The requirement to act in good faith during negotiations leading up to a contract, and not to conduct oneself with the intention of defrauding the other party, is one of the most basic tenets of contract law in Israel and in many other jurisdictions, but at the same time is complex and not easy to implement. The tension between this principle and the principle of freedom of contracts, which is intended to grant freedom of action to different bodies and persons of varying status and with different interests, is self-evident. Indeed, until the Contracts Law (General Part) came into force in Israel in 1973, the leading approach was the English approach which gave a higher status to the principle of freedom of contracts. Thus, the Contracts Law (General Part) 5733-1973 states in section 12:
(a) In negotiations leading up to the conclusion of a contract, a person must act in an acceptable manner and in good faith.
The sanctions for conduct in bad faith are severe, and include obligations for compensation for pecuniary and non-pecuniary damage (Contracts Law (General Part) 5733§12(b), Contracts Law (Remedies for Breach of Contract), 5731-1971§10, 13, 14).
But what is the actual obligation? What is actually required of the negotiating party to disclose to the other party, against its direct interest, in order not to abide by the law and not risk paying significant compensation to the other party, when things are discovered, before or after signing the contract?
A lot of opinions on this subject have been put forward and there is no unequivocal answer for example: Benjamin Porat “Good Faith: A Comparative Conceptual Review” Mishpatim (2016)). It is clear that the parties are required not to lie and misrepresent to actually deceive the other side but there is a big gap between blatant lies and the need to “reveal cards” that may impact the nature and price of the transaction. Some court rulings have not clarified the matter: “The parties to the contracts are not angels to each other, but again they must not be wolves to each other” (59/80 HCJ Beer-Sheva Public Transportation Services Ltd. v. The National Labor Courtin Jerusalem, Piskei Din 33 (1) 828 (1980)).
We can however, learn to distinguish the boundaries of the “good faith” principle from court rulings in different situations, where the court has identified a violation of the principle of good faith. One of them, for example, is the ruling that telling a half-truth is like a lie. If, in response to a question about the financial condition of a party to the contract, an answer is given about the existence of a loan given to a third party, without specifying that a third party is bankrupt – this is a misrepresentation, which constitutes conduct in bad faith. If a contractor sold a store in a building in which he built in partnership with another contractor, and undertook to the buyer that no competing business would be established in the building, while committing only to the part he is going to receive in the building (when the second contractor is free to sell a store to a competing business in his own share) – it was ruled that this is a “half-truth”, and compensation was awarded to the buyer (Daniel Friedman and Nili Cohen, Contract Law 683 (Vol. 1, 2nd edition, 2018)).
The bottom line is that despite the fact that almost 50 years have passed since the enactment of the Contracts Law (General Part), the parameters of the principle of good faith remain unclear enough for an untrained eye, and a sharp and experienced eye is required to discern the limits that can be defended in court if and when such a requirement arises.
