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Planning & Construction Law Client Update 

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January 5 2017

New Precedent Prohibits Planning & Construction Committees to Demand Letters of Indemnity from Entrepreneurs

A new judgment handed down by the Supreme Court has changed the legal standing of a custom according to which entrepreneurs were required to provide planning & construction committees with letters of indemnity with respect to future claims for compensation which may be brought against such committees, as a condition to the approval of a plan by them.  About ten years ago, the National Planning and Construction Committee decided that a condition to the grant of approval to a plan for change of use to residential use, which plan had been filed by the appellant in the case (Bickel Flowers Ltd), would be the issue of a letter of indemnity by the entrepreneur for the benefit of the local committee. By terms of the letter of indemnity, the entrepreneur undertook to indemnify the committee in respect of claims for compensation which might be filed by nearby landowners who suffer damage, pursuant to Section 197 of the Planning & Construction Law.   Some 57 claims were filed against the committee pursuant to Section 197 of the Planning & Construction Law with respect to the said plan, these claims totaled some approximately NIS 27 million.

The Administrative Court had decided that the letter of indemnity which the local committee had prepared for the entrepreneur included some draconian and unacceptable conditions.  This Court had decided that while the local committee was entitled to demand a letter of indemnity to cover the costs of the planning, this should be done in good faith.  In an additional proceeding, the District Court had found that such custom of issuing letters of indemnity was common throughout planning & construction committees within the framework of the contractual relationship between them and the entrepreneurs, and that it was entitled to recognition in case law.  The appellant before the Supreme Court – Bickel Flowers – argued that the demands of the committee were unacceptable since they had no origin in law.

In his judgement His Honor Mr. Justice Danziger of the Supreme Court examined the considerations for and against the practice of issuing letters of indemnity.  As part of this examination, he referred to the suspicion that the committees would make wrongful use of these letters, and would blackmail the entrepreneurs to agree to grant indemnities by threatening to delay projects.   From here the Supreme Court proceeded to discuss the principle of the legality of this practice and commented that there is no direct recognition of this said custom in case law.  Rather at most there are obiter dicta which did not directly address its legality.

Accordingly, the Supreme Court decided that the practice whereby the approval of a plan is conditional upon the grant of a letter of indemnity by the entrepreneur, was carried out without authority since it contradicts the principle of administrative legality as well as the Basic Law: the State Economy, which provide that obligatory payments will be imposed on individuals only pursuant to law.  An agreement to issue such a letter of indemnity is not required by the Planning & Construction law.  Therefore, the local committee must compensate those injured from the plan under an absolute obligation imposed on it [the committee] which cannot be conditioned, for example by seeking to transfer the obligation to pay the compensation to the entrepreneurs. 

This judgment has raised a storm in the local authorities and the uncertainty now surrounding the progress of plans which were conditioned upon the issue of letters of indemnity. It is important to emphasize that the judgment brings about a substantial change to the legal situation which existed before it was handed down concerning the legality of the demand for the grant of letters of indemnity in these cases and so the judgment constitutes a new precedent in this respect.   This is because, until this judgment was handed down, the courts' approach to the practice of requiring letters of indemnity evidenced its acceptance and approval of this practice, at least implicitly if not directly. However, now in the Bickel Flowers case His Honor Mr. Justice Danziger has explicitly decided that the demand for these letters of indemnity is not lawful.
 
Reference: CA 5958/15 Bickel Flowers Ltd v The Local Planning & Construction Committee Rishon Lezion (judgment of His Honor, Mr. Justice Danziger, 15.12.2016)
Disclaimer: This Newsletter is intended only to provide general updates to clients and for no other purpose. Nothing in this Newsletter constitutes any opinion or advice on the subject matter dealt with therein. For any advice or opinion, clients are advised to approach the relevant lawyer at Naschitz, Brandes Amir & Co.

Contact Us:

Shira Ozik
Adv. Shira Ozik
tel: 972-3-6235074
email: sozik@nblaw.com
Shmuel Lechner
Adv. Shmuel Lechner
tel: 972-3-6235076
email: slechner@nblaw.com
Edited & Written by Dr. Sharon Yadin, Adv.
English version by Adv. Helen Raziel