement Ltd v. Balhassan [2], at p. 139). Notwithstanding, when an action is filed in court on a matter that was the subject of an arbitration agreement, the court has the power to stay the proceedings in the action. Thereby, a breach of the arbitration agreement is prevented. The main provision of the law that governs the issue of a stay of proceedings is found in s. 5 of the Arbitration Law:

‘5. (a) If an action is filed in court with regard to a dispute that it was agreed to submit to arbitration, and a litigant who is a party to the arbitration agreement applies to stay the proceedings in the action, the court shall stay the proceedings between the parties to the agreement, provided that the applicant was willing to do everything necessary to carry out the arbitration and continue it, and he is still prepared to do so.

(b) An application for a stay of proceedings may be filed in a statement of defence or in another way, but not later than the day on which the applicant first argued on the merits of the matter in the action.

(c) The court may refuse to stay the proceedings if it finds a special reason why the dispute should not be adjudicated in arbitration.’

Thus we see that when the conditions included in the section are fulfilled, the court will, as a rule, stay the proceedings between the parties to the arbitration agreement, unless it finds that there is a special reason why the dispute should not be adjudicated in arbitration. When considering whether to order a stay of proceedings in the action, the court may take various considerations into account (for a discussion of these considerations, see S. Ottolenghi, Arbitration — Law and Procedure (third extended edition, 1991), at pp. 126-145). In this context, the question arises as to how the court should act in cases where an application to stay proceedings is filed by some of the defendants who are a party to an arbitration agreement with the plaintiff, when there are other defendants who are not a party to this agreement. The question arises because it is not possible to compel someone who is not a party to the arbitration agreement to take part in the arbitration proceeding. Therefore, granting the application to stay the proceedings in such a case will lead to a split in the proceedings: the dispute between the plaintiff and the defendants who are party to the arbitration agreement will be adjudicated within the framework of an arbitration proceeding, whereas the dispute between the plaintiff and the other defendants (those who are not parties to the arbitration agreement) will be adjudicated before the court. Such a split may lead to conflicting conclusions and findings and is also not desirable for practical reasons. On the other hand, denying the application for a stay of proceedings will allow the breach of the contractual consent between the parties to the arbitration agreement. In the case law of this court, it is possible to find traces of different approaches with regard to this issue. In a decision from 1993 that addressed this issue, it was held, by a majority, that the court should examine the existence of two conditions (which were named ‘the two-stage test’): (a) is the joinder to the action of the defendant who is not a party to the arbitration agreement a genuine one, meaning that it was not done in order to evade the obligation to settle the dispute within the framework of arbitration (procedural necessity); (b) does holding the proceedings within one framework, without a split, constitute a condition for the plaintiff being able to obtain effective relief (substantive necessity). If the court is persuaded that both of the aforesaid questions should be answered in the affirmative, then there exists a special reason not to order a stay of the proceedings (the majority opinion in LCA 985/93 Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [3]; for another approach, see the minority opinion of Justice M. Cheshin in Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [3] and also CA 307/71 Unico Reutman Public Works Co. Ltd v. Shimshon Insurance Co. Ltd [4]; for a similar problem with regard to an exclusionary forum selection clause, see CA 4601/02 Rada Electronic Industries Ltd v. Bodstray Co. Ltd [5], at pp. 478-479).

5.    An additional provision concerning a stay of proceedings on account of an arbitration agreement is found in s. 6 of the Arbitration Law:

‘If an action is filed in court with regard to a dispute that it was agreed to submit to arbitration, and the arbitration is subject to an international convention to which Israel is a party, and the convention contains provisions concerning a stay of proceedings, the court shall exercise its power under section 5 in accordance with those provisions and subject thereto’ (emphasis added).

As can be seen from the wording of the aforementioned section, it does not apply to every case of an application for a stay of proceedings based on the existence of an arbitration agreement. Its application is limited merely to those cases where the arbitration is subject to an international convention to which Israel is a party, and that convention contains provisions concerning a stay of proceedings. With regard to such cases, the section provides that the power of the court vis-à-vis the issue of a stay of proceedings, as set out in s. 5, shall be exercised in accordance with the provisions of the convention and subject thereto. In other words, s. 6 of the law refers to the provisions of the convention concerning a stay of proceedings, and grants them preferential status to the provision of s. 5 of the Arbitration Law.

6.    In our case, there is no dispute between the parties that the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (hereafter — the convention or the New York Convention) applies to the arbitration clause. This convention, which was enacted in New York in 1958, was intended to replace the Geneva Protocol on Arbitration Clauses, 1923 (Treaties 4, p. 67) (hereafter — the Geneva Protocol). The convention was ratified by Israel in 1959 (the text of the convention was published in Treaties 10, p. 1). The relevant provision for our purposes is art. 2 of the convention:

‘Article II

1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

2. The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed’ (emphases added).

From the wording of art. 2(3) of the convention it can be seen that the court is required to order the referral of the parties to an arbitration proceeding, unless one of the three exceptions is satisfied: the arbitration agreement is null and void, inoperative or incapable of being performed.

The scope of the dispute

7.    Zuz filed its action both against hotels.com and against Hotels Online. The agreement between Zuz and hotels.com includes an arbitration clause, according to which disputes concerning the agreement will be decided within the framework of an arbitration proceeding that will take place in the State of Texas in the United States. On the other hand, there is no arbitration agreement between Zuz and Hotels Online. The lower court reached the conclusion that the joinder of Hotels Online to the action satisfied the two-stage test adopted in Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [3]. In this respect, it was held that the procedural necessity of joining Hotels Online to the action arose from the fact that it was the party that allegedly violated the exclusive right granted to Zuz under the agreement. The lower court also held that splitting the proceedings — in such a way that the dispute between Zuz and hotels.com would be adjudicated in an arbitration proceeding in the United States, whereas the dispute between Zuz and Hotels Online would be adjudicated before the courts in Israel — may lead to conflicting determinations and thereby prejudice Zuz’s right to obtain effective relief. We are prepared to assume, without ruling on this issue, that the District Court was right in determining that there is both a procedural necessity and a substantive necessity for joining Hotels Online to Zuz’s action. Had the only provision of law relevant to our case been the one in s. 5 of the law, then in view of the aforesaid assumption and on the basis of the case law rule laid down in the majority opinion in Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [3], it would apparently be necessary to reach the conclusion that there is no basis for staying the proceedings against hotels.com. However, in the case before us the provisions included in s. 6 of the law and in art. 2(3) of the convention apply. Consequently, according to s. 6 of the law, the court is required to determine the issue of stay of proceedings in accordance with the provisions of the convention. The question that arises in our case is therefore as follows: in cases where s. 6 of the law and art. 2(3) of the convention apply, is the court competent to refrain from staying proceedings because of the joinder of a defendant who is not a party to the arbitration agreement? In order to answer this question, we are required to consider two secondary questions that are interrelated: first, do the three exceptions included in art. 2(3) of the convention constitute a closed list? In other words, is the court compelled to stay the proceedings in every case where none of the three aforesaid exceptions apply? Second, does the fact that there is a defendant who is not a party to the arbitration agreement fall within one of the three exceptions in art. 2(3) of the convention? Let us now turn to consider these issues.

The scope of discretion given to the court under s. 6 of the law together with art. 2(3) of the convention

8.    The question of the scope of discretion given to the court under s. 6 of the law together with art 2(3) of the convention was considered in the judgment of LCA 1407/94 Mediterranean Shipping Co. S.A. v. Crédit Lyonnais (Suisse) S.A. [6]. According to the approach of Justice M. Cheshin, the referral of the parties to arbitration under the aforesaid provisions is an obligatory referral. This means that when the conditions set out in s. 6 of the law and in art. 2(3) of the convention are satisfied, the court is compelled to stay the proceedings and refer the parties to an arbitration proceeding, unless one of the exceptions set out in art. 2(3) of the convention applies (ibid. [6], at pp. 129-132). On the other hand, Justice T. Strasberg-Cohen questioned ‘whether the interpretation that denies the court discretion is the only possible and proper one’ (ibid. [6], at p. 128). Since it was not necessary to rule on that issue within the framework of those proceedings, she left undecided the question whether the list of exceptions in art. 2(3) of the convention constitutes a closed list (ibid. [6], at pp. 127-128). It should also be noted that there are conflicting decisions of the District Courts on this issue (see CC (TA) 842/87 General Electric Corp. of New York v. Migdal Insurance Co. Ltd [8]; CApp (Hf) 213/99 Egnatia Shipping Limited v. Israel Discount Bank Ltd [9]; for a different approach, see CA (TA) 3060/03 University of Leicester v. Cohen [10]).

9.    In order to establish the scope of the court’s discretion under s. 6 of the law in conjunction with art. 2(3) of the convention, let us first turn to the language of these provisions. Section 6 of the law provides that the power of the court under s. 5 of the law — which deals, as aforesaid, with stay of proceedings — shall be exercised in accordance with and subject to the provisions of the convention governing the arbitration (para. 5 supra). Article 2(3) of the convention provides in mandatory language that the court ‘shall… refer’ the litigants to arbitration, unless one of the three exceptions listed in the article is satisfied (para. 6 supra). It would appear that the manner in which the two provisions are worded leads to the conclusion that if one of the three exceptions mentioned in art. 2(3) of the convention is not satisfied, then as a rule the court is required to order a stay of the proceedings. It should be noted that art. 4 of the Geneva Protocol, which includes a similar provision to the one in art. 2(3) of the convention, is also worded in a way that compels the court to refer the dispute to arbitration when the conditions set out therein are satisfied. Moreover, it appears that, according to the wording of the two aforesaid provisions, a situation in which there is a litigant who is not a party to the arbitration agreement does not fall within any of the three exceptions in art. 2(3) of the convention. As I shall clarify later, I am of the opinion that considerations concerning the purpose of s. 6 of the Arbitration Law and of art. 2(3) of the convention lead to a similar conclusion.

10. One of the main purposes of the convention is effective enforcement of international arbitration agreements, by means of setting uniform standards according to which such agreements will be enforced (A.J. van den Berg, The New York Arbitration Convention of 1958 — Towards a Uniform Judicial Interpretation (1981), at p. 4; regarding the importance of giving a uniform interpretation to the convention, see van den Berg at pp. 1-6). The concern that was expressed in this regard is that courts of the states that are parties to the convention will be deterred from sending local defendants to litigate within the framework of an arbitration proceeding in a foreign state, and for that reason will tend to refrain from honouring international arbitration agreements (see Scherk v. Alberto-Culver Co. [11], at footnote 15, and the references cited there). Such a situation is likely to cause substantial difficulty in achieving certainty, which is an essential component in the realm of international commerce. It is also likely to provide an incentive for parties to turn to the courts in their own country, in order to bring about a situation in which the dispute is adjudicated in the forum that is preferable to them. This ‘competition’ may result in conflicting decisions of courts in different countries, thereby increasing uncertainty and creating an undesirable situation. The aforesaid reasons led the United States Supreme Court to distinguish between international arbitration agreements, at least those that concern the commercial sphere, and arbitration agreements that do not have an international aspect. It was held that there are situations where international arbitration agreements should be honoured, even in cases where there would be no basis for honouring identical domestic arbitration agreements (Scherk v. Alberto-Culver Co. [11]; Mitsubishi Motors Corporation. v. Soler Chrysler-Plymouth, Inc. [12]). Against this background, let us now turn to examine comparative law in so far as it concerns the interpretation of art. 2(3) of the convention.

