Retrospective Judgment

Deputy President E. Rivlin

Is a person’s expenditure for childcare  while at work deductible as an expense incurred in the production of income,? This is the legal question before us. Apparently, the existing law offers us one, and only one, answer.

The facts

1.    The respondent (the counter-appellant) is the mother of two children, and a lawyer in private practice.  She and her life partner – the father of the children - are jointly raising their children.  During the tax years under appeal – 1999-2001 – the respondent requested to deduct expenditures for her children’s  pre-school and day care from her taxable income. The respondent’s daughter Maya was born in 1994, and her son Guy was born in 1997.  The respondent sought to deduct pre-school payments for Guy for the years in dispute. She also sought to deduct pre-school payments for Maya up to July 2000, and payments for afternoon day-care after Maya began attending elementary school that year. The respondent did not request a tax deduction for clubs that the children participated in during the afternoon, nor for day camps during the vacation summer months when the day care center was closed. The respondent declared that had her two children not been looked after in these frameworks until the afternoon hours, she could not have continued to work as a lawyer in private practice. The appellant refused to allow the deduction of the disputed expenses, and the issue was brought before the District Court. This is an appeal against its decision.

       The Israel Bar Association requested to join the appeal proceeding as amicus curiae. We see no need to grant that request, inasmuch as the Bar Association has no unique interest in the questions in dispute, despite the fact that the respondent is an lawyer by profession and occupation.  Nonetheless, the written position of the Bar Association, and its oral statements were all before us when we wrote our opinion.

The District Court judgment

2.    The District Court granted the respondent’s appeal in part, ruling that the part of the expenses incurred for her children’s care should be allowed as a deduction from income, in accordance with certain rules that it specified. The court ruled that the parental obligation to  care for children is established both by law and natural imperative. The District Court stated that “evidently the parties do not dispute that placing the [respondent’s] children in supervisory frameworks was a necessity, without which she would not have been able to maximize income”. The District Court therefore ruled:  

'The basic assumption is that each of the individual spouses is entitled to realize his professional ambitions, his right to realize his desire to work in his occupation and to produce income for himself and his family members. The entrustment of children requiring adult supervision, including by dint of law, enables the parents to go to work and do their work. As distinct from food and medicines, as claimed by the respondent, the children would not have been under another person’s supervision for the aforementioned times and for the aforementioned number of days per year, had the spouses not been busy in the production of income... in that sense, this not an expense which "is absolutely private”…’

Nonetheless, the District Court noted that the child's presence in the various supervisory frameworks also contributes to the child's development and education.  The contribution stems from the very fact of children spending time with toddlers their own age, from spending time in the presence of non-parental adult figures, and from educational and enrichment activities.  This has been ruled  a "benefit" that accrues to the parents from the very fact of their children being in the different supervisory frameworks. Regarding this point, the District Court accepted the respondent’s claim that "were it not for the need to spend long hours at work, both she and her children would benefit from spending as much time as possible with one another, and certainly for a period of time in excess of the time required for their education, development, imparting of knowledge, etc."  That benefit, according to the District Court, "would also have accrued from spending a few hours during a smaller number of days...especially for toddlers".  In this context, the District Court noted that "it is undisputed that the company of children in the day-care center, and the activity there, replace entertaining friends at home, or participating in clubs, but this could be accomplished through other, more limited means than spending no insignificant number of hours every day outside the house, in the school."

The District Court therefore ruled that the total payments made for supervision should be classified in accordance with two categories of payments. The first reflects payments that should be ascribed to "enrichment" activities, while the other should be ascribed to “supervision" costs. Only the latter should be permitted for deduction as an expense in the production of income:

‘First of all, supervision expenses that are not enrichment expenses are not expended by reason of personal or individual taste. The assessee is forced to make these payments in order to be able to produce his income. It is, however, clear that having been compelled to do so, he will choose supervision in accordance with his own taste, which is where the personal preferences play a role.  Were it not for the need to purchase  supervisory services for the children, in order to provide for personal needs, he would choose different, more limited frameworks.  To be clear: the need arises initially in order to facilitate the production of income, and only after that are the personal considerations factored in, relating to the best interests of the child, the appropriate framework etc.  This is not comparable with the direct purchase of enrichment services, such as hobby clubs, private lessons, or other enrichment programs.’

   3. The District Court distinguished between expenses for "direct enrichment" and expenses for "indirect enrichment". It therefore ruled that there is no basis for permitting payments made for all categories of enrichment, however,  the mechanism for identifying the costs is different. Expenses incurred for "direct enrichment" include payment for education, clubs and other clearly enriching activities. The court ruled that the central element of "direct enrichment" is the granting of lasting benefits to the child, whereas the supervisory component in this particular context is secondary to the main component - education and enrichment.  If a certain payment can be identified as intended for an activity classified as "direct enrichment" - it will not be permitted as a deduction.  On the other hand, "indirect enrichment", as defined by the District Court, is that enrichment from which children derive from frameworks that are primarily the supervisory.   In this context, the court ruled that expenses imputable to supervision should be separated from expenses attributable to indirect enrichment.  The District Court noted that:

'In this computerized, documented era, in which all activities can be monitored and reconstructed, assuming the existence of economic and other models that allow it, it would seem that the aspiration for an accurate assessment requires that where an assessee can prove that a certain expense should be attributed, under  s. 17 of the Ordinance,  to the production of his income, and that component can be quantified as a part of the total in a manner that distinguishes it from the portion that does not serve for the production of income, that portion should be permitted for deduction.'

The District Court observed that the supervision and enrichment costs can be quantified based on the data collected by organizations that run day care centers, such as Wizo and Na’amat.  The District Court also noted that the day care centers managed by these organizations "can also serve as a point of reference for the reasonability of an expense". In this context the District Court noted that the question of the reasonability of the expense as prescribed by section 30 of the Ordinance was not adjudicated in the appeal before it. The District Court further stressed that supervisory expenses not incurred for the purpose of parents going to work could not be deducted.

4.  Equipped with these determinations, the District Court proceeded to classify the expenses that the responded sought to deduct.  The court ruled that payment to a babysitter or a care-giver in the home was payment for supervision, and was fully deductible, subject to the principle of the reasonability of the expense.  Regarding the after-school center where the respondent's daughter spent the afternoon , the District Court ruled that the expense was primarily for purposes of supervision. As such two thirds of it should be permitted for deduction (while the other third “takes into account the personal benefit, including the meal"). As for the payments to the pre-school (where the children also received lunch), the District Court ruled that one half of the sum would be regarded as an expense for indirect enrichment and personal components such as food, and would not be permitted for deduction. The [other] half of the payments, which the District Court attributed to supervision expenses, would be deductible. The District Court further ruled that where separate payment was made for the children's meals, two thirds of the payment would be regarded as an expense for supervision.

5.    The District Court rejected the appellant's claim that,  at the very most, the claimed expense merely prepared the ground for generating income, but was not an expense "in the production of income", as required under s.17 of the Ordinance. The District Court distinguished childcare expenses from expenses for the purchasing of food and medicines, arguing that food and medicines are required at all events, even where a person does not generate income. The court was also of the opinion that in the case at hand one could not draw an analogy from case law that determined that travel expenses to a workplace were not a permitted deduction, and that in the case at hand, the expenses also met the test  that they serve their purpose at the time the income is created.  When the respondent is at work - it ruled – "she is only able to earn her income by virtue of the fact that her children are under supervision." The District Court held that childcare expenses for the children are connected to the creation of income, and are incidental to the creation of income, because had the children not been under supervision, the respondent would not have been able to produce income. It therefore held that the expenses were not just "a preliminary condition for her to go out to work", but rather that the expenses were required “for every hour during which she makes money". The court further ruled that if expenses intended to increase the yield of workers at the place of work were permitted for deduction, then "the supervision of the children must at least be considered as increasing output from a situation in which the parents are unable or limited in their capacity to produce income, to a situation where, for as long as the children are under supervision, they can operate at an increased output for the sake of producing their income."

6. Finally, the District Court dismissed the appellant's claim that the credit points given to the working mother (in conjunction with child allowances) constitute an exhaustive arrangement, and that the deduction of expenses in addition to that arrangement constitutes a double benefit. The court ruled that this claim was only raised by the appellant in  summations, and that it constituted an impermissible broadening of the scope of the dispute. On the merits, the District Court ruled that absent an explicit statutory provision, there were no grounds for denying permission to deduct an expense that fell within the ambit of s. 17. Furthermore, the District Court opined that credit points and child allowances are arrangements that serve an extra-fiscal purpose that is external to that of the Ordinance, . The court held that this result held true even when taking into consideration the fact that, over the years, various Knesset Members had made explicit proposals, which were not accepted, to recognize the deduction of child-care expenses related to their parents' work.  It ruled that this legislative history does not impugn the fundamental principle whereby an expense incurred in the creation of income is a permitted deduction.

This judgment is the subject of the appeal before us

The Appellant's claims

7.  The appellant brought an arsenal of claims contesting the permission to deduct supervisory expenses of children while their parents are at their place of work. The appellant's view is that "the expense will only be recognized for deduction if it is an integral part of the natural structure of the business and constitutes part of the business process itself" (hereinafter: the "incidentality test"). The appellant claims that the "if not for" test that served the District Court (in other words: if not for the payment of childcare expenses for the children, the respondent would not have been capable of producing income) is not the accepted test in case-law. The appellant claims that the appropriate test is the incidentality test, and the requirement that there be a close, tight and direct connection between the expense and the income. The appellant therefore claims that childcare expenses do not satisfy the conditions of this test, given that at the most it can be considered only a "preliminary condition" for earning income, and is not an integral part of the process of producing income. This expense does not bear the close, tight and direct connection required for purposes of deduction. The District Court’s judgment, according to the appellant, blurs the boundaries between business and non-business expenses, and between revenue expenditure and capital expenditure, which likewise bear a connection to the production of income. The appellant further claims that permitting the deduction of an expense that is neither directly nor tightly connected requires explicit grounding in a statutory provision (such as the provisions of ss. 17 (11)  - 17 (13)).

Even were it to be held that childcare expenses involve a business component, the appellant claims that this does not mean that these expenses should be permitted, given that they are mixed expenses, and the business component of is not clearly discernible. The appellant refers to the District Court's rulings concerning the personal benefit to the children from merely being in the supervisory framework. Its view is that if the expense is determined as being a mixed one, then its components are inseparable because "each and every act of supervision…..benefits the child and the parent whose child is learning and developing at a time he can also work". The appellant opines that given the respondent's failure to provide a clear and accurate basis for differentiating between the private and business components, the expense should not be permitted "based on guesswork and all manner of calculations". In its view, where the components of a "mixed" expense cannot be determined precisely, an explicit provision is necessary, such as the regulations enacted by the Minister of Finance under section 31 of the Ordinance concerning the deduction of expenses for maintaining a car (see: Income Tax Regulations) (Deduction of Car Expenses), 5755-1995, telephone expenses, refreshments at the place of business location, and clothing expenses (see: Income Tax Regulations) (Deduction of Certain Expenses), 5732-1972). On the merits, the appellant claims that there is no basis for the determination that the total amount of expenses to be ascribed to indirect enrichment expenses is lower than the amount of expenses to be ascribed to supervision.

The appellant argues that the matter at hand is comparable to that of expenses for traveling to work - meaning that if it has been determined that the latter are not permitted for deduction, then a fortiori this must be the conclusion regarding childcare expenses.   

8. The appellant claims that its position is also supported by the legislative history, which shows that childcare costs are not deductible, and that the current legislative arrangement with respect to credit points and allowances is exhaustive. The appellant noted that prior to the passage of Amendment No. 22 to the Ordinance (in 1975), the Income Tax Ordinance contained a specific arrangement by which child care expenses could be deducted up to prescribed ceilings. The appellant stresses that this arrangement was replaced by the arrangement based on credit points and allowance points.  It refers to the Explanatory Notes to Amendment No. 22 which indicate that the credit was given to working mothers as "an additional incentive for married women to go out to work".   It also cites the report published by the Tax Reform Committee concerning the Recommendations for Changing Direct Tax – 5735-1975 (hereinafter: Ben Shachar Report), which states that the credits system was preferred, inter alia by reason of its simplicity. Based on all these, the appellant argues that, ab initio, the legislature viewed childcare expenses as private expenses, because from the very outset the deduction was specifically permitted by virtue of a specific section. The arrangement adopted in 1975 is thus unique and exhaustive, and replaces the deduction of childcare expenses. The appellant maintains that granting the credit and allowance points to a woman constitutes "partial recognition" of childcare expenses. It claims that there can be no deduction of an expense that already confers credit.  The appellant bases this claim on judgments given in  regard to National Insurance payments.  The appellant argues that recognition of the expense as a deduction would constitute a double benefit, which was not the legislature's intention. The appellant also pointed out the various legislative proposals made over last decade, with respect to childcare expenses, which were ultimately rejected by the legislature. It argues that the failure of these numerous attempts to grant a tax deduction for  childcare expenses also supports the conclusion that these expenses are not deductible.

9. The appellant further argues that the District Court's judgment "ignores its expected economic implications", and that "it does not achieve its aims and even impairs the efficiency of resource allocation in the economy".  According to the appellant, the financial cost of the judgment amounts to three billion shekels a year, and as such substantially affects the entire state budget. The appellant repeated these claims in writing in its supplementary pleadings on 22 December 2008. The thrust of the argument that the director general of the Finance Ministry intended to bring to our attention concerning a number of economic matters, was set out in the notice that was submitted on the appellant's behalf on 7 January 2009. In that, notice the appellant claims that the current economic crisis is liable to cause a significant reduction in tax collection, and that the dimensions of the additional burden on the public coffers are still unclear.  The appellant stated that covering the budgetary costs of the judgment will probably necessitate a raise in taxes – "a step which is regressive and inevitably harms the weaker sectors". The appellant also maintains that permitting the deduction of childcare costs constitutes a deviation from the policy of "broadening the tax base, cancellation of sectorial exemptions, and lowering of tax rates – a policy intended to "create the possibility of economic growth in the economy, while constructing a simple, transparent, and fair tax system thay projects certainty while emphasizing the reduction of tax rates".  The appellant raises the fear of a "slippery slope": permitting the deduction of childcare expenses may compel the deduction of additional expenses only remotely connected to production of income, such as commuting expenses, rent  paid by the assessee for purposes of his work, clothing expenses, food expenses, etc.

10. The appellant believes that it is for the legislature to decide upon the manner by which women should be encouraged to go to work. It claims that the legislature, and not the court, should decide matters that have significant, broad implications. The appellant also stated that the State of Israel operates a "governmental assistance network in all matters related to child care". In the framework of the arrangements established for that purpose, it cites the credit points given to working women for each child; subsidies for day care centers; negative income tax; child allowances, and a compulsory education system.  The appellant claims that permitting the deduction of childcare expenses will mainly benefit the wealthy, and economically secure sectors of the population, among which the proportion of working women is already high.  This – it argues – would yield a regressive result. Recognizing childcare costs as tax deductible is inefficient in the appellant’s view, because it increases the friction between the citizen and the tax authorities, and because it necessitates extensive resources. Permitting the deduction of childcare expenses will result in a significant broadening of the scope of reporting, because numerous assessees who do not currently file tax returns will begin to file them in order to obtain the tax deduction. These expenses are not recorded on the books, which makes tracking and verification difficult. The appellant believes that the deduction cannot be made through the employers, because that would require conducting an assessment. The end result  will be an increase in the costs of  abiding the law for assessees, and an increase in the administrative costs of the tax authorities.

The Respondents Arguments

11.  The respondent maintains that chilcare costs are permitted deductions under the opening clause of s. 17 of the Ordinance.  The respondent notes that under the provisions of this section, the expenses incurred in the creation of particular income can be deducted from that income. Where the legislative intention is not to permit the deduction of certain expenses –the respondent argues – they are explicitly disallowed under the Ordinance and  its associated regulations.  According to the respondent, childcare expenses fall within the scope of s. 17 of the Ordinance, in accordance with the accepted tests for recognizing expenses. The respondent argues that the expenses are all related to maintaining the existing situation, and bear a concrete connection to the relevant income yielding activity.  As such, they relate to income and fulfill the incidentality test.

The respondent further stresses that childcare expenses are not private expenditures comparable to food and medicine. They also differ from travel expenses. They are expended exclusively by reason of going to work.   They are expended in order to enable the production of income, and would not otherwise have been spent. As far as “mixed” expenses – which combine a business expense with a personal expense – are concerned, the respondent argues that the components must be distinguished so that only the appropriate part  be permitted as a deduction.

12.       The respondent requests that we reject the appellant’s argument that the solution to the economic ramifications of going to work is to be found in the credit points granted for dependent children. She argues that this is a social benefit intended to enable the assessee to enjoy a higher disposable income when she has dependent children.  Credit points are intended to preserve financial resources for the assessee’s “private” expenses. According to the respondent, they are entirely unrelated to childcare expenses, which are deductible to ensure the payment of true tax  on the assessee’s business activity.  The respondent argues that this deduction satisfies both the test of preservation of the productivity of an asset intended to produce income, and the “incidentality test” – in other words, it is an expense related to the process of producing income.

13.       The respondent argues that the appellant’s claims pertaining to the financial, budgetary and national economic ramifications of the lower court’s ruling cannot alter the proper interpretation of the Ordinance’s provisions. It is her position that once it is determined that the Ordinance’s provisions  permit the deduction of childcare expenses, the appellant can no longer challenge the implementation of those provisions. The provisions can only be amended by legislation.  Furthermore, the respondent claims that the forecasts regarding the grave consequences of the judgment are unfounded. The is no real fear of an increase in tax in the wake of the judgment, and even were there to be a tax increase, it would not necessarily be regressive.  The respondent maintains that the appellant’s claim that the judgment is not exhaustive should prompt the appellant to enact supplementary regulations. The respondent also seeks to minimize the appellant’s concerns regarding the “retroactive” effect of the ruling, inasmuch as expenses that were not reported as a caregivers’ wages, and for which taxes were not withheld, would not be deductible. This would be the case for various other reasons, such as a lack of  appropriate documentation, or due to prescription.

We have decided to dismiss the appeal, subject to the following specification.

Deduction of childcare expenses - General

          14. The dispute grounding the appeal that we decide raises a number of issues. The first is whether an expense for  childcare can be defined as “an expense in the production of income”. The second pertains to the question of characterizing an expense as a “mixed expense”. The third concerns whether the arrangement for allowances and credit points, to which the appellant refers, is exclusive and exhaustive, such that no additional expense can be deducted. Finally, there is the question of whether the law applies prospectively or retroactively. We will examine these questions in order.

Childcare expenses – An expense incurred in the production of income

15.  In the absence of a statutory provision specifically addressing the possibility of deducting childcare expenses, the question of whether such an expense is deductible must be examined in accordance with s. 17 of the Ordinance, similar to the examination of other expenses for which there is no special arrangement. The opening section of s.17 of the Ordinance states:

‘In ascertaining the chargeable income of any person, all disbursements and expenses that person incurred during the tax year wholly and exclusively in the production of his income shall be deducted – unless the deduction is limited or disallowed under section 31 [emphasis added – E.R.].

As noted by the District Court, “the parties do not dispute that the placement of the (respondent’s) children in a supervisory framework is a necessity in the absence of which she would not be able to maximize income”.  The parent’s duty to provide supervision for their young children is not just an imperative of nature; it is also legally prescribed (see: Capacity and Guardianship Law, 5722-1962, ss. 14,15,17; Penal Law, 5737-1977, ss. 361,362).  It is not disputed that had the respondent not gone out to work, her children would not have required particular supervisory frameworks, such as after-school day care , and that at least some of the respondent’s expense would have been saved. Needless to say, herein lies the fundamental and substantive, albeit not the only, difference between supervisory expenses for children and expenses for food and medicine. Whereas the latter are expended irrespective of whether a person works, the former are not required where a person does not work, and tends to his children himself (see A. Likhovsky, “Gender Categories and Status in the Laws of Income Tax”, 24 Tel-Aviv U. Law Review  205 (2000)).

16.    The appellant is of the opinion that it is not sufficient that an expense serve to produce income in order to permit its deduction, but that  it must also be incidental to the production of income, in other words - involved in it. The test of incidentality was defined by Justice A. Witkon in CA 284/66 Kopilovitz v. Assessment Officer for Large Factories, Tel –Aviv, [1], at p. 718, in the following manner:

‘The test of “incidentality” means viewing the source of income – in this case the employer-employee connection – in an organic sense, and asking whether the said expense arises from the natural course and structure of the source. To be deductible, it can be regular or irregular, but it cannot be an expense that is external to the nature and framework of the income. The difficulty of applying this test was already noted in the well-known Strong v. Woodifield case: “Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise”.’

This test was adopted into Israeli Law from English Law, where it served as an old, well-established rule. This Court has implement the rule even where it lead to problematic results. For example, we may cite the dispute that emerged in CA 190/61 Borek v. Assessment Officer  [2],  at p. 1801.  That case discussed whether to permit the deduction of travel and food expenses of the appellant, who was the employee  of two separate employers, and was required to travel by shared taxi from one place of work to the other. The Supreme Court affirmed the ruling of the District Court, which rejected the assessee’s claims:

‘The aforesaid is legally well-founded, and correctly reflects the long-established rule, even though criticism has been leveled at the narrowness of the test, from time to time. See the incisive comments of the Royal Commission on the taxation of profits and income (1955) Cmd. 9474, secs. 238-241), but this is the law….it is true that such a person too is “forced” to incur travel or food expenses “in the production” of his income that stems from his second source of income. This, however, is not the decisive test set forth in s. 11 (1) of the Income Tax Ordinance, 1947. We must ask ourselves whether the assessee incurred the expense “in the production” of his income, and that question can only be answered in the negative…

As such, and not without misgivings, we must reject the appeal’ [emphasis added - E.R].

In our case, as mentioned, the District Court viewed childcare expenses as satisfying the conditions of the incidentality text. The court ruled that childcare costs are incidental to the production of the income, because had the children not been under supervision, the respondent would not have been able to produce income at all. As such, it ruled that the expenses are not just “an initial condition” for going to work, but are also required “hour-by-hour in the course of producing income”.  The District Court added that just as expenses intended to increase the productivity of workers at their workplace are deductible, “so too, supervision of children at least raises productivity from a situation in which parents are unable to produce income, or in which their capacity to do so is limited, to a situation in which, for as long as the children are supervised, they can operate with increased productivity in the production of income” and the expense should therefore be a permitted deduction.

The “Incidentiality” test

    17. My view is that even were we to accept the appellant’s claim that the expense under discussion does not fulfill the conditions of the traditional incidentality text, and that it does not “arise from the natural course and structure” of the income producing source, it would not necessarily disallow the expense as a deduction. The character and the status of the incidentialy text must be examined in light of current rules of interpretation, and in keeping with the purpose of s. 17 of the Ordinance. The test is, indeed, based opon a century-old rule, but its vintage does not per se justify a deviation from the currently accepted rules of interpretation (see: CA 165/82 Kibbutz Hatzor v. Assessment Officer Rehovot [3], at p. 70). The interpretative question concerns the proper construction of the term “expenses …in the production of income”. These words do admit of a number of interpretative possibilities. “Production of income” is a process that is not always clearly delineated. For example, one could argue that only expenses that are located directly on “the production line” of the income – if the productive unit is compared to a factory – would be defined as “expenses … in the production of income”. This is a narrow interpretation of the term “production of income”. On the other hand, the production process could be viewed as including not only the “production line”, but also additional components necessary for production purposes, and which serve the need of producing income.

