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On Linkage and Revaluation

Published online by Cambridge University Press:  12 February 2016

Israel Gilad
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Extract

The breach of contract or commission of a civil wrong gives rise to a right of the injured party to compensation for damage caused by the violation of his right. In principle, the amount of money to be received as compensation is determined in two stages: the first stage is the establishment of the real scope of the compensable damage, i.e. the definition of the loss or detriment with respect to which the victim is entitled to compensation; the second stage is the monetary assessment of the compensable damage—translating the loss or detriment into monetary units which will reflect the financial value of such loss or damage. The whole process is governed by the higher principle of restitutio in integrum, i.e. restoring the victim to his former position, which in the field of tort law means restoration of the victim to his position prior to the commission of the tort, and, in the field of contracts, means bringing him to the situation in which he would have been had the agreement been honoured.

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Articles
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Israel Law Review , Volume 15 , Issue 1 , January 1980 , pp. 79 - 105
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Copyright © Cambridge University Press and The Faculty of Law, The Hebrew University of Jerusalem 1980

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References

1 In addition to enforcement of the right, or as alternative relief.

2 It should be noted that we do not make separate reference to cases in which the right violated is defined, from the outset, in monetary terms (e.g. liquidated debts), for in those cases there is also need for the second stage. This point will be elucidated later.

3 Sec. 76(1 )of the Civil Wrongs Ordinance (New Version) states: “Where the plaintiff has suffered damages, compensation shall only be awarded in respect of such damage as would naturally arise in the usual course of things, and which directly arose from the defendant's civil wrong”.

Sec. 10 of the Contracts (Remedies for Breach of Contract) Law, 1971 (henceforth: the Remedies Law) states: “The injured party is entitled to compensation for the damage caused to him by the breach and its consequences and which the person in breach foresaw or should have forseen, at the time the contract was made, as a probable consequence of the breach”.

4 Yardenia Ltd. v. Ofer Bros. Ltd. et al. (1976) (I) 30 P.D. 31, 35 (henceforth: Yardenia), and also Tedeschi, G., “On the Date for Assessing Damage” (1978) 13 Is.L.R. 10.Google Scholar

5 E.g. (a) A debt that must be paid in foreign currency will be repaid according to the rate of exchange on the day of the Court's decision (Rivlin et al. v. Valis (1960) 12 P.D. 85).

(b) In the case of conversion and unlawful detention of an article, if the article that was the object of the tort rose in value, it should then be assessed at the time of the Court's decision (Goldkorn v. Wissotsky (1954) 8 P.D. 262; Shafir v. Shafir (1970) (II) 24 P.D. 453, 457);

(c) the determination of loss of earnings, for the purpose of assessing the losses of the dependents, according to the level of earnings on the day of the decision (Attiah v. Rosenbaum (1954) 8 P.D. 1135, 1145).

(d) The damage suffered by a person who lends out an article that was not returned on time will be assessed according to the value of the article on the day of the decision (Koor Gavish Ltd. v. Pettigrew (1952) 6 P.D. 1370, 1373).

6 Jerusalem Development Co. Ltd. v. Attorney General (1959) 13 P.D. 819, 827. The accepted view is that the nominalist principle applies to liquidated debts, i.e. debts which are defined in monetary terms, but not to unliquidated debts.(The above citation also referred to “a monetary debt of a liquidated sum”.) For this reason, the view has recently been aired that the nominalist principle has no place in the law of torts, for debts arising from a tortious act are clear examples of unliquidated debts (Horowitz v. Ports Authority of Israel (1978) (II) 32 P.D. 256, 265–66—henceforth: Horowitz). We disagree with this conclusion. It is true that the debt arising from a civil wrong is, at the first instance, an unliquidated debt. However, when the damage has been assessed and is expressed in monetary terms, the debt in torts, also becomes a liquidated one. From the moment that the damage is assessed, the debt becomes subject to the nominalist principle, like any other debt that is liquidated. On the application of the nominalist principle in the law of torts see United Tours Co. Ltd. v. Til Tours Ltd. (1978) (I) 32 P.D. 387, 389–90. For the same reason, the nominalist principle applies to contractual damages, which were not in the first instance defined in monetary terms, from the moment that these debts assume a monetary form.