11. It would appear that there is a real similarity in the way in which art. 2(3) of the convention has been interpreted in many of the common law countries. The rule that has been laid down in this respect is that the clause is of a binding character. This means that if none of the three exceptions mentioned in the article apply, the court is required to stay the proceedings and refer the parties to an arbitration proceeding, without exercising any discretion in the matter (van den Berg, The New York Arbitration Convention of 1958 — Towards a Uniform Judicial Interpretation, supra, at pp. 135-137). The aforesaid rule is followed, inter alia, in the United States (Riley v. Kingsley Underwriting Agencies Ltd. [13]; Intergen N.V. v. Grina [14]), Canada (City of Prince George v. A.L. Sims & Sons Ltd. [15]; BWV Investments Ltd. v. Saskferco Products Inc. [16]) and England (Lonrho Ltd v. Shell Petroleum Company Ltd [18]). We should also point out that until the enactment of the Arbitration Act 1996, there existed in England a clear distinction, for the purposes of the issue of stay of proceedings, between domestic arbitration agreements and international arbitration agreements. Whereas with regard to domestic arbitration agreements the court had discretion not to order a stay of proceedings, with regard to international arbitration agreements the courts were obliged to order a stay of proceedings, unless one of the exceptions mentioned in the convention was satisfied. In 1996 the law was changed and now the English courts do not have discretion on the question of stay of proceedings even with regard to domestic arbitration agreements (D. Sutton and J. Gill, Russell on Arbitration (twenty-second edition, 2003), at pp. 18-19; with regard to the rule in England before the 1996 amendment, see M.J. Mustill and S.C. Boyd, Commercial Arbitration (second edition, 1989) at pp. 462-483).

Moreover, in addition to the rule that art. 2(3) of the convention is of a binding character, it has been held that a situation in which one or more of the defendants is not a party to the arbitration agreement does not fall within any of the three exceptions in art. 2(3) of the convention. In other words, the existence of a litigant who is not a party to the arbitration agreement does not make the arbitration agreement that exists between all or some of the other litigants null and void, inoperative or incapable of being performed. Therefore, in a situation of this kind, the court is obliged to order a stay of proceedings with regard to those litigants who are party to the arbitration agreement (Yearbook, Commercial Arbitration, vol. XXVIII–2003, 637-639; van den Berg, The New York Arbitration Convention of 1958 — Towards a Uniform Judicial Interpretation, supra, at pp. 161-168). This rule is followed, inter alia, in Canada (Kaverit Steel and Crane Ltd. v. Kone Corp. [17]; City of Prince George v. A.L. Sims & Sons Ltd. [15]) and in England (Lonrho Ltd v. Shell Petroleum Company Ltd [18]).

12. We see that considerations of certainty and the fear of international arbitration agreements not being honoured due to a preference for local litigants' interests, have led foreign courts to adopt an interpretational approach that restricts the scope of discretion with regard to a stay of proceedings vis-à-vis international arbitration agreements. In this respect, we should mention two additional considerations that are unique to the situation in which one of the litigants is not a party to the arbitration agreement: first, a significant number of arbitration agreements that stipulate to the holding of an arbitration in a foreign state also include a clause that applies the law of that state (or another foreign law) to the matter. If a stay of proceedings is not given with regard to such agreements because of the existence of an additional defendant who is not a party to the arbitration agreement, a question is likely to arise with regard to the law that should be applied to the dispute between the plaintiff and the defendant who is a party to the arbitration agreement. If we say that the court in Israel is required to apply the foreign law, then there will occur a split of a different kind to the one we mentioned: the dispute between the plaintiff and the defendant who is a party to the arbitration agreement will be decided according to the foreign law, whereas the dispute between the plaintiff and the defendant who is not a party to the arbitration agreement will be decided according to Israeli law. In such a situation there is a concern that conflicting decisions will be made, and therefore the justification underlying the refusal to stay proceedings is significantly weakened. On the other hand, if we rule that the whole matter should be decided in accordance with Israeli law, we shall find ourselves significantly changing the material rights of the parties to the arbitration agreement, in addition to giving judicial approval to the breach of the arbitration agreement. This increases the fear of uncertainty with regard to international arbitration agreements (for a discussion of this issue with regard to internal arbitration agreements, see the minority opinion of Justice M. Cheshin in Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [3], at pp. 406-408). Admittedly, in this case there is no express provision in the agreement concerning the applicable law, but we should remember that our ruling articulates a general principle. Moreover, Zuz does not claim that Israeli law governs the agreement. Even if the claim had been made, it would have been difficult to accept it. Agreeing to hold the arbitration in Texas certainly does not imply that Israeli law is applicable. Second, refraining from staying proceedings despite the existence of an international arbitration agreement, for the reason that one or more of the defendants are not party to the arbitration agreement, may create an additional difficulty. Admittedly, as a result of declining to stay the proceedings, a split of the case will be avoided, in the sense that the plaintiff’s action against the defendant who is a party to the arbitration agreement — which should have been adjudicated within the framework of arbitration — will be decided together with the action against the defendant who is not a party to that agreement. However, this cannot prevent the defendant who is a party to the arbitration agreement from acting under the agreement and filing an action with regard to precisely the same matter before the arbitrator in the foreign country. This is what hotels.com has done in the case before us. The result would be that the dispute between the parties to the arbitration agreement would be split and heard before two different tribunals: the action of the one party will be heard by the courts in Israel, whereas the action of the other party will be decided by the arbitrator abroad. It thus follows that refraining from staying the proceedings, albeit preventing a split in one respect, creates a split of the proceedings in another respect, with all that this implies. In order to prevent this new split, the court in Israel will be required to issue an injunction against the defendant who is a party to the arbitration agreement, prohibiting him from continuing his action before the arbitrator and compelling him to litigate also as a plaintiff before the courts in Israel. This would result in another significant departure from the contractual consent between the parties to the arbitration agreement (with regard to an injunction restraining foreign proceedings, see CA 778/03 Inter-Lab Ltd v. Israel Bio Engineering Project [7]).

13. I am of the opinion that the aforementioned considerations lead to the conclusion that the court’s scope of discretion under s. 6 of the law, together with art. 2(3) of the convention, is significantly narrower than its scope of discretion under s. 5 of the law. When dealing with arbitration that is governed by the convention and the relevant requirements in s. 6 of the law and art. 2(3) of the convention (such as the requirement that the stay of proceedings has been requested by a litigant who is a party to the arbitration agreement) are satisfied, as a rule the court is required to order a stay of proceedings unless one of the three exceptions in the aforesaid art. 2(3) exists (for support for this position, see Ottolenghi, at pp. 150-156; for a discussion of the question of the existence of the requirements listed in s. 6 of the law and in art. 2(3) of the convention, cf. Mediterranean Shipping Co. S.A. v. Crédit Lyonnais (Suisse) S.A. [6]). This result is consistent with the language of the law and with the language of the convention. It is also consistent with one of the main purposes of art. 2(3) of the convention: promoting legal certainty with regard to international arbitration agreements, by removing the concern that courts in the various countries will tend to prefer the interests of the local litigant, and therefore will refrain from honouring international arbitration agreements that stipulate to legal proceedings in a foreign country. I am prepared to assume that there may be exceptional cases in which the court may refuse to stay proceedings, even if none of the aforesaid three exceptions is satisfied. However, these cases will be rare (cf. Etri Fans Ltd v. NMB (UK) Ltd [1987] 2 All ER 763). It should be emphasized that our decision in these proceedings concerns only arbitrations that are governed by the New York Convention. It is possible that in certain cases another international convention will apply. As stated above, s. 6 of the law provides that when the arbitration is governed by an international convention to which Israel is a party, and the convention includes provisions concerning a stay of proceedings, the court shall exercise its authority under s. 5 of the law ‘in accordance with those provisions and subject thereto’.

14. Indeed, no one disputes that there are weighty reasons that support a refusal to stay proceedings in cases where some of the litigants are not parties to the arbitration agreement, at least in certain circumstances (for details of the reasons, see the minority opinion of Justice M. Cheshin in Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [3], at p. 405). These reasons are what led the majority in Alrina Investment Corporation v. Barki Feta Humphries (Israel) Ltd [3] to the conclusion that within the framework of s. 5 of the law, the court may, in circumstances of this kind, refuse to stay proceedings notwithstanding the existence of an arbitration agreement, provided that the two-stage test is satisfied (see para. 4 supra). In any case, it should be remembered that we are concerned with arbitration agreements that are subject to the convention, and are therefore governed by s. 6 of the law, and not with domestic arbitration agreements, which are governed by s. 5 of the law. With regard to international arbitration agreements it should be held that the fact that there is a litigant who is not a party to the arbitration agreement does not fall within any of the three exceptions in art. 2(3) of the convention. In other words, this circumstance does not constitute, as a rule, a reason for the court to refuse to order a stay of proceedings, in so far as arbitration agreements that fall within the scope of s. 6 of the law are concerned. The District Court therefore erred in refusing to stay the proceedings for the reason that Hotels Online, which is one of the defendants in Zuz’s action, is not a party to the arbitration clause.

Additional arguments

15. In its response to the application for leave to appeal, Zuz raises additional arguments that do not concern the question of the interpretation of s. 6 of the law and art. 2(3) of the convention, which we have discussed up to this point. I shall address two of these arguments, which require consideration. According to Zuz, hotels.com acted in bad faith when it submitted the arbitration request in the United States. As aforesaid, this request was submitted in August 2004, after the lower court gave its decision and after the application for leave to appeal was filed before us. Despite this, within the arbitration request hotels.com refrained from mentioning the existence of the proceedings taking place in Israel, including the decision of the District Court. According to the argument, the aforesaid manner of conduct is sufficient to lead to the denial of the application of hotels.com. Admittedly, in certain circumstances the appeals court may take into account events that took place after the decision of the lower court was issued. I am also prepared to assume that the duty of good faith extends also to proceedings under ss. 5 and 6 of the law (see the opinion of President M. Shamgar in Mediterranean Shipping Co. S.A. v. Crédit Lyonnais (Suisse) S.A. [6], at p. 127). Notwithstanding, I cannot accept Zuz’s argument. The subject of the District Court’s decision is the application for a stay of proceedings in an action filed by Zuz, on the grounds that there is an arbitration clause. The decision does not deal with a future action of hotels.com against Zuz. All that was held in the decision is that there is no basis for a stay of proceedings with regard to the action of Zuz against hotels.com. Since this is the case, it cannot be said that the arbitration request filed by hotels.com in the United States is tainted by bad faith. Admittedly, within the arbitration request, hotels.com should have mentioned the proceedings that are taking place in Israel and the decision of the lower court. However, I am of the opinion that the failure to mention this fact does not, in and of itself, justify denying the appeal. I will further add that the concern of a split in the litigation between two different tribunals, which has occurred de facto in this case, is one of the reasons that led me to the conclusion concerning the proper interpretation of s. 6 of the law and art. 2(3) of the convention (see para. 12 supra).

