¹ Sec. 10(b) of the Trust Law states as follows: “In carrying out his functions, a trustee shall exercise such loyalty and diligence as a reasonable person would exercise in the circumstances”. This requirement reflects the duality of the fiduciary obligation—on the one hand, the duty of loyalty which in essence is a subjective duty, even if it is concretized into objective rules of behaviour (cf. Be'ersheba Public Transport Services Ltd. et al. v. National Labour Court in Jerusalem et al. (1981) (I) 35 P.D. 828, 835 concerning interpretation of the term “good faith” in sec. 39 of the Contracts (General Part) Law, 1973)—on the other hand, the duty to exercise diligence, which is essentially an objective one. This paper will concentrate mainly on the loyalty obligation.

² The personal nature of the relationship finds expression, for example, in sec. 10(d) of the Trust Law, which prohibits the trustee from delegating any of his powers to another. See also sec. 14(a) of the Agency Law, 1965, which lists, amongst the reasons for termination of the agency, the death of the principal or the agent, and also sec. 16 of the Agency Law, which in principle prohibits sub-agency.

³ The term “fiduciary obligation” was chosen in order to distinguish it from the institution of trust, but Israeli legislation does not make sufficient literal distinction between these two institutions. The word ne'emanut in Hebrew denotes both trust and the duty to act loyally. See, for example, sec. 8 of the Agency Law, which refers to a fiduciary obligation and sec. 10(a) of that Law which refers to the institution of trust.

⁴ West of England and South Wales District Ex p. Dale & Co. (1879) 11 Ch.D. 772, 778; Scott, , “The Fiduciary Principle” (1949) 37 Cal.L.R. 539CrossRefGoogle Scholar; Sealy, , “Fiduciary Relationships” (1962) Cam.L.J. 69, 72.CrossRefGoogle Scholar

⁵ The list of fiduciary relationships is open: Likud Faction in the Petah Tikvah Municipality v. Petah Tikvah Municipal Council et al. (1980) (II) 34 P.D. 566, 570; English v. Dedham Vale Properties Ltd. [1978] 1 All ER 382. On the categories to which the fiduciary obligation applies, see: Finn, , Fiduciary Obligations (Sydney, 1977)Google Scholar; Sealy, supra n. 4, at 69; Scott, supra n. 4; Goff, & Jones, , The Law of Restitution (London, 2nd ed., 1978) 490Google Scholar; Weinrib, , “The Fiduciary Obligation” (1975) 25 U.T.L.J. 1.CrossRefGoogle Scholar

⁶ Finn, supra n. 5, at 13; Weinrib, supra n. 5, at 3 et seq.; Shepherd, , “Towards a Unified Concept of Fiduciary Relationships” (1981) 97 L.Q.R. 51, 75Google Scholaret seq. The fact that the trustee must act in accordance with the instructions of the beneficiary does not exclude the relationship from the fiduciary framework (see, e.g. sec. 8 of the Agency Law).

⁷ See the opinion of Barak J. in the Likud Faction case, supra n. 5, at 570.

⁸ See the Agency Law, sec. 8(5), according to which the agent will “…generally refrain from doing anything involving a conflict between the interests of the principal and his own interest or the interests of another person”; sec. 13(a) of the Trust Law, which prohibits the trustee from doing anything “involving a conflict of interests between the trust and himself or any of his relatives”. On the rule prohibiting conflict of interests and its application, see the judgment of Barak J. in the Likud Faction case, supra n. 5, at 570 et seq. And see Jerusalem Industrial Company Ltd. v. Agion (1952) 6 P.D. 887, 889, which was also cited in GUckman Ltd. et al. v. A.M. Barkai Investment Ltd. (1978) (II) 32 P.D. 281, 286. And see Barak, , “Conflict of Interests in Fulfilling a Function” (1980) 10 Mishpatim 11Google Scholar; Shapira, , “Foundations for Investment in Trusts: What is the “Sole Benefit of the Foundation”?” (1980) 10 Mishpatim 94, 96Google Scholaret seq.

⁹ See e.g. Likud Faction, supra n. 5; Jerusalem Industrial Co., supra n. 8; Shimshan v. Ayun (1956) 10 P.D. 1767; Meagan v. Peer (1973) (I) 27 P.D. 576; Ben-Tal v. Ben-Tal (1977) (I) 31 P.D. 57, 60.

¹⁰ Sec. 29 of the Partnership Ordinance (New Version) 1975 (see Haddad v. Kahah (1953) 10 P.M. 311, 314; Estate of Gerlitz v. Aharon (1979) (I) 33 P.D. 253); secs. 17, 41 of the Legal Capacity and Guardianship Law, 1962. (See also Tedeschi, , “Guardian and Agent” in Massot Bamishpat (Jerusalem, 1972) 334Google Scholaret seq.); sec. 8 of the Agency Law, 1965; secs. 7, 10 and 13 of the Trust Law, 1979.

¹¹ Sealy, , “Some Principles of Fiduciary Obligation” (1963) Cam.L.J. 119.CrossRefGoogle Scholar

¹² Sec. 5 of the Trust Law, too, deals with the effect of the trust with respect to a third party, but see n. 26 below.

¹³ Restatement, Torts 2d s. 874, and for this reason, the party in breach may be liable for punitive damages, cf. Denison v. Fawcett (1956) 12 D.L.R. 2, 537; Friedmann, , “Restitution of Benefits Obtained through Appropriation of Property or the Commission of a Wrong” (1980) 80 Col.L.R. 504, 554, note 87.CrossRefGoogle Scholar In England, violation of a fiduciary obligation is not considered a civil wrong: English v. Dedham Vale Properties Ltd. (1978) 1 All ER 382; Undershills, , Law Relating to Trusts and Trustees (London, 13th ed., 1979) 12Google Scholar, note 7.

¹⁴ Comment c to s. 874 (supra n. 13), states that a person who knowingly assists a fiduciary in committing a breach of trust is himself guilty of tortious conduct and is subject to liability for the harm thereby caused under s. 876, which deals with persons acting in concert.

¹⁵ On the view that the contractual debtor has the option to either fulfil the contract or to pay compensation see W.T.B., , “The Right to Break a Contract” (1917) 16 Mich.L.R. 106.Google Scholar Also Friedmann, , “On the Relationship Between the Option to Cancel and the Remedy of Enforcement of the Contract” in Digest of Lectures for Judicial Study Sessions (Jerusalem, 1975) 87.Google Scholar But recently, there emerged in American Law the tort of breach of contract, which suggests that breach of contract will sometimes not be tolerated: Friedmann, supra n. 13, at 515, note 52, 554.

¹⁶ Today, however, the tendency is to impose liability upon the third party even in the absence of a “breach”, e.g. when the parties have agreed upon an exemption clause: Hassid v. Knopf (1980) (II) 34 P.D. 225 (obiter), following Torquay Hotel Ltd. v. Cousins [1969] 2 Ch 106; see nn. 112, 113 below, and the text there

¹⁷ On the relationship between breach of contract and liability in torts, see Tedeschi, , “The Creditor's Claim in Torts against a Third Party” in Studies in Private Law (Jerusalem, 1959) 128, 147Google Scholaret seq.

¹⁸ See Tedeschi, , “Some Aspects of the Concept of a Contract” (1966) 1 Is.L.R. 223, 231Google Scholaret seq. It must, however, be mentioned that under English Law, the relationship of the parties to a contract for the purchase of specific property (in which there is an inherent conflict of interests) is a fiduciary one, although in a limited sense. For sources, and on the incorporation of the rule in Israeli case law, see Grabelsky-Cohen, N., “The Nature of the Undertaking to Effect a Transaction” (1978/1979) 4 Tel Aviv U. Studies in Law 33.Google Scholar

¹⁹ Contracts (General Part) Law, secs. 12 & 39.