The purpose, which guides the interpretative task,  is the purpose of the provisions of s. 17 itself, i.e., the obligation to pay true tax (see: CA 1527/97 Interbuilding Construction Company v. Assessment Officer T.A-1 [4] at  p. 699). In other words, the taxation of  the assessee’s  real income, which is the income after deduction of the expenses incurred in order to produce it (and cf: : CA 4271/00 M.L. Investments and Development v. Director of Land Appreciation Tax  [5], at p. 959.  Charging tax for an amount that does not reflect a person’s real income cannot be defined as “income tax”. If an assessee is not permitted to deduct an expense incurred in the production of his income, it is tantamount to ”over taxation”, because the income taken into account for purposes of determining his tax liabililty is higher than his real income (see: Yoram Margaliot, “Fictitious Regressiveness in Family Taxation,” 2 Maazaney Mishpat   358 (2002)).  The legislature is entitled to deviate from this fundamental principle, and determine that a particular expense, incurred in the production of income, is not deductible, but in view of the aforementioned purpose, this must be done explicitly. The aforementioned purpose indicates that nothing compels the conclusion that only an expense “which arises from the natural course and structure of the source” will be a recognized expense, if there are other expenses that are incurred exclusively in the production of income. By the same token, deduction of an expense is not permitted when the deduction would create a situation in which the assessee’s income for tax purposes would be less than his real income. For example, consumer expenses of the assessee (which may, occasionally, bear some connection to the production of income), as well as expenses which are only indirectly and remotely connected to the production of income. Taxation of the true income is the purpose, and the incidentiality test is meant only to serve that purpose.

For our purposes, we can seek some guidance from accounting practices, which provide that “recognized expenses in a profit and loss report – where there is a reduction in future economic benefits related to a reduction in the asset or an increased undertaking which admits of reliable measurement”; and also: “recognized expenses in the profit and loss report based on the direct connection between the costs incurred by the entity and the production of particular items of income (see ss. 94 and 95 of the “Conceptual Framework for Preparing and Presenting Financial Reports” of the Israeli Accounting Standards Board (2005), [emphases added - E.R.]. These rules mandate a direct connection between the expense and the production of items of income. They also require reliable measurement of the expense. They do not require that the expense  “arise from the natural course and structure” of the income producing source.

18.  All of this leads to the conclusion that there must be a real, direct  connection between the expense and the production of income as a condition for allowing the deduction of the expense.  The borders of the production process lie beyond the “production line”, and their precise delineation is in accordance with the concrete circumstances and the aforementioned purpose. The emphasis is not on the location where the expense is incurred – in the “factory” or external to it. This distinction loses its importance in an era in which the boundaries between the “factory” and the ”house” have become blurred. As indicated by s. 17 of the Ordinance, the requirement is that the expense be incurred exclusively in order to produce income. An expense that a person would have made even had he not produced the income will not, so it would seem, be permitted (see examples above regarding medicines and food). In other words, the incidentality test should be (only) an auxiliary test for the identification of revenue expenditures in the production of income. Other expenses, too, proved by the assessee as bearing a real and direct connection to the production of income, and which were expended exclusively for the production of income, may be permitted for deduction.

Intermediary Cases and the Accepted Test

19.  As stated in Kopilovitz v. Assessment Officer [1]: “Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the cases that may arise”. Indeed, certain expenses are categorically incurred in “the production of income” and expenses that are not categorically “the production of income”; there is also a variety of intermediary cases. There can be no doubt that in terms of certainty of the law, the legislature would do well by clarifying the law in these latter cases. In the absence of clarification by the legislature, the court is required to decide, and this indeed has occurred more than once in the past. The rulings in those cases indicate that the ab initio the test of incidentality deviated from its original borders. A few examples will demonstrate this.

In terms of the prevailing law, a number of expenses are permitted as deductions even though they are not really incidental to the production of income. An example of this is the permitted deduction of study expenses, which are considered as “preserving what already exists”. Thus in CA 141/54 Wolf –Bloch v. Jerusalem District Assessment Officer [6], Justices A. Witkon and Y. Sussman ruled, in opposition to the dissenting opinion of Deputy President S.Z. Cheshin, that the overseas travel expenses of the appellant – a dentist by profession – to a professional training seminar should be permitted. The reason was that these expenses could be defined as “preserving what already exists” in the sense of maintaining the doctor’s professional level. Justice Witkon noted that:

‘I have already commented that if the expenditure was made in relation to a capital asset, but not for the purpose of its production or improvement, but rather in order to maintain it – within the framework of activities that are organically a part of the income – then there are grounds for permitting the deduction of that kind of expense. In my view, the question is ultimately whether the purpose of the expense was to create a new product, or to improve an existing product, or whether its purpose was to maintain the asset in its current condition’ [emphasis added – E.R.].

It could have been argued that maintaining one’s professional level constitutes a condition for the continued production of income in the future, but cannot properly be viewed as an “organic” part of the income producing process. One could claim that for a dentist, the process of producing income for purposes of the incidentality test is providing medical treatment to patients, and that when a doctor engages in further studies she is not treating her patients and is not performing any action that produces income as a direct result.  The Supreme Court, per Justice Witkon, took a different view, finding, as stated, that professional studies abroad may be conducted “within the framework of activities that are organically a part of the income”.  This is as it should be, despite the doubt regarding whether this expense satisfies the case-law test of incidentality.  There is, however, no doubt that that an expense for studies abroad intended for the purposes of maintaining one’s professional level constitutes an expense in the production of income, in view of the purpose of s. 17. The expense bears a real, direct connection to the production of income, inasmuch as failure to maintain one’s professional level will prevent the production of income in the future (even if not immediately); the expense is expended for the sole purpose of producing income for the person studying; it is neither a capital nor an appreciation expense (in accordance with the tests established by case law, see Wolf –Bloch v. Jerusalem District Assessment Officer [6] ibid.). The conclusion is, therefore, that in view of the goal of paying true tax, and taxation of the assessee’s real income, this expense should be permitted for deduction. The Supreme Court arrived at the correct and appropriate result in accordance with the purpose of s. 17, even in a case in which it was questionable whether the expense satisfied the requirements of the incidentality test.

20.  To complete the picture, it bears mention that there were cases in which it was held that even an expense incurred in order to “preserve what already exists” must satisfy the test of incidentality in order to be permitted for deduction (see: CA 358/82 Alco Ltd v. Assessment Officer for Large Factories [7]). The learned Amnon Raphael criticized this ruling (Income Tax, vol.1 – 291-292 (3rd ed. 1995)), writing:

‘A revenue expenditure is generally, but not always, incidental to the process of producing income… It seems to us that it the test established under s. 17 of the Ordinance includes both revenue producing expenses and revenue expenses that are not incidental, such as expenses recognized by reason of preserving what already exists. In our view, there is no necessity that these expenses be incidental to the production of income, and their deduction will nonetheless be permitted […] Our opinion is, as stated, that the “incidentality test” is just one of the tests for purposes of examining whether an expenses is for the production of income or not, but not the only one.

Finally, we should remember that there is no single, conclusive test in accordance with which the nature of each and every expense can be examined’

            I concur with this view. I too believe, as mentioned, that the incidentality test is an auxiliary test which is not exclusive, and that particular expenses may be permitted for deduction even if not satisfying that condition, provided that they satisfy the requirements set forth above.

Naturally, this interpretative conclusion does not alter the case-law rules pertaining to the non-deductibility of capital expenditures, or those that touch upon the questions of the actual classification of expenditures as revenue or capital . The prohibition on the deduction of capital expenditures and appreciation expenditures was explicitly prescribed in the Ordinance (see the provisions of ss. 32 (3) and 32 (4) of the Ordinance). The incidentality test may serve, inter alia,  in drawing a distinction between capital and revenue expenditures (see: Raphael,  ibid  at p. 291; A, Witkon and Y. Neeman, Tax Law,   4th ed., p. 151 (1969); CA 735/86 Zvi Ben Shachar Seeds Ltd v. Assessment Officer Tel-Aviv 3 [8]). However, these questions do not arise in the case before us, and we will not address them.

From the Principle to the Question in Dispute

21. We now turn to the implementation of the above in the case before us. The District Court’s view was that childcare expenses satisfy the incidentality test given that they are necessary “hour by hour in the course of producing income”. The court compared these expenses to expenses to improve worker productivity, concluding that if the latter were deductible, then it was appropriate that the same rule  apply to the former, the absence of which precluded production altogether. It is conceded that the application of the incidentality test in this case is somewhat contrived. It is doubtful whether the expense for childcare “arise from the natural course and structure” of the income producing source. However, this does not determine the fate of the expense. The childcare expense bears a real, direct connection to the production of income. It is expended to enable the parent to produce income. Placing the children under supervision is a necessity, the absence of which renders the parent unable to produce income, – due to the parents’ natural responsibility for their children,  which is also a duty imposed on them by law. To the extent that one can quantify childcare expenses, there are grounds for holding that this is an expense exclusively for the purpose of producing income. This being so, even were we to accept the appellant’s claim that childcare expenses do not satisfy the incidentality test, in its narrow construction, it would not prevent our permitting the expense as a deduction as an expense “in the production of income”. At the same time, and by force of the same rules, in a family unit consisting of two parents, the expense childcare would not be permitted if one of the parents were not working (and  would, therefore, be capable of supervising his children), for it would not be an expense incurred “in the production of income”.

Childcare costs as a mixed expense

22.  In addition to the requirement that the expense be incurred in the production of income, there is also a requirement, as stated, that it be "for that purpose only". This requirement adopts the requirement of English Law that the expense must be expended "Wholly and exclusively in the production of income” (Raphael, ibid, p. 287).  Prima facie, it could have been argued that a "mixed" expense, containing a component of revenue (expense in the production of income) and a non-revenue element, would not satisfy that requirement and would not be allowed as a deduction (see Yair Newdorf, "Mixed Expense", 22 (3) Taxes A-68, A-70 (2008) (Hebrew)). This however is not the case. In this context, accounting principles do not have a parallel requirement regarding the "exclusivity" of the expense.  Where a certain expense comprises a component that satisfies the requirement and a component that does not, that part of the expense which satisfies the condition specified in the definition may be allowed as an expense. The deduction of that part is even an obligation in accordance with accounting principles, because the non-deduction of expenses (when they can be quantified reliably) distorts the financial results of the reporting body.

An examination of the circulars issued by the income tax authorities shows that the they, too, are of the opinion that the requirement of "exclusivity" should not be given too literal an interpretation, and that in various situations in which the expenses are mixed, an effort should be made to distinguish between the revenue component and the non-revenue component, and to permit the former for deduction (see: I.T. Circulars 17/89, 35/93, 37/93). For example, Income Tax and Appreciation Tax Circular 35/93 determined that: "it is possible that in respect of a particular asset, expenses are mixed, in the sense that some of them are intended to repair that which exists, while the other part is intended to improve the asset.  In such a case, an attempt should be made to distinguish between the  two components of the expenditure, so that only the first component is permitted for deduction under s. 17 (3) of the Ordinance". In Circular 17/89, rules were established for permitting the deduction of trips abroad, including the relative manner of permitting the deduction of a mixed expense of which the income production component which was the main component. Another example is the Directive to the Administration of the Tax Authority under which one third of the expense incurred in purchasing a newspaper would be permitted as a deduction, for a person whose profession or position required use of the economic information appearing in the newspaper (Newdorf, ibid, p. A-71).

23.  The approach, which permits the assessee to extract from a mixed expense the income producing component from a mixed expense, and allows its deduction, was adopted by this Court in CA 580/65 E. Ben-Ezer and Sons Ltd. v. Assessment Officer for Large Factories  [ 9 ].  Justice Mani ruled that travel expenses incurred for going overseas were not permitted if they included the travel expenses of the managers' family members, whose trip was not for the purpose of producing income. Justice Silberg concurred with this result, "Since those expenses also included the expenses of the wife, the husband's report did not distinguish between his expenses and those of his wife". Justice Kister concurred with this result, and did not see any need to "express an opinion on whether and to what extent it was possible to distinguish between the overall travel expenses of a number of people". In view of this reasoning, it has been claimed that this judgment too, which prohibited the deduction of a mixed expense, created an opening for the recognition of part of a mixed expense (Newdorf, ibid). In CA 35/67 Shtadlan v. Tel-Aviv Assessement Officer 4 [10], Justice Mani ruled that attorneys fees paid by an appellant to his lawyer constituted a mixed expense – both revenue and capital. All the same, this result did not lead to the dismissal of the appeal, but rather to the file being returned “to the assessment officer to determine, having given the appellant the opportunity of stating his claims and producing evidence, which part of the fees should be attributed to revenue expenditure”.

Over the years, this rule has been implemented in numerous decisions. In Tax App. (T.A) 22/67 Eliyahu v. Tel-Aviv Assessment Officer 1 [11] the District Court (per  Judge S. Asher) accepted the recommendation of the Assessment Officer to permit 50% of the assessee's car maintenance costs as an expenditure for the production of income. In Tax App. 45/97 Levav v. Assessment Officer [12], the District Court (per Judge B. Ophir-Tom) ruled:  “Although, as explained, the expense is a mixed one…. having found a reasonable way of dividing it and neutralizing the component permitted for deduction, it would be appropriate for the respondent to adopt an approach that would enable the deduction of the portion meriting deduction, as dictated by economic and tax logic”. In that case, the court applied a particular method of attribution in order to distinguish between the revenue and personal components of the expense.

This approach also found support in academic writing from four decades ago. In their book (ibid., at p. 137), A. Witkon and Y. Neeman note that:

‘[I]n fact, where the expenditure admits of division, such as an expense for maintenance of a car that serves both business and private purposes, it is permitted to deduct the portion appropriate to business use’

In his aforementioned article (ibid,  p. A-72), Newdorf analyzes the significance of that example – the distinguishing of the car–maintenance expenses – noting: “Conceivably, Justice Witkon was hinting that even in mixed expenses in which the separation of the revenue component from the others is not simple, a method must be found to recognize the revenue aspect, for otherwise it is unclear why Witkon chose an example in which the separation is particularly difficult if not impossible”.

   24.  This interpretation, which has been adopted by the courts over the years, is linguistically possible, and is consistent with the purpose of s. 17. The purpose, as stated, is to tax the true income of the assessee - accurate taxation. The question is what constitutes an “expense” that must be examined through the lens of s. 17. Where it is possible to quantify the amount spent in the production of revenue, that portion may be regarded as an “expense” to be evaluated under s. 17. The portion expended in the production of income – the “expense” – was made “for that purpose only”. This portion satisfies the requirement of exclusivity, and should therefore be a permitted deduction. This is a linguistic  possibility within the semantic field of sec. 17. It does not inappropriately stretch the borders of the language. This is shown by the fact that this interpretation has been applied in practice for decades, even during the period when literal interpretation reigned supreme. As mentioned, it is also the desirable interpretation in terms of the purpose of s. 17. Failure to permit the deduction of an expenditure made for the production of income leads to the assessee being taxed in excess of his real income, which is an unsuitable consequence in terms of the purpose of income taxation in general, and the provisions of s. 17, in particular.

Identifying the permitted deductible expense in a mixed expense

25.  The assessee bears burden of proof for identifying the portion of a mixed expense that constitutes an expense in the production of income. Should he fail to discharge that onus, the expense will not be permitted as a deduction. (Raphael, ibid, p. 288; CA 2082/92 Shacham v. Assessment Officer Tel-Aviv 2 [13]; TaxApp (Tel-Aviv)  97/85  Peretz Ettinger Ltd v. Assessment Officer Tel Aviv 1 [14]). The burden of proof is that generally applied in civil law, and its elements are determined in accordance with the matter at hand and the concrete circumstances (see, for example, how this burden was met in Levav v. Assessment Officer [12].

    The legislature and the delegated authority adopted various arrangements allowing the partial deduction of mixed expenses.  Section 31 of the Ordinance states:

The Minister of Finance may, with approval by the Knesset Finance Committee, make regulations – whether in general or for particular categories of assessees – on the limitation or disallowance of the deduction of certain expenses under sections 17 to 27, and in particular on –

(1) the method of calculating or estimating expenses;

(2) the amounts or rates of deductible expenses;

(3) the conditions for allowing expenses;

(4) the manner of proving expenses.

 [emphasis added - E.R.]                                                       

 Section 243 of provides:

The Minister of Finance may make regulations for the implementation of the provisions of this Ordinance, especially including regulations on –

…(3)  any matter on which the Ordinance authorizes him to  prescribe.

By force of these provisions, the Minister of Finance enacted various regulations, including Income Tax Regulations (Deduction of Certain Expenses), 5732-1972,  and Income Tax Regulations (Deduction of Vehicle Expenses), 5755-1995. These regulations quantify the deductible component to be allowed as an income producing expense  in various mixed expenses, such as expenses for vehicle maintenance (which may serve both for the production of income and for personal use), different expenses attendant to trips abroad, bed and breakfast expenses, telephone expenses, etc. A certain difficulty may be posed by the fact that, in these regulations, “expense” is defined as “an expense permitted for deduction  in accordance with ss 17- 27 and s. 30 of the Ordinance…” in accordance with the wording of s. 31 which confers the Minister of Finance with the authority to enact regulations regarding “the limitation or disallowance of the deduction of certain expenses under sections 17 to 27”. If indeed the legislature’s view was that mixed expenses could never be permitted for deduction under s. 17, and inasmuch as the expenses under the Regulations must be deductible under s. 17, how is it that the Regulations permit mixed expenses? (see:  Newdorf, in his aforementioned article, at pp. A-75-77; TaxApp. 539/03 Agbaria Maarof Abd el-Kadr v. Assessment Officer Hadera [15].  Even if there is come clumsy drafting in this collection of provisions, they shed light on the legislature’s position on this matter: Where a mixed expense may be separated into its components, the part constituting an expense in the production of income will be permitted for deduction. The portion permitted for deduction was stipulated in the Regulations at a particular rate or a fixed, determined sum, which serves the interests of certainty, simplicity, and saves administrative and costs (CA 280/99 Kima v. Assessment Officer Dan Region [16], at p. 530). The advantages of clear, explicit determinations in the regulations are obvious, but where such determinations in secondary legislature are absent, the Court will address the matter, as we will now do.

     26.  The District Court held that expenses for “direct enrichment” are not permitted as deductions. The District Court defined “direct enrichment” as including “studies, compulsory studies, various clubs, and classical enrichment activities, etc”. As noted by the District Court, the primary, central component of these frameworks is the education and enrichment of the children. In tax jargon, this means the granting of an “enduring advantage” to the children. As such, the expenses are of a private character, and are not allowed for deduction. Indeed, as the District Court held, even if the child is supervised while being in an enrichment framework, the supervision component is secondary to the principal component – personal enrichment – and expenses occasioned thereby will not be permitted for deduction. In that regard, the lower court was strict with the assessee, but that issue is not in dispute between the parties.

     The District Court further held that the payment to a babysitter or a caregiver, at home, is given as salary for supervision, and the entire expense should be permitted for deduction, subject to the principle of the reasonability of the expense. This result is appropriate and raises no grounds for intervention. The entire expense incurred for paying a babysitter or a care-giver while the parents are at work constitutes an “expense in the production of income” that is spent “exclusively for that purpose”. Even though the children may gain lasting advantage from being supervised by a care-giver or baby sitter, this advantage is marginal and limited to the extent of not meriting any weight (all, naturally, subject to the proviso that that the caregiver does not carry out additional tasks or roles that go beyond tending the children)..

   27.  The question becomes more complex when it relates to supervisory frameworks that carry added value for the children, such as staying in kindergartens, after-school programs, and the like. The expense incurred by the parent in paying for the children to stay in these frameworks, is, in general terms, a mixed expense, which includes both income producing and the private expenditure. (See Margoliot, in his article, ibid, at p. 354). On the other hand, under no circumstances can we accept the appellant’s claim that the expense is a mixed one that is indivisible.  The child staying in a supervisory framework simultaneously benefits both from “indirect enrichment” and from supervision, but this is not the question. The question is whether it is possible to extract the supervision expense from out of the total expense. The answer to that question cannot be sweepingly negative. For the sake of simplicity, let us assume that a business venture is established in which two, separately owned companies operate. The first provides care and supervision for the children and nothing else. The other provides the children with a variety of enrichment activities, while they are under the supervision of the first company. It provides them with games, crayons for drawing, and one of the company’s workers tells the children stories and plays with them. Let us assume that the parents pay each company separately for its services. In that situation, it cannot be said that the payment for supervision is unquantifiable.  A similar quantification can be conducted even when the various services are all supplied to the children by the same entity.  This kind of quantification is not substantively different from the methods adopted in various judgments, some of which were cited above. Such quantification may, indeed,  comprise some element of arbitrariness, whether it is the result of legislation or of a judgment. Either way, if the assessee proved, to the required degree, the relative part that should be regarded as an income producing expense, that part should be allowed as a deduction.

    It seems that the District Court rightly ruled that in this case it was proven that the expense was primarily for supervision, subject to the principle of the reasonability of the expense (under section 32 of the Ordinance). As noted by the District Court, expenses for a supervisory framework are made first and foremost to enable the parent to produce income. Once a parent knows that he must incur that expense, he will choose the framework according to his personal taste and preferences. In the hearing before the District Court, the question of the reasonability of the expense did not arise, and we accept the principled approach of the District Court that the various public supervision frameworks may serve as a standard for the reasonability of the expenses, at least with respect to frameworks intended for relatively older children.

    Having held that expenses for the supervision of children fall within the definition of expenses for the production of income, and that, in principle, they admit of quantification and are therefore permitted as a deduction, the path is open for the legislature, the delegated authority and the Tax authorities, should they so choose, to take actions intended to clarify the rules for extracting the expense permitted as a deduction.  The legislature and the delegated authority, and perhaps even the Tax authorities, will also be able to address the question of which partner should be granted the deduction.  Until then, it would seem appropriate for the tax authorities to grant the deduction at equal rates against the income of each spouse. A provision of this kind not only prevents unjustified fiscal manipulations; it  also dovetails precisely with the principles of fairness and equality, which we have stressed in this judgment.

    The credit  arrangement for working mothers – Is it comprehensive?

   28. The appellant argues that the arrangement established under the Ordinance for credit and allowance points is exclusive and exhaustive, replacing the legislative arrangement that preceded it which permitted the deduction of supervision expenses for children, and was repealed. This being the case, the appellant argues that deduction of supervision expenses for children cannot be allowed in addition to the credit, in as much as “where an expense confers a credit, it cannot be deducted under section 17 of the Ordinance (see: CA  30/73 Roth v. Haifa Assessment Officer [17].  This claim is unfounded.

This is the wording of section 40 before it was amended in 1975:

           (a) (1) In the calculation of the chargeable income of an individual resident of Israel, who proved to the satisfaction of the assessment clerk that during the tax year there were living children who he supported and who were not yet 20 years old, he will be permitted a deduction of 250 Lirot for the first child, 300 Lirot for the second child, 325 Lirot for the third child and 375 Lirot for each additional child.

          (2) An individual entitled to a deduction under paragraph (1) but who is not entitled to a deduction under section 37, will be permitted an additional deduction for the sum of 700 Lirot; this paragraph shall not apply to an individual who would have been entitled to a deduction under section 37 were it not for the provisions of section 66 (a)(2);

          (3) Parents living apart and for whom the child support is divided between them, shall divide the deductions under paragraphs (1) and (2) in accordance with the support expenses made by each one of the parents; where the parents were unable to agree upon the relationship of support expenses, it shall be determined by the assessment clerk

The appellant seeks to infer from this arrangement that the legislature regarded childcare expenses as non-deductible, and that an explicit provisions is required in order to permit them for deduction.  An examination of this arrangement indicates that this is not the case. Prior to its amendment in 1975, s. 40 permitted the deduction of expenses for “children’s maintenance”.  Today, as in the past, it is not disputed that a person’s basic support, expenses for a person’s sustenance, are not deductible. This is entirely unrelated to the matter under discussion.  More precisely, our concern is not with maintenance of  children in general, but rather with a specific, far more restricted issue – expenses for supervision of children, - expenses made for purposes of the production of the parents’ income. The cancellation of the specific arrangement that existed in the past, and which permitted the deduction of specific private expenses, carries no implications for permitting the deduction of expenses that were determined to be deductible under s. 17 of the Ordinance.  It bears note that even the deduction under s. 40, before its amendment, was also granted for cases in which the children were not in any supervisory framework. This being so, the cancellation of that arrangement is of no relevance for the matter before us.

29.  An analysis of the existing arrangement for credit and pension points yields a similar conclusion. The provision of section 40, in its current wording, reads as follows:

‘(a) An individual Israel resident is entitled to pension points for each of his children, as prescribed in section 109 of the National Insurance Law [Consolidated Version], 5728-1968; the pension points shall be paid by the National Insurance Institute under the National Insurance Law.