16. Another issue raised by Zuz in the proceeding before us concerns the position of hotels.com with regard to the validity of the agreement. According to Zuz, during the proceeding in the lower court hotels.com tried to advance contradictory arguments: on the one hand, it argued that the arbitration clause in the agreement should be honoured, and on the other hand it refused to admit entering into the agreement. According to Zuz, in these circumstances we should apply the rule determined in Mediterranean Shipping Co. S.A. v. Crédit Lyonnais (Suisse) S.A. [6] and refuse to stay the proceedings. This argument should also be rejected. An inspection of the pleadings filed in the lower court shows that hotels.com did not deny the existence of the agreement, and certainly did not do so expressly. The fact that hotels.com does not deny entering into the agreement is also apparent from the proceeding before us. In any case, the fact that hotels.com itself filed an arbitration request based on the arbitration clause in the agreement shows that it is not seeking to deny entering into this agreement.

17. The result is that the appeal is allowed, and the decision of the District Court, insofar as it concerns the issue of a stay of proceedings, is nullified. The proceedings in Zuz’s action against hotels.com are stayed. Consequently, the temporary relief granted by the District Court on 19 September 2004, is set aside. There is no basis for ordering, within this proceeding, a stay of proceedings against Hotels Online, which is not a party to the agreement. Zuz is liable, with regard to both proceedings, for the legal fees of hotels.com in a sum of NIS 60,000 and for court costs.

 

 

Vice-President M. Cheshin

I agree.

 

 

Justice E. Arbel

I agree with the comprehensive opinion of my colleague Justice A. Grunis and like him I recognize the importance of effective enforcement of international arbitration agreements by adopting uniform and clear rules that will allow the enforcement and implementation of such agreements, including in circumstances where one or more of the litigants is not a party to the arbitration agreement.

 

 

Application granted. Appeal allowed.

3 Elul 5765.

7 September 2005.

 

 

CA 3912/90

Eximin SA, a Belgian corporation

v.

Itel Style Ferarri Textiles and Shoes Ltd

 

The Supreme Court sitting as the Court of Civil Appeal

[22 August 1993]

Before President M. Shamgar and Justices E. Goldberg, Y. Malz

 

Appeal on the judgment of the Tel-Aviv-Jaffa District Court (Justice H. Ben-Atto) on 12 August 1990 in Civil File 2093/86.

 

Facts: the appellant bought 3,000 pairs of denim boots from the respondent for a customer of the appellant in the United States. The boots had a pocket on which a letter ‘V’ was sewn. When the boots reached the United States, they were detained in customs because the design violated a trade mark registered in the United States.

The issue in dispute was: who was responsible for ignoring the question of whether the design involved a breach of a registered trade mark?

 

Held: (Majority opinion — President M. Shamgar, Justice Y. Malz) Since both parties knew of the possibility that there might be a registered trade mark, and neither investigated the matter, both parties acted with a lack of good faith. Consequently, liability for the damage should be allocated between the parties.

(Minority opinion — Justice E. Goldberg) Since the appellant (the importer) asked for a change in the boots’ design because of customs problems, the respondent (the manufacturer) was entitled to rely upon the appellant knowing United States law and taking the necessary precautions to ensure it was not infringed. Therefore no lack of good faith should be imputed to the respondent, and full liability for the violation of the trade mark should rest with the appellant.

 

Appeal allowed in part, by majority opinion.

 

Legislation cited:

Contracts (General Part) Law, 5733-1973, ss. 12, 39, 61(b).

Contracts (Remedies for Breach of Contract), 5731-1970, ss. 10, 14(a).

Sale (International Sale of Goods) Law, 5731-1971, Schedule, ss. 1, 52, 52(a), 82, 88.

Sale Law, 5728-1968, ss. 6, 18.

 

Israeli Supreme Court cases cited:

[1]      CA 815/80 Harlow and Jones GMBH v. Adders Building Materials Ltd [1983] IsrSC 37(4) 225.

[2]      FH 36/84 Teichner v. Air France Airlines [1987] IsrSC 41(1) 589.

[3]      CA 338/73 Parcel 677 Block 6133 Co. Ltd v. Cohen [1975] IsrSC 29(1) 365.

[4]      CA 144/87 State of Israel v. Engineer Faber Building Co. [1991] IsrSC 45(3) 769.

[5]      HCJ 59/80 Beer-Sheba Public Transport Services Ltd v. National Labour Court [1981] IsrSC 35(1) 828.

[6]      CA 825/79 Sherbet Brothers Building Co. Ltd v. Schwartzbord [1982] IsrSC 36(4) 197.

[7]      CA 804/80 Sidaar Tanker Corp. v. Eilat-Ashkelon Pipeline Co. Ltd [1985] IsrSC 39(1) 398.

[8]      CA 158/77 Rabinai v. Man Shaked Ltd (in liquidation) [1979] IsrSC 33(2) 281.

[9]      CA 789/82 Ezra v. Mugrabi [1983] IsrSC 37(4) 565.

[10]    CA 714/87 Sher v. Cohen [1989] IsrSC 43(3) 159.

 

For the petitioner — A. Brumer.

For the respondent — D. Blum.

 

 

 

JUDGMENT

 

President M. Shamgar

     1. (a) This is an appeal on a judgment of the Tel-Aviv District Court, which dismissed the appellant’s claim for restitution and damages.

(b) The relevant facts, as determined by the trial court, are as follows: the appellant, a Belgian company, bought from the respondent, an Israeli company, 3,000 pairs of denim boots, for a customer of the appellant in the United States. The boots were of a special design that was popular at that time: the boot appears to be part of the trousers with a pocket on which the shape of the letter ‘V’ is sewn. The respondent manufactured boots like these, before the appellant contacted it, for the local market, and it manufactured boots like these also for export, inter alia to Germany.

The appellant sent the customer six different designs, and it approved one of these designs, with two changes: removing the ‘forza’ mark that was sewn on the design and replacing the neolyte sole with a leather sole. The respondent manufactured the entire quantity of boots in accordance with the order, sent the goods to the United States and received the full price, which was guaranteed by documentary credit.

When the goods reached the United States, it turned out, allegedly, that the design violated a trade mark registered in the United States, and the consignment was therefore detained in customs.

(c) The appellant sued for restitution of the price of the goods, arguing that the transaction failed through the fault of the manufacturer. At a preliminary hearing, the parties accepted a proposal of the court to minimize the damage. The appellant removed the ‘V’ mark from the boots and the customer in the United States bought them at a reduced price. Consequently, the claim was reduced to the difference in the price that represented the appellant’s loss. The trial court ruled that the responsibility for ignoring the breach of the trade mark registered in the United States lay, in this case, with the appellant, and it dismissed the action.

This is the subject of the appeal before us.

2.    The parties raised different and diverse arguments in this appeal, some of which in the abstract, relating to the nature of the transaction and its significance with regard to determining liability, and others in the concrete, relating to the specific relationship that developed between the parties. We will consider the arguments in the order they were raised.

3.    The nature of the transaction and its significance for determining liability between the parties

(a) Article 1 of the schedule to the Sale (International Sale of Goods) Law, 5731-1971 (hereafter — ‘the International Sale of Goods Law’), provides:

‘1. The present Law shall apply to contracts of sale of goods entered into by parties whose places of business are in the territories of different States, in each of the following cases:

(a) where the contract involves the sale of goods which are at the time of the conclusion of the contract in the course of carriage or will be carried from the territory of one State to the territory of another;

(b) where the acts constituting the offer and the acceptance have been effected in the territories of different States;

(c) where delivery of the goods is to be made in the territory of a State other than that within whose territory the acts constituting the offer and the acceptance have been effected.

2.            Where a party to the contract does not have a place of business, reference shall be made to his habitual residence.

3.            The application of the present Law shall not depend on the nationality of the parties.

4.            In the case of contracts by correspondence, offer and acceptance shall be considered to have been effected in the territory of the same State only if the letters, telegrams or other documentary communications which contain them have been sent and received in the territory of that State.

5.            For the purpose of determining whether the parties have their places of business or habitual residences in “different States”, any two or more States shall not be considered to be “different States” if a valid declaration to that effect made under Article 2 of the Convention dated the 1st day of July 1964 relating to an Uniform Law on the International Sale of Goods is in force in respect of them.’

The appellant argues that this law applies to the present case. As the respondent does not contest its applicability, I will assume that the said law does indeed apply. I will add that the International Sale of Goods Law reflects customary international law with regard to sale transactions between countries, even though changes have occurred in customary international law since its enactment: in 1980, the United Nations Convention on Contracts for the International Sale of Goods (hereafter — ‘the Vienna Convention’) was ratified in Vienna, and this in practice replaced the Convention relating to an Uniform Law on the International Sale of Goods that was signed in the Hague in 1964, to which the law referred. I will address the changes that have been made since the law’s enactment, in so far as this is necessary.

(b) Article 52 of the said Schedule provides:

‘1. Where the goods are subject to a right or claim of a third person, the buyer, unless he agreed to take the goods subject to such right or claim, shall notify the seller of such right or claim. Unless the seller already knows thereof, and requests that the goods should be freed therefrom within a reasonable time or that other goods free from all rights and claims of third persons be delivered to him by the seller.

2.            If the seller complies with a request made under paragraph l of this Article and the buyer nevertheless suffers a loss, the buyer may claim damages in accordance with Article 82.

3.            If the seller fails to comply with a request made under paragraph l of this Article and a fundamental breach of the contract results thereby, the buyer may declare the contract avoided and claim damages in accordance with Articles 84 to 87. If the buyer does not declare the contract avoided or if there is no fundamental breach of the contract, the buyer shall have the right to claim damages in accordance with Article 82.

4.            The buyer shall lose his right to declare the contract avoided if he fails to act in accordance with paragraph l of this Article within a reasonable time from the moment when he became aware or ought to have become aware of the right or claim of the third person in respect of the goods.’

This section is similar to section 18 of the Sale Law, 5728-1968, which provides:

‘(a) The vendor shall deliver the item sold free of every charge, attachment or other third-party right.

(b) The vendor shall notify the purchaser immediately of any claim of rights in respect of the item sold, of which he knew, or should have known, before delivery of the item sold.’