²⁰ In the Public Transport Services case, supra n. 1, at 834, Barak J., while preserving the distinction, likens contractual relations to fiduciary relations in the light of sec. 39 of the Contracts Law, saying: “Thus, if the expressions “trust”, “faith” and “loyalty” were not all occupied, the relationship created between contracting parties subsequent to sec. 39 of the Contracts Law could be described as a relation of trust, the contracting party fulfilling the contract faithfully while implementing the trust which the other party vests in him”.

²¹ Friedmann, supra n. 13, at 552, 553.

²² This is sometimes reflected in the fact that the parties are not at liberty to contract out the fiduciary obligation: sec. 11 of the Trust Law does not allow for contracting out the provision of sec. 10(b), the section which lays down the fiduciary obligation. There are, however, some such obligations which are negotiable, according to their degree and importance. Thus, for example, under sec. 11 of the Trust Law, secs. 10(a), (c) and (d) of that Law are negotiable, even though these may also be seen as concretizing the fiduciary obligation (see n. 10 supra); see also sec. 8 of the Agency Law, which permits basic negotiation with respect to the obligations listed in the section, though apparently not with respect to the fundamental obligation specified at the beginning of the section, and in any case not when the agent acts with malicious intent: Barak, Agency Law, 1965 (see in the Digest of Commentary on the Laws of Contract, edited by Tedeschi, ) (Jerusalem, 1975) 390–1.Google Scholar From the point of view of the limitations imposed by the law on the freedom to contract, the duty to act in the customary manner and in good faith is similar to the fiduciary obligation. The duty to act in the customary manner and in good faith cannot be contracted out, at least not with respect to the element of good faith (Shalev, , “Section 12 of the Contracts Law: Good Faith in Negotiations” (1976) 7 Mishpatim 118, 122Google Scholar). Thus, as we have said, this duty brings the regular contractual framework closer to that of a fiduciary relationship.

²³ See the text on notes 106–114 below.

²⁴ See the text on notes 115–149 below.

²⁵ See supra n. 10.

²⁶ It is hard to reconcile between sec. 14 and sec. 5 of the Trust Law which reads as follows: “A Trust has effect vis-à-vis any person who knows or ought to have known about it, and where a note has been entered under sec. 4, vis-à-vis the whole world”. We adopt the view of Weisman, according to which the operative section prescribing the liability of the third party is sec. 14 and not sec. 5 of the Trust Law, and we also agree with the reasons Weisman offers in his article “Shortcomings in the Trust Law, 1979” (1980) 15 Is.L.R. 372, 398–399. (But see n. 95 below). Sec. 5 may be considered as a declaratory one, whereas sec. 14, while stating the remedies and the conditions to their application, has the effective impact.

²⁷ This demand is also not found in the explanatory note to sec. 6 of the Bill. However, Weisman tends to the view that the Trust Law is based on the real right of the trustee in the property. He comments that the language of sec. 1 of the Trust Law is sufficiently vague to enable us to read into it this trait (supra n. 26, at 377).

²⁸ This is the view of Dr. Reichman, which he aired at a study session on the subject of the Trust Law, 1979, held at the Tel Aviv University on January 18, 1980.

²⁹ This requirement of a triangle was one of the reasons underlying the view of the Attorney General, when the Bill was proposed, that the Bill does not apply to fiduciary relationships: Shamgar, , “Commentary on the Trust Bill” (1973) 23 Ro'eh Heshbon 147.Google Scholar

³⁰ Another good reason for the omission of this section is that it contains a closed list of functionaries to whom the above provisions of the Trust Law apply. The section, as it stood, was liable to give rise to the question of whether the Law could be extended to a person not appearing in the list. Abandonment of this list allows the Law to be applied in every appropriate case. It may, of course, be argued that omission of this section attests to the intention that the Trust Law not be applied to the functionaries listed therein, but this is not compatible with the clear tendency to extend the application of the Trust Law beyond the strict confines of the Bill. In his article, “Principles of the Laws of Unjust Enrich ment in the Light of New Israeli Legislation: Part One” (1981) 8 Iyunei Mishpat 22, 36 n. 77, Friedmann supports a wide interpretation of the Trust Law.

³¹ The Foundations of Law directs that the court will use analogy if it cannot find an answer to its question in a legislative act or in case law. In the Agion case, supra n. 8, the Court, to a certain extent, relates to the company directors as if they were trustees. We do not believe that this means that under case law, the English laws of trust apply to company directors. The Court discussed this question from the aspect of the fiduciary obligation, and for this purpose it compared the company directors to trustees. Furthermore: the rules governing a director's fiduciary obligation to the company are not part of company law in the wide sense (for the distinction see Barak, supra n. 22, at 10 et seq). Gower, , too, in his work, Principles of Modern Company Law (London, 4th ed., 1979) 606Google Scholar, treats the consequences of a breach of a director's fiduciary obligation to the company as the application of the general principles of breach of fiduciary obligation and not as a special law relating to companies. Thus, if the general law applying to fiduciary obligations changes, the change will apply to company directors as well. We see no difficulty in the provisions of sec. 34 of the Trust Law, according to which “The provisions of sections 26 and 29 to 31 shall apply mutatis mutandis to a public-benefit company. For this purpose, the directors of the company shall be regarded as the trustees of an endowment”. Prima facie, it could be argued that directors will be regarded as trustees only for the purpose specified in that section, and for no other purposes, but this interpretation is unacceptable. With respect to a public-benefit company, the director will be regarded as the trustee of an endowment subject to the special framework referred to in Chap. 2 of the Trust Law. With respect to a regular company, the director will anyway be regarded as a regular trustee subject to the provisions of Chap. 1. Hence, sec. 34 of the Trust Law is wholly compatible with the approach according to which a company director will be regarded as a trustee under the Trust Law.

³² It will, however, be mentioned, that in England, recognition was not accorded to the right to trace with respect to a trust not involving trust property: see n. 14 below.

³³ This is the position under the Companies Ordinance, with respect to a director who acts by virtue of a contract with the company. Cf. Gower, supra n. 31, at 608 n. 45, who says that when a director has a contract with the company, the liability of the third party will merge into the tort of knowingly inducing a breach of contract.

³⁴ Hivac Ltd. v. Park Royal Scientific Instruments Ltd. [1946] Ch. 169. This decision was cited, with approval, in Palimport Ltd. v. Ciba-Geigy Ltd. (formerly Ciba Ltd.) et al. (1975) (I) 29 P.D. 597, 605.

³⁵ Bowstead, on Agency (London, 14th ed., 1976) 350.Google Scholar

³⁶ Restatement Agency 2d s.312 Comment a; Reuschlein, and Gregory, , Handbook on the Law of Agency and Partnership (St. Paul, 1979), 176, 177Google Scholar; Seavey, , Handbook of the Law of Agency (St. Paul, 1964) s. 118, 204.Google Scholar

³⁷ In Meyer v. Executive of the Jewish Agency (1974) (I) 28 P.D. 393, 397–9. In the District Court, Executive of the Jewish Agency v. Meyer, (1966) 78 P.M. 172, 182–3.

³⁸ Cf. Beecham Group v. Bristol Meyers Co. (1979) (III) 33 P.D. 755. A violation of patent was regarded as a breach of statutory duty under sec. 63(a) of the Civil Wrongs Ordinance.

³⁹ Rabello, , Essays on the Law of Obligations: From Roman Law to the New Contracts Law (Jerusalem, 1977) 198Google Scholaret seq. Today, the application of the tort may be extended by virtue of sec. 1 of the Foundations of Law.