7 On the relationship between the price level, purshasing power and the principle of restitutio in integrum, see p. 99, infra.

8 As specified in the Adjudication of Interest Law, 1961 (henceforth: the Interest Law). See infra n. 14.

9 E.g. sec. 11(b) of the Remedies Law: “Where an obligation to pay a sum of money has been broken, the injured party shall, without proof of damage, be entitled to compensation in the amount of the interest on the sum in arrears from the date of breach to the date of payment…”

10 In this way, the rates of adjudicated interest were raised from 11% to 15% (from May, 1973); from 15% to 22% (from January 1975); from 22% to 26% (from February, 1977) from 26% to 30% (from December, 1978); and from 30% to 72% (from February, 1980).

11 Ports Authority v. Ararat Ltd. (1977) (I) 31 P.D. 533 (henceforth: Ararat).

12 The content and scope of these rules will be discussed later, on pp. 83–86 infra.

13 Adjudication of Interest (Amendment No. 3) Law, 1978. For English text of the Law, see (1979) 14 Is.L.R. 521.

14 Below appear the relevant provisions of the Adjudication of Interest and Linkage Law (“linkage” was added to the title of the Law in the above amendment):

“2. A judicial authority which awards a sum of money to a party, or which orders the enforcement of such an award or which fixes a sum of money due under any enactment may, at its discretion, award interest on the whole or a part of the sum.

5(a) The period of interest shall be in the case of an award under section 2, from the date of submission of the claim, or from such other day, beginning with the day on which the cause of action arose, as the judicial authority may decide, to the day of payment…

3 A (a) Instead of awarding interest, a judicial authority may, at its discretion, award linkage differentials or linkage differentials and interest, fully or in part”. The following should be noted: (a) The index on which the adjudication of linkage differentials is based is the Consumer Price Index (henceforth: CPI) published every month by the Central Bureau of Statistics, (b) Interest on the linkage differentials is at the rate of 3%. (c) Something similar was applied to court costs and legal expenses. Further on the system of linkage, see p. 87 infra.

15 The use of the term “revaluation” in this context is not precise, for we are not concerned with a second assessment based on the first, but with one assessment made after the day of breach. Nevertheless, we shall continue to use this commonly accepted term in the sense of a deferred assessment.

16 Yardenia at 36.

17 Assessment in Israeli pounds of damage which crystallized in terms of foreign currency will be carried out at the Execution Office according to the exchange rate on the day of payment, Yardenia at 38.

18 In Ariel v. Kirshenbaum (1977) (III) 31 P.D. 102, 106, the Court said that the date of assessment of damage arising from breach of a contract for the sale of land “can change according to the circumstances of every case, and an artificial date that will not allow for correct assessment of the damage that was caused should not be chosen.”

19 Yardenia at 39.

20 Ararat at 536, 546, 552.

21 Ararat at 538, 552. Further details and analysis of this ruling will appear on p. 85 infra.

22 Ararat at 549, 551.

23 Ararat at 546. This is an additional exception to those mentioned in n. 5, supra.

24 Ararat at 542.

25 Ibid.

26 Ararat at 542–546, 551.

27 Haifa Municipality v. Rosen (1979) (I) 33 P.D. 175, 183; Ronen v. Khion (1978) (II) 32 P.D. 3, 8; Ariel v. Kirshenbaum op. cit. supra n. 18, at 106.

28 Chaimi v. Ashter (1977) (II) 31 P.D. 589, 595.

29 Sec. 76(1) of the Civil Wrongs Ordinance, quoted in supra n 3.

30 Horowitz at 263.

31 Supra n. 21.

32 Although this is an extension as opposed to the restrictive approach which limited this system to moveable property alone.