The appellant argues that article 52 applies also to a trade mark right held by a third party. In his work ‘The Sale Law, 5728-1968’, in A Commentary on the Law of Contracts, The Harry Sacher Institute for Research on Legislation and Comparative Law, G. Tedeschi ed., 1972, at p. 98, Professor Z. Zeltner points out (with regard to section 18 of the Sale Law) that:

‘The expression “other third-party right” includes, apparently, patent and trade mark rights held by a third party.’

E. Zamir, in ‘The Sale Law, 5728-1968’ Interpretation of the Law of Contracts (the Harry Sacher Institute for Research on Legislation and Comparative Law, G. Tedeschi, ed., 1987), at p. 374, also points out (with regard to section 18) that:

‘The third party’s right does not need to be in the sale item itself. If, for example, the sale item or the transfer thereof to the purchaser involves a breach of an intellectual property right, such as a patent, copyright or trade mark, this is also a breach of section 18(a) in the relationship between the vendor and the purchaser.’

See also footnote 73.

For a comparison of the provisions of contractual legislation and the provisions of the International Sale of Goods Law, see CA 815/80 Harlow and Jones GMBH v. Adders Building Materials Ltd [1], at p. 230.

(c) A more specific provision to this effect may be found in Article 42 of the Vienna Convention:

‘Article 42

(1) The seller must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property, of which at the time of the conclusion of the contract the seller knew or could not have been unaware, provided that the right or claim is based on industrial property or other intellectual property:

(a) Under the law of the State where the goods will be resold or otherwise used, if it was contemplated by the parties at the time of the conclusion of the contract that the goods would be resold or otherwise used in that State; or

(b) In any other case, under the law of the State where the buyer has his place of business.

(2) The obligation of the seller under the preceding paragraph does not extend to cases where:

(a) At the time of the conclusion of the contract the buyer knew or could not have been unaware of the right of claim; or

(b) The right or claim results from the seller’s compliance with technical drawings, designs, formulae or other such specifications furnished by the buyer.’

See also section 2-312(3) of the American Uniform Commercial Code (U.C.C.):

‘2-312 Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement.

(1) Subject to subsection (2) there is in a contract for sale a warranty by the seller that:

(a) The title conveyed shall be good, and its transfer rightful; and

(b) The goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.

(2) A warranty under subsection (1) will be excluded or modified only by specific language or by circumstances which give the buyer reasons to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.

(3) Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of a rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of the compliance with the specifications.’

With regard to German Law see: N.M. Galston, International Sales: The United Nations Convention on Contracts for the International Sale of Goods, New York, 1984, at p. 633.

 (d) The accepted interpretation of these provisions is that the seller’s duty to transfer unencumbered ownership also includes the duty to transfer ownership unencumbered by rights such as trade mark rights vested in a third party. This interpretation prima facie supports the appellant’s position.

(e) Attention must be paid to the limitations that appear in the same art. 42 of the Vienna Convention. These are also stated in case-law relating to the other aforementioned sections. In other words, art. 42 is a kind of miniature codification of the qualifications that have been developed over the years with regard to the seller’s duty to transfer ownership free of any third-party claims. Its provisions can therefore also be of assistance, by way of analogy, in the case before us. This is also in keeping with the desire to unify the law, as held in FH 36/84 Teichner v. Air France Airlines [2], at p. 611:

‘National distinctiveness, which is a valuable asset within the confines of a particular legal system, may have problematic results when an event — such as an international flight — transcends borders and becomes involved with several legal systems. This is the reasons for the trend of unification in extensive spheres of law, primarily those relating to international transport and commerce…’

It should be noted that the international norm, in this case, agrees with, and integrates into, the national norm.

Thus, as in the provision of art. 42(1) of the Vienna Convention, the seller will be liable only for a right of which he knew or of which he could not have been unaware (where a standard close to knowledge is intended). See J. Honnold, Uniform Law for International Sales, Deventer, 2nd ed., 1991, at p. 350; this assumes that we are speaking of such a right in the State where the product will be sold (provided, of course, that this State was determined in the contract between the parties) or in any other case, in the buyer’s State.

Similar to the provisions of art. 42(2) of the Vienna Convention, the seller shall be exempt from liability if the buyer knew or could not have been unaware of the right, or if the infringement of the right derives from compliance with specific instructions of the purchaser. It should however be noted that we are referring to conditions that the buyer asked the seller to fulfil, and not conditions left to the seller’s discretion. With regard to conditions left to the seller’s discretion, opinion is divided as to who should be held liable for the infringement of the right (see Galston, supra, at pp. 34-36, and with regard to section 2‑312(3) of the U.C.C., see also J.J. White & R.S. Summers, Handbook of the Law under the Uniform Commercial Code, St. Paul, 2nd ed., 1980, at p. 364). In cases dealing with liability for infringement of a third party right,  the buyer is required to notify the seller within a reasonable time of discovering the infringement, and the notice must state the nature of the right. However the seller may not raise the argument that he was not notified of the infringement if he knew of it.

It should be noted that the parties may contract out of these provisions in the contract between them, whether expressly or by implication.

The question that arises in this case is, therefore, whether there was a restriction to the seller’s liability, or, alternatively, whether it can be inferred from the behaviour of the parties before making the contract that they wanted to restrict the seller’s liability.

(f) It is not disputed that that both the appellant and the respondent knew that the goods were intended to be sent to the United States. Moreover, both of them could not have been unaware of the possibility that a registered trade mark existed. The trade mark is registered by the American company ‘Levis’. This company is not a small, unknown company. This company’s goods are marketed around the world and any sensible person ought to have assumed that such a company would register a trade mark for its products, at least in its country of origin, which is the United States. This assumption is especially valid with regard to the appellant and the respondent, both of which are companies that do business in this field and are aware of its special characteristics. We cannot accept a claim by either of them that it did not know or could not have known about the existence of this registered trade mark. With regard to the respondent, this knowledge can also be inferred from the testimony of Mr Ben-Vered, who confirmed that the respondent knew that denim manufacturers normally register trade marks for their products, and the respondent did its best to make sure it did not infringe them. This is the case, to a greater degree, with regard to the appellant’s customer, who is resident in the United States and does business there in selling products of this kind. It is true that he did not do business directly with the respondent, but only with the appellant, but the appellant cannot claim that its customer did not need to inform it about a registered trade mark. This argument was not even made, and in any case it concerns the relationship between the appellant and the customer, who is not a party in this proceeding. In so far as this appeal is concerned, the appellant acted for the customer, and the knowledge imputed to the customer may also be imputed to the appellant, particularly in view of the customer’s active involvement in the actual transaction.

It transpires, therefore, that, prima facie, the seller’s liability is limited, since the buyer was also aware of the problem with the goods. We will discuss the significance of this qualification for the purpose of determining liability below, but first let us examine the intention of the parties, on the basis of the contract made between them and their behaviour before signing it.

(g) The appellant approached the respondent with a request that it manufacture for it boots of the kind described. I am prepared to assume, in the appellant’s favour, that it chose a design from among those in the possession of the respondent, without submitting any design of its own, since the facts show that six similar designs were sent to the customer in the United States. Sending the designs also makes it clear that the question whether the appellant brought this design to the respondent or not is insignificant. The customer certainly should have known about the existence of a registered trade mark. At least he should have suspected this, and this gave rise to a duty to look into the matter before approving one of the designs. Moreover, not only did the customer approve one of the designs, but he also asked for changes to be made to it. The nature of this request shows the customer’s familiarity with the laws of his country of residence. From the moment that the customer did this, the respondent was entitled to assume that prima facie there was no problem whatsoever with the goods. We say prima facie because in the case of a company like Levis, the respondent should indubitably have suspected the existence of a registered trade mark. What is more, the appellant is correct in arguing that the respondent should have assumed no more than that the buyer examined the fitness of the product’s design merely for his own needs, without examining whether it complied with the law in the United States.

It transpires that even from the behaviour of the parties before signing the contract we can infer that the purchaser accepted, if only in part, the risk that the goods did not comply with certain requirements under American law. In this respect it may be added that the trial court even made a finding of fact, that under United States law the importer-buyer could have obtained permission from the ‘Levis’ company to import these boots. Nonetheless, I am not prepared to accept the unequivocal conclusion of the trial court that the exporter-seller was entitled to rely absolutely on the importer making the necessary preparations, from his point of view, for receiving the goods in the United States. As the party familiar with the special nature of the business and as the party who in principle is supposed to be liable for a breach of a registered trade mark in such a case, it should have ascertained whether the importer acted properly, or, at least, it should have raised the question.

(h) In order to remove all doubt, I will point out that the question whether the transaction was a F.O.B. transaction or a C.I.F. transaction is insignificant. The dispute between the parties relates to a preliminary stage of execution, and the question of liability for infringement of a registered trade mark is not contingent on the type of carriage transaction. The proof of this is that the various sections, whether in the International Sale of Goods Law or in the international conventions, do not refer to this at all.

4.    Determination of liability of the exporter-seller and the importer-buyer

(a) The result of the above is that there is prima facie a qualification to the liability of the seller-exporter; at the least, the behaviour of the parties shows that it is not necessarily the seller who should bear the liability. On the other hand, it appears that the full liability should not be imposed on the buyer-importer.

The parties’ behaviour shows that they did not trouble to cooperate with one another. The parties disagreed about the responsibility for carrying out various actions, and instead of sitting down and resolving the differences, each of them acted, apparently, as he saw fit, ignoring the damage that was likely to be caused and assuming that the other party would be liable for it. Each of the parties, in fact, foresaw the damage but did not trouble to clarify the risk of its happening to the other party, nor did it trouble to disclose it to the other and prevent the damage, even though it was clearly able to do so. Albeit the lack of cooperation (or lack of disclosure) of the type that existed here does not exempt the party who must carry out an action from its duty, but the question is whether it is not sufficient to grant him a partial defence.

(b) The behaviour of each of the parties, as described, amounts to lack of good faith in performing the contract (s. 39 of the Contracts (General Part) Law, 5733-1973 (hereafter — ‘the Contracts Law’), and also s. 6 of the Sale Law), and perhaps even to lack of good faith at the negotiation stage (s. 12 of the Contracts Law). The remarks of Prof. G. Shalev in her book, The Laws of Contracts, Din, 1990, at p. 43, are most pertinent in this respect:

‘The golden path in implementing the principle of good faith is found in a balance between the ethical basis for the principle and the requirements of trade. Following this path dictates proper behaviour in conducting business. The principle of good faith symbolises an abandonment, to some extent, of individualism and egoism, but it does not dictate absolute altruism… the general requirement to act in good faith should therefore be seen as a balanced requirement of consideration for the other party and cooperation with him, for the realization of the purpose of the contract.’

In order to remove doubt, we will point out that the provisions of the Contracts Law also apply to the case before us, if not directly, then by virtue of section 61(b) of the Contracts Law.