(b) (1) If an Israel resident individual, who is the parent of a single parent family, has children who during the tax year had not yet reached age 19 and were maintained by him, but is not entitled to credit points under section 37, then, in calculating his tax, in addition to the pension points under subsection (a) in respect of the children who live with him, 1/2 credit point shall be taken into account in respect of each child in the year of its birth and in the year of its maturity, and one credit point in respect of each child beginning with the tax year after the year of its birth until the tax year before the year of its maturity; and in respect of his being the parent of a single parent family – one additional credit point only;

(2) If parents live separately and the maintenance of their children is shared by them, then the parent who is not entitled to a credit point under paragraph (1) shall receive one credit point or part thereof, according to his share in the maintenance.

(3) For purposes of this subsection:

"year of birth" – the tax year in which the child was born;

"year of maturity" – the tax year in which the child reached the age of eighteen.

The provision of section 66 (c)(3) states:

The following provisions shall apply to the separate tax calculation:

…. (3) only the registered spouse shall be entitled to pension points under section 40(a); the woman shall be entitled to half a credit point under section 36A, and – further against the tax due on her income from personal exertion – to credit points for her children as follows:

(a) half a credit point for each of her children in the year of its birth and in the year of its maturity;

(b) one credit point for each of her children beginning with the tax year after the year of its birth until the tax year before the

year of its maturity;

For this purpose: "year of birth" and "year of maturity" – as defined in section 40(b)(3).

It is not disputed that granting credit points constitutes an incentive for both spouses to go to work outside the household (see Margliot, in aforementioned article, at p. 336). But this is irrelevant to the case in point. The question requiring an answer for our purposes is whether the credit points arrangement is exhaustive in the sense that it bars any possibility of an assessee deducting  childcare expenses. This question must be answered in the negative. First,  in order for an expense to be disqualified for deduction by reason of the granting of a credit, the  credit must be given for that specific expense. Credit points are given from the year of birth until the child reaches the age of 18, i.e., even for ages at which the child does not require supervision in order for the parent to go to work. The credit points under s. 40 are also given when only one of the parents goes to work. Second,  the legislature did not explicitly determine that granting credit points was intended to replace the deduction of childcare expenses. Third, an analysis of the purpose of the credit points arrangement does not lead to the conclusion that the appellant seeks to draw.  Many hold the view that in imposing income tax, consideration should be given for child-raising costs that do not fall within the definition of expenses in the production of income. This point was made by Margaliot (see article, ibid,  at pp 353-354):

There is extensive literature treating of the need to have consideration for the general expenditure for raising children when calculating the tax burden, since it is accepted that children are not a consumer product but a part of the tax payint unit (the assessee). This means that there is a need to calculate the income of the family liable for tax having consideration for the number of children. An assesee with children should pay less tax than another assessee with the same income, but who has no children. The reason is that income tax is imposed in accordance with ability to pay and the ability of an assessee without children is greater, because he does not bear the expenses of raising children…and they should therefore be taken into consideration when determining the tax chargeable income of the assessee-parent.

The purpose revealed by the aforementioned arrangement regarding the credit points - which bears no direct relation to childcare expenses -  may definitely be consistent with the imposition of income tax according to the ability to pay, having consideration for the number of children. There is no basis for the claim that the central goal of the credit points arrangement is to replace the permitted deduction of childcare expenses incurred in the production of the parent’s income.

30.  The appellant maintains that support for its construction can be found in the very fact of the non-adoption of various bills proposing the explicit recognition of childcare expenses. But that does not lead to the conclusion that the appellant seeks to draw. The question requiring this Court’s decision concerns the interpretation of the existing statute law. Having concluded that a particular expense should be recognized for deduction according to our interpretation of s. 17 of the Ordinance, the existence of incomplete legislative proceedings does not change that conclusion. Obviously, if the legislature chooses to allow and expense that is currently not allowed, or to disallow a currently permitted expense, it has the ability and authority to do so by explicit legislation.

   “Regressivity”, equality and other issues

31.                   The appellant claims that the main beneficiaries of permitting the deduction of childcare expenses will be the upper, well- established social echelons, among which the rate of working women is high, in any case. In its view, this result is regressive. Making this claim requires precision. Allowing the deduction of an expense in the production of income is neither a benefit nor a sectoral subsidy. Permitting the deduction of an expense in production of income derives from the goal of income tax, which is to tax a person’s real income. The fundamental principle deriving from that goal - that an expense incurred in production should be permitted -  is implemented in the same manner for the rich and the poor.  Regarding the alleged regressivity, there are numerous factors that may result in a tax being progressive or regressive.  Hence, should it be determined that  certain assessees from among a group of high-income assesses, cannot deduct part of their expenses, it would have a progressive effect. On the other hand, establishing a rule that would prevent some of the high-income assesses from deducting an expense incurred in the production of income would be inappropriate, for it would violate the equality in the distribution of the tax burden among the group of high-income assesses. This is so because the tax burden would not be determined exclusively in accordance with the assessees’ income, but rather as a factor of the manner in which they produced it (see Margaliot, in his article,  p. 361).   By the same token, were we to assume that the majority of those benefitting from the deduction of financing and administrating expenses are the holders of capital in the top percentile, would avoiding the deduction of such costs in that situation be an appropriate progressive step, or perhaps a discriminatory, inefficient distortion of the tax system?  Alternatively, if two assessees - one with children and the other without -  earn the same gross salary, and one of them is forced to pay childcare costs in the production of his salary, then obligating them to pay an identical tax, without permitting the deduction of the income-producing expense, would distort the tax system, and create wrongful inequality between the assesees.  In fact, this is the question of equality relevant for our purposes – equality in the application of the tax law, and equality in the imposition of tax on real income, and permitting the deduction of an expense that serves in the production of income. The equal imposition of tax laws removes various distortions in decisions, which stem from over taxation.  The practical result of the removal of these distortions is likely to induce  women who do not to work because of the tax distortions, to go out to work.  Such a result is also likely to be efficient in economic terms, because by their work these woman increase the economic product  (and the state’s income from taxes, even if only in the long term). Encouraging woman with children to enter the workforce need not come at the expense of other woman who enjoy a high income. If the legislature wishes to grant a subsidy or a benefit to woman who are unable to earn large salaries, the economic cost of that subsidy could be financed by a tax imposed equally to all of the high-income assessees. At all events, there is no justification for creating distortions and inequality in the high-income sector by determining that only assessees with children will bear the funding burden (by not permitting the deduction of expenses from their income).    

32.    The consideration of encouraging women to enter the work force is neither a guiding, nor even a secondary consideration in our conclusion. As explained, our conclusion derives from the basic principles of tax law, and from the goal of taxing the real income of the assessee. The social goal goes beyond these principles. Recognition of the  contribution of women to the labor market crosses the boundaries of income levels, and is not limited to the tax or financial advantages that they gain by reason of the balance of income over expenditure. Failure to recognize childcare expenses is a valueless  - and in this case illegal - relic of the archaic division of roles between the spouses, in which the nature of things was that the female was entrusted with care giving and supervision. According to that conception, releasing the wife from that duty by hiring a care giver was regarded as a private expense that was deemed a luxury. Accordingly, in a judgment handed down in the United States one generation ago (but never overturned), the tax court maintained that child care expenses, like other aspects of family life and maintaining the household, should not be treated differently from any other private expense. It clarified its position as follows:

‘The wife's services as custodian of the home and protector of its children are ordinarily rendered without monetary compensation. There results no taxable income from the performance of this service and the correlative expenditure is personal… Here the wife has chosen to employ others to discharge her domestic function and the services she perform are rendered outside the home’ (Smith v. Commissioner of Internal Revenue [ ]).  

The “private” duty imposed on the wife confers a private status upon the care-giving expenses.  זו גם This, even if we ignore the feminization of the work. This archaic conception also leads to the question of whether it is economically “worthwhile” for the woman to go out to work, and to the proposed distinction between woman of high economic status and others. This distinction is not relevant to the question of the social recognition of childcare expenses, because such recognition is a result of the equality of the spouses with respect to the right and the duty to work. A hint of this archaic conception can also be found in our midst by the fact that credit points were only granted to the woman. The deduction, on the other hand, according to our interpretation is bi-sexual.  Abandoning the archaic conception, in our case, is consistent with the basic principles of tax law, and with the purpose of taxing the real income of both the male and the female assessee. These principles stand at the basis of the interpretation we propose for the provisions of s. 17 of the Ordinance.

We do not presume to replace the legislature or the executive branch in the creation of arrangements intended to encourage women to enter the labor market. The legislature also has the authority to determine that a particular expense which serves in the production of income will not be allowed as a deduction. However, in the absence of an explicit determination on the legislature’s part, it is not possible to reach the conclusion that an expense in the creation of income cannot be deducted.

Application

33.    The bottom line is that the appeal is denied. Regarding the method of deduction, if at all, and the manner of extracting the permitted expense for deduction from the overall “mixed” expenses, the legislature and the delegated authority would do well to give this matter their attention. In the absence of regulations, these topics will be treated at the level of the the assessee and the assessment officer. The deduction will be calculated using the methods used in the past with respect to mixed expenses.  The assessment officer will be the one to decide the portion that should properly be deducted, and that portion which is not permitted for deduction – and in the case of disagreement, the matter will be brought before the court, as in the past. In the matter before us, the concrete questions have already been decided by the trial court, and there is no need for them to be reconsidered.

All that we have decided today is that in the absence of legislation, there is a legal duty of deduction. The legislature may decide otherwise, but as long as it does not, we have done nothing other than declare the existing law. The question remaining for our examination is the date upon which this ruling goes into effect.

34.  In general, a new judicial rule operates both retrospectively and prospectively (LCA 8925/04  Solel Boneh Construction and Infrastructures Ltd v Estate of Alhamid [18] (hereinafter: Solel Boneh). When interpreting a legislative provision, the court declares the existing law and does not create it: it declares what the law always was. Even when the court chooses prospective effect for its judgment, the accepted distinction is between the litigant who seeks to deviate from the previous law, for whom the new rule will have retroactive application, and other litigants whose matters have yet to be resolved, and in respect of whom the new rule will not apply (ibid, para. 7 of President Barak’s judgment). This distinction provides an incentive for the litigant arguing for a change in the law.

This is not the case when the previous law is not fundamentally flawed, and it is the change in the social and cultural environment in which the court operates that catalyzes the change in the law. In cases such as these, the effect may be purely prospective (the rule would not even be applicable to the litigant who initiated the legal proceeding in order to bring about the new case law), or qualified (the ruling applies to that particular litigant). A request for prospective effect may also arise in cases in which the parties relied on the previous rule for an extended period of time and regulated their relations in reliance thereupon (see ibid,  para. 12). The choice of non-retrospective change of the law thereby limits the harm to the reliance interest that might be caused by giving retrospective effect to a new rule. In the words of President A. Barak (ibid, para. 14), it prevents the need to decide between “truth” and “stability” (an expression coined by President Smoira), and it enables the attainment of both “truth” and “stability”.

35.  It seems that this case justifies giving today’s ruling only prospective effect , starting as of the tax year beginning in the January 2010, subject to one qualification regarding its application to the parties before us. There are a number of reasons for both the choice and its qualification.

The construction given today to the provision of s. 17 brings about a practical change in the way the appellant has treated assessees for many years. The need to protect the reliance interest in this case is a powerful one.  The old rule created a real, substantial reliance that precludes the retrospective application of the rule. Returning taxes collected undermines the tax collector’s reliance interest (ibid, para. 20).  In the present context, it is doubtful whether this interest can be protected by means of other legal doctrines. The proviso presented here to retrospective application would not apply to the case of the respondent in this case. The reason for this is the general need to provide an economic incentive to the litigant, in appropriate cases, to take steps to change the existing law. The concrete reason in this particular case is that a decision was already made concerning the respondent by the trial court. As stated,  as long as appropriate regulations have net been enacted, the question of how to implement the new rule will be an issue for case-by-case examination by the assessment officer, and in the absence of agreement, a subject for judicial resolution. In the matter of the respondent, this last stage has already been exhausted. The result is that, in this case, the general qualification frequently accompanying prospective application has been realized.

It should be emphasized that the criteria for distinguishing the appropriately deductible expenses from the overall “mixed expenses” were chosen in accordance with the particular circumstances of the respondent. They do not prevent other assessees, or the assessment officer, from reaching other results in appropriate circumstances.

In conclusion, the application of this judgment is prospective, but it will apply to the respondent in this case, whose claim succeeded in changing the rule.

Deputy President

Justice E. Rubinstein

A.    I concur with the result reached by my colleague the Deputy President, and his elucidative reasoning. I would like to add a few comments.

B.   In my view, the judgment of my colleague and that of the trial court bring the interpretation of taxation law, and for our purposes of section 17 of the Tax Ordinance (along with section 32 (1) which prohibits the deduction of home or private expenses), closer to social developments, in other words, closer to reality, and true tax can be levied only if anchored in reality. Reality, as any socially aware person knows,is a “gradual revolution” in relation to the past, now expressed by the fact that women work outside the home. This phenomenon crosses social boundaries and is expanding, fortunately, into social circles among which women did not previously work outside the home. I stress the expression “outside the home” because work inside the home, even for women who are only homemakers - or for a man who plays the same role at home - is difficult, taxing work. The expression “a working woman” is an archaic term. Maintaining a home is no trivial matter, and the woman who is a homemaker, or a man fulfilling that role, are working in the most basic sense of the word.  This reality has been partially recognized by the law in certain contexts. In any case, it is clear that the interpretation of tax law must reflect the dynamic social situation, just as the law itself must go hand in hand with social developments. Personally, with all due respect, I dispute the position expressed by the appellant that the recognition of the deduction constitutes, in and of itself, a benefit for the richer classes, and is regressive with respect to the weaker socio-economic sectors.   It is clear for all to see that young couples, even from relatively well established families, where both spouses work outside the home, are forced to spend considerable sums for childcare. Indeed, in the absence of a grandmother or grandfather who has the time, or is retired,  and who can voluntarily care for the children, the amount spent for that purpose constitutes a large portion of the couple’s expenses, or as expressed in the immortal aphorism attributed to the late Knesset Member Abraham Hertzfeld, “All  income is dedicated to expenses”. Taking the bull by the horns, it is clear that without incurring these expenses, one of the spouses would not be able to work outside the home.  Accordingly, it is quite obvious that childcare expenses are expenses necessary for the production of income, and the qualms regarding its regressive character can be allayed without difficulty, as also explained below.

C.    Needless to say, this was not the dominant approach in the past (see, inter alia, Asaf Lachovsky “Categories of Gender and Status in Income Tax Law”, 24 (1) Tel-Aviv Law Journal 205, 225 – 228 (2000), and references there (hereinafter: “Lachovsky”). The author criticizes the conception that views childcare expenses as private expenses, stating (p. 227)

‘It seems that the real reason for the special treatment of childcare expenses is the identification of this expense as a woman’s expense.’

 We will return to the gender issue further on. Regarding the deduction, in the article by Dr. Yoram Margaliot, cited by my colleague, he suggested disguising childcare costs as a “mixed expense” (p. 360).

D.   The learned Prof. Y. M. Edrey, in his (new) book “Introduction to the Theory of Taxation” (5769-2009), treated the subject at length, and similarly took issue with the "accepted theory" according to which study expenses, travel expenses, and childcare expenses are private expenses (pp. 221-112). In his view, this accepted view is based on "social assumptions that are no longer appropriate in a modern, egalitarian Israeli society" (p. 223), and that ignore the human capital and changing social conditions in different areas.  I will not address the issues that digress from the specific matter at hand, but I will only note that regarding expenses for academic studies, the author’s view is that developments in this area include the need to recognize advanced academic studies as expenses for maintaining existing economic value  (p. 210 and p. 215), and that in his view, the half-credit points granted in the Income Tax Ordinance are insufficient (p. 226). I had the opportunity in the past to address the issue of studying towards an academic degree in CA 350/05 Jerusalem Assessment Clerk v. Bank Yahav  (not yet reported) [19]. I stated there:

'(1) Academic studies, as with any other studies, are for the person's benefit, they contribute to his values,  broaden his professional and other horizons, and raise his level. However, the legislature chose to express this recognition by way of credit points, and not by way of deduction. We also learn this from the legislative developments in this area. On  10 August 2005, the Tax (Amendment No. 147) Ordinance, 5765-2005,  came into force. Section 9 establishes an arrangement for credit points based on expenses for academic and education studies (the addition of ss. 40C and 40D to the Ordinance, including "half a credit point for an individual who completed studies towards a first or second academic degree," and "half a credit point for teaching studies", respectively.  Prima facie, it may be inferred that studies towards an academic degree, until that time, were not allowed as a deduction from the chargeable income of the student, and hence the amendment. Furthermore, in Amendment 151, 5766-2006, the legislature went another step down the same path, and explicitly prohibited viewing academic studies as a permitted expense, stipulating among the "matters prohibited for deduction":  “educational expenses, including expenses for acquiring academic education or for acquiring a profession, and apart from expenses for professional advanced studies, which are not studies for acquiring academic education or a profession, for purposes of preserving that which exists"  (see s. 32 (15)).  This also appears in the explanatory notes: “It is proposed to clarify that deductions for educational expenses for the purposes of acquiring a profession or acquiring academic education are not deductible from a person’s taxable income unless they were expenses for preserving that which exists that do not confer the student with a permanent advantage. As stated, this is the existing situation, but in order to remove all doubt, it is proposed to establish this explicitly in legislation” (Government Draft Proposals,  5766, 236, pp.  305-306 (emphasis added – E.R.).

(2) The absolute majority of the workers in the bank in this case studied, as mentioned, towards a first or second degree in business administration, and with respect to studies of anthropology or geography, for example, the bank itself agrees that the expenses are not recognized for tax purposes.  The present case involves the study of business administration, which may be of benefit to the bank workers, but the academic degree as such cannot be regarded as fulfilling the required connection between itself and the function of the assessee.   To be precise - this does not constitute a rejection of the "substantial test" which the court must adopt when examining the recognition of academic degrees as allowable  expenses (see: R. Livnat, "Advanced Academic Degrees – as a Recognized Professional Studies Expense", Taxes  13/2 (April 1999); L. Newman, "The Parameters for Permitting the Deduction of Expenses for Academic Studies" Taxes 16/3 (June 2002)). The studies must be essentially connected to the assessee’s professional role, but they must also focus on, and be essential to his job. Furthermore, while academic study does provide the student with tools, in the current case these extend beyond the knowledge required for discharging his role. As such, they are in a field in respect of which the fiscal legislator adopted a different approach. This point was addressed by Judge Altovia in his comments on the second degree, but they are also applicable to a first degree:

“From the perspective of tax law, second degree studies are not different from studies towards a first or third degree. Second degree studies give the student, apart from the academic degree as such, academic tools, personal skills of analysis, study, research, data processing, analytical abilities, capacity for broad and focused perspective, ability to confront different and conflicting opinions, and others such life skills which cannot be enumerated, and which deviate above and beyond the particular subject being studied”(ITA (Tel_Aviv) 1122/03 Heichal Yair v. Assessment Clerk - Gush Dan  (not yet reported).

However, a broad perspective and the legislature's considerations, are separate issues. Even if we  are aggrieved by this situation and hope for its change, this is the current situation.’

E.  How does the issue of childcare differ from the aforementioned academic studies expenses (to which recognition should, ideally, be extended)?  At least in that  the legislature made his views patently and explicitly clear in regard to education, as shown above, and it has the capacity to do so, as mentioned by the Deputy President, in the matter concerning us, as well.  However, as distinct from the issue of educational studies, with respect to childcare we find ourselves in the more flexible realm of interpreting the subject of deductions, which is regulated, albeit laconically, in the Ordinance.

F.   As Edrey argues concerning the subject of childcare expenses, the solution provided was that of credit points – from birth until age 19 –  which is also the response of the state in the matter before us, “irrespective of whether the children require supervision or not. Furthermore, to the best of my knowledge, there has been no systematic discussion of the question of whether these credit points actually contributed to encouraging women to go to work, or whether they encouraged employers to discriminate against women and pay them a low wage” (p. 226). The author rejects the criticism levelled by the authorities against the District Court’s decision, and notes, inter alia (p. 226), that the authorities have the ability to provide appropriate solutions:

'One possible example of a creative solution to the question of deduction of expenses for the care and supervision of small children can be found in the examination of the accumulated cost to the state treasury of implementing the aforementioned judgment, and a courageous decision to direct these sums for the development of a network of quality daycare centers situated near places of work; to provide a real incentive to employers to invest in daycare centers for the children of their employees, and other similar solutions. Needless to say, a serious examination of the optimal solution requires the involvement of experts from the fields of early-childhood education, sociology, and economics.

G. With all due respect, I concur with these last comments, and personally, I cannot understand the claim that recognizing the deduction would not encourage women to work - or  couples to work. I have no doubt that, looked at from a broad perspective, it would provide that kind of encouragement, and to me, this appears as clear as day.

H. Indeed, initially, I was impressed by the aforementioned claim - that credit points are granted, and that the state had therefore provided an appropriate solution, and there was, therefore, no need for an additional solution relating to childcare expenses.  However, closer examination reveals that there is no correlation between the purpose served by credit points and that of the deduction, as explained by my colleague the Deputy President.  Furthermore, as also noted by the District Court, the proposal for the 1975 legislative reform (the Ben Shachar Reform) stated (Draft Amendment of the Tax Ordinance (No. 22) 5735-1975, Draft Laws, 5735, 319, 320): "The credit points will replace the deduction for residence and the deduction for a woman...allowance points will replace the deductions for children, and replace the child allowance paid by the National Insurance Institute". In other words, as the trial judge pointed out, the subject was the encouragement of childbirth. I am aware that there may be a certain overlap of the deduction and the credit during certain years of child rearing, and if we are really  intent upon true tax, that is inappropriate. But the challenge of regulating the matter so that the public coffer is not harmed falls to the authorities.

I.         Indeed, it could be claimed that, to a certain extent, our decision turns the back the clock, at least with respect to the burden to be imposed on the tax authorities - after the tax system underwent a reform in 1975, to a regime of credit points and allowances, as distinct from deductions, and  its life was made easier in this regard.    My colleague the Deputy President  gave a detailed description of the developments from 1975, in order to show that, in essence, our ruling does not turn the clock back. Of course, the multi-assessee dialogue with the tax clerks will certainly not be easy, and there will be additional work for tax clerks, work from which they were exempt over the years with respect to childcare.  Shlomo Yitzhaki, in his article “Tax Reform 1975” (in  David Glicksberg (ed.) Tax Reform, 5766-2005, p. 195, and see p. 215ff), points out that the 1975 reform was directed, inter alia,  and with special emphasis, to the streamlining of proceedings in the tax system (see: Draft Bills, 5735, 319; Tax Reforms, ibid., 226ff). Our judgment thus makes it necessary for the tax system to deal with numerous new details in every file, and one needn’t be an administrative genius to understand – and we state it quite frankly – that it involves a significant administrative burden.  However, as noted by my colleague, even if the Jordan flows slightly backwards, the legislature , the secondary legislator and the Tax Authority have a ”medicine cupboard”.  That is’ they can  establish norms to regulate the deduction to be recognized, in order to simplify, as far as possible, the individual auditing process. This is accomplished by determining  even such matters as what constitute reasonable childcare expenses, and the cost of “baby sitting”, which is hardly  beyond human capability. To my understanding, there are accepted market rates childcare costs, in addition to the other classifications mentioned by  my colleague (and see:  Margaliot, at pp. 360- 361, who suggests allowing the deduction of a certain percentage of the expense, or the setting of a ceiling , as per the practice with other items (office hospitality costs, telephone expenses) that were regulated by the establishment of presumptions).  Such regulation should be done earlier than later, in order to avoid local and individual “trench wars” between the assessees and the tax authorities regarding the amount of childcare expenses permitted for deduction. Regulation of this kind would resolve issues such as the distinction between supervision expenses and “enrichment” expenses, which were dwelt upon by the District Court, and would also quell the fears of deduction “out of all proportions”, which might lead to reduced taxation specifically of those who pay particularly high supervision expenses.