33 Sec. 10 of the Remedies Law quoted in supra n. 10.

34 Infra pp. 80–81.

35 Supra n. 6.

36 An example of the resultant distortion is the situation in which the Court was requested to enforce a contract for the acquisition of land when the consideration, that was fixed nominally at the time, no longer reflected the market price of the land owing to inflation. Adhering to the nominalist principle, the Court refused to revalue the land (Hadar Automobiles v. Siman Tov (1975) (I) 29 P.D. 561). Only recently has the Court seen fit to revalue in such a case, basing itself on the special provision in the Remedies Law authorizing it to make enforcement of the contract contingent on the conditions implied by the contract according to the circumstances of the case (Rabbinai v. Man Shaked Co. (1978) (II) 32 P.D. 281). As for debts which were fixed by the parties in nominal terms from the outset, it may be argued that the injured party is not entitled to compensation for the loss in value of the debt, for he could have insured himself against such loss when making the contract. This argument might possibly be correct with respect to agreements contracted these days, when people are aware of inflation. It would not be fair to invoke such an argument with respect to agreements entered into in the past, when the inflation rate was low.

37 In Horowitz at 266–67, the Court held that this difficulty may be overcome by linking the revalued sum to the CPI. With all due respect, we cannot divine the basis for such a view (that was not based on the system of linkage provided by the law). From the moment that the debt is revalued, it becomes a liquidated debt, governed by the nominalist principle, which rejects linkage that changes the nominal sum.

38 See supra n. 14.

39 Furthermore, the court is authorized to adjudicate interest on the nominal sum at the rate of 3%. See supra n. 14.

40 Is the court authorized to assess the damage according to its nominal value on the day evidence is heard, and then award linkage differentials on that sum, from the day that the cause of action arose? This is possible under the letter of the law, but it is inconsistent with the principle of restitutie in integrum, for if the court were to act in this manner, the victim would receive double compensation for inflation, at the defendant's expense.

41 It must be stressed that at this stage in the development of the law, the question relates only to the field of tort law. As long as revaluation is not recognized in other branches of law, the system of linkage will prevail in an exclusive fashion. Nevertheless, the forthcoming analysis does relate to other branches of law, particularly contract law.

42 The day on which evidence is heard, the day that judgment is given, the date of actual payment, or any other time suitable for the purpose of revaluation.

43 Horowitz at 270.

44 Sec. 76(1), quoted supra n. 3.

45 “Damage” is defined in the Civil Wrongs Ordinance as “loss of life, or loss of, or detriment to, any property, comfort, bodily welfare, reputation, or other similar loss or detriment”.

46 See Tedeschi, supra n. 4.

47 It may be argued that sec. 76(1) of the Civil Wrongs Ordinance implies that compensable damage is in fact the forseeable damage, and not real injury. Our answer to this is that there is a well known distinction between the kind of damage and its extent—if the tortfeasor could forsee the kind of damage he would cause, it is not required that he be able to forsee its extent (Ringer v. Leon (1963) 17 P.D. 1662).

48 Attiah v. Rosenbaum, supra n. 5.

49 Horowitz at 263.

50 See again the definition of damage in supra n. 45.

51 Ovadiah et al. v. Logasi et al. (1979) (I) 33 P.D. 701, 704. With these words, the Court rejected the argument that the owner of a chattel which was damaged in an accident is obliged to purchase, with his money, a similar chattel, in this way reducing the effects of inflation.

52 The first assumption is questionable with respect to non-material damages. The second assumption is incorrect in all those cases in which the market price does not reflect the victim's subjective assessment of the damage.

53 Immediate compensation was viewed as ideal compensation in Hasneh, Insurance Co. of Israel Ltd. v. Clament Korral et al. (1979) (I) 33 P.D. 309, 320. The Court there said that a person whose car has been stolen is entitled to compensation which would have enabled him, at the time of conversion, to purchase an identical car.