⁴⁰ The distinction between causing a breach of contract (or obligation) and aiding or procuring a breach of statutory duty (a combination of secs. 63 and 12 of the Civil Wrongs Ordinance) is blurred. If a breach of patent—a clear obligation in the field of private law—constitutes a breach of statutory duty (supra n. 38), then prima facie, so would a breach of contract, and if this is the case, then knowingly causing a breach of contract would also constitute aiding in a breach of statutory duty. Nevertheless, one could say that the two rights are distinct: a patent has one single source of force and content—the law, whereas in the case of a contract, the law is the source of its force, but its contents are provided by the agreement of the parties. According to this distinction, will a person who violates a statutory obligation applying to the contract be regarded as violating a statutory duty, or could we say that in this case too, the agreement of the parties is the source of the contents, because that obligation could have been contracted out and was not? And what happens in the case of a cogent statutory obligation applying to the contract? (See Bar-Shira, A., Breach of Statutory Duty Laws of Damages, Various Torts (Tedeschi, G., ed.) (Jerusalem, 1979), 14–15Google Scholar, who tends to the view that a person violating an obligation imposed by law on the contract is violating a statutory duty. Therefore, a person knowingly causing a breach of such an obligation is aiding in the violation of a statutory duty). However, a breach of contract would not seem to constitute a breach of statutory duty in the light of the last part of sec. 63(a), whereby there is no tort if the statute, correctly interpreted, intended to preclude a remedy in torts. It could be said that the Contracts (Remedies for Breach of Contract) Law intended to preclude remedies in torts (Bar Shira, op. cit., 45). Then there is the question of the mental element. Causing breach of contract requires a metal element, but does the same apply to aiding in a breach of statutory duty? It seems the answer is positive, as the mental element is embedded in the very nature of the act of aiding in the commitment of a wrong: Barak, , The Law of Civil Wrongs, The General Part (Tedeschi, G., ed.) (Jerusalem, 2nd ed., 1976) 439.Google Scholar The confusion between causing a breach of contract and aiding and procuring a breach of statutory duty is intensified in the other direction too: if knowingly causing a breach of contract is extended to obligations deriving from the law, then any intentional aid to a breach of statutory duty also constitutes causing a breach of obligation. On the question of the application of breach of statutory duty in the field of private law see Committee of Workers of Eilat-Ashkelon Pipeline Co. v. Eilat-Ashkelon Pipeline Co. (1977) 8 P.D.A. 421, 452.

⁴¹ (1979) (II) 33 P.D. 533, 548, 557, 559, 563. In the District Court, it was decided that the fiduciary obligation arose by virtue of agency relations: Lockman v. Shift (1977) (II) P.M. 480. This opinion concerning the source of the fiduciary obligation was rejected by the Supreme Court.

⁴² The Contracts (General Part) Law came into force one month or so after the time of the undertaking discussed in Lockman v. Shiff, supra n. 41. In that case, Elon J. mentioned sec. 12, but did so as a basis for his proposal (upon which he did not rule) that the negotiations be regarded as a legal act for the purpose of the Agency Law (there, 562). Hence, the involvement of the shareholder in that case in the negotiations on behalf of the company could have made him an agent of the company. This proposal was rejected by Kahan J. (there, 557). Elon J. reiterated his proposal in Dadon v. Abraham (1979) (III) 33 P.D. 365 (not discussed by the other Justices). It is doubtful whether this view based on sec. 12 may be accepted. The fact that a certain act entails legal consequences does not make of it a legal act, for otherwise, every breach of duty in the field of tort law would mean that the act causing the breach was a legal act: Englard, , “On Brokerage and Agency” (1980) 10 Mishpatim 359.Google Scholar

⁴³ For a broad application of sec. 12 see Pridar v. Castro (1980) (II) 35 P.D. 713. The court found that a director who made a contract on behalf of his company with a third party had personally acted in breach of the duty imposed by sec. 12 towards that third party. The director was subject to that duty although he himself was not a party to the contract. The difference between this case and that Lockman case (supra n. 41) is that in Pridar the fiduciary relations existed between the director and the other contracting party, whereas in Lockman the fiduciary relations arose between the contracting party and a person acting on behalf of him. In both cases, however, the duty did not arise between the contracting parties themselves, and the tendency of the court in Pridar to enlarge sec. 12, can apply to the Lockman situation as well.

⁴⁴ Is it possible, under the circumstances which came to light in the Lockman case (supra n. 41), to apply the Trust Law? Two problems arise: first, does the Trust Law recognize that circumstances may give rise to a trust? The answer would seem to be negative, in the light of sec. 2 of the Law (unless, as we have said, we regard these circumstances as arising out of the Law (sec. 12 of the Contracts Law) or out of a contractual undertaking). In the Lockman case, in which the shareholder assisted in the sale of company property, could it be said that the shareholder had an “interest in the property”, or a “relationship” thereto, as defined in sec. 1 of the Trust Law? Indeed, the fiduciary relationship was created by virtue of the status of the shareholder and not by virtue of his interest in the property, but it would seem that the definition in sec. 1 is sufficiently wide to include this case as well, for the object of the transaction was property belonging to the company.

⁴⁵ Barak, supra n. 22, at 418.

⁴⁶ Theoretically, it is possible to conclude that the liability of the person in breach and the person causing the breach of contract may be identical, by means of the following construction: The person knowingly causing the breach of contract commits a civil wrong. The person who breaks the contract aids the person causing the breach, and he is therefore liable under sec. 12 of the Civil Wrongs Ordinance [N. V.]. Such a construction could be of practical importance if we were confronted with a problem concerning the duty of contribution between the person in breach and the person causing the breach with respect to payment of damages to the injured party. In this case, the person in breach and the person causing the breach would be joint civil wrongdoers and would be obliged to contribute inter se under sec. 84 of the Civil Wrongs Ordinance. But it seems that the duty of contribution between the person in breach and the person causing the breach exists even if their liability is different (n. 111 below). The construction proposed above remains on the purely theoretical level. For a discussion see Tedeschi, supra n. 17.

⁴⁷ This idea of equating the liability of a person in breach of obligation with that of a person involved in the breach of obligation was to be applied in the context of contempt of court proceedings as well: in Hadar Lod Taxis Ltd. v. Biton et al., (1980) (IV) 34 P.D. 232, the sanction for contempt of court was applied to an outsider who had knowingly caused a violation of an injunction. Even though the outsider was not a party to the proceedings, and prima facie could not be indicted for contempt of court, the Court (following English case-law) had no hesitation in imposing the same liability as that borne by a party to the proceedings.

⁴⁸ Of course, when the source of the agency lies in a contract, the contractual remedies will apply directly, but a contract is not necessarily the source of agency, and for this situation, sec. 9(a) was designed: Barak, supra n. 22, at 140 et seq.; Procaccia, , The Agency Law, 1965 (Tel Aviv, 1978) vol. A, p. 114.Google Scholar

⁴⁹ It is questionable whether this section negates liability in torts. In the Bailees Law, there is no section dealing with preservation of remedies, but it is difficult to draw far-reaching conclusions from this, as it is doubtful whether such a section is of more than declaratory value. On the relationship between the remedies in the Bailees Law and those in the Civil Wrongs Ordinance see Friedmann, , “Remedies for Breach of Contract” (1973) 2 Iyunei Mishpat 134–46Google Scholar; Tedeschi, , “The Statutory Bailee” (1978) 8 Mishpatim 430, 437.Google Scholar For a restrictive approach see Saltun, , “Tortious Aspect of Bailees Law, 1967” (1977) 5 Iyunei Mishpat 653.Google Scholar

⁵⁰ See sec. 1 of the Foundations of Law, and cf. Wertheimer v. Harari (1980) (III) 35 P.D. 253, 270.

⁵¹ Cf. sec. 13 of the Trust Law. It is not required that the third party has initiated the act causing the violation of fiduciary duty. From this aspect, secs. 9(b) and 14 describe situations which fall within the bounds of the tort of causing a breach of contract: Bauernfreund v. Dresner (1951) 5 P.D. 1559. For a critique of this ruling, see Harrari, , “The Boundaries of Responsibility in Causing a Breach of Contract” in Selected Legal Issues (Jerusalem, 1958) 68Google Scholar, In England: D.C. Thomson v. Deakin [1952] Ch. 646, 649. In the United States, it seems that a conflicting transaction per se does not entail liability, if the third party did not take an active part, such as proposing a high price: Prosser, , Handbook of the Law of Torts (St. Paul, 4th ed., 1971) 934.Google Scholar

⁵² Supra n. 41. In the District Court (1977) (II) P.M. 480.