Both sides acted in bad faith. This is in fact consistent with the two aspects of the principle of good faith. On the one hand, we are talking about a cumulative requirement, which imposes an additional obligation to the express obligations under the contract, namely the obligation to act in good faith. This requirement is relevant to the duty of the seller-exporter to inform the importer-buyer, even though he knew, for example, that the latter would be liable (in view of the said qualifications). On the other hand, this is also a moderating provision, which in the appropriate case allows a deviation from the requirement to carry out the contract perfectly. This description is relevant to the duty of the importer-buyer, not to sit by idly, even though he assumed, for example, that the exporter-seller would be liable. Prof. G. Shalev says of this in The Laws of Contracts, at pp. 43-44:

‘The joining effect of the principle of good faith is reflected in all those cases in which it was held that the debtor must carry out his existing obligations in good faith, or in which an additional obligation was imposed upon him. The moderating effect of the principle of good faith is reflected in those cases where this principle allows a deviation from perfect performance of the obligation, provided that the performance and the deviation therefrom were done in good faith. In practice, this moderating effect is reflected in transferring the obligation to act in good faith from the debtor to the creditor under the contract, and it is equivalent to the requirement to exercise good faith with regard to rights arising from the contract.’

See in this regard also what was said in CA 338/73 Parcel 677 Block 6133 Co. Ltd v. Cohen [3], at p. 369, about s. 6 of the Sale Law:

‘We will consider here the two aspects of section 6. One aspect is the performance of a contract by the debtor party, who is liable to carry it out in good faith and in accordance with accepted practices. The legislator could not have been referring to the accepted practices among swindlers; rather the debtor must act in accordance with the accepted practices in fair negotiations. The second aspect of that section is the extent of the right of a party claiming a right under the contract; he too is subject to the same rule, which means that the entitled party may not pounce on a word in the contract and abuse it; rather he must exercise that right given to him in accordance with accepted practices among people who conduct their business in good faith and honestly. It should be emphasized that the legislator used the words ‘an obligation that arises’ and ‘a right that arises from a contract’, and significance should be attached to this. These obligations which are stated in s. 6 are additional obligations and rights that are added to what is stated in the contract, and they should be regarded as if they were expressly written in the contract’ (emphasis added).

Prof. M. Mautner says in his book, The Decline of Formalism and the Rise of Values in Israeli Law, Ma’agalei Da’at, 1993, at pp. 58-59:

‘The operation of section 39 is based on the assumption that the legal relationship between two persons is governed by a certain norm, whether contractual or otherwise, which creates an obligation and a right between the parties. Section 39 governs this norm, by expanding the scope of the debtor’s obligation or by limiting the scope of the creditor’s right. The duty imposed in the section is therefore an altruistic duty. The term ‘altruism’ is generally used to describe a situation where a person does not act out of a desire to promote his own interests, but his action is based on an intention to promote the interests of another. Altruism is the opposite of egoism, which in essence is acting while regarding the interests of each individual in society as invariably distinct from those of others. A party who is subjected to the duty of good faith must therefore adopt altruistic behaviour, which means he must act to protect the interests of the other party, beyond what is stipulated in the norm that governs his relationship with that party.’

Incidentally, Prof. Mautner also sought to characterize the duty of a litigant to act in good faith as an altruistic obligation, which means he must act to protect the interests of the other party, beyond what is stipulated in the norm that governs his relationship with that party.

The said duties are also expressed in the laws of international sale, as reflected in article 52 of the Schedule of the International Sale of Goods Law and in article 42 of the Vienna Convention. By virtue of these sections, the first and main duty is the duty of the exporter (the seller) to transfer the right to the importer (the buyer) free of any third-party rights. The other duty is the duty of the importer, if he is aware of such a right, to act himself so that the transaction is not frustrated, or at least to inform the exporter of the difficulty that is likely to arise, so that the latter may act accordingly. Similarly, the exporter too must inform the importer, if he thinks that a difficulty is likely to arise, particularly if he can assume that there is a qualification of his liability. These provisions are admittedly not stated expressly in the said articles, but they undoubtedly arise from them and are required by the very existence of a relationship whose purpose is cooperation between the buyer and the seller for the success of the business relationship between them.

Failure to comply with the requirement of good faith amounts to a breach of contract, and since in our case each of the parties lacked good faith, we are speaking of reciprocal breaches of the contract (see Shalev, The Laws of Contracts, at p. 65). The breach of each of the parties contributed ultimately to the breach made by the other party which resulted in the damage. It can also be viewed as a breach that contributed directly to the damage.

As stated above, the duty of disclosure may already have arisen at the negotiation stage, but as long as it was not carried out, the duty remains, and so if it was also not carried out at the contractual stage, the lack of good faith amounts to a breach. This was held also in CA 144/87 State of Israel v. Engineer Faber Building Co. [4], at p. 778:

‘The duty to act in good faith can also take the form of a duty of a party to the contract to disclose important facts during the contractual period… The question of the existence of such a duty and of its scope naturally vary from case to case… The duty of disclosure during the contractual period exists — or more precisely continues to exist — whenever the duty of disclosure was not carried out by a party at the pre-contractual stage, and the necessity of the disclosure continues to exist also during the contractual stage, and the degree of necessity is such that failure to comply with it amounts to behaving unfairly and not in accordance with accepted practices and in good faith.’

In any case, the question is what is the consequence of a lack of good faith that amounts to a breach by both parties.

(c) Article 82 of the Schedule of the International Sale of Goods Law provides:

‘Where the contract is not avoided, damages for a breach of contract by one party shall consist of a sum equal to the loss, including loss of profit, suffered by the other party. Such damages shall not exceed the loss which the party in breach ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters which then were known or ought to have been known to him, as a possible consequence of the breach of the contract’ (emphasis added).

Similarly, art. 74 of the Vienna Convention provides:

‘Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.’

In Israel, s. 10 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970 (hereafter — ‘the Remedies Law’), provides:

‘The injured party is entitled to damages for the damage caused to him as a result of the breach and its consequences which the party in breach foresaw, or should have foreseen, at the time the contract was made, as a probable consequence of the breach’ (emphasis added).

The idea underlying the principle of causality is that the person in breach is liable for the damage resulting from his action. Therefore, if two persons caused the damage, neither should be preferred to the other, but the liability should be divided between them so that each shall be liable for his share of the damage.

(d) The finding that each party should be liable for the damage for which he is responsible is also consistent with the requirement to mitigate the damage.

Article 88 of the Schedule of the International Sale of Goods Law provides:

‘The party who relies on a breach of the contract shall adopt all reasonable measures to mitigate the loss resulting from the breach. If he fails to adopt such measures, the party in breach may claim a reduction in the damages.’

Similarly, section 77 of the Vienna Convention provides:

‘A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated.’

Similarly s. 14(a) of the Remedies Law states:

‘The party in breach is not liable for damages under sections 10, 12 and 13 for damage that the injured party could have prevented or mitigated by reasonable measures.’

These sections effectively limit the entitlement of the injured party to damages and constitute an incentive for the injured party to act to prevent and reduce his damage. However, the rule concerning the mitigation of damage comes into effect only after the breach, whereas we are concerned with the ‘mitigation of damage’ at stages preceding the breach or at stage of the breach itself. The use of s. 10 of the Remedies Law (or art. 82 of the Schedule to the International Sale of Goods Law) to achieve this purpose will preserve coherence and contribute to the integrity of the system. For why should we only hold the injured party liable to prevent his damage ex post facto, if he can easily do this ab initio? We used the word ‘easily’, since we are not talking about actual prevention but about not acting to create or to increase his damage. This applies a fortiori to our case, where the injured party is also in breach.

(e) It is true that the court tends to attribute unequivocal and absolute implications to a lack of good faith. Thus, a party’s lack of good faith may deprive him of a remedy or confer a remedy on the other party. In this respect Justice Barak states (in HCJ 59/80 Beer-Sheba Public Transport Services Ltd v. National Labour Court [5], at pp. 838-839):

‘Sometimes the result of non-compliance with a duty is the payment of damages or specific performance. Sometimes the result is that the party in breach is refused compensation or enforcement. Sometimes the result of the breach is that the other party is empowered to do certain acts within the sphere of the contract which otherwise would have been deemed a breach, or that the party in breach is denied a power given to him under the provisions of the contract. Sometimes the result is merely that the action done in breach of the duty has no effect and is invalid…’

The same has also been held with regard to improper behaviour that did not necessarily amount to a lack of good faith. CA 825/79 Sherbet Brothers Building Co. Ltd v. Schwartzbord [6] concerned a memorandum for the sale of land. The parties agreed they would prepare a detailed contract after they agreed the payment terms. But the buyer was evasive and on two occasions did not come to meetings arranged by the parties for preparing the formal contract, which led the seller to believe that the purchaser wished to withdraw from the transaction. Although the law did not regard the buyer’s behaviour as amounting to a withdrawal from the transaction, and the memorandum remained valid, Justice D. Levin nonetheless ruled that the buyer’s claim for damages should be dismissed in full, in view of her behaviour:

‘Although the appellant did not formally cancel the memorandum, and she cannot be blamed for its non-realization, we cannot ignore the fact that her behaviour, as described above, contributed to the complication that ultimately led to this litigation. The transaction was in its initial stages, and on the determined facts, the appellant had not yet altered her situation as a result of the contract. In these circumstances I do not see what damage she can claim, and what justification there is for finding in her favour and awarding her any real damages’ (ibid., at p. 210).

It should be noted that in the other cases described, only one of the parties acted in bad faith or negligently, whereas in the present case, both parties lacked good faith.

Moreover, if it is possible to deny a remedy completely in cases like the aforesaid, then a partial denial of damages is even more possible, and as I shall show below, it is also desirable.

(f) As stated, the accepted premise is that contractual liability is absolute liability, in the sense that it usually arises in full force irrespective of the nature of the breach, the intentions of the party in breach or other circumstances. But even if we accept this premise, it does not mean that we cannot take into account the lack of good faith of both parties to the contract. Both parties in this case are tainted by this behaviour.

(g) It was pointed out in CA 804/80 Sidaar Tanker Corp. v. Eilat-Ashkelon Pipeline Co. Ltd [7], at p. 426, that:

‘There is no a priori jurisprudential understanding of the term “absolute liability”. Its meaning varies with the context in which it appears and the purpose that it is intended to serve.’

With respect to the method of examining the nature of absolute liability, we must refer to the statutory provision (the internal examination), in order to determine whether we can derive the purpose of the absolute liability from it. In this way we can also examine the applicability of defences such as a lack of good faith (of both parties, as in this case) to this provision. We must also consider general legal principles (the external examination). Accordingly, what will determine whether a lack of good faith can be imputed to a party to a contract who is prima facie entitled to compensation for damage resulting from a lack of good faith on the part of the other party, is the purpose of the law: in our case, this means the International Sale of Goods Law and general legal principles.