54 “…with respect to a civil wrong … he must [i.e. the tortfeasor] of course, restore the situation to what it was previously… this means that he must give the victim its value [of the damage] at that time so that he [the victim] could go and buy articles identical to those that he lost, or could repair the damage when the money coming to him from the tortfeasor… actually reaches him”. Yardenia at 37.

55 This can be deduced from his past behaviour.

56 The same problem exists if we employ a different criterion in order to determine how much compensation he should receive on some date later than the breach so that his position will be the same as it would have been had he received immediate compensation upon crystallization of the damage. Under this alternative criterion, the question is: what would an injured person who was not compensated do in order to protect himself from the damages caused by the tort, at the moment they crystallize? By means of the question thus formulated, we are trying to discover what an injured person would forego in order to regain, at the time the damage crystallized, his former situation. The aim of the compensation will accordingly be to enable him, on the day he receives the compensation, to achieve all that he forfeited at the time in order to avoid the damages resulting from the tort. Thus, for example, in Hasneh v. Clament Korral, the Court held that a person whose car had been stolen would borrow money in order to buy a new car, and he is therefore entitled to compensation for all the expenses incurred in procuring the loan.

It seems that this is nothing but another side of the criterion that we suggested. There we asked what a victim would do if at a certain time he was given a certain sum, and here, we are asking what the victim would do, at the same time, with the same sum, if he did not have to spend it on making good the damages resulting from the tort. But even if we view this as an independent criterion, there is still a lack of clarity here as to the expected behaviour of a person who tries to make good the damage on his own. Would he use the money to purchase an article identical to that which was damaged? Might he have borrowed money to do so? Or would he have purchased an alternative article? Here too, we can make many assumptions, none of which is any sounder than the others, and each one leading to a different amount of compensation.

57 The ideal would be to award compensation to the victim according to the market price of the damage as if it crystallized on the day that compensation was made, but we have seen that in most cases, revaluation on the day of payment is not possible, and the court must rest content with revaluation at the time of the hearing.

58 The relative price of two products is the ratio between the price of one product and that of another. If a loaf of bread cost as much as four oranges, the relative price of bread and oranges would be 1/4. Change in the nominal value owing to inflation does not affect the relative price. If we were to double or treble the nominal price of bread and oranges, their relative prices will remain unaffected. A change in the relative price expresses a change in the value of the product: if, for the price of a loaf of bread, we could now buy only three orange, we can say that the price of oranges rose relative to bread. Our assumption is that in periods of inflation in which nominal prices change frequently, relative prices change frequently as well.

59 The likelihood of disparity will increase, for it can be assumed that changes in the relative prices of products which are not interchangeable will be greater than those in the prices of interchangeable goods which compete with one another.

60 I.e., the relative change in his wages is identical to the relative change in the value of the article or the investment.

61 Changes in the level of prices are expressions of changes in the nominal prices of goods and services, but not of changes in their relative price. This is due to the fact that a change in the level of prices is defined as the average change in the prices of all products. Let us assume that there are only two products on the market: A. which costs IL. 3 per unit, and B, also IL. 3 per unit. The level of prices is 1. A year later, A cost IL. 6 and B costs IL. 9. In order to buy those two products, one now needs IL. 15 instead of IL. 6. The current price level in relation to the base year is 15/6, i.e. the purchasing power of money is 2.5 times less than in the base year. This, is an average rise, since one product doubled in price and the other trebled. The change in the level of prices says nothing concerning the relative prices of these products.

62 We are disregarding the fact that the CPI does not accurately reflect the level of prices in the economy, both because the “basket of products” does not include all the products on the market, and because of a preferential system whereby basic products are given greater weight.

63 As we have said, we are assuming that over the period in which nominal prices change frequently because of inflation, relative prices also change frequently.

64 We can now understand the use of the word “general” purchasing power, which refers not to specific products, but to goods and services as a whole.