⁵³ The Contracts Law does not apply to this case, and therefore, in spite of the illegality of the contract, the District Court did not rule that the act was void ab initio, but only that it was unenforceable (supra n. 52 at 496).

⁵⁴ Not necessarily as an agent (supra n. 41, at 542–3, 559). The fiduciary obligation arose by virtue of the circumstances (there, 548, 557, 559, 563). See text at nn. 41–44.

⁵⁵ Supra n. 41, at 546–51, 553. On this possibility, see the text at nn. 142–149.

⁵⁶ Supra n. 41, at 558–60. The District Court, supra n. 52, at 489–96, ruled, inier alia, that the company did not properly ratify the undertaking made by Shiff to Lockman. In the Supreme Court, Levin J. expressed the view that he tends to see such ratification in the conduct of the company (there, 553), whereas Kahan J. concurred in the ruling of the District Court (there, 561). Elon J. did not express an opinion on this point. The District Court regarding the act of ratification mentioned sec. 6(a) of the Agency Law (there, 496). However, it is doubtful whether this section applies at all, since the agreement between Lockman and Shiff did not constitute even ostensibly part of an act of agency. It would be more suitable to see whether the principal consented to Lockman receiving from Shiff a “promise of a benefit, in connection with the object of the agency” (sec. 8(4) of the Agency Law).

⁵⁷ Cf. Dadon v. Abraham (1979) (III) 33 P.D. 365.

⁵⁸ With respect to the Trust Law it is also possible that Lockman would not have been entitled to his commission due to the invalidation of the transaction.

⁵⁹ See the opinion of Levin J. in Lockman, supra n. 41, at 543: “It is obvious that the said sec. 9 deals with the right of the principal against the agent, and the right to cancel the act in the relations between the principal and the third party, but it does not deal with the contractual relations between the agent and the third party to their full extent. Thus, from the point of view of secs. 8 and 9 of the Law, when taken by themselves, there is nothing to stop the agent, as long as the principal has not withdrawn from the act because of the agent's breach of fiduciary obligation, from suing the third party for the profits from the said act, subject to the principal's right to sue for them himself; the question of whether under these circumstances the undertaking of the third party to the agent is enforceable or not must be determined according to contract law and not according to the laws of agency”.

⁶⁰ Shiff's promise to Lockman may serve as an instrument for assessing the damage caused to the company according to the rules which developed concerning “civil bribery”. The company is presumed to have incurred damage equal at least to the sum that the third party, Shiff, promised to pay the beneficiary, Lockman. This is also the amount of Lockman's profit. See Friedmann, , Unjust Enrichment (Tel Aviv, 1970) 54Google Scholar, n. 57, and infra n. 117.

⁶¹ Barak, supra n. 22 at 414–5.

⁶² Supra n. 22, at 415. Thus, if the third party was aware of the facts, but did not know that they constitute a breach of fiduciary obligation, the act will not be considered as having been done “with his knowledge”: Martin Co. v. Commercial Chemists Inc. 213 So 2d 477 (1968). In this case, the third party was a contractor for a certain employer. The employer appointed an employee to oversee the work. The employee and the contractor agreed that the contractor would give out the work to others, and the money given by the employer for execution of the work would be divided amongst the employee, the contractor and those doing the work. When the contractor asked the employee if he was allowed to make such an arrangement, the employee replied that he received permission from the employer's legal department. It emerged that in fact, no such permission was given. The Court released the contractor from liability (the action was for restitution of the profits made by the employee and the contractor from the transaction), ruling that he was reasonable in his belief that the employee had authority to make such an arrangement. See Restatement, Agency 2d s. 313, which states that a third person who employs the agent of another party is liable to that other, unless he reasonably believes that the other party acquiesces in the double employment. We could arrive at the same conclusion in Israel in the light of the Agency Law (on the assumption that the relations described here are those of agency, or an analogous arrangement). Sec. 8(4) of the Agency Law stipulates that an agent shall “not, in respect of the same object, be the agent of different principals without their sanction”. In this case, there was a breach of a fiduciary duty under the Agency Law as well. But how could the third party be released, in the absence of the justification in sec. 9(b)? It could be said that the third party's reasonable belief that the double agency was sanctioned by the principals negates the mental element required by sec. 9(b) as a condition for incurring liability. The third party knew about the double agency, but he did not know that it constituted a breach of fiduciary obligation.

⁶³ This conclusion accords with the interpretation given to the mental element in causing a breach of contract in England: Emerald Construction Co. Ltd. v. Lowthian [1966] 1 WLR 691, 700–701; Daily Mirror Newspapers Ltd. v. Gardner [1968] 2 QB 762; Greig v. Insole [1978] 1 WLR 302, 342. In Hassid v. Knopf, supra n. 16 at 225, Ben-Porath J. decided that liability for causing a breach of contract is incurred also by one who “turns a blind eye”. The justices in the majority concluded that in that case, it was not proved that the defendent turned a blind eye, and they left open the question of the extent of the mental element in causing a breach of contract. The expression “good faith” which appears in the sections dealing with conflicting transactions, (secs. 9 of the Land Law, 1969 and 12 of the Movable Property Law, 1971 is also incompatible with turning a blind eye. On interpretation of the expression, (not necessarily in connection with the sections of conflicting transactions) see Rosenstreich v. Eretz Yisrael Automobile Co. Ltd. (1973) (II) 27 P.D. 709, 712; Marko v. Rotfeld (1976) (II) 30 P.D. 393, 396; Abu Sanino v. Minister of Transport (1976) (III) 30 P.D. 250, 252.

⁶⁴ Prof. Barak points out that constructive knowledge is not sufficient for the purpose of sec. 9(b) (supra n. 22 at 415, n. 33). This conclusion emerges from his approach according to which the expression al da'at implies an intention that it not be interpreted in the light of sec. 18 (there, 587). Our interpretation of the expression al da'at differs from that of Prof. Barak, but we agree with him that sec. 18 does not apply to sec. 9(b).

⁶⁵ This formulation appears both in positive form (had knowledge or should have knowledge) and in negative form (did not know and was not bound to know). See, e.g. secs. 16, 18(b) of the Sale Law, 1968; secs. 8, 10 15(b) of the Hire and Loan Law; sec. 14(a) (b) of the Contracts (General Part) Law, 1973; sec. 18(a) of the Contracts (Remedies for Breach of Contract) Law, 1970; secs. 6, 21, 49 of the Legal Capacity and Guardianship Law, 1962; secs. 19A, 19B of the Companies Ordinance, introduced by the Companies Ordinance Amendment (No. 17) Law, 1980.

⁶⁶ See, e.g. sec. 9 of the Land Law; sec. 12 of the Movable Property Law; sec. 13 of the Contracts (General Part) Law; sec. 34 of the Sale Law; sec. 19A(3) of the Companies Ordinance; sec. 6(a) of the Agency Law, 1965; but see sec. 3(4) of the Pledges Law, 1967, which uses the expression “knew or ought to have known” in the context of determining priority.

⁶⁷ Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 2 All ER 1073. 1101; Karak Rubber Co. v. Burden (No. 2) [1972] 1 All ER 1210; Rowlandson v. National Westminster Bank [1978] 1 WLR 798.

⁶⁸ Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch 276; Competitive Insurance Co. v. Davies Instruments Ltd. [1975] 3 All ER 254; Belmont Finance Corp. Ltd. v. Williams Furniture Ltd. [1979] 1 All ER 118.

⁶⁹ In England, too, this view has its proponents, who sharply criticise the other view which extends the mental element: Goff, and Jones, , The Law of Restitution (London, 2nd ed., 1978) 507, 515Google Scholar; Note, (1976) 92 L.Q.R. 4.

⁷⁰ This is the view of Prof. Weisman in his article, supra n. 26 at 299.

⁷¹ Supra n. 63.