 (h) The purpose of the International Sale of Goods Law is in effect to establish a standard contract that shall be deemed to be adopted by the parties, unless they make a stipulation to the contrary. The purpose of this contract is to allow the parties to realize their wishes to the maximum, while allocating between them the various risks involved in the transaction. The premise of the law is that the responsibility for performing a particular act in a transaction should be imposed on the party that can perform it in the best possible way.

Performance in the best possible way means, inter alia, performance at the lowest cost, since the presumption in this kind of commercial transaction is that the parties wish to derive the maximum benefit from the transaction. Therefore, the International Sale of Goods Law will not impose liability for doing a particular act on a party that may perhaps be able to do it well, if this will involve a considerable expense that may even negate the benefit that the parties will derive from the transaction itself.

Allocating the risks allows each of the parties to act in the knowledge that the other party will act in a manner consistent with the purposes of the transaction. In other words, the law gives both parties the possibility of reliance, which is one of the main aims running throughout the law of contract.

 (i)   Does achieving the purposes of the law depend upon the existence of absolute liability? Quite the contrary. Like any contract or transaction, the sale transaction is also based on a desire for cooperation between the parties, assuming, of course, that the cooperation will benefit each of them, and both of them jointly. There is no reason to assume that this cooperation ends with making the contract, and in our case upon reaching an agreement whose essence is the applying the International Sale of Goods Law to the relationship between the parties. As stated above, even a duty of disclosure that is not discharged at the pre-contractual stage remains in force at the contractual stage. It is only reasonable that along their joint path the parties will encounter various problems that require some flexibility and even a deviation from what was originally determined. Without doubt, cooperation will also be needed in the future. One aspect of this cooperation is the recognition that damage may be caused to one of the parties as a result of lack of good faith by both parties. ‘Cooperation’ in such a case is reflected in the allocation of liability for damages between the two — an allocation made after the event, which may in fact encourage cooperation from the outset.

(j)    This determination does not conflict with the parties’ reliance, since a party to a transaction who knows of a particular problem involved in it (and in our case it has been proved that both parties could have known) and does not raise it with the other party, knowing that such an act may in fact lead to frustration of the transaction, cannot claim that he relied upon the other party investigating the matter. This very argument contains a large degree of lack of good faith (see also: Dr A. Porat, Allocation of Liability in the Law of Contract (Doctoral Thesis), 1989, 88).

Moreover, it is possible that the very allocation of liability will strengthen the reliance of the two parties to the transaction, for when they know that each of them is under a duty to help the other to act — to a reasonable degree, naturally — their faith in the performance of the transaction will be strengthened and their reliance will be increased. We can also refer in this respect to the remarks of Dr Porat, Allocation of Liability in the Law of Contract, at p. 90:

‘... when the contract obliges both parties to perform somewhat complex obligations towards one another, rather than, for example, the mere payment of money. In such circumstances, each party knows that he is often likely to encounter difficulties in performance, from which the other party can help him to extricate himself easily. If, in his understanding of the legal position, the other party is not obliged to help him even when it does not require an investment of resources, then his confidence in his own ability to perform the contract will be diminished. In any event, his confidence that he will receive, or that he is entitled to receive, the counter-performance of the other party will diminish. If however, in his understanding of the legal position, the other party must help him to a reasonable degree, his confidence in his own performance will increase, while at the same time his confidence that he will receive counter-performance will also increase, and as a result his ability to rely on the contract will increase.’

Prof. Mautner, supra, writes, at p 57:

‘Because it is intended to guarantee the fulfilment of the reasonable expectations of the parties from their legal relationship, the duty of good faith in section 39 is the legal expression of the sociological concept of “trust”. A number of sociologists regard the concept of “trust” as a key concept for understanding the way in which modern society functions. It can be stated simply that trust exists where the individual can assume that another individual or institution, whose behaviour is liable to influence him, will act in a way that can reasonably be expected of persons or institutions of that type… The trust is needed where the activity requires reliance on another, without real knowledge of the details and manner in which he acts… Sociologists who have dealt with this concept think that the degree to which we need to rely on trust has increased greatly in modern times, when many of our actions require reliance on the behaviour of many people, and understanding their ways of acting requires expertise that we do not have. Not only are they beyond our control; we do not even know them. Indeed, these sociologists assume that in the absence of trust in interpersonal relationships and in the absence of trust in the proper function of institutions, the order of modern society will collapse, to be replaced by utter chaos and a regression to a primitive era of self-reliance.

… I believe that there is a firm bond between the concept of trust and the legal concept of good faith. The idea underlying the two concepts is identical: the basis for the sociological concept of trust is the possibility that each individual may rely on the fulfilment of his reasonable expectations of other individuals and institutions to behave as required by their position or function. The basis for the legal concept of good faith is the possibility that each individual may rely on the fulfilment of his reasonable expectations of the legal relationship which he has with another, even if this expectation is not completely protected by the specific legal norm that defines the relationship.’

(k) To the same extent, the determination above does not affect the basic allocation of risks between the parties. The International Sale of Goods Law does not anticipate a situation where both parties can efficiently and cheaply avoid a difficulty that arose subsequently. A risk of this kind is not defined in the law, and consequently there is no initial allocation for it. A subsequent allocation, in accordance with the lack of good faith of each of the two parties, does not therefore conflict with the initial allocation (see also Dr Porat, Allocation of Liability in the Law of Contract, at p. 93).

 (l)   There is of course no doubt that the allocation of liability in our case is consistent with ideas of morality, justice and prevention of unjust enrichment that are the source of Israeli law in general, and the law of contract (including sales contracts) in particular. Where two parties cause damage, it is neither fair nor moral for one party to be liable for the full damages of the other. Why should a party to a contract be entitled to full compensation for damage caused also by his own foolish behaviour and lack of good faith? Moreover, allocating the liability between them will encourage good faith or care on the part of the two parties to the transaction. Recognizing a lack of good faith of a party to a contract does not prejudice the morally binding force of the other party’s promise (in this respect, see: P.S. Atiyah, Promises, Morals and Law, Oxford, 1981). In reply to the question whether a specific promise is also considered to include the element of the consent included therein being irrevocable and therefore morally binding, we can also take into account the lack of good faith of the party to whom the question was addressed (see also: Porat, supra, at p. 122).

Similarly, this recognition does not prejudice the autonomy of the individual’s will and the idea of trust, which underlie the need to keep promises (see in this respect: C. Fried, Contract as Promise, Cambridge, 1981). A person interested in furthering his desire by placing himself in the hands of others to make a mutual profit is not interested in subjecting himself to the arbitrariness of the other party, so that the latter may both contribute to a breach and still insist upon full compliance with the promise. There is no moral value in this. The desire to create relationships of trust between people also does not justify a party contributing to a breach of a promise and insisting, nonetheless, upon full performance thereof. We should emphasize that recognizing the lack of good faith of both parties does not mean that the promisor is released from his promise, nor that it is legitimate to breach a promise. The idea behind it is merely the determination of reduced sanctions because of the lack of good faith of the party who was given the promise. In this respect it should be noted that Israeli law tends to read implied terms and conditions into contracts, which are mainly based, inter alia, on good faith.

In a similar context Dr Porat, supra, at p. 107, says:

‘External intervention in the contents of the contract, whether direct or indirect, both by virtue of a specific statutory provision and by virtue of a provision of a law that gives the court broad discretion, emphasizes the fact that the modern contract should not be regarded as a formal instrument for allocating risk and planning for the future. The external intervention is sometimes not specifically anticipated; this is so where it is done by virtue of general provisions of law, which must be given meaning in accordance with the circumstances or considerations of legal policy. In this way, a price is paid in a decrease in security and certainty, reliance is adversely affected and legal principles are not always clear and obvious. Recognizing a defence of contributory negligence in these circumstances is merely the addition of another external criterion, which is not always consistent with the expectations of the two parties, and the reasons for its existence are first and foremost morality, justice and fairness.’

We can only add that if intervention is possible in a case of a contract written by the parties themselves, how much more so in a case of a contract whose contents are determined by a law and with regard to which it can be assumed that the principles of fairness are the central pillars of the legal system that led to its legislation.

(m) In a situation like the one before us, where in practice both parties contributed by their behaviour to the damage, allocating the liability is the desired result. The plaintiff can no longer claim that he was entitled to rely upon the performance of the other party, since the defendant has an equal right to say this. Similarly, the plaintiff cannot rely on arguments concerning the moral aspect of keeping promises. There is also no difficulty in applying the doctrine, for just as the defendant’s liability for the plaintiff’s damage will be determined, so too will the plaintiff’s liability for the defendant’s damage be determined. Any other ruling would lead to an absurd, since as each of the parties is in breach, we should prima facie impose on each of them absolute liability for the damage caused by the breach to the other party.

The fitting solution in circumstances like these is to allocate liability between the parties. In this respect Dr Porat, supra, at p. 212, says:

‘We are dealing with two sets of behaviour, at the same level, with identical characteristics, where neither has any advantage over the other. The equality described above almost cries out, for reasons of justice and fairness, for equal treatment of the plaintiff and the defendant, i.e., an allocation of responsibility. It is impossible to determine who should be preferred. This is even a situation which would lead to a vicious cycle of claims without any solution.

Any solution, other than an allocation of liability, would be arbitrary and, for that reason, unjust.’

(n) This ruling has an additional advantage in that it unites the principles for compensation in the law of torts and the law of contract. The appeal before us is an example of a case that lies on the borderline between the two fields. This borderline must inevitably be blurred in the appropriate case.

In fact, each of the parties could have argued that the other was negligent or, to be more precise, made a negligent misrepresentation. The compensation claimed would be for damage caused unlawfully. There is no real reason to apply different principles of compensation in the two cases.

There is also no doubt that a case of this sort is particularly suited for an allocation of liability. What reason is there for establishing a different liability in accordance with the drafting of the statement of claim? On the contrary, this would divert the consideration of the case from substantive issues to merely technical issues regarding the nature of the grounds set out in the statement of claim, thereby emphasizing what is trivial instead of what is important (see Porat, supra, at p. 115).

(o) It is interesting to note that in similar cases the court has recognized, even if only tacitly, the possibility of allocating contractual damage in accordance with the degree of culpability of the two parties. This is so in cases where the court considered the revaluation of the contractual price. The court tended to justify the revaluation, or not making a revaluation, inter alia with reasoning relating to the relative culpability of the two parties. In the words of Justice Barak in CA 158/77 Rabinai v. Man Shaked Ltd (in liquidation) [8], at pp. 291-292:

‘In principle, a court asked to make an order of specific performance has three options: the court can refrain from granting the order; it can make an order of specific performance as stated in the contract; it can make an order of specific performance with instructions to revalue the price… In CA 277/57, the court refused… to make an order of specific performance with regard to a contract for the sale of land... where the buyer had delayed in performing it, during which time the price had fallen to less than a fifteenth of the original price. The court adopted the same approach… when it refused to make an order of specific performance with regard to the contract for the sale of land… (emphasizing) that it did so in view of the special circumstances of the case, in which the buyer had shown inflexibility, a fact that reduced the degree of the deliberate refusal of the seller to transfer the asset. In a number of judgments, this court has made an order of specific performance and refused to revalue the price… while emphasizing the deliberate behaviour of the seller, who not only breached the contract but also put off the buyer repeatedly and intentionally refused to honour the contract that he had made... Finally, in a number of cases, this court has made an order of specific performance while partially revaluating the price… Recently… we ordered specific performance of a contract for the sale of an apartment, which the seller had deliberately breached, and it gave instructions that part of the price would be paid with linkage to the increase in the consumer price index’ (emphasis and parentheses added).