J.    My colleague the Deputy President rightly noted that our decision is not limited to one gender, but applies to both. This is similarly a part of the conceptual-social revolution in which this judgment is rooted, which militates against identification of the woman exclusively with private activity (Lachovsky, p. 225;  and see: Labor.App. (Jer) 2456/03 Bahat v. State of Israel [20]  where a man (a lawyer in the District Attorney’s Office) claimed and obtained a shortened work day, and a day-care supplement, etc.). There is no need to belabor the point that many more couples share the burden of childraising than in the past, so that the man’s role in family care, with its implications for his ability to work outside of the home is, in many cases, almost equal to that of the woman, the traditional house keeper, who now goes out to work herself, even if his status is  not yet entirely equal to hers, as there are also subjects that nature itself dictates (breast feeding). Perhaps the psalmist was referring to our times in writing (Psalms 102:13): “A person goeth out to his work and labor towards evening”. The first verse says neither “man” nor “woman”, but rather “person”[(adam ­–Heb.]. From my perspective, I think that the approach in this judgment brings it close to the spirit of the International Convention on Economic, Social and Cultural Rights, and the Convention on the Rights of the Child, which was ratified by  Israel in 1991 (and see also: Draft Bill – Basic Law: Social Rights (Draft Bills 3068, 23 Tevet, 5762-7.1.02) s. 4).

K.       This last matter brings us to consideration of social rights in general. A person has a right to human dignity (Basic Law: Human Dignity and Liberty)  and to freedom of occupation (Basic Law: Freedom of Occupation).  A person’s right to self-realization should and ought to receive expression in the practical possibility of fulfilling that right.  Our concern here is not with lofty words but with “basic sustenance”, in accordance with the simple equation that if a person is unable to go to work because the price of caring for his children (for obviously the “daily separation” from his children is in itself difficult) consumes the fruits of his labor, then that element of self-realization involved in his leaving the home will be severely impaired. (As for his social rights, see: Dafna Barak – Erez and Aeyal Gross, in Dalia Dorner Volume (S. Almog, D. Beinish, Y.Rotem, eds.),  5769-2009, p. 189). Tax law is an integral part of the economic-social fabric and, in my opinion, its interpretation should take these aspects into account.

L. It would not be superfluous here to mention that the obligation of charity in Jewish Law (for its basis, see Shulhan Arukh, Yoreh Deah, Laws of Charity, 247:1),  which is of such singular importance (see Midot Zedakah of the esteemed Hasidic rabbi, Menachem Mendel Schneerson of Lubavitch, 5754) is fixed as follows (Shuhan Arukh, Yoreh Deah, ibid,  249:1): “if he is financially capable, he should give in accordance with the needs of the poor, and if not, he should give up to one fifth of his assets, which is the ideal performance of the commandment, and one tenth is the mediocre and less than that is mean”. This commandment is known as “Tithing of Assets” The question is what constitutes the basis from which tithe (one tenth) is given and inter alia what is recognized as an expenditure to be deducted from the profit in its calculation. It has been ruled that  the cost of a child carer hired by the woman going to work, for purposes of her work, can be deducted from her profits which are liable for tithes of assets.  See inter alia the responsum of Rabbi Joseph Ginzburg in Pinat Ha-Halakhah, Weekly Session (Habad)  1164, 30 Nissan, 5769 (20.4.09) and references.  See also the responsum of Rabbi Chaim Katz “Tithing Assets – Offsetting Expenses” on the internet site of the Beth El Yeshiva, 11 Iyar 5768. See also Ahavat Hesed of the esteemed Rabbi Yisrael Meir Hacohen, the Hafetz Hayyim (ed. Rabbis D. Zicherman, and B. Zeligman, 5763, at 232): It seems that he should also have a special book, in which he records all of the profits bestowed to him by Hashem, after deduction of the expenses of his business”, and in the editors note, ibid 20, concerning “all of the expenses that are necessary for the business”, and references. The emerging picture is that Jewish law regards necessary expenses, including expenses for a caregiver, as appropriate for deduction from the basis of tithes (ma’aser kesafim),  and the analogy to our case is clear.

M.  After writing all of the above, I perused the article of Dr. Tzila Dagan “Recognized Expense” (31 (2) Tel-Aviv Law Review  257 (2009)). Among other things, the article addresses the subject of expenses for childcare, from the initial assumption (p. 293) that it is first necessary to establish who is the “normative assessee, through whom we can arrive at appropriate conclusions. By examining considerations of efficiency, division, community and identity, the author concludes (p. 300) that “permitting the recognition of expenses for childcare will, indeed, promote economic efficiency, and will contribute to equality between women and men”. She notes however that this may have problematic distributive consequences. For example, women whose tax rate is high will receive more of a benefit than those whose tax rate is low (pp. 296-297, 300). But in her view, this effect can be moderated by a ceiling that restricts the expenses permitted for deduction, and a bonus for women who earn less than the tax threshold. The spirit of the comments is consistent with our approach. Indeed, in my view, the significance of our judgment in this case is that there is a need to achieve a new balance, which accurately reflects contemporary Israeli society, taking into account the changes in the socio-economic environment, changes that are often – though not always –  for the better.

N.  As stated, I concur with the opinion of my colleague the Deputy President.

Justice

Justice E. Arbel

I concur with the judgment of my colleague, the Deputy President, and with his reasoning.  Indeed, as stressed by the Deputy President, the result whereby the deduction of working parents' childcare expenses are deducted from taxable income stems from, and does not deviate from the general principles of tax law. It leads to a result of true taxation, which is the central goal of tax law. At the same, it cannot be ignored that this particular decision concerning tax issues also raises other important social issues. The result reached by my colleague, the Deputy President, in my view, also achieves an important social goal that enables women to go out to work, or at least makes it easier. Should  a woman wish to work, whether for economic reasons or for considerations of self-realization and development, then society should not frustrate that desire by disregarding the significant economic burden of childcare while she is at work. One cannot ignore the social reality that this economic burden is usually borne by the female member of the family, for a variety of reasons.   As such, recognition of childcare expenses is a step towards a more egalitarian society (see: Tzila Dagan, “Recognized Expense”, 31 (3) ­Tel-Aviv Law Review 257, 297 (2009).

On the practical level, I find it proper to mention that in my view,  when both parents are at work, activities such as clubs and day camps that fall outside the usual childcare framework, may be regarded as partially deductible expenses because part of their purpose is the supervision of children while the parents are at work. It should be remembered that the hours of activity and holidays of the kindergartens and schools are not always identical to the work hours and holidays of the worker. As such, parents are often compelled to find frameworks for their children when the regular frameworks are not available. The fact that some of these frameworks also provide enrichment for the children does not prevent recognition of part of the expenses as intended for the supervision of the children, even though the rates paid for day camps or clubs may differ. Granting partial recognition will also prevent a situation in which the parents will opt for frameworks that do not provide any enrichment so that part of the expense will be recognized for tax purposes, rather than choose frameworks that provide some enrichment  but would not be recognized for tax purposes. On the other hand, in my view, consideration should also be given to additional factors, such as social interests, and considerations of the child’s best interests, which presumably support encouraging parents to spend  more time with their children. It may, therefore, be proper to consider the determining a limit to the number of childcare hours per day that would be recognized as an expense, for reasons of public policy. In addition, in the framework of establishing rules for this field, consideration should be given to the distributive implications as they relate to families from varying economic backgrounds, that spend varying sums on childcare (see: Dagan, p. 296).  In any case, establishing guidelines for implementing of the rule laid down in this judgment is a matter for the legislature, or the delegated authority, and they would do well in regulating the matter in a clear, prompt manner in order to prevent individual disputes with assessees.

Justice M. Naor

            1.         I concur with the principal conclusion of my colleague the Deputy President according to which childcare expenses are permitted for deduction. I also concur with the comments of my colleague Justice Rubinstein.

2.    Following an exhaustive hearing before this panel, the Director General of the Ministry of Finance requested to appear before us to present the budgetary implications of the rejection of the appeal.  There was no basis for that request. If – and this is our legal conclusion – the expense is one which is permitted as a deduction, then it cannot be expected that our conclusion will change due to the budgetary implications, serious as they may be. On the day of the hearing before this Court, we proposed that the state regulate the subject of deduction of childcare expenses in regulations, but that proposal was rejected. It would seem, in the wake of this judgment, that it would be appropriate to reconsider the arrangement of the subject in primary legislation (or, at least, in secondary legislation), which will establish clearly defined criteria for childcare expenses. Legislative arrangement will prevent the need for superfluous individual litigation for each and every assessee.

3.    I will not deny that I was disturbed, not from the legal point of view but from the social point of view, by the question raised by the state concerning whether the recognition of the deduction did not constitute a benefit for the more established social classes, and regressivity with respect to the weaker socio-economic sectors.  My colleague Justice Rubinstein also addressed this subject, disputing the appellant’s position on this matter.  Personally, I am unable to dismiss the appellant’s arguments.  As stated, this is a disturbing issue from the social point of view; however, the solution. cannot lie in the non-recognition of the possibility of deducting the expense, just as the burden on the state budget cannot distort the result. My colleague Justice Rubinstein cited, with approval, the comments of Prof. Edrei, who brings a possible example of a creative solution to the question of deducting childcare expenses for small children by opening a network of quality daycare centers near workplaces. I warmly endorse the proposal to examine the possibility of expanding the free education provided by the state to young children. Such a solution, if found feasible, would benefit all Israel children (and their parents), and might well broaden the circle of those who go out to work (including women), even among those in low tax brackets.

4.    Regarding the date upon which our judgment takes effect, unlike my colleague the Deputy President, my view is that the matter should not be decided in the framework of this proceeding. I think that the matter should be left pending for proceedings in which arguments can be heard on the matter. According to my colleague, although we are concerned with  a declaration concerning an “existing situation”, there is justification for giving our judgment only prospective effect (except with respect to the respondent). The question of when a judicial ruling comes into force is a complex one that cuts both ways. While our judgment is a “revolution” in terms of actual practice, to the best of my knowledge, this judgment is the first to address and decide the question of the deduction of childcare expenses in Israel. The appellant, too, agrees that the question has not previously been addressed directly in Israel. Our judgment is, therefore, not a deviation from existing precedent (which is also permitted). Even if the assessment officers were asked to recognize these expenses and refused, until today that refusal had never been subjected to judicial review.  The “revolution” is, therefore, not in the settled law, but rather in the practice of the assessment officers. Under these circumstances, when the matter at hand “has never been ruled on in the past, it cannot be said that there is a reliance interest worthy of protection” (LCA 8925/04 Solel Boneh Construction and Infrastructures Ltd v. Estate Ahmad Abd Alhamid  [18], para. 18) that justifies retroactive application. Furthermore, presumably, there are a substantial number of assessees who waited for a decision in the respondent’s case, and thus prospective application will not only prevent the restitution claims that worry my colleague the Deputy President, but will also hurt all of those whose claims are still pending regarding open tax years, without having had any opportunity of presenting their claims on the matter. Note that regarding the latter it is certainly not a matter of “restitution of taxes that were collected, [that] harms the reliance interest of the tax collector”  - an interest that was addressed by my colleague. Furthermore, even if the question of restitution of taxes arises, there may be other legal doctrines which provide us sufficient grounds for not determining prospective application (see, e.g: CA 1761/02 Antiquities Authority v. Mifalei Tahanot Ltd [21], para. 69).  Thus, the question can go either way, but since we have not heard arguments concerning application in respect to time, I would refrain from ruling on the question, and leave it for future resolution (cf: HCJ 2390/96 Karasic v. State of Israel [22], 694 a-b). Under the circumstances, the appropriate place for resolving the question of the date of application is  in future litigation, with any particular assessee, and not the current case.

Justice

Justice E. Hayut

I concur with the conclusion of my colleague the Deputy President E. Rivlin, that the appeal should be dismissed and we should uphold the ruling of the District Court, according to which s. 17 of the Tax Ordinance [New Version] should be interpreted to permit the deduction of a person’s childcare expenses from his chargeable income.  I also concur with his conclusion that these expenses should also be permitted in cases of a “mixed expense”, in other words, an expense that contains an additional, non-revenue component.

Regarding the effect of the new ruling, whether retrospective or prospective, my colleague feels that even if it should be applied to the appellant before us, due to the need to provide incentives for litigants in appropriate cases to take measures to change the existing law, the case at hand justifies only prospective effect for this judicial ruling (as of the tax year beginning in January 2010). The reason for his approach is:

‘The construction given today to the provision of s. 17 brings about a practical change in the way the appellant has treated assesees for many years. The need to protect the reliance interest in this case is a powerful one.  The old rule created a real, substantial reliance that precludes the retrospective application of the rule. Returning taxes collected undermines the tax collector’s reliance interest :’

Justice Naor, on the other hand, feels that the decision on the issue of the ruling’s effect (prospective or retrospective)  should be left for another proceeding, as the question being “a complex one which cuts both ways”, and because we have not heard the parties’ arguments on the matter. On this issue, I concur with the view of my colleague Justice Naor.  I, too, feel that the question is a complex one which should be examined in all its ramifications before we rule  categorically on the judgment handed down in this appeal. I will further add that, in my view, and even though the Court has not previously addressed the issue of deduction of child-care expenses from taxable income, the criterion implemented by my colleague the Deputy President in determining that these expenses are permitted for deduction, is a new test, which is broader than the incidentality test, which prevailed until today, and which the District Court sought to implement in the current case (and I concur with the comments of my colleague, in para. 19 of his opinion, that any attempt to apply the incidentality test to this case is somewhat contrived). Indeed, as held by my colleague the Deputy President, the incidentailty test should be an auxiliary test for identifying revenue expenditures in the production of income, but not an exclusive test. In its stead, a more sophisticated test should be endorsed, that of the real and substantial connection between the expenditure and the production of income (See para. 16 of the opinion of my colleague the Deputy President).  In that sense, we are handing down a new ruling that replaces the old one, and this being the case, in my view, there is even more of a need for a solid, detailed basis to justify deviating from the ruling in Solel Boneh Construction v. Estate of Ahmad Alhamid [18], according to which the point of departure is that a new judicial ruling goes into effect retrospectively. Finally, and in order to remove all doubt, I will add that, in any case, I concur with the position of my colleague the Deputy President according to which our new ruling should be applied to the case at hand.  In this context, it is not amiss to mention that it was for similar reasons that the Deputy President M. Cheshin, who was in the minority in Solel Boneh  [18], had difficulty in finding any case in which a successful plaintiff whose case had led to a change in the existing law and the creation of a new one, would not be found worthy of enjoying the fruits of the new ruling (See ibid, para. 26). This approach, as stated, is acceptable to me.

            For all of the above reasons, I join in the conclusion of my colleague the Deputy President, that the appeal should be dismissed.

Decided in accordance with the judgment of Deputy President E. Rivlin.

6 Iyar 5769 (30 April 2009)

LCA 8925/04

1.     Solel Boneh Building and Infrastructure Ltd

2.     Aryeh Insurance Company Ltd

v.

1.     Estate of the late Ahmed Abed Alhamid deceased

2.     Abed Alhamid Mudib

3.     Hatam Mohammed Halef

4.     Engineer Dov Yahalom

5.     Noga Insurance Company Ltd

6.     Farid Attallah

The Supreme Court sitting as the Court of Civil Appeals

[27 February 2006]

Before President A. Barak, Vice-President Emeritus M. Cheshin and
Justices D. Beinisch, E. Rivlin, A. Grunis, M. Naor, Y. Adiel

Appeal by leave of the judgment of the Haifa District Court (Justice B. Bar-Ziv) on 16 August 2004 in LCA 1494/04.

Facts: Ahmed Alhamid died in a work accident. His estate and dependents (the respondents) filed a claim against the appellants for compensation. During the proceedings, the respondents reached a settlement with the appellants, according to which the appellants would pay a sum of NIS 100,000 to the respondents. This settlement was given the force of a court judgment on 22 February 2004. Three weeks later, the Supreme Court gave its judgment in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter ([2004] IsrLR 101). In that judgment the Supreme Court held that if a person is injured as a result of a tort and his life expectancy is shortened (the ‘lost years’), he is entitled to compensation for the loss of earning capacity in those years. The estate is also entitled to compensation for this head of damage, if the life expectancy of the injured person is shortened and he dies during the tortious act or soon after it. This decision overruled Estate of Sharon Gavriel v. Gavriel, which had been given twenty years earlier, and in which it was held that compensation would not be awarded for the ‘lost years.’

Following the decision in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter, the respondents applied to the trial court to cancel the settlement and to amend their statement of claim. Their application was granted. The appellants’ appeal to the District Court was denied. The appellants applied for leave to appeal to the Supreme Court, and leave to appeal was granted.

The questions before the court were whether the ruling in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter should apply retrospectively to events that occurred before that ruling, and if so, whether the respondents were entitled to cancel the settlement because of the subsequent change in the law.

Held: (President Barak) As a rule, case law has both retrospective and prospective effect. There is no reason why the ruling in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter should not apply retrospectively.

(President Barak) The question whether the respondents may cancel the settlement because of the (retrospective) change in the law should be resolved with reference to the doctrine of mistake in the law of contracts. The respondents’ mistake, however, was only a mistake in the ‘profitability of the transaction.’ Such a mistake is not a ground for cancelling an agreement, and therefore the settlement could not be cancelled.

(Vice-President Cheshin) As a rule, case law has only prospective effect. Retrospective application of case law is the exception to the rule. The plaintiff has the burden of persuading the court that considerations of justice require the relevant case law to have retrospective application. In the present case, considerations of justice supported the retrospective application of Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter.

(Vice-President Cheshin) The respondents did not make any mistake in real time. The question whether the law would change was not one of the risks that the parties took into account when they made the settlement. Consequently there was no basis in the doctrine of mistake for cancelling the settlement.

Appeal allowed.

Legislation cited:

Basic Law: Freedom of Occupation.

Basic Law: Human Dignity and Liberty.

Contracts (General Part) Law, 5737-1973, ss. 14(b), 14(d).

Interpretation Law, 5741-1981, ss. 1, 22.

Unjust Enrichment Law, 5739-1979, s. 2.

Israeli Supreme Court cases cited:

[1]        CA 140/00 Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [2004] IsrSC 58(4) 486; [2004] IsrLR 101.

[2]        CA 295/81 Estate of Sharon Gavriel v. Gavriel [1982] IsrSC 36(4) 533.

[3]        CFH 4011/04 Jerusalem Municipality v. Estate of Ettinger [2005] IsrSC 59(4) 8.

[4]        HCJ 716/86 Moriah Spas Hotel, Dead Sea v. Tamar Neveh Zohar District Council [1987] IsrSC 41(2) 389.

[5]        LCrimA 1127/93 State of Israel v. Klein [1994] IsrSC 48(3) 485.

[6]        CA 6585/95 M.G.A.R. Computerized Collection Centre Ltd v. Nesher Municipality [1996] IsrSC 50(4) 206.

[7]        HCJ 3648/97 Stamka v. Minister of Interior [1999] IsrSC 53(2) 728.

[8]        RT 8390/01 Axelrod v. State of Israel (not yet reported).

[9]        HCJ 221/86 Kanfi v. National Labour Court [1987] IsrSC 41(1) 469.

[10]     CA 2000/97 Lindorn v. Karnit Road Accident Victims Compensation Fund [2001] IsrSC 55(1) 12.

[11]     HCJ 680/88 Schnitzer v. Chief Military Censor [1988] IsrSC 42(4) 617; IsrSJ 9 77.

[12]     HCJ 2722/92 Alamarin v. IDF Commander in Gaza Strip [1992] IsrSC 46(3) 693; [1992-4] IsrLR 1.

[13]     CA 2622/01 Director of Land Appreciation Tax v. Levanon [2003] IsrSC 57(5) 309.

[14]     HCJ 1113/99 Adalah Legal Centre for Arab Minority Rights in Israel v. Minister of Religious Affairs [2000] IsrSC 54(2) 164.

[15]     CA 376/46 Rosenbaum v. Rosenbaum [1948] IsrSC 2 235.

[16]     HCJ 9098/01 Ganis v. Ministry of Building and Housing [2005] IsrSC 59(4) 241; [2004] IsrLR 505.

[17]     HCJ 19/56 Brandwin v. Governor of Ramla Prison [1956] IsrSC 10 617.

[18]     LCA 2413/99 Gispan v. Chief Military Prosecutor [2000] IsrSC 54(4) 673.

[19]     CA 180/99 Director of Purchase Tax v. Tempo Beer Industries Ltd [2003] IsrSC 57(3) 625.

[20]     CA 3602/97 Income Tax Commission v. Shahar [2002] IsrSC 56(2) 297.

[21]     CA 5/84 Yehezkel v. Eliyahu Insurance Co. Ltd [1991] IsrSC 45(3) 374.

[22]     LCA 1287/92 Buskila v. Tzemah [1992] IsrSC 46(5) 159.

[23]     AAA 1966/02 Majar Local Council v. Ibrahim [2003] IsrSC 57(3) 505.

[24]     CA 110/86 Gevaram v. Heirs of the late Shalom Manjam [1988] IsrSC 42(2) 193.

[25]     HCJ 6055/95 Tzemah v. Minister of Defence [1999] IsrSC 53(5) 241; [1998-9] IsrLR 635.

[26]     HCJ 1715/97 Israel Investment Managers Association v. Minister of Finance [1997] IsrSC 51(4) 367.

[27]     CA 2495/95 Ben-Lulu v. Atrash [1997] IsrSC 51(1) 577.

[28]     CA 3203/91 Azoulay v. Azoulay (unreported).

[29]     CA 4272/91 Barbie v. Barbie [1994] IsrSC 48(4) 689.

[30]     CA 2444/90 Aroasty v. Kashi [1994] IsrSC 48(2) 513.

[31]     CrimA 4912/91 Talmai v. State of Israel [1994] IsrSC 48(1) 581.

[32]     CA 6821/93 United Mizrahi Bank Ltd v. Migdal Cooperative Village [1995] IsrSC 49(4) 221.

[33]     HCJ 5843/97 Bar-Gur v. Minister of Defence [1998] IsrSC 52(2) 462.

[34]     HCJ 6126/94 Szenes v. Broadcasting Authority [1999] IsrSC 53(3) 817; [1998-9] IsrLR 339.

[35]     HCJ 4804/94 Station Film Ltd v. Film and Play Review Board [1996] IsrSC 50(5) 661; [1997] IsrLR 23.

[36]     HCJ 606/93 Advancement Promotions and Publishing (1981) Ltd v. Broadcasting Authority [1994] IsrSC 48(2) 1.

[37]     CFH 7325/95 Yediot Aharonot Ltd v. Kraus [1998] IsrSC 52(3) 1.

[38]     LCA 6339/97 Roker v. Salomon [2001] IsrSC 55(1) 199.

[39]     HCJ 57/67 Gross v. Income Tax Commissioner [1967] IsrSC 21(1) 558.

[40]     HCJ 4157/98 Tzevet, Association of Retired IDF Servicemen v. Minister of Finance [2004] IsrSC 58(2) 769.

[41]     CA 8972/00 Schlesinger v. Phoenix Insurance Company Ltd [2003] IsrSC 57(4) 817.

[42]     CA 1761/02 Antiquities Authority v. Station Enterprises Ltd (not yet reported).

American cases cited:

[43]     Kuhn v. Fairmont Coal Co., 215 U.S. 349 (1910).

[44]     Great Northern Railway Co. v. Sunburst Oil & Refining Co., 287 U.S. 358 (1932).

[45]     Linkletter v. Walker, 381 U.S. 618 (1965).

[46]     Chevron Oil Co. v. Huson, 404 U.S. 97 (1971)

[47]     United States v. Johnson, 457 U.S. 537 (1982).

[48]     Griffith v. Kentucky, 479 U.S. 314 (1987).

[49]     James B. Beam Distilling Co. v. Georgia, 501 U.S. 529 (1991).

[50]     Harper v. Virginia Dept. of Taxation, 509 U.S. 86 (1993).

English cases cited:

[51]     National Westminster Bank plc v. Spectrum Plus Ltd [2005] UKHL 41; [2005] 4 All ER 209.

European Court of Human Rights cases cited:

[52]     Marckx v. Belgium (1979) 2 E.H.R.R. 330.

European Court of Justice cases cited:

[53]     Defrenne v. Sabena [1976] E.C.R. 455.

[54]     Deutsche Telekom A.G. v. Vick, Conze and Schroder [2000] I.R.L.R. 353.

Indian cases cited:

[55]     Golak Nath v. State of Punjab [1967] 2 S.C.R. 762.