⁷² Supra n. 63.

⁷³ On the expression “should have known” in the context of sec. 12 of the Sale Law, 1968, see Marko v. Rotfeld (1976) (II) 30 P.D. 393, 396; Spector v. Zarfati (1978) (I) 32 P.D. 231, 236–7. On this expression in the context of secs. 15 and 18 of the Hire and Loan Law, 1971, see Shlomo Carmel Ltd. v. Pharphury (1980) (I) 34 P.D. 701 (it was stressed therein that the parties acted in good faith, 712, 714).

⁷⁴ The authorities cited in n. 67 supra.

⁷⁵ For an authority demonstrating the rule in England, see Thomson v. Clydesdale Bank [1893] AC 282.

⁷⁶ Swiss Bank Corporation v. Lloyds Bank Ltd. [1979] 3 WLR 201. In the Court of Appeal and House of Lords, the decision of the Lower court was overruled but not on this point: [1980] 3 WLR 457; [1981] 2 WLR 893.

⁷⁷ But it seems that if the third party acquired his knowledge of the breach of fiduciary obligation towards the beneficiary after entering into the transaction, but before its completion, he may still be bound to the rights of the beneficiary. In secs. 9 of the Land Law and 12 of the Movable Property Law, there is express requirement that good faith persist until the transaction is completed. Even though no such express requirement appears in sec. 14 of the Trust Law, it would seem that it must be applied thereto, for in essence, sec. 14 reflects the doctrine of a purchaser in good faith and for value which requires that good faith continues till the transaction with the third party is completed. It would be different with respect to sec. 9(b) of the Agency Law, which is in essence punitive, and does not deal with priorities: the relevant moment for examining the mental attitude of the third party will be the time of making the transaction.

⁷⁸ In the case of Batts Combe Quarry Ltd. v. Ford [1949] Ch 51, B sold a quarry to A and promised not to participate in a competing business in the area. The seller's son, C, decided to establish a quarry, and B financed him. The Court ruled that the receipt of money on the part of the son is not actionable inter ference with the contract between A and B. The fact that C gave no consideration to B was not only no fault of his, but also was the cause of his being released from any liability.

⁷⁹ N. Grabelsky-Cohen, supra n. 18 at 47 et seq.

⁸⁰ Boker v. Anglo-Israeli Co. Ltd. (1971) (II) 25 P.D. 121. For discussion, see Grabelsky-Cohen, supra n. 18 at 51 et seq. But in Wertheimer v. Harrari (1981) (III) 35 P.D. 253, Barak J. ruled that the substance of the right may change in accordance with the circumstances, and no hard and fast rule may be set.

⁸¹ For evidence that the Trust Law is conceived of as dealing with proprietary rights, see sec. 3(a), which states that “The income of any trust property or something for which any trust property has been exchanged, shall also be property of the trust”; sec. 3(b): “the Trust property shall not be distrained save for debts resting on that property or arising out of activities of the trust”; secs. 5 and 14 which deal with the effects of trust vis-à-vis a third party, and sec. 15: “A profit improperly derived by a trustee in consequence of the trust shall be treated as part of the trust property”. Will the Trust Law apply to an undertaking to effect a transaction in the property? According to sec. 2 of the Trust Law, a trust is created, inter alia, by a contract with a trustee. If the Court construes the contract to purchase the property as a contract between a beneficiary (the purchaser) and a trustee (the seller), contracts of sale will resume their English format and will become contracts of trust. In this manner, the rule in Boker, supra n. 80, may be changed. Apart from the textual difference between secs. 9 and 12, and sec. 14 on the question of the mental element, which, as we have said, probably does not reflect a substantive difference, there is another difference: whereas secs. 9 and 12 give immediate priority to the first right when the necessary conditions are fulfilled, the Trust Law leaves the question of the priority of the beneficiary's right to the discretion of the court.

⁸² Where the property was damaged while in the possession of a third party in good faith, the third party will incur the liability of a borrower, in that he is holding the property without giving any consideration (sec. 1(d) of the Bailees Law). He incurs liability of the highest degree (sec. 2(c) of the Bailees Law).

⁸³ Obviously, if in the course of the breach of obligation, a tort which requires no special mental attitude (such as conversion) has been committed this con sequence would not be very grave.

⁸⁴ This result could also be achieved by interpreting sec. 14 and giving the court discretion whether to impose on the third party the liability and obligation of the trustee. See text at nn. 104–105 and also at nn. 128–130.

⁸⁵ And if not directly, then by way of analogy.

⁸⁶ See text at nn. 119–126 below.

⁸⁷ In tort law, the remedy of invalidation does not exist, but under certain circumstances, the tort doctrines will entail invalidation of the act between B and C Thus, the contract between A and B forbids B to make a contract with C without A's consent; C made a contract with B, knowing of this clause and without A's consent. In doing so, he caused a breach of contract vis-à-vis A. The order against C will remove the consequences of the breach by invalidating the transaction between B and C: Esso Petroleum Co. Ltd. v. Kingswood Motors (Addlestone) Ltd. [1974] KB 142. See also the comment of Eveleigh J. expressed obiter dicta, in Midland Bank Trust Co. Ltd. v. Green [1979] 3 All ER 28, 37–8. On appeal, the decision was reversed, but not on this point [1981] 1 All ER 153.

⁸⁸ In these cases, will the other sanctions in sec. 9(b) of the Agency Law and sec. 14 of the Trast Law apply to the third party? It seems that the answer is positive, for the third party does not need to improve his position if the act is void, and not merely voidable. Thus, if the third party had knowledge of the breach of fiduciary obligation on the part of the agent, the principal will be entitled to sue the third party for compensation, as specified in sec. 9(b), even though the right of repudiation will have no significance in such a case. As for the effect of the act in a case in which special legal provisions regulate such effects—may these provisions be incorporated into the general law? Thus, for example, sec. 21 of the Legal Capacity and Guardianship Law states that an act of the parents which requires the Court's approval under sec. 20(5) of the Law will be valid even without such approval, if the third party had no knowledge and was not required to know that approval was necessary. We therefore see that the third party acquires “immunity” due to an absence of an “incriminating” mental element. If he knew or ought to have known, and there was no approval, the act is void, but sec. 14 may be invoked, according to which he will incur the responsibility and obligations of the trustee. (If he gave no consideration, the defense in sec. 21 will in any case not apply. The act will be void according to sec. 20(3) of this Law (On sec. 20, see Sharf v. Evar (1980) (IV) 34 P.D. 178), and even here, it will be possible to apply the provisions of sec. 14). It is clear however that where the acts with the third party are void the proprietary remedies of the Trust Law are of no great significance, since the property—due to the void transaction—had not been legally transferred to the third party and the beneficiary is entitled to the property, its substitute and proceeds by virtue of his real right.

⁸⁹ Sometimes by way of non-disclosure: sec. 15 of the Contracts (General Part) Law.

⁹⁰ According to sec. 14(a) of the Contracts Law.

⁹¹ Barak has a different view, according to which, invalidation under sec. 9 will be governed by the Contracts (Remedies for Breach of Contract) Law, 1970, by way of analogy; supra n. 22 at 416.

⁹² Unless we say that in such a case, the transaction with the third party is void for noncompliance with the provisions of the law or for illegality, in which case the trustee is not bound by it in any case (see supra n. 88).

⁹³ This separation of the rights in the property between the trustee and the beneficiary does not exist in many cases of fiduciary relationships. The act of a director who makes a contract in the name of the company is an act of the company, and the rationale underlying the court's authority to invalidate the act does not apply. The case is more similar to agency, in which the principal has the power to repudiate. What, then, is the law? In the case of a defect in the making of the contract (due to the third party's notice of the breach of obligation on the part of the director to the company), general contract law will apply, affording the company the right to repudiate. Beyond this (as in a case in which the third party gave no consideration) either contractual norms or sec. 14 may apply. In any case, it seems possible to apply sec. 14, according to which the third party incurs the responsibility and obligations of a trustee. The rule according to which the court has the authority to set aside acts tainted with a breach of fiduciary obligation is followed in Anglo-American law as well: Bogert, & Bogert, , Handbook of the Law of Trusts (St. Paul, 5th ed., 1973) 555, s. 154.Google Scholar This remedy serves the same purpose as the constructive trust i.e., granting priority to the beneficiary: For an application see In re Estate of Rothko 372 NE 2d 291 (1977).