This was also the case in CA 789/82 Ezra v. Mugrabi [9], at p. 574, where Justice Bejski held:

‘… in enforcing a contract, the consideration or balance of the consideration payable is revalued as of the date of enforcement… the same applies with regard to restitution in the case of a breach of contract… subject to the court's discretion regarding the degree of revaluation… taking into account the circumstances relating to the nature of the breach, the behaviour of the person in breach, and the circumstances that should be taken into account for this purpose’ (emphasis added).

See also: M. Hork, ‘Adjustment of the Contractual Price’, 8 Iyunei Mishpat, 1981, 88, at p. 112.

(p) Before concluding, I will mention that if we were discussing the breach of the duty of good faith at the negotiation stage, it would have been easier to recognize the doctrine of allocation of liability, since s. 12 does not originate exclusively from the law of contracts, as Prof. D. Friedman and Prof. N. Cohen point out in their book, Contracts, Aviram, vol. 1, 1991, at p. 636:

‘The difficulty existing in a contractual claim does not arise with respect to improper behaviour at the negotiation stage, in view of the fact that the claim is not contractual and in view of the tortious nature of s. 12. This position is consistent with our general approach whereby the section can be supplemented by means of the principles embodied in the Torts Ordinance.’

See also CA 714/87 Sher v. Cohen [10], at p. 164.

However, since it appears to me that the situation before us must be classified as part of the performance stage, since we are concerned with an obligation that derives from the contract (an obligation to transfer ownership free of any right of a third party), I therefore think it correct to examine the incorporation of the allocation of liability into that material. Undoubtedly, the readiness to recognize the allocation of liability at the negotiation stage also supports the need to incorporate this doctrine also at the stage of performance of the contract, in all its stages. We should emphasize once more that since the lack of cooperation and the absence of disclosure in our case originated in the pre-contractual stage, it is easier to apply the accepted principles at this stage to them.

(q) I have determined that in this case we should recognize the allocation of liability between the parties. All that remains is to determine how this allocation is to be made.

There are three possible methods:

(1) An allocation by comparing the degree of bad faith attaching to each of the parties.

(2) An allocation by comparing the causal contribution of each of the parties to the damage.

(3) An allocation that combines the degree of bad faith with the causal contribution to the damage (Porat, supra, at p. 314).

In the case before us, where we are concerned with a situation of mutual lack of good faith, we must compare both the causal contribution of each party to the damage and the degree of lack of good faith of each of them.

Finally, in the circumstances of the case, it seems to me that the correct allocation between the parties is the equal allocation.

5. The result is that the appeal should be allowed, albeit in part. The exporter-seller will be liable for 50% of the damage and the importer-buyer will be liable for the remaining 50%.

In the circumstances, each of the two parties shall pay costs to the State Treasury in a sum of 6,000 NIS.

 

 

Justice Y. Malz

I agree.

 

 

Justice E. Goldberg

I agree with President Shamgar’s remarks that both the appellant and the respondent ‘could not have been unaware of the possibility that a registered trade mark existed,’ for the reasons that he gives in his opinion. If so, the respondent’s behaviour cannot be deemed to be tainted by a lack of good faith, for the appellant had the same knowledge as the respondent. The lack of cooperation between the parties also cannot be deemed a lack of good faith, when each of them also knew of the danger that the anticipated damage existed and did not need the other party in order to discover this danger.

The buyer’s demand of the seller, under art. 52(1) of the Schedule to the Sale (International Sale of Goods) Law, that ‘other goods free from all rights and claims of third persons be delivered to him by the seller’ is based on the fact that the buyer did not agree ‘to take the goods subject to such right or claim’ (emphasis added). Such an agreement does not need to be expressly stated, and it may be inferred from the circumstances.

In our case, the learned judge determined that:

‘The manufacturer knew that the plaintiff had examined the sample in the United States and received the customer’s consent. This examination resulted in two special changes being ordered, of which at least one — the replacement of the soles — relates to customs problems. In this situation, a representation was made to the manufacturer that the party making the order knew the laws of the country of destination and the duties it imposed on him thereunder, and that he had complied with these obligations as an importer… the manufacturer was permitted to rely on the importer making the necessary preparations, from his point of view, for receiving the goods in the United States.’

What emerges from the remarks of the trial court is that the appellant, who, as stated, knew that there was a possibility that a registered trade mark existed, also knew the laws of the country of destination, and therefore it can be regarded as having agreed to assume the risk involved therein. If it turned a blind eye, this does not justify allocating the liability between it and the respondent.

I would therefore dismiss the appeal.

 

 

Appeal allowed in part, by majority opinion (President M. Shamgar and Justice Y. Malz), Justice E. Goldberg dissenting.

22 August 1993.

 

 

C.A. 84/64

           

BETH HANANYA, WORKERS' COOPERATIVE SETTLEMENT LTD.

v.

MOSHE FREIDMAN et al.

 

 

In the Supreme Court sitting as a Court of Civil Appeal

[30 July 1964]

Agranat D.P., Berinson J. and Manny J.

 

 

 

Cooperative societies - membership - admission of wives - effect of long unchallenged usage - Cooperative Societies Ordinance, sec. 1.

 

 

At a general meeting of the appellant society a resolution was adopted amending a certain provision of its constitution. The respondents, members of the society, sought a declaration that the resolution was void because wives of members had voted thereon although not formally members themselves. The appellant pleaded that the wives had been duly admitted to membership, that it was customary, as throughout the settlement movement, for wives to become members and that the respondents were estopped from denying such membership. The District Court granted the declaration claimed.

 

Held, granting the appeal, that whilst normally a person did not become a member unless duly admitted under the relevant law or according to a society's rules, the question was whether or not in formally accepting a husband as a member the intention was to exclude his wife. Such intention could only be established by examining the circumstances. In the instant case, the only conclusion that could be drawn was that admission of a husband included his wife, especially as wives had always been treated as members for all purposes. The mode of admission to membership was left by law to a society's constitution and the statutory definition of "member" was broad enough not to exclude those who became members in some manner other than that specified in such constitution.

 

            A society's constitution was in the nature of a contract between it and its members or among the members inter se. In certain circumstances the contract might be varied by mutual consent evidenced manifestly in long continuous practice. Such variation received the force of a binding usage. That was so in the instant case, wives having been accorded rights and obligations equal to those of their husbands. The court could not equitably disregard this situation and set it at naught.

           

            To hold that the wives were not members would shake the society and others like it to their very foundations since it would render everything done by them void of all legal effect.

           

Israeli cases referred to:

 

(1)       C.A. 25/50 - S. Wolfson v Spinis Co. Ltd. (1951) 5 P.D. 265: 4 P.M. 26.

           

            Palestinian case referred to:

 

(2)   C.A. 5/40 - S. Cohen and Company and an. v. Abraham Capun (1940) 7.P.L.R. 80; (1940) 1 S.C.J. 63.

 

English cases referred to:

 

(3)       Lyle-Meller v. A. Lewis and Co. (Westminster), Ltd. (1956), 1 All E.R. 247.

(4)   Lewis H. Evans, Official Manager of the Agriculturalists' Cattle Assurance Company v. Aaron Smallcombe and an. (1868) L.R. 3 H.L. 249.

 

American case referred to:

 

(5) Francis v. Perry (1913) 144 N.Y.S. 167.

 

R. Navat for the appellant.

A. Fichman for the respondents.

 

BERINSON J.:                       The appellant is a workers' settlement constituted as a cooperative agricultural society (hereinafter referred to as "the society" or "the settlement"), and the respondents are members of the society.

 

            On 2 June, 1963, the general meeting of the society resolved to change the clause in the society's articles of association which deals with the settlement of disputes. At that meeting, as at all meetings of the society, members' wives participated and voted. The respondents claim that the wives are not members. Because they participated, the respondents applied to the District Court for a declaration that the above resolution was null and void and that the clause in its version prior to the resolution, remained in force.

           

            The society raised the following points in its defence:

           

1. The women were duly accepted as members.

 

2. In the settlement, as in all other workers' settlements of the Settlement Movement in Israel, there is a binding custom according to which wives are full members.

 

3. The respondents are estopped from denying the wives' membership.

 

            These contentions were not accepted by the District Court and judgment was given in favour of the respondents. In the present appeal, the same three points are raised and I shall deal with each of them.

           

1. With respect to the procedure for accepting members into the society. Mr. Tobel. the secretary of the society. testified as follows:

 

            "Application for membership is always made by both spouses together and both sign the application which is in the form specified in the society's articles of association... The committee considers the application after making enquiries about the personalities and the health of both spouses. They are both sent for medical examinations.  Should the committee find that one of the couple is unsuitable, neither is accepted. If the committee finds the couple suitable, it resolves to accept them and passes the matter on to the general meeting for approval. Only the name of the head of the family is designated in such approval. In my opinion, under this procedure the whole family is accepted as member."

           

            Mr. Tobel's opinion did not meet the approval of the learned Judge who held that "acceptance of members into the cooperative society may not be implied - it must be explicit". He deduced this from the definition of the term "member" in the Cooperative Societies Ordinance, and from the society's articles of association (hereinafter referred to as "the articles") which specify that the decision of the administrative committee to accept a member must be approved by the general meeting.

           

            It is true that usually a person does not become a member unless he has been duly accepted in accordance with the provisions of the law and the articles as they stand. Nevertheless, it seems to me that the learned Judge was in error here. First, we are not dealing with the question of implied acceptance of members. There is no dispute that the women, together with their husbands, signed the written applications for joining the society or that the committee would decide whether to accept or reject both husband and wife. The committee's decision would be passed to the general meeting for approval and the general meeting would approve the application in the name only of the husband. The sole question that might arise is what was the intention of the general meeting in giving its approval? Was it to approve the husband alone and to reject the wife or to approve them both even though formal expression of such approval was made in the name of the husband alone. In the Corpus Juris Secundum. vol. 7. p. 56, sec. 23(b), we find:

 

"One may become a member of an association by formally signing its articles, or in any other way that shows a mutual agreement between himself and the existing members that he is a member. But membership is a question of intent and cannot be established by any facts which fail to show the existence of a mutual intent that one shall be a member of the association... It is sufficient if the existing members agree to accept him as a member, and he agrees to become such, with the mutual understanding that he shall be entitled to all the rights and privileges incidental to membership, and shall assume all the duties and obligations attaching thereto, the question of membership depending on the intent and understanding of the parties."