[56]     India Cement Ltd v. State of Tamil Nadu [1990] 1 S.C.C. 12.

[57]     Orissa Cement Ltd v. State of Orissa [1991] Supp. (1) S.C.C. 430.

Jewish law sources cited:

[58]     Babylonian Talmud, Rosh HaShana 25b.

[59]     Babylonian Talmud, Bava Batra 21a.

For the appellants — J. Asulin.

For respondents 1-3 — G. Tannous, R. Tannous.

For the fourth respondent — T. Tenzer.

For the fifth respondent — Z. Rapaport.

For the sixth respondent — D. Attallah.

JUDGMENT

President A. Barak

The Supreme Court decided that a person who is injured as a result of a tort and whose life expectancy is shortened is entitled to compensation for the loss of earning capacity in the years by which his working life expectancy was shortened. His estate is also entitled to compensation for this head of damage, if the life expectancy of the injured person is shortened and he dies during the tortious act or soon after it. This is the ‘lost years’ rule. It was decided in CA 140/00 Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. In that case the Supreme Court departed from a case law ruling that had been decided twenty years earlier in CA 295/81 Estate of Sharon Gavriel v. Gavriel [2]. When the judgment was given in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] there was a large number of claims concerning compensation for loss of earning capacity pending in various courts. What effect does the new ruling have on those cases? That is the general question that arises before us. The specific question is what effect does Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] have on a settlement concerning the quantum of damages between an injured person and several tortfeasors that was given the validity of a partial judgment, while the action continued with regard to the relationship between the tortfeasors inter se.

The facts and the proceedings

1.    The deceased Ahmed Alhamid Mudib Abu Sahon was killed in a work accident. An action was filed with regard to his death by his estate and his dependents against the employer, the owner of the site where he worked and the insurers. In the course of the proceedings, the parties, at the recommendation of the court, reached a settlement. According to this, the plaintiffs would be paid a sum of NIS 100,000. The trial would continue with regard to division of the liability between the parties. On 22 February 2004, this settlement — which was called in the court’s decision a ‘procedural arrangement’ — was given the force of a court decision.

2.    On 15 March 2004, judgment was given in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. The application for a further hearing was denied (CFH 4011/04 Jerusalem Municipality v. Estate of Ettinger [3]). In consequence, on 5 April 2004 the plaintiffs filed an application to cancel the procedural settlement and to amend the statement of claim. The defendants opposed this. The Magistrates Court (Justice I. Ganon) granted the application. He held that his decision (of 22 February 2004) amounted to a ‘procedural arrangement,’ and was not a ‘partial judgment.’ It was not proper or just to prevent the plaintiffs from cancelling the settlement. The defendants appealed to the District Court. The appeal was denied. It was held (per Justice B. Bar-Ziv) that the decision of the Magistrates Court amounted to a partial judgment. For reasons of justice — and according to case law — it was possible to repudiate this partial judgment. The defendants applied to this court for leave to appeal. We granted the defendants’ application and gave leave to appeal. In view of the importance of the questions that arise before us the panel was expanded.

The questions that require a decision

3.    The appeal before us raises two main questions. First, does Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] apply prospectively only (from now onwards) or does it also have retrospective effect (changing the position in the past)? If Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] has no retrospective effect, it does not apply to the accident in this case, and therefore there is no argument that allows the agreement between the parties to be repudiated. But if Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] does have retrospective effect, the second question arises: this concerns the effect that Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] has on the agreement between the parties. Let us turn to consider the first question.

A.    The temporal application of Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter

Time and law

4.    Does the ruling in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] apply to tortious acts that took place before it was decided? Does it have retrospective effect? The answer to this question lies in the status of time in the law. Indeed, every legal norm applies not only in space but also in time. Against this background, we should consider a wide variety of problems in which time, at the heart of the law, is a common factor. One group of problems concerns laws that apply when the law changes at a certain point in time. These are the problems of intertemporal law (droit transitoire). Within this framework, the question of the retrospective, effective or prospective application of the new law plays a central role (see A. Rodger, ‘A Time For Every Thing Under The Law: Some Reflections On Retrospectivity,’ 121 L. Q. R. 57 (2005); R.H.S. Tur, ‘Time and Law,’ 22 Oxford J. L. Stud. 463 (2002); see also A. Barak, Legal Interpretation (vol. 2, 1993), at p. 609). This is the case with regard to the temporal application of new legislation; it is also the case with regard to the temporal application of new case law — whether this overrules previous case law or whether it determines a new case law ruling. In all of these, the question of the temporal application of the new norm arises. We shall focus on the solution to this question in a case where a new judicial ruling gives a new interpretation to a statute by overruling a previous interpretation. What is the temporal application of the new case law ruling? Does it apply both from this moment onward (prospectively) and also to earlier events (retrospectively)? Or does it perhaps apply only from this moment onward (purely prospectively)? If the latter, what is the law with regard to the case in which the new law is decided: does the new law apply to it (a kind of general prospectivity and a specific retrospectivity)? And does it apply also to all the other cases that are being litigated before the courts? This is not a new question in Israel. There is academic discussion of it in Israel (see G. Tedeschi, ‘Case Law for the Future,’ Essays in Law 25 (1978); E. Kaplan, ‘Prospective Application of Supreme Court Precedents,’ 9 Hebrew Univ. L. Rev. (Mishpatim) 221 (1979); A. Barak, Judicial Discretion (1987), at p. 417; E. Kaplan, ‘Future Application of Supreme Court Precedents,’ Avner Hai Shaki Book 125 (2005)). It arose in the past in several judgments, and several obiter statements have been made on this subject (see HCJ 716/86 Moriah Spas Hotel, Dead Sea v. Tamar Neveh Zohar District Council [4], at p. 392; LCrimA 1127/93 State of Israel v. Klein [5], at p. 504; CA 6585/95 M.G.A.R. Computerized Collection Centre Ltd v. Nesher Municipality [6], at p. 220; HCJ 3648/97 Stamka v. Minister of Interior [7]; RT 8390/01 Axelrod v. State of Israel [8]).

The premise: retrospective and prospective application

5.    The fundamental premise is that a new judicial ruling acts both retrospectively and prospectively (see HCJ 221/86 Kanfi v. National Labour Court [9], at p. 480). Justice Holmes rightly said that ‘Judicial decisions have had retrospective operation for near a thousand years’ (in Kuhn v. Fairmont Coal Co. [43], at p. 372). This is the position with regard to the development of the law within the framework of the common law, and it is also the position where case law interprets a legislative provision (a constitution, statute, regulation), or fills a lacuna in it (for the distinction between these, see A. Barak, ‘The Different Kinds of Judicial Creation: Interpretation, Filling a Lacuna and Development of the Law,’ 39 HaPraklit 267 (1990); A. Barak, Selected Articles (H.H. Cohn and I. Zamir eds., vol. 1, 2000), at p. 755). There are three arguments that support this approach (see Barak, Judicial Discretion, at p. 421): a jurisprudential argument, a constitutional argument and a practical argument.

The jurisprudential argument

6.    The jurisprudential argument is the following: since the court decides the law — whether within the framework of the common law or within the framework of interpreting legislation or filling a lacuna therein — it declares the law. It does not create it. When the court departs from a previous judgment, it is deciding that the erroneous judgment never was the law. The overruling judgment does not create new law. It declares what the law always was. This is the declarative theory of law. It was developed by Blackstone. His well known statement was that:

‘... if it be found that the former decision is manifestly absurd or unjust, it is declared, not that such a sentence was bad law, but that it was not law’ (1 Blackstone, Commentaries 71 (1769)).

The declarative theory of law leads to the conclusion that a judgment that overrules a previous judgment acts retrospectively. If the overruled judgment was never law, and the law was never as declared in the overruled judgment, this means that the judgment that overruled it acts temporally in a retroactive manner. An additional jurisprudential argument is this: when a change in case law is merely prospective and it does not act in favour of the parties in the trial (pure prospectivity), the new case law is an obiter dictum, and it is not binding at all.

The constitutional argument

7.    The constitutional argument that supports the retrospective application of new case law is this: a central element in any democratic constitution is the separation of powers. According to this, the legislative branch enacts statutes, and the judicial branch decides disputes. In enacting a statute, the legislative branch is competent to determine its temporal application. This determination will usually be prospective, for constitutional and other considerations. If the judgment can also determine a prospective application of the case law ruling, it will be indistinguishable from legislation. This was well expressed by Lord Devlin, when he said that if new case law has only prospective application, then it —

‘... crosses the Rubicon that divides the judicial and the legislative powers. It turns judges into undisguised legislators’ (P. Devlin, ‘Judges and Lawmakers,’ 39 M. L. R. 1 (1976), at p. 11).

Preserving the proper separation between the legislative and judicial functions leads to a recognition that the application of legislation is only prospective, but the application of case law is otherwise. A merely prospective change in case law makes the judge into a legislator (M.D.A. Freeman, ‘Standards of Adjudication, Judicial Law, Making and Prospective Overruling,’ 26 Curr. L. P. 166 (1973), at p. 204). In addition to this constitutional consideration of the separation of powers, there is an additional constitutional consideration. As we shall see, various prospective approaches distinguish between the litigant who asked the court to overrule the previous case law, to whom the new case law ruling will apply retroactively, and other litigants, whose cases are being considered before the courts and have not yet been decided, to whom the new case law ruling will not apply. This creates a forbidden discrimination that violates the principle of equality. In America there is an additional constitutional consideration that operates against a merely prospective overruling of the previous case law, and this concerns the constitutional requirement that the courts may only decide ‘cases’ and ‘controversies.’ When the new case law is given only a purely prospective force, that new case law ruling does not decide the dispute before the court; it constitutes an advisory opinion with regard to that case, and it is therefore prohibited.

The practical argument

8.    In addition to the jurisprudential and the constitutional arguments, it is possible to find support for the retrospective application of new case law in several practical arguments. First, it is argued that the ability to give only prospective validity to a new case law ruling that overrules its predecessor releases the judge from the constraints that limit his discretion as to whether to depart from a previous case law ruling or not. According to this approach, the retrospectivity of the case law ruling acts as a barrier against too great a departure from the previous law. When this barrier is removed, there is a fear that the proper framework may be undermined, and that there will be too many departures from previous case law rulings (see J. Stone, Social Dimensions of Law and Justice (1966), at p. 663; P. Mishkin, ‘Foreword: The High Court, The Great Writ, And The Due Process of Time and Law,’ 79 Harv. L. Rev. 56 (1965), at p. 70). Second, there are several systems of merely prospective changes in case law (see Barak, Judicial Discretion, at p. 420, and G. Calabresi, A Common Law for the Age of Statutes (1982), at p. 280). Choosing between these systems is complex. The litigants will usually not know which system the court will choose. As a result, the whole judicial process is undermined. Third, if we choose from among the different systems the one that advocates a purely prospective overruling of previous case law — according to which the new case law does not apply even to the litigant who was successful in his argument that the previous case law should be changed — this will reduce the motivation of litigants to argue that the case law should be changed, since in any case they will not benefit from the change. This is a negative consequence that will lead to stagnation in the development of case law (see R. Dworkin, Law’s Empire (1986), at p. 156). Fourth, often a mere prospective application of the new judicial ruling undermines public expectations of the judiciary. This leads to a loss of public confidence in the judiciary, which should be protected at all costs (see A. Barak, A Judge in a Democracy (2004), at p. 49).

Criticism of the jurisprudential argument

9.    The jurisprudential argument is not convincing. Admittedly, often a judgment only declares the law and does not create it. Similarly, sometimes a previous judgment is absolutely wrong, and it should be overruled retroactively. All of this is correct sometimes, but not always. Sometime the new judgment does create new law, which is appropriate for its time and place. The previous law — which the new judgment overruled — was not absolutely wrong. It may be that it was correct and proper in its time, but now the time has come to change it. In these circumstances, there is no jurisprudential reason not to give the new case law ruling only a prospective application. Take a law that was interpreted in the past in a certain way, and now the court departs from that interpretation and adopts a new interpretation. This overruling is not always based on an original error in the first judgment. It is based on the current needs and values of society. Indeed, interpretation of statutes is dynamic (see A. Barak, Purposive Interpretation in Law (2003), at pp. 200, 412; see also R. Eskridge, Dynamic Statutory Interpretation (1994)). ‘Yet their words remain law’ (see F.A.R. Bennion, Statutory Interpretation: A Code (third edition, 1997), at p. 687). I discussed this in one case, where I said:

‘The statute integrates into the new reality. Thus an old statute speaks to modern man... Interpretation is an ever-changing process. Modern content should be given to the old language. Thus the disparity between the statute and life is reduced. Against this background it is correct to say, as Radbruch did, that the interpreter may understand the statute better than the creator of the statute, and that the statute is always wiser than its creator. This leads to the interpretive approach that is accepted in England, whereby statute should be given an updating interpretation... Indeed, the statute is a living creature. Its interpretation should be dynamic. It should be understood in a way that is consistent with and advantageous to modern reality’ (CA 2000/97 Lindorn v. Karnit Road Accident Victims Compensation Fund [10], at p. 32. See also HCJ 680/88 Schnitzer v. Chief Military Censor [11], at p. 629 {90}; HCJ 2722/92 Alamarin v. IDF Commander in Gaza Strip [12], at p. 705 {16-17}; CA 2622/01 Director of Land Appreciation Tax v. Levanon [13]).

The same is true of the interpretation of constitutions and Basic Laws. These are living documents. A modern meaning should be given to the values enshrined in them. A similar approach applies to the development of common law. Since its inception, it has undergone wide-ranging changes that have created new case law principles that are suited to the needs of the time and place. This was discussed by Lord Nicholls, who said:

‘... judges themselves have a legitimate law-making function. It is a function they have long exercised. In common law countries much of the basic law is still the common law. The common law is judge-made law. For centuries judges have been charged with the responsibility of keeping this law abreast of current social conditions and expectations. That is still the position. Continuing but limited development of the common law in this fashion is an integral part of the constitutional function of the judiciary. Had the judges not discharged this responsibility the common law would be the same now as it was in the reign of King Henry II’ (National Westminster Bank plc v. Spectrum Plus Ltd [51], at para. 32).

In situations where the change in the common law is intended to bridge a gap between the law and life, the old precedent is overruled not because it was originally wrong, but because it is unsuited to the new reality. The declarative theory does not give any proper answer to this situation. Naturally, it is always possible to say that changes sprout forth from the fertile soil of the common law, and that the judge brings out the potential latent in it from theory into practice. Even if this is the case, it involves judicial creation. Just as a new statute, which brings out from theory into practice what is latent in the constitution, constitutes a new creation, so too does a new judicial ruling that springs forth from the soil of the law constitute a new creation. Indeed, the declarative theory is incapable of explaining the entirety of judicial activity. It has passed its time. It is based on a fiction that should not be recognized (see Axelrod v. State of Israel [8], at para. 10). It is to be hoped that though we may have buried it, it will not rule us from its grave (in the words of Maitland on the forms of action: see F.W. Maitland, The Forms of Action of Common Law (1941), at p. 2).

Criticism of the constitutional argument

10. The constitutional argument against the merely prospective application of a judicial ruling is also not convincing. The reason for this is that in the course of deciding a dispute, the court is obliged to determine the law according to which the dispute will be decided. Sometimes this decision is merely a declaration of what already exists. Sometimes this decision creates a new law, whether within the framework of the common law or by means of interpretation or filling a lacuna in legislation. Creating this law constitutes ‘judicial legislation’ (see A. Barak, ‘Judicial Legislation,’ 13 Hebrew Univ. L. Rev. (Mishpatim) 25 (1983); Barak, Selected Articles, at p. 821). This is not ‘legislation’ in the institutional sense. That is solely within the jurisdiction of the legislature. This is ‘legislation’ in the functional sense, since it creates a norm that did not exist in the past. This functional legislation does not violate the principle of the separation of powers. Recognizing it does not blur the boundary between legislation (in its institutional sense) and the administration of justice. Giving only a prospective force to a new case law ruling is an expression of judicial creation. It involves no crossing of the Rubicon that divides legislation from the administration of justice (see the judgment of Justice Cardozo in Great Northern Railway Co. v. Sunburst Oil & Refining Co. [44], at p. 366). With regard to the argument that prospective application of a new case law ruling violates equality, this is true only if we do not adopt the system of the purely prospective change. With the purely prospective system, there is no violation of equality. And as for the other systems, even though they involve a violation of equality, we need to consider whether this violation is a proper one. Equality is not an absolute right. It can be violated for proper purposes by means of proportionate measures (see HCJ 1113/99 Adalah Legal Centre for Arab Minority Rights in Israel v. Minister of Religious Affairs [14]).

The decisive consideration — the practical consideration

11. I have therefore reached the conclusion that the jurisprudential and constitutional arguments are incapable of preventing the court from departing from its previous path in giving the new case law ruling retrospective application. Prospective application, in its various forms, is consistent with the jurisprudential and constitutional status of judicial activity (see P.J. Fitzgerald, Salmond on Jurisprudence (twelfth edition, 1966), at p. 127; K. Diplock, The Courts as Legislators (1965), at p. 17). Indeed, the decision as to whether the court should deprive its new case law ruling, in appropriate circumstances, of retrospective application will not be decided by jurisprudential or constitutional considerations. It will be decided by the proper balance between practical considerations. This was well expressed by Justice Cardozo, when he said that the question of the retrospectivity of a case law ruling —

‘… will be governed, not by metaphysical conceptions of the nature of judge-made law, nor by the fetich of some implacable tenet, such as that of the division of governmental powers, but by considerations of convenience, of utility, and of the deepest sentiments of justice’ (B.N. Cardozo, The Nature of The Judicial Process (1921), at p. 148).

We have mentioned several practical considerations that support the retrospective application of the new judicial case law ruling. What are the practical considerations that support the other approach, that it is possible to deny the retrospective application of a new case law ruling? Which considerations have the upper hand? Let us now turn to consider these questions.

12. Rejecting retrospective application and recognizing only prospective application (in one of its forms) is supported by several practical considerations: first, the need to reject the retrospective application of a new case law ruling arises usually when the court examines the previous case law rule and comes to the conclusion that it ought to overrule it. Notwithstanding, the court is concerned about the damage that overruling it will cause those persons and bodies who have relied on the previous case law rule, and who have regulated their relationships on the basis of this reliance. In such a situation, the court faces the following dilemma: either it must leave an undesirable case law rule as it stands because of the reliance interest, or it must change case law and determine a new and better case law rule in its place, even though this harms the reliance interest). The approach that a change in case law should not be retrospective and should act only prospectively extricates the judge from the dilemma in which he finds himself. It allows him to make a change to an erroneous case law rule and to establish a new case law rule in its place, without harming the reliance interest. Thus security and stability are maintained in addition to adapting the law to social change. We have before us a kind of ‘wonder remedy’ that allows both stability and progress (see Barak, Judicial Discretion, at p. 421, and R.J. Traynor, ‘Quo Vadis Prospective Overruling: A Question of Judicial Responsibility,’ 28 Hastings L. J. 533 (1977), at p. 542).

13. Second, the truth is that several systems of prospective application are recognized (see para. 8, supra). This multiplicity does not lead to complexity or confusion. Within a short time it can be determined in what conditions one prospective system will be adopted and when the court will adopt another system. The ‘supply’ of prospective systems is not large, and it is possible without difficulty to choose the appropriate law in this regard.

14. Third, a merely prospective application of a new case law ruling is consistent with the sense of justice. It allows a new and just ruling to be made, without harming the reliance interest. It averts the need to made a decision — such as the one that President Zamora made with regard to the question of precedents — that ‘between truth and stability — truth prevails’ (CA 376/46 Rosenbaum v. Rosenbaum [15], at p. 254).  It makes it possible to achieve both ‘truth’ and ‘stability.’ Thereby it increases confidence in the judicial system. This confidence will be harmed if a proper change does not take place because of the reliance interest, or if the change does take place and harms the reliance interest.

15. The practical considerations lead to conflicting conclusions. How can we decide between or balance the conflicting considerations? It should be stated immediately that every legal system has decisions and balancing points of its own. This is a product of the strength of the jurisprudential and constitutional considerations in that legal system.  The decision is also affected by the way in which the society understands the judicial role, and its willingness to examine realistic arrangements and practical balances. All of these vary from one legal system to another. They also vary over time within the framework of the same legal system. A good example of this can be found in American law. There the courts of the various states first recognized the prospective overruling of case law as long ago as the nineteenth century (see T.S. Currier, ‘Time and Change in Judge-Made Law: Prospective Overruling,’ 51 Va. L. Rev. 201 (1965)). If found recognition in the Federal courts in the 1960s and the beginning of the 1970s in the judgments in Linkletter v. Walker [45]; Chevron Oil Co. v. Huson [46]). Since the 1980s there has been a significant retreat in this sphere. Today the case law of the United States Supreme Court rejects a merely prospective application of new case law rulings (see United States v. Johnson [47]; Griffith v. Kentucky [48]; James B. Beam Distilling Co. v. Georgia [49]; R.H. Fallon and D.J. Meltzer, ‘New Law, Non-Retroactivity, and Constitutional Remedies,’ 104 Harv. L. Rev. 1731 (1991); Harper v. Virginia Dept. of Taxation [50]; J.E. Fisch, ‘Retroactivity and Legal Change: An Equilibrium Approach,’ 110 Harv. L. Rev. 1055 (1997); B.S. Shannon, ‘The Retroactive and Prospective Application of Judicial Decisions,’ 26 Harv. J. L. & Pub. Pol’y 811 (2003); M. Katz, ‘Plainly Not “Error”: Adjudicative Retroactivity on Direct Review,’ 25 Cardozo L. Rev. 1979 (2004)). The original American approach — the one that recognized the possibility of changing case law prospectively — is accepted in India (see Golak Nath v. State of Punjab [55]; India Cement Ltd v. State of Tamil Nadu [56]; Orissa Cement Ltd v. State of Orissa [57]). The original American approach has also been applied by the European Court of Justice in Luxembourg (see Defrenne v. Sabena [53]; Deutsche Telekom A.G. v. Vick, Conze and Schroder [54]), and the European Court of Human Rights in Strasbourg (see Marckx v. Belgium [52], at p. 353).

16. English law wavered for a long time over the question of the prospective application of new case law (for an analysis of the various positions, see the opinion of Lord Nicholls in National Westminster Bank plc v. Spectrum Plus Ltd [51]). In that case, which was decided only a few months ago, it was held, by a majority, that the question whether to adopt only a prospective overruling of previous case law was within the discretion of the court (ibid. [51], at para. 39). It was held that there might be circumstances in which the court would adopt this approach. Lord Nicholls wrote:

‘... there could be circumstances in this country where prospective overruling would be necessary to serve the underlying objective of the courts of this country: to administer justice fairly and in accordance with the law. There could be cases where a decision on an issue of law, whether common law or statute law, was unavoidable but the decision would have such gravely unfair and disruptive consequences for past transactions or happenings that this House would be compelled to depart from the normal principles relating to the retrospective and prospective effect of court decisions’ (ibid. [51], at para. 40).

In that case it was decided to give the new case law ruling retrospective application, since the conditions for prospective application only were not fulfilled.

17. What is the law in Israel? The fundamental premise is that a new judicial ruling applies both retrospectively and prospectively. Notwithstanding, I am of the opinion that there is nothing in principle that prevents us from recognizing the power of the Supreme Court to give its precedents merely prospective force. The declaratory theory of law has not acquired great strength in Israel; there is no constitutional obstacle that prevents recognizing this possibility. The legal community in Israel would not regard this as judicial activity that is inconsistent with the character of the judicial system. The possibility of adopting this approach was raised in several judgments (see para. 4, supra) and it seems to me that Israeli law is ready to absorb it. Therefore the question is not whether we should recognize this possibility in principle. The answer to this is yes. The question is on what conditions and in what circumstances should we adopt this approach. I shall now turn to examine this question.