⁹⁴ But see the view of Ginossar, , “Rights in Rem—A New Approach” (1979) 14 Is.L.R. 286Google Scholar, according to which secs. 9 & 12 entail the invalidation of the second transaction. If the intention was that the consequences of the second transaction be invalidated, i.e. invalidation of the real right of the third party, we agree with it, but if the reference is to an invalidation of the second transaction per se, e.g. cancellation of the contract between B and C.

⁹⁵ If we compound sec. 14 of the Trust Law with sec. 5 of that Law, see supra n. 26, our conclusion will be that a third party who does not acquire trust property in good faith, is always subject to the trust, and in addition, the court has discretion to invalidate the act. This is the proposal of Weisman in his article, “Shortcomings in the Trust Law”, supra n. 26 at 399. Weisman's proposal is similar to the rule prevailing in Anglo-American law which implements A's priority by fixing a constructive trust on the property, but can reach the same result by setting aside the tainted transaction with the third party (supra n. 93). The difference between Weisman's proposal and the Anglo-American rule, is that according to sec. 5, priority is granted to the beneficiary's right only where the third party did not act in good faith, and it does not take into account the element of consideration. This element is discussed in sec. 14 and for the sake of harmony it seems that sec. 14 (and not 5) should govern the problem in all respects, including that of priorities, even where the third party did not act in good faith.

⁹⁸ In Wertheimer v. Harari (1980) (IV) 34 P.D. 645, the Supreme Court refused to enforce the contractual right of A, because Centered the scene by using sec. 3(4) of the Contracts (Remedies) Law in order to give C precedence over A. In the further hearing of Wertheimer v. Harari (1981) (III) 35 P.D. 253 the Court, in a majority opinion (per Barak I.) overruled the decision. It seems to us that the minority opinion expressed by Kahan J. (supported by Cohn J.) is preferable: according to this opinion, the priority determined by sec. 9 may change due to C's entering into the picture, which would render enforcement in favour of A unjustified. Nevertheless, the final outcome in that case (giving A priority) seems more justified, for C's only advantage—from the facts which emerged—was that he paid a greater sum of money on account. Sec. 39 of the Contracts (General Part) Law may serve as another means of changing the priorities: A's right vis-à-vis C is a right arising from an obligation by virtue of law, and is subjected by sec. 61 (b) of the Contracts Law to sec. 39 of that Law. According to this section A may be precluded from asserting his right, thus granting priority to C. This possibility was raised by Barak J. in the further hearing of the Wertheimer case, but was left undecided. The Unjust Enrichment Law provides another instrument. A's right vis-à-vis C may be regarded as a right whose theoretical basis lies in sec. 1 of the Unjust Enrichment Law. See Grabelsky-Cohen, supra n. 18 at 68–70. If so, this right will be subject to the general defense contained in sec. 2 of the Unjust Enrichment Law, on the assumption that this defense applies to quasi-contractual causes of action found in other laws. (This assumption is welcomed by Friedmann, supra n. 30 at 50–54, but is not accepted by Mazuz, M. in his article: “Circumstances under which Restitution is Unjust—Section 2 of the Unjust Enrichment Law, 1979” (1980) 10 Mishpatim 487 at 530–1Google Scholar).

⁹⁷ It would seem that amongst the considerations weighed by the court in determining priority under sec. 14, the following could be listed: the negligence of the beneficiary in realizing his rights; non-registration of a note (when this is possible) concerning the trust; (sec. 4 of the Trust Law provides for registration of a note in respect of trust property transactions which require registration. It seems that the section is not designed to apply to fiduciary relations which are not grounded in an express trust.); the degree to which C fulfilled his obligations in the transaction between himself and the trustee; the damage which C will suffer if he is deprived of the property, as opposed to that caused to A, if the transaction with C will be upheld. These considerations helped the party to the conflicting transaction who did not acquire the status of a purchaser in good faith and for value in Estate of Blum v. Nahum (1977) (II) P.M. 16, and granted him priority. But the Wertheimer decision (supra n. 96) in which the rule in the Blum case was upheld, was overruled in the further hearing. Nevertheless, the circumstances regarding the third party in the Blum case were infinitely more serious than those in Wertheimer, and it is therefore not clear whether the Supreme Court, which in the final analysis (in the further hearing) preferred A to C, would have reached the same decision under the facts of the Blum case.

⁹⁸ On this problem, see Grabelsky-Cohen, supra n. 18 at 77, n. 198.

⁹⁹ If the court invalidates the whole act, the third party is likely to be furnished with several causes of action against the trustee by virtue of sec. 12 of the Contracts (General Part) Law, and possibly an action in torts for negligence (sec. 35) and fraud (sec. 56), as well as an action for restitution in the appropriate cases by virtue of sec. 1 of the Unjust Enrichment Law.

¹⁰⁰ On the possibility of treating the “and” as “or”, see Rabello, , “Section 12 of the Contracts (General Part) Law, 1973” in Collection of Lectures from Judicial Study Sessions (Jerusalem, 1975), 57, 61.Google Scholar This conclusion enhances the possibility of applying the sections also to those cases in which the acts involving a breach of fiduciary obligation are void ab initio. Cf. n. 88, supra. In discussing repudiation of the act under sec. 9(b), Barak mentions the right to compensation from the third party as one of the consequences of the repudiation: supra n. 22 at 417, This does not necessitate the conclusion that he holds that this right is contingent upon repudiation of the act.

¹⁰¹ See text at nn. 89–91.

¹⁰² Sec. 22 of the Contracts (General Part) Law.

¹⁰³ of course, he may turn to other general remedies, such as sec. 12 of the Contracts Law.

¹⁰⁴ These alternatives naturally recall the equitable remedies of English law. According to these, the plaintiff may realize his right to trace the property by means of an equitable lien or by means of his right of ownership. For the distinction, see Friedmann, supra n. 60, at 292–4.

¹⁰⁵ See supra n. 84. A fourth, and rare possibility is to exempt altogether the third party, though not a purchaser for value without notice.

¹⁰⁶ Barak secs this as a type of transfer of obligation: supra n. 22 at 418. The difference between the action against the third party and a transfer lies in the fact that a transfer terminates the relationship between the creditor and the debtor/transferror, and gives rise to a relationship between the creditor and the transferee, (the new debtor) whereas here, the two relationships—principal/agent, principal/third party—remain co-extensive. The idea of a transfer, “in the broad sense”, of the fiduciary obligation from the trustee to the third party appears in John v. Dodwell & Co. Ltd. [1918] AC 563, in which it was decided that the third party who takes property from an agent, when he knows of the breach of fiduciary obligation, holds the property “under a transmitted fiduciary obligation to account for the principal” (emphasis added).

¹⁰⁷ Sec. 13 of the Contracts (Remedies for Breach of Contract) Law.

¹⁰⁸ E.g. the agent foresaw damage that the third party could not foresee. On an analogous situation of a different forseeability of a person in breach of contract and a person causing the breach, see Meyuchas v. Shiff et al. (1962) 16 P.D. 128, 133–4.

¹⁰⁹ The presumption in sec. 54 of the Contracts (General Part) Law concerning joint and several liability will apply to them.

¹¹⁰ Subject to the power to reduce compensation under sec. 15 of the Contracts (Remedies for Breach of Contract) Law.