 

The task therefore is to discover the true intention of the parties, having regard to all the circumstances of the case. First and foremost, obviously,  the conduct of the parties at the time of the application and their understanding of the outcome must be considered. Mr. Tobel's testimony regarding the acceptance of new members was absolutely clear. He found no express approval by the general meeting of the acceptance of the wives as members of the society but he testified that the approval of the general meeting in the name only of the husband, is viewed as approval of both husband and wife: "When it is decided to accept a new member, a whole family, and not just the one member, is accepted". This also emerges from the fact that the settlement does not accept bachelors. Bachelors who joined the settlement when it was first founded were required to marry within two years and those who did not do so were forced to leave. "At present" said Mr. Tobel, "there are no bachelors on the settlement".

 

            It is a fact that throughout the existence of the settlement, new members have been accepted in the above manner and when a new family is accepted,  everyone considers the wife to be a member with equal rights and obligations in every respect. Wives participate in the activities of the settlement together with their husbands; they participate in the general  meetings and enjoy the right to vote, they are elected to the institutions of the settlement and act in its name, just like their husbands. Accounts in the settlement are kept in the name of both spouses on the clear assumption that both are members of the society.

 

            In the light of these facts, the only possible conclusion is that the association in its general meetings would accept both spouses as members, even though only the name of the husband appeared in the minutes.

           

            This conclusion certainly does not contradict the articles of association, for, as we have said, the intention of the general meeting in approving the decision of the committee in the husband's name only is to accept both husband and wife as members. The best evidence of this is that subsequent to the approval, the wife is treated by all as a member of the settlement in every way. Nor is this conclusion contrary to the law, as the learned Judge thought, relying on the definition of "member" in section 2 of the Cooperative Societies Ordinance. According to this definition:

           

            " 'Member' includes a person joining in the application for the registration of a society and a person admitted to membership after registration in accordance with the rules (of the society) and this Ordinance and the regulations made thereunder."

           

            I have already said that the admission of the women was in fact consistent with the articles of association, for the action of the general meeting can only be interpreted as approval of the membership of both husband and wife. The Cooperative Societies Ordinance and the regulations made thereunder do not prescribe conditions for the admission of members. The regulations stipulate only that every association must in its articles of association specify the conditions for the acceptance of members, and the method of choosing them. When the choice is made in accordance with the articles, all the requirements of the law relating to this matter are satisfied. Similarly, the definition of "member" in terms of "includes" is not exhaustive, i.e., it does not preclude the possibility of a person becoming a member of the settlement in a manner different from those specified in the definition. Consequently, even if the admission of the women did not conform to all the specific provisions of the articles of association, nevertheless, since they were in fact recognized as members for many years, enjoying the benefits and bearing the responsibilities of membership, such de facto recognition gives rise to the assumption that their membership is in order de jure as well.

 

            I could in fact have ended my judgment here but because both sides argued at length on two other questions of great public importance, in that they relate not only to the present litigants but to all the workers' settlements belonging to the Settlement Movement, I will also deal with these questions as briefly as possible.

           

2. The second submission of the appellant is, as I have said, that the practice with respect to the acceptance of members has become so firmly rooted that it has become a binding custom which the respondents may not deny. The practice has been the same since the settlement was founded in 1951. Moreover, all other settlements belonging to the Workers' Settlement Movement have followed the same practice for as long as the Movement has existed. Mr. Arazi, a member of the secretariat of the Movement and the coordinator of its membership committee, pointed out: "I am familiar with the procedure for accepting members in all the settlements in Israel. In all settlements, it is customary for the acceptance of members to include the acceptance of female workers". There is no doubt that all those concerned knew of the practice and conformed to it. The learned Judge, however, thought that the practice cannot be binding because it is contrary to the law. The contradiction, he thought, lay in the fact that by giving the right to vote to both a member and his wife, a member would have two votes, whereas section 16(1) of the Cooperative Societies Ordinance allows each individual member one vote only. It would seem that conceptually, this view is based on the ancient rule of the Common law, taken from the Pentateuch, that a man and his wife are "of one flesh" (Gen. 2:24) and therefore the wife's act is that of the husband. This view is fundamentally wrong from both a legal and a factual point of view. The wife's right to her own opinion is given to her by virtue of her separate personality and membership. When the wife expresses her opinion on matters concerning the settlement, she is exercising this right of hers and in no manner can her vote be equated with the vote of her husband. Consequently, the husband is not given two votes but only one by virtue of his membership and the wife too has a vote by virtue of her membership. There was therefore no violation of the provisions of section 16(1) of the Ordinance.

 

            In support of his view denying the binding force of the above practice relating to the mode of accepting new members. the learned Judge quoted the following passage from Wurtzburg. The Law relating to Building Societies. (9th ed.) p. 21:

           

"As between the society and its members, a course of dealing at variance with the rules, for whatever length of time it may be pursued and acquiesced in, is of no validity whatsoever."

 

            The author himself adds a warning note to the effect that the authorities upon which this statement is based are not particularly strong and that his words must be read with caution. I have looked at those of the sources which I could obtain and can find in them nothing clear and explicit in support of Wurtzburg's view. And it is no wonder, for the principle emerging therefrom does not, in my opinion, conform to the accepted position of the law on this matter. The very same author says elsewhere (at p. 41):

           

"Sometimes a person is estopped, by virtue of an agreement and acceptance, from denying the legality or validity of a new regulation."

 

            That is correct. The articles of association are only an agreement between the society and its members, or amongst the members themselves, under which they proceed by mutual consent. In certain circumstances, a deviation from the articles of association will have effect because of such consent. When the deviation persists continuously for a sufficient period of time and is known to all those concerned and decisive in their mutual relations, it acquires the force of binding custom which the law recognizes, just as it recognizes every other custom or commercial usage which those concerned cannot deny.

           

            For this reason, there is no doubt that the usage with respect to the acceptance of members in the appellant settlement, in terms of duration, persistence and continuity and in view of its familiarity (Wolfson v Spinis (1) and Cohen v. Capun (2)], has become a binding custom not to be challenged.

           

3. The last argument is that in view of the circumstances, the respondents are estopped from denying the membership of the wives.

 

            After all that has happened. it is difficult to understand how the respondents summoned up courage to argue against the membership of the wives. One only has to see how in the past the respondents served in various capacities in the society and were elected at meetings in which women participated and voted. Together with their wives, they initiated various claims against the appellant in which they admitted that they and their wives were members of the society. All members of the settlement, including the respondents, looked upon the women as members of the settlement with rights and duties equal to those of the men, and not a murmur has been heard against membership of women since the settlement was founded. Now, after all this. the respondents wish to exclude the women, saying: "What happened in the past happened, but it was worth nothing, as if it had never happened." A person attempting to make such a claim must be clearly told: "What happened in the past is still valid, and will continue to be so in the future." A court of equity will not consider an argument which disregards the facts of life and attempts to dismiss them with a wave of the hand. The court will act upon the principle that a person must stand by his deeds and his words when another has acted upon them and, as a result, prejudiced his situation.

           

            Counsel for the respondents claims that the respondents' belief that the women were members was founded on a mistaken legal outlook and took no account of the real position. This contention is incorrect for a number of reasons. The question whether a particular person is a member of a society is a question of fact, see Francis v Perry (5) at p. 281, which quotes the Legal Encyclopaedia of America and England vol. 25, (2nd ed.) p. 1134, and no one will dispute that misrepresentation of fact is grounds for estoppel. We have already seen that the question of the membership of the wives hinges on determining the intention of the general meeting and that, too, is a question of fact. At most, it might be said that this is a factual conclusion arising from that which was proved, or that it is a mixed question of fact and of the law concerning the legal relationship between the parties. Even were it so, we have found a judgment of Denning J., in Kyle-Melle rv. Lewis & Co. Ltd. (3) (at p. 250), according to which misrepresentation, or deception,give rise to estoppel. In his words:

           

"I do not think that it is necessary to go into these refinements about law and fact. I am clearly of the opinion that this assurance was binding no matter whether it is regarded as a representation of the law or of fact or a mixture of both, and no matter whether it concerns the present or the future. It may not be such as to give rise to an estoppel at common law which was restricted to representations of existing fact; but we have got far beyond the old common law estoppel now. We have arrived at a new estoppel which affects legal relationships."

 

            The absence of any action which the actual situation demanded, when the position was known, is liable to be interpreted as a silent admission or as acceptance of the law, preventing the relevant party from later arguing the opposite. Such estoppel, arising as a result of silence when the position was known, has found expression in the decision of the House of Lords in Evans v. Smallcombe (4), where the Court ruled that shareholders in a company, who knew how a situation was developing and remained silent, are estopped from challenging the outcome if they did not protest at the time the event occurred...

           

            The District Court also held that one of the conditions for the application of estoppel was not fulfilled since no proof existed that the settlement had, by reason of the conduct of the respondents, changed its position to its detriment. "If the respondent settlement wishes to make the required changes in its articles of association, it can easily hold another general meeting and see to it that only the male members participate." This is a very narrow view of the issue and it misses the main point. The estoppel that was claimed against the respondents does not concern the said resolution of the general meeting but rather the question of the wives' membership: the fate of the decision hinges on this latter question. A determination to the effect that the women are not members of the settlement would be of tremendous importance and could shake the settlement to its very foundations. A workers' settlement is a way of life based on the principles of equality, mutual aid and responsibility, and the existence of communal living and services for the benefit of all the members, including women whose status and rights are equal to those of the men. From an analytical point of view, a decision that the wives are not members of the settlement and consequently are denied the right of lawful participation in the social and economic activities of the settlement would be a hard blow to the structure of the settlement and to the principles it advocates and would mar its character. From a practical point of view, such a decision would mean that everything that has been done in the settlement since its inception is without force and void ab initio because everything that took place at the meetings and in its institutions occurred with the participation of the women as subjects of equal rights to those of the men. Furthermore. in the light of Mr. Arazi's testimony, that the same situation applies in all the settlements belonging to the Cooperative Settlements Movement of Israel. it may be said chat everything that has been done in all the settlements and in the Settlement Movement itself from the very start is, and always has been, devoid of legal force. Obviously, such a result is most grave and could cause total confusion to the appellant and to all the ocher workers' settlements in Israel. This Court must do everything within its power to prevent the creation of such a terrible situation, to the extent that the law allows such action. Fortunately, the law does make such action possible, as explained above, for a number of reasons.

 

            In view of what we have said, the appeal is allowed, the decision of the District Court is hereby over-ruled, and the respondents' action dismissed, and the costs from both this Court and the District Court, in the sum of I.L. 1200, will be borne by the respondents.

           

            Appeal allowed

            Judgment given on 30 July 1964.