Protection of the reliance interest

18. What supports the need to resort solely to a prospective overruling of old case law by a new judicial decision is the reliance interest of individuals and (private and government) bodies who have managed their affairs on the basis of the old judicial ruling. ‘The interest of reliance is like a golden thread that runs through Israeli law’ (HCJ 9098/01 Ganis v. Ministry of Building and Housing [16], at para. 19). Indeed, the reliance interest is one of the most protected interests in the law. This is the position in the sphere of administrative law (see D. Barak-Erez, ‘The Protection of Reliance in Administrative Law,’ 27 Hebrew Univ. L. Rev. (Mishpatim) 17 (1996)). The same is true of private law (see D. Friedman and N. Cohen, Contracts, at p. 151; G. Shalev, The Law of Contracts — General Part: Towards a Codification of Civil Law (2005), at p. 247; see also L.L. Fuller and W.R. Perdue, ‘The Reliance Interest in Contract Damages,’ 46 Yale L. J. 52 and 373 (1936-1937)). The rule of binding precedent is also based, in part, on the protection of the reliance interest (see Barak, Judicial Discretion, at p. 441). The outlook concerning a solely prospective application of a case law ruling that changes the previous law is also derived from the need to protect the reliance interest. Indeed, a retrospective change of the existing law may seriously harm someone who relied on it, to such an extent that it may prevent the change in the law. It follows that the examination of this issue should focus mainly on the reliance interest (see Stamka v. Minister of Interior [7], at p. 746; see also P.J. Stephens, ‘The New Retroactivity Doctrine: Equality, Reliance and Stare Decisis,’ 48 Syracuse L. Rev. 1515 (1998)). Therefore, if the issue is new and has never been decided in the past, it cannot be said that there is a reliance interest that is worthy of protection.  The same is true if the old case law ruling did not in practice create any real reliance, or if the reliance was unreasonable, or if it should not be given any significant weight in view of the issue under discussion and the nature of that reliance. In all of these cases, and in others, we should not give much weight to the reliance factor, and there is a basis for applying the new case law ruling retrospectively (see W.V. Schaefer, ‘The Control of “Sunbursts”: Techniques of Prospective Overruling”, 42 N. Y. U. L. Rev. 631, (1967), at p. 638). Examples of this situation can be found in the following situations: the previous case law was not a decision of the Supreme Court; the previous case law was unclear, and it has been interpreted in different ways; the previous case law was accompanied by opposition and proposed changes; in several obiter statements judges have expressed reservations concerning the previous case law; the previous case law was not known to the parties; the parties relied on the old law but each took the risks that it might be changed (see: Note, ‘Prospective Overruling and Retroactive Application in the Federal Courts,’ 71 Yale L. J. 907 (1962)). In these situations and in many others, anyone who relies on the previous case law takes a risk and it is therefore possible to give the new case law retrospective validity. Indeed, in many cases the change in case law is not a surprise. It does not come — in the language of Lord Devlin — ‘out of a blue sky’ (Devlin, ‘Judges and Lawmakers,’ supra, at p. 10). Justice Cardozo rightly said that:

‘The picture of a bewildered litigant lured into a course of action by the false light of decision, only to meet ruin when the light is extinguished and the decision overruled, is for the most part a figment of excited brains’ (B.N. Cardozo, The Growth of The Law (1924), at p. 122).

See also Schaefer, ‘Precedent and Policy,’ 34 U. Chi. L. Rev. 3 (1966), at p. 15.

Indeed cases of reliance that justify giving only prospective force to a new case law ruling are, in the natural course of events, not many (see Traynor, ‘Quo Vadis Prospective Overruling: A Question of Judicial Responsibility,’ supra, at p. 542).

19. The existence of a reliance interest and a violation thereof are essential conditions for a merely prospective application of a new case law ruling. But they are not sufficient conditions. The court should go on to examine whether it may be possible to overcome the reliance problem without adopting a solely prospective application of the new case law. Indeed, the reliance interest is given broad protection by the law. In those cases where general laws protect the reliance interest, there is no basis for giving the interest any additional protection in the form of prospective application. An example of this is the doctrine of the de facto civil servant. According to this doctrine, when a civil servant has acted in a situation where he believed in good faith that he was acting by virtue of legislation that the court declared to be unconstitutional or unlawful, the acts that he carried out during the period of the illegality should be regarded as valid (see HCJ 19/56 Brandwin v. Governor of Ramla Prison [17], at p. 630). In this situation, validity will be given to the reliance interest by means of the doctrine of the de facto civil servant so that it is not necessary to declare the legislation invalid prospectively. We have before us an example of a broader approach, which concerns relative voidance (see LCA 2413/99 Gispan v. Chief Military Prosecutor [18], at p. 684; D. Barak-Erez, ‘Relative Voidance in Administrative Law: On the Price of Rights,’ Itzchak Zamir Book: On Law, Government and Society 283 (Y. Dotan and A. Bendor eds., 2005)). This doctrine distinguishes between a violation of the law and the relief for the violation. Within the framework of the relief, it is possible to take the principle of reliance into account.

20. Another example can be found in a case where tax was paid by virtue of legislation that was set aside because it was contrary to a Basic Law or to a statute. A restitution of the taxes that were collected naturally harms the reliance interest of the government body that collected the tax. Protection for this interest can be found in the argument that the government body is entitled to rely on the general protection given by the laws of unjust enrichment with regard to unfair restitution (s. 2 of the Unjust Enrichment Law, 5739-1979). To the extent that this protection is available to the government body, this is capable of solving the reliance problem, without it being necessary to determine that the decision concerning the unconstitutionality or the illegality of the tax does not act retrospectively. Indeed, the application of this protection to the restitution of tax payments varies from one legal system to another. In our legal system, no ruling has yet been made in this regard. It has been left undecided on several occasions and in this appeal we shall also not adopt any position on this issue (see CA 180/99 Director of Purchase Tax v. Tempo Beer Industries Ltd [19], at p. 644; CA 3602/97 Income Tax Commission v. Shahar [20], at p. 337).

21. In these examples and in many others, there is no basis for resorting to a solely prospective overruling of previous case law in order to protect the reliance interest, since other legal doctrines are capable of giving sufficient protection to this interest. Naturally, we should examine in each case whether the protection of the reliance interest, which these other doctrines provide, is comparable with the protection that the reliance interest would have been given by virtue of a solely prospective overruling of the previous case law. Sometimes the two are not interchangeable: sometimes the cost of resorting to general doctrines is so great — whether from the viewpoint of the parties concerned or from the viewpoint of the courts — that it is better to give the new case law solely prospective validity.

22. Finally, sometimes there will be a basis for giving retrospective validity to new case law even if this harms the reliance interest. It is well known that this interest does not have absolute force. It should be balanced against the values and the principles that conflict with it. Sometimes the court may think that the considerations that support a change of the law are of greater weight than the considerations that support the old law, and the damage that is caused to the reliance interest by the actual change (see CA 5/84 Yehezkel v. Eliyahu Insurance Co. Ltd [21], at p. 384; LCA 1287/92 Buskila v. Tzemah [22], at p. 172; AAA 1966/02 Majar Local Council v. Ibrahim [23]). Indeed, the determination of the question whether to give a new case law ruling solely prospective validity should take into account all of the considerations relevant to the case; the judge should balance these, by giving weight to the conflicting considerations, in the circumstances of the case before him. In all of this, the fundamental premise is the retrospective and prospective validity of the new case law.

The reliance interest and the law of torts

23. What weight should be given to the reliance interest when case law is changed in the field of the law of torts? In order to answer this question, we should examine each issue on its merits. We should examine to what extent the parties relied on the old case law, and to what extent this reliance is harmed by changing that law. The accepted view in legal literature is that, as a rule, reliance in the field of the law of torts is minimal. This was discussed by Justice Traynor, who said:

‘... neither the tortfeasor nor the victim nurses any reasonable expectations about injury that has yet to occur. When everyone’s daily life is prone to risk, it is hardly realistic to suppose that people are assiduously studying current rules of liability so that they may set out to hit or be hit advantageously’ (R.J. Traynor, ‘The Limits of Judicial Creativity,’ 29 Hastings L. J. 1025 (1978), at p. 1036; see also Traynor, ‘Quo Vadis Prospective Overruling: A Question of Judicial Responsibility,’ supra, at p. 545).

Notwithstanding, even in the field of the law of torts, there is a basis for taking the interest reliance into account. This is especially the case with regard to imposing new obligations that were not recognized in the past. It was precisely in the field of the law of torts that the courts in America first recognized the possibility of a merely prospective overruling of previous case law. They did this in the past in those cases in which the old law did not recognize liability in torts (such as the case law ruling that held that hospitals are immune from liability in tort), whereas the new law recognized liability (by cancelling the immunity). The courts decided that the new case law would only have prospective application, since the hospitals had not insured themselves in reliance on the old law (see Currier, ‘Time and Change in Judge-Made Law: Prospective Overruling,’ supra). Naturally, these considerations do not apply where there is insurance. As a rule, significant weight should not be given to an argument that the scope of the old case law ruling determined the amount of the insurance premiums (R. Keeton, Venturing to Do Justice (1969) 42). There are many different considerations according to which insurance premiums are determined, and the extent of liability under case law is only one of them. In any case, the power of insurance companies to ‘spread the loss’ among all of its insureds reduces their reliance interest. There may, of course, be exceptional cases in which the amount of the compensation has a decisive effect on the insurance, but this is not usually the case.

Should the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter be merely prospective?

24. Against the background of all the considerations that we have discussed, I am of the opinion that there is no real reason why we should not give Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] retrospective force. It will therefore apply both retrospectively and prospectively. It will apply to every tortious act that occurred before it and after it. This is the fundamental premise and there is no reason to depart from it in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. With regard to this case, the main reason underlying my approach is that a retrospective application of Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] will not harm the reliance interest to any great degree. Potential tortfeasors and injured parties did not rely on Estate of Sharon Gavriel v. Gavriel [2], which was overruled by Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1], in determining how they would conduct themselves. Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] did not impose new obligations; it only affected the quantum of damages, and here too its effect is not significant. Moreover, the liability of the tortfeasor is usually covered by insurance. Even if the insurance company relied in some way or another on Estate of Sharon Gavriel v. Gavriel [2] in determining the premium, it is capable of absorbing the additional payments for which it will be liable under Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. In his discussion of the weight of the reliance interest in the law of torts where there is insurance, Keeton says that the need to protect the reliance interest in this situation is small, since the harm to the reliance interest of a specific insurer or a specific insured is less serious. Keeton also says that as a rule it is difficult to determine the effect of a legal doctrine on the amount of the premium (see Keeton, Venturing to Do Justice, at p. 42). In any case, no figures were brought before us to show that this approach does not apply with regard to the ‘lost years.’ The burden in this regard lies with the party that argues for a merely prospective application of the new case law.

25. Moreover, Estate of Sharon Gavriel v. Gavriel [2] has passed its time. In England, Canada, Australia and the United States the approach that was expressed in Estate of Sharon Gavriel v. Gavriel [2] has not been accepted. In several countries express statutory provisions have been enacted in this regard (see Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1], at pp. 528 {143} et seq.). It has been criticized in case law (see the opinion of Justice H. Ariel in CA 110/86 Gevaram v. Heirs of the late Shalom Manjam [24], at p. 199). Criticism was also levelled at it in Israeli professional literature (see D. Katzir, Compensation for Personal Injury (fifth edition, 2003), at p. 381; A. Porat, ‘The Law of Torts,’ Israel Law Year Book 1991, 221 (A. Rosen-Zvi, 1991), at p. 250). In the draft civil codex, the Civil Law (2004), it was proposed that it should be abandoned (see section 544). Justice Rivlin in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] pointed to ‘a change in the legal climate,’ which led to the need to change Estate of Sharon Gavriel v. Gavriel [2] (see Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1], at p. 559 {177}). A change in this climate naturally affects the actual reliance, its strength and its reasonableness. Against this background, it would appear that the weight of the reliance interest of insurers on Estate of Sharon Gavriel v. Gavriel [2] does not justify giving only prospective force to Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. In any case, we do not have any reason to assume that the financial burden that Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] is likely to impose on insurance companies falls outside the scope of the professional risks for which insurance companies should be liable.

26. In so far as the retrospective operation of Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] harms the reliance interest, we should turn to the general laws that protect this interest, in order to find a remedy in them. Therefore we should allow parties in the trial court — who filed their written pleadings before the judgment in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] — to amend them as a result of that decision. We should also allow arguments in this matter to be raised in an appeal, as long as the judgment has not become final.

27. Before we conclude this topic, we would like to point out that our approach with regard to a merely prospective change is unrelated to and does not affect those cases in which it is held that a law is unconstitutional and it is also held that the unconstitutionality will come into effect at a future date (see HCJ 6055/95 Tzemah v. Minister of Defence [25], at p. 284 {687}; HCJ 1715/97 Israel Investment Managers Association v. Minister of Finance [26]; see also Y. Mersel, ‘Suspending a Declaration of Voidance,’ 9 Mishpat uMimshal (2006) 39). In all of these cases, the declaration that the provision of statute was void acted retrospectively. All that was decided was that the declaration concerning the retrospective voidance should be suspended temporarily. We therefore adopted an approach that applied the new case law rule retrospectively, by attaching a ‘time fuse’ that postpones the time when the declaration comes into effect. The considerations underlying this approach are fundamentally different from the considerations that we have discussed in our opinion.

B. The effect of Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter on the agreement between the parties

28. The estate and the dependents made an agreement with the tortfeasors that a certain amount of compensation would be paid to end the dispute between them. This agreement was given the force of a court decision. The agreement was made and was given judicial force before judgment was given in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. Now that case has come and changed the law of compensation retrospectively. According to the new law, it is possible that the estate and the dependents are entitled to additional compensation. Against this background, the question arises as to whether the estate and the dependents are entitled to repudiate the agreement, in view of the change in case law that was caused by Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. This is the second question before us in this appeal. The answer to this question should be found in the law of mistake in contracts. Admittedly, the agreement between the parties was enshrined in a judicial decision, but the law is that for the purpose of the rescission of such an agreement on the ground that it was tainted by a mistake, we should refer to the law of contracts (see CA 2495/95 Ben-Lulu v. Atrash [27]; CA 3203/91 Azoulay v. Azoulay [28]; CA 4272/91 Barbie v. Barbie [29], at p. 699). Thus the question is whether the estate and the dependents have a claim that they were mislead into thinking that the law in their case had been determined in Estate of Sharon Gavriel v. Gavriel [2] and therefore ‘the court may... cancel the contract, if it thinks that it is just to do so’ (s. 14(b) of the Contracts (General Part) Law, 5737-1973).

29. In our opinion, the answer is no. The mistake of the estate and the dependents related to ‘the profitability of the transaction’ and such a mistake does not empower the court to cancel the contract (s. 14(d) of the Contracts (General Part) Law). Indeed, each of the parties to the agreement took upon himself the risk that in view of ‘the change in the legal climate,’ there might be a change in the law of compensation in so far as the lost years are concerned. In such circumstances, there is no ‘operative’ mistake (see Friedman, ‘Contractual Risk and Mistake and Misrepresentation with regard to Profitability,’ 14 Tel-Aviv University Law Review (Iyyunei Mishpat) 459 (1989), at pp. 466-471). This was discussed by Justice Tz.E. Tal:

‘In settlements the parties take upon themselves the risk concerning the legal position. No party can be certain that he will win the case, and even if he wins, perhaps it will not be worth his time and costs, so he therefore makes a settlement. Moreover, the party making a settlement takes upon himself the risk that the law will change retroactively, and on the basis of this knowledge he settles’ (CA 2444/90 Aroasty v. Kashi [30], at p. 527).

In the same spirit, D. Friedman and N. Cohen said:

‘It is assumed that the parties to the settlement take upon themselves the risk of new case law, including that this may change the law retroactively’ (Friedman and Cohen, Contracts (volume 2, 1997), at p. 729).

Indeed, not only the estate and the dependents, but also the tortfeasors (and the insurance company that stands behind them) cannot repudiate the contract that they made because of a retroactive change in the law of compensation. Each of the parties took upon himself the risk that the new law may increase or reduce the compensation.

The appeal is allowed. The decision of the Magistrates Court (of 29 April 2004) and the judgment of the District Court are set aside.

Justice Y. Adiel

I agree with the opinion of President A. Barak.

Vice-President Emeritus M. Cheshin

I have read the opinion of my colleague President Barak, and it seems to me like a miniature that contains everything with unbelievable detail. My colleague presents the complex subject of ‘prospectivity-retrospectivity’ clearly and straightforwardly, and this presentation makes it easier for me to present a slightly different version from my colleague’s version, even though I agree with his final conclusion.

Opening remarks

2.    My colleague says (in para. 5 of his opinion; see also para. 17) that in Israeli law ‘The fundamental premise is that a new judicial ruling acts both retrospectively and prospectively,’ and after examining and clarifying the issues on their merits, he comes to the conclusion that the new case law ruling that was determined in this matter ‘will... apply both retrospectively and prospectively. It will apply to every tortious act that occurred before it and after it. This is the fundamental premise and there is no basis for departing from it...’ (para. 24 of the opinion). With regard to these statements I would like to make two comments before I discuss the heart of the matter.

3.    First, even though my colleague speaks of a new case law rule that acts ‘both retrospectively and prospectively,’ the real interpretation is that according to his understanding the new case law acts retrospectively. After all, no one disputes that according to all approaches a new case law ruling operates prospectively. My colleague wishes therefore to establish a presumption — albeit a rebuttable presumption — that a new norm which is determined in case law and overrules a norm that preceded it is valid retroactively; that it applies almost automatically to acts that were done in the period when the old norm that was overruled prevailed. In this matter I disagree with my colleague, since in my opinion a new norm that is determined in case law will apply to events that take place after it, whereas its applicability to events in the past will be the exception. The application of a new norm will therefore be prospective, and someone who wishes to apply it retrospectively — to past cases — will have the burden of proving that it is right and proper to apply that new norm to acts that were done when the previous norm prevailed and in reliance on its existence. Moreover, as I shall explain later on in my remarks below, my opinion is that determining a sweeping retrospective rule is inconsistent with the varied character of the law, and we know that when we are dealing with the retrospective application of a norm, civil law cannot be compared to criminal law, the law of contracts cannot be compared to the law of torts, and even one area of the law of torts cannot be compared to another area of it. Each area of the law should be examined separately, and the determination of a uniform rule will not be successful.

Second — and this is the main point — when President Barak says that ‘the fundamental premise’ is that a new case law ruling acts retrospectively and prospectively, my colleague is relying on the remarks of Vice-President Miriam Ben-Porat in HCJ 221/86 Kanfi v. National Labour Court [9], at p. 480). But to the best of my knowledge, case law has not until now considered in depth the question that is now before us — the question of the ‘prospectivity-retrospectivity’ of the case law rulings of the Supreme Court — and since the panel hearing this case is an expanded panel, I think that it is not right to determine a ‘fundamental premise’ for the voyage of inquiry and interpretation on which we are embarking. If this is true as a rule, it is certainly true in view of the fact that the common law has been influenced considerably, at its roots, by Blackstone’s theory that the courts do not create law but merely reveal it. As we know, there were reasons for this theory, and these reasons are not accepted by us today. See also the penetrating remarks of Prof. Tedeschi in his article ‘Case Law for the Future,’ which was published in his book Essays in Law (1978), at p. 25 (the article is also mentioned in the remarks of Vice-President Ben-Porat, in Kanfi v. National Labour Court [9]).

My opinion is therefore that we are starting without any premise, and what we write will form a first impression.

4.    At the outset I should say that, subject to what we will write below, I agree with my colleague that jurisprudential arguments, a priori legal doctrines and constitutional arguments do not have the power to decide the matter. My colleague considered these arguments and I agree with his opinion in its entirety (see also the remarks of Benjamin Cardozo cited in para. 15 below). But the question that we are called upon to decide is not which considerations will not decide the matter but which considerations will decide the matter. My colleague is of the opinion that practical considerations should prevail, and I will address these. Notwithstanding, I will add, as we shall see below, that the concept of practical considerations assumes, self-evidently, basic principles of law, which are themselves also based, inter alia, on practical considerations.

The relevant question

5.    The question that I intend to answer is this: the Supreme Court makes a case law ruling — as in our case — on an issue that is mainly found in the field of case law, i.e., an area that has not been regulated expressly in statute. Years later the court once again considers the same issue, and after considering the issue, it overrules the original case law ruling. What is the law that applies to events that occurred between the first case law ruling and the second one, which come before the courts for a decision after the second ruling? Does the law that prevailed at the time of the event — i.e., the first case law ruling — apply, or does the law provided in the new ruling apply? We should note, and we will discuss this further in our remarks below, that we have presented the question that is troubling us on a (relatively) low level of abstraction. We are not speaking in general of a case law ruling made by the court — as to whether it merely acts prospectively or whether it also acts retrospectively — but of a ‘common law’ ruling only. Indeed, we could lower the level of abstraction and restrict our remarks to the law of torts, but for reasons that will become clear in our remarks below, we prefer to consider the question in the way that we have presented it.

Past events and retrospective norms

6.    Events in the past are different from those in the present (which immediately becomes the past) and those in the future. The past is frozen in time and cannot be changed. That is how things are in the physical world and this is how things are in the normative world. And if someone asks — what, then, is a retrospective norm? — we shall answer as follows: a retrospective norm is a norm that, once it comes into effect, means that we no longer judge the past in accordance with the norms that prevailed when the events occurred but in accordance with that norm. We discussed the past, norms that apply to the past and questions that concern these in CrimA 4912/91 Talmai v. State of Israel [31], at pp. 619-620, and this is what we said:

‘... We are unable to change the past (to the regret of some and to the relief of others). Acts that were done, were done; omissions that were committed, were committed; events that occurred, occurred; vows that were made, were made; vows that were broken, were broken. All of these are as if they froze on the spot and became stone, and what has been done cannot be undone. We are incapable of doing anything other than describing and recording things that have happened — or that have not happened — but we are unable to change them. The freedom of choice and selection remains only for the future, but as to the past the choice has already been made, and the choice and selection — as choice and selection — are no more.

This is the case in the physical world and it is also the case in the world of norms, in the world that we have created and that is the product of the human spirit. Norms that existed in the past — including principles and rules of law — cannot be changed retrospectively: what was, was, and what was not...

What then is a retrospective norm, and what is a law that acts retroactively? Do these not have the power to change the past, at least in the world of norms? … Our answer to the question is no. This is what we say: the meaning of a norm that is supposed to apply retroactively is this, that from the day on which the norm begins, and thereafter, we shall no longer judge cases from the past in accordance with the norms that originally applied to them but as that norm directs us… All norms are prospective, by their very definition; they look to the future. But some of them also look to the past with regard to their application in the future to acts or omissions in the past…’

Thus, as a premise for our deliberations, the past is like Lot’s wife, whom we cannot return to life. But this is not the case in the normative sphere: if we only wish it, we can change in the future our attitude to what happened in the past. But if this is what we want, we will need to explain why and wherefore we wish to ignore what actually happened in the past and the norms that applied at the time of the event, and to apply to the past, from now on, different norms from those that prevailed at the time of the event.

7.    Every act, every omission, every transaction and everything else that has legal significance is done, or not done, within the framework of a certain legal system at a given time and place. The moment that those things come into the world certain rights and duties are formed and created. Those things are born into a certain legal system, the legal system that surrounds them, and it also gives them a certain character, a certain ‘status.’ That system of rights and duties is born, one might say, with a certain genetic-legal character. Physically that system cannot be changed. Normatively, in the future, it can be changed, and this is within our power. In CA 6821/93 United Mizrahi Bank Ltd v. Migdal Cooperative Village [32], I mentioned the statement that Parliament in Westminster can do everything apart from turn a woman into a man and a man into a woman, and I commented on that statement (ibid. [32], at p. 527):

‘This statement is, of course, imprecise. If the author’s intention is that Parliament does not have the power to make a man a woman and a woman a man — taking the words literally — then the remarks are certainly correct. But then they have no significance whatsoever, since in the same way Parliament does not have the power to move a pencil from one side of the table to the other. Parliament — as such — does not concern itself at all with physical actions, and it does not have the power to make physical changes in the world about us directly. Parliament only concerns itself with norms and normative activity, and it is in this field that it has power and authority. If the intention of the author is therefore that Parliament is “unable” — from a normative point of view — to make a woman a man and a man a woman, it is obvious that the statement is incorrect. In the wonderful world of norms — a world that cannot be perceived by the five senses but rules our lives — the Knesset “can make” a man a woman and a woman a man. It is a separate question whether those persons to whom the norms are supposed to apply will abide by them. That question, it need not be said, falls outside our jurisdiction.’