¹¹¹ On the possibility of holding the person in breach and the person causing the breach jointly liable, see Lavi v. “Magen” Liberman Ltd. et al. (1974) (II) P.M. 263, in which the Court ruled that with respect to compensation, the person in breach and the person causing the breach are liable jointly and severally. What is the normative basis for this? The obligation of contribution may be grounded in sec. 56 of the Contracts (General Part) Law, 1973, which provides, in sub-sec. (a), that “Where two persons are under one obligation, it is presumed that as between themselves they bear it in equal shares”. The root of the problem lies in the interpretation of the words “one obligation”. If they refer to the source of the obligation, then it cannot be said that the person in breach and the person causing the breach are bound by one obligation. If these words refer to the substantive content of the obligation, in our case, the obligation to compensate the injured party for one sort of damage he suffered, then the claim may be based on sec. 56. It could also be contended that the criterion of “intention”, the test by which two people will be regarded as bound by one obligation, if they intended to be obligated in concert (Zeltner, , Contract Law in the State of Israel (Tel Aviv, 1974) 318Google Scholar), applies here, since the person in breach and the person causing the breach intended to bear the damage resulting from their common' action jointly (of course, on the assumption that the interference is a result of their corroboration). Another source for the obligation of participation may be found in sec. 4 of the Unjust Enrichment Law, which refers to repayment of the debt of another: in our case, if the person causing the breach paid the full compensation for the damage caused to the injured party, then with reference to part of the compensation, he will be regarded as having paid the obligation of the person in breach, and if so, he will be entitled to restitution of that part of the compensation from the person in breach. But here, too, the position is not absolutely clear. The question is whether full payment on the part of the person in breach constitutes repayment of the debt of the person causing the breach, and this question depends on whether the two are bound by the one obligation. In any case, we may always fall back on the general principle of restitution stipulated in sec. 1 of the Unjust Enrichment Law. In Anglo-American law, various authorities support the thesis that the person in breach and the person causing the breach are bound by a mutual obligation of participation: Bird v. Randall (1761) 96 ER 210, 128; Luke v. Dupree (1924) SE 13; Williams, , Joint Torts and Contributory Negligence (London, 1951) 128Google Scholar; and see now the Civil Liability (Contribution) Act, 1978.

¹¹² This is the rule resulting from Torquay Hotel Co. Ltd. v. Cousins [1969] 2 Ch 106, which was followed in Hassid v. Knopf et al., supra n. 16 at 225, 229–30, by Ben-Porat J. In the final decision, Ben-Porat J. was in the minority, but on all other points (apart from the point in dispute), the other justices, Kahan and Beisky JJ. concurred.

¹¹³ This is the view expressed by Denning J. in Torquay, supra n. 112, at 137–8, 140. This rule, too, was followed by Ben-Porat J. in the Hassid case, supra n. 112, at 230.

¹¹⁴ The identical source of liability in the Trust Law will enable us to regard the trustee and the third party as jointly liable. It is not clear whether the remedies in the Trust Law are the general remedies of tort law or those of contract law: see the text at nn. 49–50, supra.

¹¹⁵ Restatement, Restitution s. 133 caveat 49.

¹¹⁶ Friedmann, supra n. 13, at 552–3.

¹¹⁷ Meyer v. Executive of the Jewish Agency, supra n. 37. In that case, the employer sued in quasi-contracts and torts, and the Court allowed the action, for both causes. The Court did not allow the quasi-contractual action on the basis of the principle of waiving the tort of causing breach of contract, but regarded the two causes as independent. Neither can we learn from the laws of bribery any general rale of waiving the tort of causing a breach of fiduciary obligation, since the rules concerning bribery were fixed in England with no “special need for definitively stating whether the plaintiff's cause lies in the laws of quasi-contracts or the laws of tort. In both cases, the same rules, the same presumptions and laws of evidence, and the same extent of damage apply” (loc. cit. n. 37, at 297). It is, however, clear that the obligation of restitution is grounded first and foremost in the wrong committed by the third party against the beneficiary. As to the doubts regarding the classification of the cause of action in the case of bribery, see Bowstead, supra n. 35, at 350. Because of the gravity of the breach of fiduciary obligation in the case of bribery, the view was expressed that the claim for restitution from the trustee is added to the claim from the third party: Weinrib, supra n. 5, at 13–4. This view, based on the statement in the case of The Mayor of Salford v. Lever [1891] 1 QB 168, was criticized for being punitive and for affording unjustified profit to the beneficiary. Bowstead, at 349; Friedmann, supra n. 60, at 39, n. 3; 54, n. 55. A recent English decision overruled it: Mahesan v. Malaysia Government Officer's Cooperative Housing Society Ltd. [1978] 2 WLR 444. Here, the agent was in fact sued for restitution of the bribe and for compensation both (since the third party was not located), but the Court also considered the case in which the action was against the third party. For a critique of this decision, see Tettenborn, , “Bribery, Corruption and Restitution: The Strange Case of Mr. Mahesan” (1979) 95 L.Q.R. 68.Google Scholar

¹¹⁸ See text at nn. 89–91 above.

¹¹⁹ A tort in the broad sense—for from the point of view of compensation, the principal is entitled only to those damages specified in sec. 9(b) and not to compensation under tort law. Of course, it is possible that the factual situation described in sec. 9(b) will be identical with the tort of causing a breach of contract or other torts, and then the principal will in any case be able to sue the agent in torts: however, this will not always be the case.

¹²⁰ For a comprehensive discussion see Friedmann, supra n. 13. For an approach according to which the doctrine of “waiver of tort” does not exist any more in Israeli law in the light of sec. 6(a) of the Unjust Enrichment Law see Tedeschi, , “Performance by a Third Party and Restitution” (1980) 10 Mishpatim 17, 35–36Google Scholar; Tedeschi, , “Aspects of Unjust Restitution” (1981) 11 Mishpatim 385, 411.Google Scholar

¹²¹ See Ganaim v. Ganaim (1972) (I) 27 P.D. 414, 428; Rabello, , “The Gift Law, 1968” in Interpretations of the Laws of Contract, Tedeschi, , ed. (Jerusalem, 1979) 19–20.Google Scholar

¹²² Cf. Bourstein v. Bourstein (1978) (I) 34 P.D. 388.

¹²³ Friedmann, supra n. 13, at 532 et seq.

¹²⁴ Scott, , The Law of Trusts (Boston, 3rd ed., 1967) 3569 s. 506Google Scholar; Goff & Jones, supra n. 5, at 513, 572; Finn, supra n. 5, at 130 et seq.

¹²⁵ Polystick v. Cégécol S.A.S. (1975) (II) 29 P.D. 397, 403. For a similar decision in England: Printers and Finishers Ltd. v. Holloway [1964] 3 AU ER 7313. In Polystick, the Court did not go into the normative source of the cause of action against a third party in good faith, to whom it referred only in support of the basic proposition that the contractual fiduciary relationship between A and B is of such force as to affect C as well. In that case, it was ruled that in fact, the third party had knowledge of the fact that the discovery of information involved a breach of fiduciary relationship between the employer and the other party to the contract. Even in considering these facts, the Court did not elucidate the nature of the cause of action, and it extended the injunction, as a matter of course, to the third party as well. In our opinion, the third party could have been sued for causing a breach of contract, but in this case, the third party was a company controlled by the person in breach, and so it seems that here, the Court lifted the corporate veil, and bound the third party directly to the obligations and contractual rights of the parties to the contract. If the third party had acted in good faith, the cause would have been unjust enrichment. The injunction was intended to prevent further enrichment of the third party after the breach of obligation was discovered. As for the profits derived by the third party prior to the injunction, the rule is that he is not obliged to return such profits, unless they were derived after he acquired knowledge of the trustee's breach of fiduciary obligation: Scott, supra n. 124, at 3570 s. 506; Vulcan Detinning Co. v. American Can Co. (1913) 73 A 603.