65 In Hasneh v. Clament Korral, the Court reached the conclusion which our system deems desirable, and ruled that the victim will be compensated for the nominal value of the damage on the day it crystallizes (the value of a car on the day it is stolen), to which sum will be added linkage differentials up to the day of the Court's decision. Although we accept the final result, we disagree with the reasoning given. The Court assumed that if the victim had received immediate compensation, he would have borrowed money and bought an article identical to the damaged one, and consequently, he is entitled to current compensation in the amount of the linked purchase. If the assumption is that the victim would have bought an identical article, then he must be given compensation which would enable him, at the time of the decision, to acquire this article, for only thus will his position be identical to that in which he would have been had he been compensated immediately. If the price of the item rose more than the CPI, the compensation awarded by the Court will not enable him to buy the article, and he will not be restored to his former position.

66 Kahane v. Feingold (1956) 10 P.D. 1282, 1285.

67 “It can usually be said that determination of the interest rate is of necessity based on a certain degree of standardization which is, at times, arbitrary, for the reason that the court cannot, in each an every case, take upon itself the added burden of finding out what a creditor would do with the money … had it been repaid on time. He may have kept it in his house, in which case he will suffer no damage due to the delay. He may have kept it in his current account at the bank, and the interest he would have received would be much lower than that awarded him … the law disregards all these possibilities and others like them, so as not to over-complicate the work of the judge”. United Tours Co. Ltd. v. Til Tours, op. cit. supra n. 6, at 391.

68 Supra n. 61.

69 And in Horowitz, it is emphasized that the forseeable event is the devaluation of the currency, and there is no parallel reference to the rise in prices (including the changes in relative prices).

70 See p. 86 infra.

71 The nominal sum should be multiplied by the CPI on the day of payment and the result should then be divided by the CPI on the day the damage crystallized.

72 These difficulties became manifest in Hasneh v. Clament Korral, supra n. 53. Under the system of revaluation the Court had to decide in 1977 the value of the 1968-model car which was stolen in 1969. The lower Court made this determination according to the price of a 1968-model car in 1977. The higher Court rejected this approach, and rightly so, for in 1969, when the damage crystallized, the car was one year old, whereas in 1977, at the time of revaluation, the car was 9 years old. The Court also rejected the contention that compensation should be fixed according to the price of the 1976-model of the same car. Although that, too, would involve assessment of a one-year-old car and the damage in fact was caused to a one-year-old car, it was not proved to the Court that the relationship between the price of a 1968-model car and the 1969-model was the same as the relationship between a 1976- and 1977-model car (pp. 319–20).

73 “…Is it right to restrict the cause of action in torts of a landowner … to damage suffered as a result of devaluation of money, or it may be more correct to grant him, in such a case, compensation according to the rise in the price of land. I personally generally prefer to award compensation only for the devaluation of money … to my mind, what is preferable is an easily-implemented rule, requiring no clarifications as to the special circumstances of each case, which are liable to complicate the discussion and cause further delay in the final decision and in the payment of the compensation due” (emphasis added): Joseph et al. v. State of Israel (1975) (II) 29 P.D. 486, 493.

74 “It may be more practical and more stable [than revaluation] if the damage is assessed on the day that it occurs, and then linked to the CPI or some other index … such a solution would eliminate the need to link the value of the damaged property to the movements in the price market [changes in relative prices]. By assessing the damage on the day of breach, we fix its monetary value, and every change therein will automatically find expression, in the end, in the amount that the tortfeasor has to pay on the date of actual payment”: Ararat at 553, and Joseph v. State of Israel at 493–4.

75 Benounu v. State of Israel et al. (1979) (II) 33 P.D. 296, 299.

76 Income Tax Ordinance (New Version) sec. 2(4). See also Income Tax (Definition of Interest and Linkage Differentials as Income) Order, 1977.

77 See Yoran, A., “Linked Compensation — Full Compensation?” (1979) 14 Is.L.R. 515–16.Google Scholar 78 See Yoran at 518.

79 Yoran at 518–19.

80 Benounu v. State of Israel.

81 Income Tax (Exemption from Tax on Linkage Differentials) Order, 1980.