(See also HCJ 5843/97 Bar-Gur v. Minister of Defence [33], at p. 473). I went on to say in Ganis v. Ministry of Building and Housing [16], at para. 38 of my opinion:

‘And so, in the creation of norms in the world of norms, Parliament is all-powerful. Parliament does not have — nor did it ever have — a surgeon’s scalpel that can draw blood. But it had, has and always will have a normative surgeon’s scalpel.’

Indeed —

‘From the viewpoint of the legislation, in and of itself — or we might say, from a merely normative viewpoint — there is no difficulty in this. Just one stroke of the pen, and a statute that is enacted today carries itself into the past at the whim of the legislator. Such is the act of legislation’ (ibid. [16], at para. 29 of my opinion).

And as I went on to say (ibid.):

‘Therefore a kind of dichotomy arises: reality does not allow us to change events in the past, but from a normative point of view we find legislation that seeks to take control of events in the past that were originally governed by a different law.’

8.    But as long as no change is made to a norm, the norm that prevails at the time when the event occurred is the norm according to which the event will be judged, and it will determine which rights and obligations were created and what is the reciprocal relationship between them. This is true of the law and it is also true of social customs, social ethics, human behaviour and interpersonal relationships between human beings. Every act and all conduct is judged according to its time and place. An ‘enlightened’ emperor is enlightened relative to his time and the times that preceded him. It cannot be otherwise. It would not be right to judge — favourably or unfavourably — persons in the past and acts in the past with the tools that we have today. ‘Jephtah in his generation is like Samuel in his generation’ (Babylonian Talmud, Rosh HaShana 25b [58]).

9.    Everyone agrees without exception that the legal status of acts and omissions that have legal significance should be determined, first and foremost, in accordance with the law that prevailed at the time the act or the omission was committed. This consensus is also the source of the doctrine of acquired rights. In the words of s. 22 of the Interpretation Law, 5741-1981:

Here, then, is the principle of prospectivity: a new law is valid from the date of its commencement and thereafter, and it follows from this that when a later law repeals an earlier law, the repeal does not affect rights and obligations (in the broad sense of these concepts) that came into existence by virtue of the previous law. This is, of course, ‘if there is nothing in the matter under discussion or in its context that is inconsistent’ with this provision (s. 1 of the Interpretation Law), i.e., this rule will not apply where the new law itself says that it applies retroactively (on the self-evident assumption that the retroactive application was done lawfully).

This fundamental assumption, that the operation of a statute is prima facie prospective, gives expression to our intuitive feeling and the sense of fairness that is innate in us that this is how it should be. As we said in Talmai v. State of Israel [31], at p. 621:

‘The doctrine concerning “acquired rights” is an effective tool in the law, and usually it gives legal expression to the intuitive feeling of the expert jurist and the sense of fairness innate in us; moreover, all of these are consistent with public order and public security. A contract that is made and that is binding under the law that was in force when it was made will bind the parties to it even if the law, and with it the preliminary conditions for the making of a contract, is subsequently changed (subject to public policy); a tort that was done does not cease to be a tort merely because after the act that particular tort was repealed, and vice versa: an act that did not amount to a tort when it was done will not become a tort merely because after the event the legislature decided that such an act would constitute a ground for a tort; and so on and so forth.’

This is the situation with regard to rights and obligations that have arisen from within Israeli law. It is also the case with regard to rights and obligations that have arisen from within a legal system outside Israel, where that legal system is a legal system to which the rules of private international law that prevail in Israel refer. This is the case with regard to the existence, or the non-existence, of a right or an obligation, and this is the case with regard to the scope of a right or an obligation. This is the theory of acquired rights, even though this theory is capable of making us dizzy by its circular nature (Talmai v. State of Israel [31], at p. 622). We should also add this: a recognition of rights and liabilities under the law that prevailed at the time of the act or omission is not only required by common sense and logic, but this determination, and this alone, is capable of introducing security into practical life. This is how people acquire rights and this is how obligations are imposed on them. This is how people acquire immunity, etc..

10. This, therefore, is the first rule of legislation — the rule of prospectivity. A statute has, in principle, prospective application; its purpose is to create rights and liabilities for the future. And even though it is possible to give a statute retroactive application (subject to the general restrictions of the law), someone who argues this has been done has the burden of proving it.

All of this concerns legislation. What is the position with regard to case law?

A norm determined in case law

11. A long time has passed since we abandoned Blackstone’s theory that the courts merely ‘reveal’ law and do not ‘create’ law. We do not need to look far, for this can be seen in our case: in the earlier case of Estate of Sharon Gavriel v. Gavriel [2] the court created law, and this is also what happened in the later case of Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. This is true of every judgment of the Supreme Court, especially of judgments that knowingly and intentionally determine case law rules, whether they are rules that have a larger effect or rules that have a smaller effect. Case law in a judgment, whether it is an important case law ruling or not, whether it is mainly declaratory or it is mainly constitutive, is case law that is created on the date of giving the judgment. On that date the right of the litigant is created de facto. On that day the case law rule is made. In judgments and decisions made by the court, it creates law (‘judicial legislation’) and rights, and in principle there is no reason why I should distinguish between a system in which a statute repeals a statute and a system in which case law overrules case law. Just as when a new statute repeals an old statute the new law does not — prima facie — affect rights and obligations that were created by the old statute, so too when case law overrules case law the new case law does not — prima facie — affect rights and obligations that were created by the old case law. Subject to what we shall say below, there is no difference — prima facie — between statute and case law, whether it is from the viewpoint of practicalities, the viewpoint of justice, the viewpoint of social ethics or any other viewpoint. A norm is cancelled by a later norm, and the same logic that applies in the one case should also apply in the other case.

12. As in all the literature that has been written on the subject of retrospectivity, my colleague the president also raises the element of reliance (which is a close relative of the doctrine of acquired rights) as an element that support the principle of prospectivity. I agree with his remarks, provided that we realize that we are not speaking of a specific or an individual reliance, in a particular case, but of an element of ‘constructive’ reliance. We are speaking of a phenomenon of reliance that derives from an examination of the conduct of human beings; a reliance that originates in experience that is acquired in practical life; a reliance that is based upon the ordinary person and the ordinary case. This extralegal element underwent a process of crystallization, its essence was formulated into a legal rule, and from the time it was formulated the rule prevails and we no longer need to ask the question whether, in one specific case or another, the element of reliance actually occurred. In other words, the element of ‘constructive’ reliance led to the creation of a rule in the law, and it can be said — and this is what we do say — that today we have an institutional rule according to which the application of norms in the law — whether in statute or in case law — is prospective. The meaning of this is that a new statute or a new case law ruling does not purport to affect rights and liabilities that arise and were created by the law or case law that prevailed and existed before the new statute or case law; this, of course, is subject to the exception that we may decide and determine that in the circumstances of a certain case or a certain type of case, the application of a certain norm will be retroactive, and for what period of time it will apply retroactively.

13. To summarize this far, we can say the following: rights and obligations exist by virtue of the legal system; where the court decides a certain rule, rights and obligations, within the scope of that rule, exist by virtue of that rule. The case law that was decided is the law of the state — there is no other law of the state — and everyone is supposed to act accordingly. And if at a later date the court considers the ruling and overrules it, the new case law is valid from the date on which it was decided. The new case law ruling does not, prima facie, affect rights and obligations that were created by virtue of the old law. And if someone argues that the new case law acts retrospectively and that it can change or cancel rights or liabilities that were created and exist by virtue of the old case law, the person making that argument has the burden of justifying and explaining why and how the new case law is capable of cancelling rights and liabilities that were created and exist in accordance with the old law. See also and cf. A. Barak, Judicial Discretion (1987), at para. 283, the excellent article of Dr. E. Kaplan, ‘Prospective Application of Supreme Court Precedents,’ 9 Hebrew Univ. L. Rev. (Mishpatim) 221 (1979), and her revisiting of this article: ‘Future Application of Supreme Court Precedents,’ Avner Hai Shaki Book, 4 Mozenei Mishpat (Netanya Law Review) 125 (2005). I think that Dr Kaplan and I both travel along the same route, each of us in his or her own way.

14. Hitherto I have discussed one half of the picture. The other half, which is relevant to the current case, concerns the question of the application of a norm retrospectively. In so far as we are speaking of statute, the question of its retrospective application will be decided and determined by interpreting the statute and on the basis of the assumption that the statute satisfies the constitutional tests (in our legal system — satisfies the tests of the Basic Law: Human Dignity and Liberty and the Basic Law: Freedom of Occupation). Thus, if the statute is intended by the legislature to be retrospective, i.e., to change in the future rights and obligations that were created by the law that prevailed before the statute, and this designation arises from its interpretation in accordance with the accepted rules of interpretation, then such will be the case. The question that we are asking concerns the status of new case law that overrules previous case law. Can the new case law have retrospective effect? In other words, can case law in the future retroactively change rights that were acquired and obligations that were imposed under the previous law?

15. It is plain and simple that in the absence of any statute that tells us otherwise — and there is no statute in this regard — the question of the retrospective application of case law is also a question of case law. How then should we decide the matter? At this crossroads, we shall find it difficult to draw an analogy from ‘statute repeals statute’ to ‘case law overrules case law.’ The reason for this is that there are many different considerations that lead the legislature to enact or to grant retroactive application to a statute and these include considerations that by their very nature are foreign to the way in which a court works. In the words of R.J. Traynor, in his article ‘Quo Vadis Prospective Overruling: A Question of Judicial Responsibility,’ 28 Hastings L. J. 533 (1977), at pp. 537-538:

‘… In the legislative process there is neither beginning nor end. It is an endless free-wheeling experiment, without institutional restraints, that may have rational origins and procedures and goals or that may lack them…’

The legislature therefore has a broad horizon of considerations. The court is different. Its considerations are restricted to the world of the law, and they are mainly considerations of justice, reasonableness and utility.

In his book, The Nature of the Judicial Process (Yale University Press, 1921), Benjamin N. Cardozo addressed the question whether we should distinguish — for the purpose of prospectivity-retrospectivity — between case law that changes previous case law concerning the validity of statute (from a constitutional point of view), case law that changes previous case concerning the interpretation and scope of a statute and case law that changes previous case law concerning the interpretation or scope of a common law rule. He said in this regard (ibid., at pp. 148-149):

‘… Where the line of division will some day be located, I will make no attempt to say. I feel assured, however, that its location, wherever it shall be, will be governed, not by metaphysical conceptions of the nature of judge-made law, nor by the fetich of some implacable tenet, such as that of the division of Governmental powers, but by considerations of convenience, of utility, and of the deepest sentiments of justice.’

It follows that since the considerations of a legislator in applying a statute retrospectively are different from the considerations of a court in applying case law retrospectively, we will find it difficult to draw an analogy from statute to case law.

16. The main difficulty that stands in our way in applying case law retrospectively lies in those rights that have been acquired and those expectations that have arisen as a result of the previous case law — rights and expectations in the broad sense of these concepts — which the new case law wishes to cancel or restrict. At the time of the event, the law of the state was the original case law, and now we are seeking not to apply to the event that law of the state, but rather case law that was determined later and that overruled the previous case law. We should not take this injury lightly, since it is capable of completely changing legal relationships to the point of causing an injustice. As Lord Diplock said in a lecture in 1965 on the subject of ‘The Courts as Legislators’:

‘… judge-made law… is in theory retrospective. A precedent which reverses or modifies a previous precedent is applicable to all such cases which are tried subsequently even though they arise out of acts done before the new precedent was laid down. This is unjust, and because it is unjust it is itself a factor which makes the courts more hesitant than they would otherwise be to correct previous errors or to adapt an established rule of conduct to changed conditions. And yet the rule that a new precedent applies to acts done before it was laid down is not an essential feature of the judicial process. It is a consequence of a legal fiction that the courts merely expound the law as it has always been. The time has come, I suggest, to reflect whether we should discard this fiction’ (cited in Traynor, ‘Quo Vadis Prospective Overruling: A Question of Judicial Responsibility,’ supra, at p. 535, note 7).

See also the remarks of Lord Nicholls in National Westminster Bank plc v. Spectrum Plus Ltd [51].

17. The conclusion that inevitably follows is therefore that where case law ruling A prevails and subsequently case law ruling B overrules it, we need a substantial reason of great weight in order to agree to apply case law ruling B retrospectively to an event that occurred when case law ruling A was in force, i.e., to an event that occurred after case law ruling A and before case law ruling B. When we consider that the main purpose of the court is to do justice, we will realize automatically that the substantial reason of great weight that tells us to apply the new case law retrospectively also needs to be a reason that is based entirely on considerations of justice. Because if that reason is not entirely based on considerations of justice, it will not have the strength to overcome the premise that an event that occurred when a certain case law ruling was in force ought to have its legal character determined by that case law. This is what ought to happen, and this is how we ought to act. This justice that we should seek may be an individual, specific justice, between a plaintiff and a defendant, and it may be a justice that applies to a whole branch of law. The greater the requirements of justice, the greater the retrospectivity. But we must find justice, which is the force motivating the decision to apply the case law retrospectively.

18. We said at the beginning of our remarks (in para. 4) that we would only consider in this opinion of ours the type of case that is before us, i.e., a case law ruling that overrules a case law ruling in the field of case law (the Israeli version of common law). This is what we said, and for good reason. The reason for this is that this field of ‘case law overrules case law’ extends to various branches of the law and to very different types of cases. It is so wide in the areas that it applies that it would not be right and proper to speak of an all-embracing formula that is supposed to extend to all the different kinds of case. If we find an all-embracing formula of this kind, its wording will be so general and so diluted that we will be unable to make use of it as a tool for examining and considering cases. Indeed, the less the wording is fine-tuned, the greater the erosion of the mechanisms of scrutiny and wisdom.

19. We can find an analogy to our case in the subject of the freedom of expression. Freedom of expression, as we have said elsewhere (HCJ 6126/94 Szenes v. Broadcasting Authority [34], at p. 854 {384}), is not monolithic. It protects different kinds of interests, some of which are interests of great weight and some interests of little weight, and it would not be right and proper for us to give equal protection and equal treatment to all of these interests:

‘… the freedom of expression (like the freedom of creation) is not monolithic; it is a kind of federation, a federation of rights and interests. There are historical chronicles and there are speeches; there are commentaries and there is fiction and poetry; there is political comment and there is commercial advertising, there are marches and there are demonstrations, there are plays and there are films. Each of these methods of expression reflects a certain interest, and not all the interests are the same. Thus, for example, commercial advertising will not receive — and should not receive — the same protection as historical chronicles. It follows that instead of speaking of the freedom of expression in general, we ought to select carefully from the whole gamut of freedom of speech the aspect that is relevant. We are not talking of mere labels — fiction or historical chronicles, a poem or a demonstration. We should investigate to the very roots and do our very best in order to establish the nature of the interest that seeks protection — the essence and the substantial content of the right presented before the court.’

See also HCJ 4804/94 Station Film Ltd v. Film and Play Review Board [35], at p. 689 {57}; HCJ 606/93 Advancement Promotions and Publishing (1981) Ltd v. Broadcasting Authority [36], at p. 25; CFH 7325/95 Yediot Aharonot Ltd v. Kraus [37], at p. 78. Indeed, were we to regard the interest of freedom of expression as a monolithic interest, then we would be mixing together a large number of different ingredients. For everyone will agree — even the most ardent supporters of the freedom of expression — that political comment cannot be compared to commercial advertising.

20. Our case is like the case of freedom of expression, because the issue of ‘case law overrules case law’ is not monolithic and is not made of one material only. Thus, for example, the relevant considerations in a criminal proceeding are different from the relevant considerations in a civil proceeding, and any child will realize this. It is not at all surprising, therefore, that in the article of Richard H. Fallon and Daniel J. Meltzer, ‘New Law, Non-Retroactivity, and Constitutional Remedies,’ 104 Harv. L. Rev. 1731 (1991), the authors speak separately of the question of retroactivity in criminal cases, of limited immunity in constitutional torts cases and in proceedings to impose taxes. Moreover, they discuss separately the various approaches of the Supreme Court on the question of retroactivity in criminal cases in the time of Chief Justice Warren and in the time of Chief Justice Rehnquist (for the doctrine that prevailed in the time of Chief Justice Warren, see also: M. Cheshin, ‘Further on the Reassessment by the Income Tax Commissioner,’ Tax Quarterly, 1968, at p. 3). Moreover, civil law is also not monolithic. Thus, for example, the law of contracts is different from the law of torts, and the factor of reliance — as a factor that runs through the length and breadth of the law — is of prime importance in the law of contracts, whereas it is of secondary importance in the law of torts. Possibly we may even distinguish — in the field of torts — between torts involving property damage and those involving personal injury. The same is true with regard to the question whether in the sphere of ‘case law overrules case law’ the same rule should apply in a common law matter, i.e., in a matter than is not expressly regulated in statute; in a matter of declaring a certain statute to be unconstitutional and therefore void; and in a matter that concerns the interpretation and scope of a statute. All of these cases, and others too — so Benjamin Cardozo taught us (see para. 15, supra) — will be governed by the same basic considerations: justice, utility, etc., but when a specific case is brought before us in the field of ‘case law overrules case law,’ we have the burden of investigating the nature of the matter thoroughly. And we shall decide the law only after examining the specific force of the competing interests.

21. Moreover, as we have said above, case law that has been made becomes the law of the state, and therefore it is supposed to guide people in their actions. Even if it is later held that a case law decision in the past was made in error, that case law was still the law of the state until it was overruled. The Rabbis of the Talmud have already taught us that ‘an error, once made, has effect’ (Babylonian Talmud, Bava Batra 21a [59]). The same is true of a case law ruling that is made (case law A) and that the court later decides to overrule (case law B). This is what has happened in our case; the decision in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] has overruled the decision in Estate of Sharon Gavriel v. Gavriel [2]. The question that arises concerns the interim period, namely what is the law concerning those events that took place in the interim period, between case law A and case law B, which come before the court for consideration after case law B? (Actually, the question also arises with regard to events which occurred before case law A and which come before the court for consideration after case law B). The premise for our case is that in both the first case law ruling (in our case: Estate of Sharon Gavriel v. Gavriel [2]) and in the second case law ruling (Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]) the court created law — law that applies to the parties and that has normative application for everyone.

22. In so far as the new case law ruling is supposed to apply to events that occurred after it was given, we shall encounter no difficulty. But this is not the case when we seek to apply the new case law retrospectively to the interim period between the two case law rulings. An analysis of this scenario of ‘case law overrules case law’ against the background of the recognition and consensus that both the first case law ruling and the second case law ruling created law necessarily leads us to the conclusion that when the court considers whether the second case law ruling — a ruling that creates law — should apply retrospectively, it should take into account, among the considerations that oppose this, those considerations that conflict with the inclination of applying the new law retroactively. These opposing considerations may lead us to a conclusion that the new law should not be applied retroactively — whether in general, in a class of cases or in one specific case or another — and they may also go on to create qualifications and defences, whether these are qualifications and defences with normative effect that are required by the new rights, or they are qualifications and defences that are required by the general law. After all, during the interim period the first case law prevailed, and we shall find it difficult to accept that after a period of months or years — sometimes quite a long period — the first case law will be struck down, retroactively, without any attention being given to what happened in the interim period. The most important factor for our case here is, of course, the reliance element.

23. I should add in this context, with all due caution, that it is possible to argue that reliance in the context of our case here does not only concern a situation in which someone relies on the existing law (the first case law ruling) and changes his position; reliance also concerns the normal course of events and the reasonable expectation that notice will be given in advance of a change in the law, and that the individual as a rule benefits from certainty with regard to the law. See also Prof. A. Barak, ‘Judicial Legislation,’ 13 Hebrew Univ. L. Rev. (Mishpatim) 25 (1983), at p. 73. Even if a person does not change his position specifically by relying on the existing law, retrospective application of a law is capable of confusing and undermining the confidence of the individual in the system of government. We have known for a long time that a statute requires prior notice, and a change in the proceedings for enacting a statute should also require prior notice. See United Mizrahi Bank Ltd v. Migdal Cooperative Village [32], at pp. 533-534. As we have already said in our remarks above, the main factor in the struggle between stability and change is the principle of justice and fairness — mainly distributive justice — together with the factors of proper practice and utility.

When is retrospectivity appropriate?

24. It is plain and simple that in the absence of a statute that gives us directions pointing one way or another — and there is no statute in the Israeli legal system on this subject — the question of the retrospective application of a particular case law ruling is a question that should be determined by the relevant legal system, whether normatively or on an individual basis. The question is one of determining a rule and establishing the exceptions to it: what will be the rule and what will be the exceptions? Common law, for example, never questioned the retrospective application of new case law — this was the rule that it determined — especially as a result of the doctrine outlined by Blackstone, according to which the courts do not create law but only reveal it. At the same time, the courts in England were aware of the injustice that may be caused by applying a new case law ruling retrospectively, and they sought to remedy this defect by determining a balancing formula that takes into account any exception to the rule. See, for example, para. 40 of the opinion of Lord Nicholls in National Westminster Bank plc v. Spectrum Plus Ltd [51] (which is cited in para. 16 of the opinion of my colleague, the president).

25. My colleague President Barak refers to comparative law, and in his opinion he reviews a broad selection of case law in various countries. In National Westminster Bank plc v. Spectrum Plus Ltd [51] the justices of the House of Lords also referred extensively to comparative law and the various case law rulings that have been made in various countries, and it is possible to say that over the years these have been of all types and kinds. The selection is a wide one, and anyone who wishes to rely on comparative law may choose what he wants. See, for example, P.J. Stephens, ‘The New Retroactivity Doctrine: Equality, Reliance and Stare Decisis,’ 48 Syracuse L. Rev. 1515 (1998). There is much confusion, especially in the United States, and the literature on the subject is extensive and burdensome. It is difficult to avoid the impression that the course of case law in the United States — case law that changes direction from time to time — is affected mainly by the fundamental outlooks of the justices of the United States Supreme Court with regard to the role of the court in the system of government. See also and cf. J.E. Fisch, ‘Retroactivity and Legal Change: An Equilibrium Approach,’ 110 Harv. L. Rev. 1055 (1997). As for us, true to our approach we will say that where ‘case law overrules case law,’ the second case law ruling will apply prospectively, but the court, like the legislature, may apply it retrospectively while taking into account the distribution of justice between those who benefit and those who lose out under the later case law.

26. The first question is: what is the law concerning the plaintiff who won in the later case (case law B) and brought about the overruling of the original case law? In our opinion, the question concerning the distribution of justice between a plaintiff and a defendant should be asked also in the case of this plaintiff, just as it will be asked in the case of plaintiffs who will come after him and seek to benefit from the new case law. We should, however, add that we shall have difficulty in finding a case where that plaintiff will not be found worthy to benefit from the fruits of the new case law. First it should be said — and others have already said this — that if the plaintiff in the later case does not benefit from the application of the new case law to his case, when it is the case law that he himself brought about, we shall not find plaintiffs who bring about a change in case law that ought to be changed, and the public will be the loser. Second, justice demands that the new case law will apply to the person who brought about the change, and that he will benefit from his labours. But we should emphasize that where the interest of the defendant and the public interest outweigh the interest of the plaintiff, the new case law will not apply even to the plaintiff who brought about its creation. The effect of the case law ruling will be merely prospective — i.e., the case law will apply only to events that occur after it is given — and in the language of American jurists it will be said that the case law ruling is ‘purely prospective.’ It need not be said that if the defendant has a specific defence against the right that the court is establishing for the first time, he is entitled to raise that defence in exactly the same way that defendants in the future will be entitled to raise specific defence arguments against the new right that was established in the second judgment. All of the aforesaid concerns the plaintiff who brought about the change in case law. But what is the position with regard to others whose case is identical or very similar to the case of the person who brought about the change?

27. My answer to this question is that the ‘legal burden’ lies with this other plaintiff to persuade the court that the new case law ruling should be applied retrospectively, namely that it is right to change arrangements that were in force and systems of rights-obligations that were established before the new case law, and especially that it is just — in distributing justice between a plaintiff and a defendant — to apply the new case law retrospectively. Indeed, unlike my colleague, who is of the opinion that the new case law applies retrospectively unless the court decides otherwise — I am of the opinion that case law should not apply retrospectively unless the court decides otherwise. The burden of persuading the court that a case law ruling should be applied retrospectively rests with the plaintiff.

28. In this context I would like to ask a question of the supporters of retrospective application. Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] recognized — or perhaps we should say, created — a head of damage that previously had been denied by case law, and thereby it changed the substantive law of torts with regard to personal injury. We should emphasize that we are not speaking of a change of procedure but a change in substantive law. See Dicey and Morris, The Conflict of Laws (thirteenth edition, L. Collins ed., 2000), vol. 1, rule 17, at para. 7-034 et seq.. This gives rise to the question: let us suppose that our case did not concern the creation of a head of damage but the creation of a tort, i.e., the creation of a new cause of action whose existence the court rejected in previous case law. Would we decide to apply this case law retrospectively?

What is the law in Israel?

29. Since we have, until now, spoken at length, we can now speak briefly. My colleague the president is of the opinion that restrospectivity is the rule and non-retrospectivity is the exception. In his words (at para. 17 of his opinion):

‘The fundamental premise is that a new judicial ruling applies both retrospectively and prospectively. Notwithstanding, I am of the opinion that there is nothing in principle that prevents us from recognizing the power of the Supreme Court to give its precedents merely prospective force.’

My opinion is otherwise. Unlike my colleague, who assumes — as a premise — that new case law acts retrospectively unless there is a statement to the contrary, my assumption is that new case law acts prospectively unless there is a statement to the contrary. In other words, in my opinion prospective application is the rule, whereas retrospective application is the exception. Since this is the case, the premise is that new case law has prospective application, and therefore the onus lies with the person arguing that it should have retrospective application. This is how we should address the issue.

From general principles to the specific case

30. Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1], as case law that creates law and as case law that overrules case law, applies to events that will occur after it. Everyone agrees upon this. The relevant question is whether this case law should be applied retroactively, to events that occurred when Estate of Sharon Gavriel v. Gavriel [2] was valid. It would be true to say that the question is not an easy one for us. Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] reversed the ‘lost years’ rule as held in Estate of Sharon Gavriel v. Gavriel [2], and by doing so it created an earthquake in this specific field of the law of torts. A ‘minor revolution’ took place, in the language of President Yitzhak Kahan in Estate of Sharon Gavriel v. Gavriel [2] (at p. 570). Should Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] be applied retrospectively?

The question whether Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] should be recognized as having retrospective application or only prospective application will be determined by the conflict between the competing considerations, and in this regard I was especially impressed by the moral warmth that can be seen in the judgment of the court in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] — a judgment that was written by our colleague Justice Rivlin, with the agreement of President Barak, Vice-President Or and Justices Mazza and Dorner — and from the intensity with which Justice Rivlin spoke of the right of the injured party to receive justice, namely compensation for the lost years. Let us cite several passages from the opinion of Justice Rivlin in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]:

‘The compensation for the “lost years” is… capable of remedying the unequal state of affairs that was created as a result of the tortious act. It offers a solution to the injustice that is inherent in the denial of the right of compensation to someone who is not able to realize his earning capacity, because of a reduction of his life expectancy brought about by a tort, while at the same time compensation is awarded to someone whose inability to realize his earning capacity derives from his being injured by a tort. This results in it being cheaper to kill than to wound. It should be noted that we are not concerned with punishing the tortfeasor but with balancing the scales and refraining from an unjust reduction of the compensation merely because of the fact that in addition to the harm to the injured person’s earning capacity the tortfeasor also caused him a reduction of his life expectancy’ (ibid. [1], at para. 15).

‘Money cannot replace a damaged limb, the suffering involved in loss of a place of work, and it can certainly not replace years of life that have been lost. However, this alone cannot undermine the power of the courts to award compensation, in so far as this is necessary in order to bring the injured person as close as possible to the position he would have been in, had the damage not occurred… The compensation will not prevent the suffering, but it can make the suffering bearable’ (ibid. [1], at para. 18).

‘Indeed, if compensation for the “lost years” is not awarded, the result obtained from the provisions of s. 78 of the Ordinance, in cases where the deceased does not have, when he died, a claim for compensation, is, from the viewpoint of the dependants, harsh and unjust. Take the case of a person who had a working life expectancy of twenty years, and because of a tortious act his life expectancy is reduced to only two years. The vast majority of the potential earning years, which will not be realized because of the act of the tortfeasor, will not be given any expression in the award of compensation, and the dependants, even if they inherit what he was awarded in his claim, will be left with an empty shell, unless the injured person chose — and to put such a choice before him is inconsistent with criteria of justice and logic — not to file a claim for his damage’ (ibid. [1], at para. 29).

‘… the award of compensation for the loss of earning in the “lost years” corrects — admittedly not in the full sense of the word but in important senses — the major imbalance in the external balance that was caused by the wrongful act of the tortfeasor. The injured person has been deprived, by the wrongful act, of the ability to earn income and to make use of it for his needs and for those of his family. Awarding compensation addresses the need to take this into account, and ensures that the lack of balance caused by the tort will not remain unaddressed especially in cases where the result of the tortious act is particularly serious…

… the award of compensation for the “lost years” prevents the arbitrary results according to which compensation is not awarded for the loss of earnings to an injured person whose life expectancy is shortened, while compensation on this head of damage is awarded to an injured person in a permanent vegetative state, or to the estate for pain and suffering and reduction of life expectancy, all of which without any really adequate justification for the distinction… Perhaps most importantly of all, the awarding of the compensation for the “lost years” (to the living injured person) ensures that a situation will not arise in which, although the dependants have been deprived by the tortious act of the support of the injured person — support that they would have received had it not been for that act — this damage will remain unremedied’ (ibid. [1], at para. 70).

If justice is on the side of the plaintiff — or perhaps we should say, on the side of the injured person or his dependents — then justice appeared in its full glory in the opinion of Justice Rivlin in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1]. This justice, warm human justice, has great weight — maybe even decisive weight — when determining the question of retrospectivity. I have also taken into account the fact that our case concerns differences of opinion between an insurance company and a worker who was killed in the course of his employment, and the plaintiffs are the dependents of the deceased and his estate. In the distribution of justice between these two parties, who are not of equal force, and in view of the ability of the insurance company to spread the damage, the scales tip in favour of the injured person and those dependent upon him. There was a time — a long time ago — when counsel for a plaintiff was not allowed to mention — especially before a jury — that the defendant was insured and that the damages would be paid by the insurance company and not by the defendant personally. That time has passed, and we are in the present.

31. In summary, I agree with the conclusion of my colleague the president that the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] should be applied retrospectively, subject only to specific arguments — including arguments of reliance and other arguments — that defendants may raise in proceedings against them.

The agreement between the parties and the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter

32. On the basis of the assumption that Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] applies to their case — and this is indeed what we are deciding — the defendants raise a defence argument that relies on an agreement that was made between them and the plaintiffs and that was given the force of a court decision. The rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] was made on 15 March 2004, but a short time before that the parties made a settlement according to which the defendants would pay the plaintiffs a sum of NIS 100,000 in settlement of the claim. On 22 February 2004 — approximately three weeks before the rule was made in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] — this agreement was given the force of a court decision. The question is therefore whether this agreement, which was given the force of a court decision, stands in the way of the plaintiffs and denies them their (retrospective) right. My colleague, President Barak, is of the opinion that the agreement is a barrier to the plaintiffs’ claim, and I agree with his conclusion. But my method is different from his method.

33. In my colleague’s opinion, the question should be decided in accordance with the provisions of s. 14(b) of the Contracts (General Part) Law, 5733-1973, which provide and tell us the following:

This provision of statute concerns a ‘mistake,’ and the relevant question is whether the plaintiffs did indeed fall victim to an operative ‘mistake’ when they signed the settlement. Personally, I find it difficult to see any ‘mistake’ to which the plaintiffs allegedly fell victim.

34. There is no doubt that when it was made the agreement was not tainted by any mistake. But the case law rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1], as my colleague says, should be regarded as case law that changed the law of compensation retroactively — in our case, at least to the date of making the agreement — and if this is so, the plaintiffs should be regarded as having fallen victim to a mistake when they made the agreement: the plaintiffs thought that the rule in Estate of Sharon Gavriel v. Gavriel [2] applied to them, whereas it was in fact the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] that applied to the case (as we found out shortly afterwards). I do not accept this line of reasoning. The mistake of which s. 14(b) of the Contracts (General Part) Law speaks is a mistake that is contemporaneous with the time of making the agreement. In other words, the concept of ‘mistake’ in a contract, by its very nature, applies on the date of making the contract. We do not find any mistake of this kind. And if it is argued that the retroactive application of the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] made an agreement that was originally untainted by any mistake (‘in real time,’ as the saying goes) into an agreement that is supposedly tainted by a mistake, it seems to me that we are stretching the concept of ‘mistake’ to the point of bursting, such that its whole content will be spilled. See LCA 6339/97 Roker v. Salomon [38], at p. 253. In a paraphrase of remarks that were written in Roker v. Salomon [38], at p. 254, we can say the following: the concept of mistake is built on the essence of ‘mistake,’ and around that essence there are events and cases that are attracted to its centre of gravity. The essential meaning is what will determine the scope of the concept. The D.N.A. is what will decide it. Introducing an objective element into this concept of mistake will completely undermine the arrangements (see and cf. D. Friedman and N. Cohen, Contracts (vol. 2), at p. 727, para. 14.57).

35. With regard to the present case, we shall say this: there is no doubt that the plaintiffs did not make a ‘mistake’ when the agreement was made — in the fundamental and accepted meaning of the concept of ‘mistake’ — and I have not found any justification for imputing any mistake to them after the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] came into existence, by distorting the language. This is the case even if we adopt the retrospective perspective. But according to our approach, there was certainly no mistake in the agreement, since the retroactive force of the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] was given to it by the court, and not automatically by the general law. And if there was no mistake in the agreement, there is therefore no basis for applying the provisions of s. 14(b) of the Contracts (General Part) Law.

36. I think that the remarks of Justice Tzvi Tal in Aroasty v. Kashi [30] are in agreement with our remarks. At pages 522 et seq. of the judgment, Justice Tal addresses the question of the retrospective application of case law that interprets a law and the issue of a ‘mistake of law’ as a defect in a contract (according to the provisions of s. 14(d) of the Contracts (General Part) Law)), and in his summary of the matter he determines (at p. 524) that ‘a later interpretation of a “statute,” which changes its meaning from what a party to a contract originally thought, cannot be considered a “mistake of law”.’ Later on (at p. 525) Justice Tal goes on to say that —

‘It is difficult to entertain the idea that it is possible to open a matter that has been concluded, such as a contract that has already been performed, with a claim that one of the parties made a mistake of law, as a result of new case law, maybe years later, that changed the previous law.’

37. I should also point out that had the element of mistake existed in the settlement in our case — and in my opinion, as aforesaid, the agreement was not tainted by any mistake — I would have been disposed to consider seriously the plaintiffs’ application — an application based on the provisions of s. 14(b) of the Contracts (General Part) Law — to cancel the settlement ‘for reasons of justice.’ Indeed, were we to agree that the agreement was tainted by a mistake, then the question would have arisen as to whether the plaintiffs’ mistake was an operative mistake, i.e., a mistake that makes a contract defective, or whether it was only a mistake in the ‘profitability of the transaction’ (in accordance with s. 14(d) of the Contracts (General Part) Law, and in such a case there would be no grounds for cancellation of the contract. My colleague the president is of the opinion that the mistake in our case was a mistake in the ‘profitability of the transaction,’ and I find this conclusion problematic.

38. The parties before us made a settlement between themselves, and we agree of course — how could we do otherwise? — that a settlement tells us that the two parties to the settlement made reciprocal concessions with regard to the chance of being entitled to more than what the settlement gave them, something that is commonly known as ‘risk management.’ See D. Friedman, ‘Contractual Risk and Mistake and Misrepresentation with regard to Profitability,’ 14 Tel-Aviv University Law Review (Iyyunei Mishpat) 459 (1989), at p. 469; Friedman and Cohen, Contracts, supra, at p. 736; HCJ 57/67 Gross v. Income Tax Commissioner [39], at pp. 559-560 (per Justice Silberg). The question is simply what chance did the parties to the settlement give up and what risk did they take upon themselves? This question also contains the answer to the question: what is a ‘mistake in profitability?’ We accept the definition of Friedman and Cohen that ‘a mistake in profitability… is a mistake with regard to a risk that the party took upon himself, whether expressly or according to the correct interpretation of the contract or in view of the understanding that we have of contracts of this kind’ (Friedman, ‘Contractual Risk and Mistake and Misrepresentation with regard to Profitability,’ supra, at p. 466; Friedman and Cohen, Contracts, supra, at p. 727). With regard to this risk that a party ‘took upon himself,’ Friedman goes on to tell us (ibid.) that:

‘… We do not necessarily mean that the party took this risk upon himself willingly and knowingly. Sometimes this is indeed the case, but in other cases the law attributes to him the taking of the risk under discussion. In other words, in view of the approach that we have to the nature of contracts and in view of our understanding of the ordinary risks involved therein, we assume (unless it is determined otherwise) that a party took on a certain risk even if he was not actually aware of this.’

The question in a settlement is, therefore, which fact, legal rule or possible development in the future was in dispute between the parties (Friedman and Cohen, Contracts, at p. 736). A settlement is an act of risk management, but ‘the question is always what was the risk that was minimized and what were the assumptions underlying that settlement’ (Friedman, ‘Contractual Risk and Mistake and Misrepresentation with regard to Profitability,’ supra, at p. 470). Thus, a mistake is a mistake in the ‘profitability of the transaction’ — it is not an operative mistake — if it falls within the scope of the risk that each party took upon itself. By contrast, a mistake that falls outside the scope of the risk will not be a mistake in the ‘profitability of the transaction.’ In the language of Friedman (ibid., at p. 466):

‘… There is no basis for the claim of mistake with regard to a risk that a party took upon himself within the framework of a contract (it is possible, if one wishes, to call this mistake a “mistake of profitability”), but there is a basis for a claim of mistake with regard to a matter that was not included within the scope of the risk that the party took upon himself.’

And as Friedman and Cohen say on the subject of settlements (Contracts, at p. 737):

‘… Where a settlement is based upon a fundamental mistake, on a point that was not in dispute and with regard to which the parties did not compromise, the settlement may, like any other agreement, be rescinded provided that the conditions for this are satisfied. Even if the settlement was given the force of a judgment, the settlement and the judgment that is based on it may be cancelled because of a mistake… A settlement is admittedly a case of risk management, but the question is always what is the risk that was minimized and what were the basic assumptions that served as a basis for that settlement.’

39. In our case we can say that when the settlement was made — in ‘real time’ — the question of the ‘lost years’ was far removed from the areas of risk that the parties took upon themselves or from the hopes that the parties entertained. Indeed, like in any settlement of a pecuniary nature, the parties settled with regard to the amount of the compensation that the employer should pay the worker, but the question of the ‘lost years,’ as a question in itself, was very remote from their thinking. We should assume — this is what any reasonable understanding tells us — that when calculating the compensation the parties were mindful of the rule in Estate of Sharon Gavriel v. Gavriel [2], and they made this case law ruling the basis for the negotiations between them.

But now the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] has appeared. The rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] is not merely ‘another rule’ in the law of compensation. This is not an ordinary rule, a rule of the kind that we encounter every day. This is a rule that brought into the world a new head of compensation. It is a creation ex nihilo, or perhaps we should say, a creation ex negativo. It is like a case law ruling that creates a new cause of action in torts that never existed when the settlement was made (and what is more — a cause of action whose existence was expressly rejected in case law). This is expressed in the remarks of Justice Rivlin in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1], when he said (in para. 70 of his opinion) that following the rule in Estate of Sharon Gavriel v. Gavriel [2], as the years passed, we expected that legislation would change the case law ruling, but we waited in vain and the legislature failed to step forward and enact legislation. Indeed, in our opinion Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] did cause a minor revolution in the field of the law of compensation in torts. Had Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] been the prevailing case law at the time the settlement was made, then if they had assumed that Estate of Sharon Gavriel v. Gavriel [2] was actually the prevailing case law the parties to the settlement would have made an operative mistake. Their mistake would not merely have been a mistake in ‘the profitability of the transaction,’ since the question of the ‘lost years’ would have been beyond the scope of the concessions that were made and the reciprocal risks that the parties took upon themselves. The plaintiffs did not take into account in their considerations the possibility that the decision in Estate of Sharon Gavriel v. Gavriel [2] would be overruled. In the settlement they did not ‘waive’ the possibility of a change in the law, and it is not just that we should attribute to them a waiver of a chance that the law would be changed.

40. As we have said in our remarks above, Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] is, in our opinion, like a case law ruling that created a new cause of action, and, what is more, a cause of action whose existence was rejected in the past. Just as in the latter case — had it occurred — the question of the existence of that cause of action would have fallen, so it may be assumed in the ordinary case, outside the scope of the risks and chances, so too in our case. Thus, the principle of justice that led us to apply the decision in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] retrospectively is the very same principle of justice that tells us to recognize a ‘mistake’ — in so far as there was one — as an operative mistake, as a mistake that is not merely ‘a mistake of profitability,’ as a mistake that undermines a transaction and cancels a settlement. But in our opinion, as aforesaid, there was no mistake in the settlement. The doctrine of ‘mistake’ is too limited to include a set of facts that did not include a real mistake in ‘real time,’ and for this reason I agree, albeit with some regret, with the conclusion of my colleague the president that the settlement brought an end to the claim of the plaintiffs, who are the respondents before us.

Summary

41. I agree that the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] ought, in principle, to apply retrospectively, but it is subject to defence arguments that a defendant may raise in the specific circumstances of his case. As I said at the beginning of my opinion, I agree with my colleague the president that the appeal should be allowed and the judgment of the trial court should be set aside.

Justice E. Rivlin

I have read the illuminating opinions of both my colleague President A. Barak and my colleague Vice-President M. Cheshin. I agree with the result that my colleagues have reached that the appeal should be allowed and the judgment of the trial court should be set aside. With regard to the fundamental disagreements between my colleagues, which concern the method of reaching the result, my opinion is in accordance with the opinion of the president, for his reasons.

Justice A. Grunis

I agree with the opinion of my colleague, President A. Barak.

Justice D. Beinisch

My colleagues, President Barak and Vice-President Cheshin, have spoken extensively on the question of the temporal application of new case law and in their opinions the question of prospectivity and retrospectivity has been presented in all its multi-faceted complexity. I agree with their opinion concerning the result, according to which the appeal should be allowed and the judgment of the trial court should be set aside. With regard to the fundamental dispute I will add only a few words with regard to my position.

There is no dispute between my colleagues that the application of new case law can be retrospective. The vice-president is of course correct when he says that the real and only question is the question of the retrospective application of new case law, since there is always prospective application. My colleagues also agree that the application of legislation of the Knesset, which is usually prospective unless it contains a statement to the contrary, cannot be compared to the application of case law, which is the ‘common law’ in our legal system. The disagreement revolves around the question of what is the fundamental premise: what is the rule and what is the exception?

In this disagreement, I agree with the opinion of President Barak that ‘The fundamental premise is that a new judicial ruling acts both retrospectively and prospectively.’ The different approaches were presented by my colleagues, as aforesaid, comprehensively and fluently and to attempt to add to them would be merely to detract. In his opinion, the president defined the ‘practical consideration’ as the decisive consideration for his conclusion and he gave his reasons for this. Indeed, in my opinion too the practical consideration outweighs the other considerations and touches upon the heart of the judicial role and the essence of judicial creation.

Let us mention once again the consensus in our legal system that the Supreme Court does not lightly depart from its precedents. New case law is created against a background of new circumstances, and as a rule these are not commonplace in our judicial work. New case law is made when the court is persuaded that the previous case law was erroneous or when its time has passed because circumstances have changed. The need for new case law arises when the law needs to be brought in line with reality, whether this is social reality, practical reality or legal reality. Only then is case law likely to change and thereby develop the law.

A change in case law requires a balancing of the existing position and the extent to which it corresponds with reality against the extent of the harm to legal stability and its consequences. When the judge reaches the point of decision and comes to the conclusion that the legal reality should be changed, from that point onward he will have great difficulty in making a decision that only has prospective application. In the course of applying the law on a daily basis, it will be a very complex if not impossibly difficult task to continue to make judicial decisions that are based on the case law ruling that has been overruled, or to contend with the need to examine the validity of the new case law ruling on a case by case basis. This difficulty is resolved when the rule is that new case law will apply retrospectively.

This conclusion does not ignore all the situations and difficulties that may arise. It does not ignore the existence of circumstances in which decisive weight should be given to the need to respect rights and obligations that were crystallized in the past and to refrain from a serious injury to protected interests. The aforesaid conclusion does not require us to ignore differences between different branches of public and private law that may justify special treatment, as Vice-President Cheshin has said in his opinion. The approach that recognizes the retrospectivity of new case law as a rule determines a fundamental position but it does not compel us to ignore exceptional circumstances in which new case law should not be applied retrospectively because of the extent of the injury to acquired rights or a protected reliance interest. The decision when to restrict new case law and to give it prospective application only, or suspended retrospectivity, is a decision that depends upon the circumstances and the context. The proper balancing point in each specific case will usually be decided from the viewpoint of and in accordance with the new case law, and restrictions will also determined on the basis of the new case law. Cases in which we are required to limit the application of the case law and to make it merely prospective will be examined by means of legal doctrines that run the length and the breadth of the legal system and through all of its branches, and this was discussed by President Barak when he presented a non-exhaustive list of possible solutions in difficult cases.

By way of generalization it is therefore possible to say that when the court has crossed the ‘stability barrier’ presented by existing case law and sees a need to make a new case law ruling that is appropriate to the time and the social and normative reality that prevails when it is made, there is a need for consistency in deciding cases in accordance with case law as it stands at the time of giving judgment, while adapting it to the specific solutions that are provided in exceptional cases, in order to prevent damage and harm that are disproportionate according to the fundamental principles of the legal system.

I therefore agree with the opinion of President Barak.

Justice M. Naor

1.    In my opinion, in the circumstances of the case before us there is a settlement between the plaintiffs and the defendants, and this was given the force of a judgment on 22 February 2004 (although this judgment was called a ‘decision’). The proceeding between the plaintiffs and the defendants therefore ended before the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] was made. This is sufficient in order to determine that there was no basis for allowing the plaintiffs to repudiate their consent to the settlement in these circumstances (see Ben-Lulu v. Atrash [27]; HCJ 4157/98 Tzevet, Association of Retired IDF Servicemen v. Minister of Finance [40], at pp. 790-791; CA 8972/00 Schlesinger v. Phoenix Insurance Company Ltd [41], at p. 843). Therefore, because of the principle of finality, the question of the retroactive application of new case law does not arise at all in this case, just as it does not arise with regard to other cases that already ended in a settlement or a final judgment before the decision in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] was made.

2.    The question of the retroactive application of judgments that change case law in general, and the judgment in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] in particular, is an important question. The disagreement of opinion between my colleague President Barak and my colleague Vice-President Cheshin is ultimately a question of what is the rule and what is the exception. Neither my colleague the president nor my colleague the vice-president recommend making an absolute rule that allows no exceptions (cf. the judgment given very recently with an expanded panel in CA 1761/02 Antiquities Authority v. Station Enterprises Ltd [42]). Since in my opinion a discussion of this issue is not required for the decision in this case, I shall limit myself to addressing the question of the retrospective or prospective application only with regard to the decision in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1].

3.    In this matter, I am of the opinion, like all my colleagues, that the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] should be applied retroactively to cases that are pending in the judicial system. The decision in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] did not come into the world from nowhere and its spirit hovered over legal proceedings for a long time before it was made. Many parties sought to amend statements of claim and to argue that they are entitled to compensation for the lost years before the decision in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] was made. Many cases, in all the courts, waited for the litigation in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] to end, and it is not right that the Ettinger estate should be the only one that benefits from the change in case law. Moreover, as my colleague Vice-President Cheshin said, the rule in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] is of great force, and it was very just that my colleague Justice Rivlin called in his opinion in Estate of Ettinger v. Company for the Reconstruction and Development of the Jewish Quarter [1] for compensation to be awarded for the ‘lost years.’

4.    I therefore agree that the appeal should be allowed, the judgments of the Magistrates Court and the District Court should be set aside, and the judgment (called a ‘decision’) of 22 February 2004 should be reinstated.