¹²⁶ Goff & Iones, supra n. 5, at 542, relying on Stevenson Jordan & Harrison Ltd. v. MacDonald & Evans (1951) 68 R.P.C. 190; Fraser v. Evans [1969] 1 QB 349, 353. It is doubtful whether this would be the result in Israel, in view of the fact that a purchaser in good faith and for value precludes the court from applying sec. 14 of the Trust Law, unless we conclude one of the following: first, a trade secret is not “property” as defined in sec. 1 of the Trust Law, and the obligation of restitution will be based on sec. 1 of the Unjust Enrichment Law which is not limited by the doctrine of purchaser in good faith and for value. Second, if we presume that a trade secret does constitute property, sec. 1 of the Unjust Enrichment Law will apply as a supreme doctrine, rather than as a marginal arrangement subject to specific provisions. This conclusion is rendered problematic in the light of sec. 6(a) of the Unjust Enrichment Law, the provisions of which apply when there are no special provisions on the particular matter in other laws. Sec. 42 of the Trust Law does subject the provisions it contains to another law containing special provisions on the matter, but it seems that the stipulations for the obligation of restitution on the part of a third party following a breach of the fiduciary obligation as laid down in sec. 14 constitute a lex specialis on the matter of restitution. To the problem of determining the “special law” see Friedmann, supra n. 30 at 43 et seq.

¹²⁷ This problem does not arise in fiduciary relationships in which there is no separation of the rights in the property between the trustee and the beneficiary. See supra, n. 93.

¹²⁸ Restatement, Trusts 2d s. 292; Restatement, Agency 2d s. 314; Scott, supra n. 124, IV s. 292, 2386.

¹²⁹ See text at nn. 83–4 above.

¹³⁰ could be argued that the discretion of the court relates not only to the invalidation of the act as specified in sec. 14 but also to the question of whether the third party should incur the responsibility and the obligations of a trustee. See text at nn. 104–105 above.

¹³¹ As to the various criteria for “enrichment” see Friedmann, supra n. 30 (Part Two) 271–275. Cf. the question raised as to the scope of restitution under sec. 9 of the Contracts (Remedies for Breach of Contract) Law, namely whether in inflationary times the restitution is determined upon objective principles, i.e. upon the question what would a reasonable man have done with his money or upon subjective principles, i.e. what was the actual use of the money that should be restored: Kalanit Hasharon Investment and Building (1978) Ltd. v. Horowitz (1979) (III) 35 P.D. 533, 545–546.

¹³² Restatement, Trusts 2d s. 292; Scott, supra n. 124, IV s. 292, 2386.

¹³³ Here, too, the argument presented in n. 130 supra could be put forward. Cf. the position adopted by the Court with respect to the remedy of enforcement under sec. 3 of the Contracts (Remedies for Breach of Contract) Law in the cases of revaluation: enforcement will be granted, subject to a change in the obligation of the injured party who is seeking enforcement. However, some of the justices found a legal foundation for this position in sec. 4 of the Contracts (Remedies for Breach of Contract) Law: Rabinai v. Mann Shaked Co. (Ltd.) (in receivership) (1979) (II) 33 P.D. 281, 294. But see Reitberg v. Nissim (1970) (III) 34 P.D. 314, 333–334.

¹³⁴ Scott, supra n. 124, IV s. 292, 2387.

¹³⁵ From the day the action for invalidation is filed, or from the day the Order of invalidation is given. Cf. the force of an Order for fulfilling an obligation in an illegal contract, given by the court by virtue of sec. 31 of the Contracts (General Part) Law, as treated by Friedmann in his article, “The Consequences of Illegality in Israeli Law In View of the Provisions of Sections 30–31 of the Contracts (General Part) Law” (1977) 5 Iyunei Mishpat part 1, pp. 618, 634–6. See also the argument in n. 130 supra.

¹³⁶ Including a person who only ought to have known of the breach: Scott, supra n. 124, IV. s. 291.6, 2383. If the interpretation of “ought to have known” as being wider than “good faith” is accepted, then in any case it is possible that diminished liability ought to be borne by a person who ought to have known of the breach, as opposed to the liability of a person who had actual knowledge.

¹³⁷ Scott, ibid.

¹³⁸ Although the distinction might be drawn by means of a flexible construction, according to the circumstances, of the word “reasonably”.

¹³⁹ Here also the lack of distinction between a party in good faith and one who had knowledge of the breach may be overcome by means of the term “reasonable”. It will also be mentioned that sec. 3 talks of what the beneficiary has “reasonably expended or undertaken to expend or invested in order to obtain the benefit”. The words “to obtain the benefit” should be interpreted both widely and narrowly. Widely—not only the consideration for the acquisition of the property, but also every expenditure or investment which enhanced the value of the property; narrowly—when the benefit was not obtained directly from the benefactor (the beneficiary in a trust) but from the trustee, then the third party had no reason to deduct the consideration paid to the trustee for the property from the amount of restitution. The question of the third party's right to reimbursement for the price paid to the trustee must be discussed in the framework of his relations with the trustee, and it must not be confused with the right of the beneficiary to restitution of the property. Only where the consideration has been transferred to the beneficiary should the third party be allowed to deduct it from what he must restore. Cf. Scott, supra n. 124, ss. 2915, 2381–2. (Again, the problem is different, where there is no legal separation between the trustee and the beneficiary—supra, n. 93).

¹⁴⁰ It is interesting to compare the text of sec. 3, which leaves the court no discretion whether to recognize the right of the beneficiary to deduct his costs, and which employs only the criterion of reasonableness, with the text of sec. 5 which deals with a person acting to preserve the interests of another. This person must overcome, in addition to the problem of objective reasonableness, the requirement of good faith, and also subjective reasonableness which is measured from the point of view of the other person who receives the benefit (sub-sec. (c)). It would therefore be more convenient for a third party who improved the property to be awarded costs under see. 3 by way of setting off what he has to restore, rather than to independently sue for reimbursement of the costs of the improvements from the beneficiary.

¹⁴¹ The Unjust Enrichment Law does not expressly afford proprietary remedies, and it does not provide the beneficiary with the remedy of tracing against the third party. In cases in which the trust is not connected with a relation to property, the claim of the beneficiary against the third party will apparently be a personal one. This is the position of English law, under which the beneficiary's action for restitution of the bribe money is a personal, not a real action, and cannot create a constructive trust: Metropolitan Bank v. Heiron (1880) 5 Ex D 319; Lister v. Stubbs (1890) 45 Ch D 1; Powell & Thomas v. Evan Jones & Co. [1905] 1 KB 11. This rule was severely criticized: Underhill, supra n. 13, at 296–7; Goff & Jones, supra n. 5, at 509–11, Needham, , “Recovering the Profits of Bribery” (1980) 95 L.Q.R. 536.Google Scholar With respect to profits unlawfully derived by the agent (of which bribery is the classic case) we could reach an in rem solution by means of a combination of secs. 10(b) and 10(a) of the Agency Law: according to sec. 10(b) the principal is entitled to these profits, and according to sec. 10(a), the agent will be regarded as holding these monies in trust. This is a constructive trust, with all its ramifications. See Barak, supra n. 22, at 429. This is also the position under sec. 15 of the Trust Law, which regards such profit as part of the trust property. But it must be recalled that the Trust Law will apply directly only to fiduciary relationships which relate to a property. Further on these sections, see text at nn. 142 ff.

¹⁴² Sec. 10(b) of the Agency Law talks of the right of the principal to “any profit or benefit accruing to the agent in connection with the object of the agency”. Barak comments that “the section applies to “any” profit and benefit, whether attained in a forbidden manner or in a permitted manner”: supra, n. 22 at 429. The wording of sec. 15 of the Trust Law is more restrictive, in that it says that “A profit unlawfully derived by a trustee in consequence of the trust shall be treated as part of the trust property”. Apparently there is a real difference between these two sections. But it would seem that sec. 8(4) of the Agency Law blurs the distinction. That section states that the agent must not receive “from any person any benefit or any promise of a benefit in connection with the object of the agency” without the consent of the principal: as such, when the principal consents, the agent himself is entitled to derive profits, and sec. 10(b) will not apply. If consent was not given, then the agent was in breach of his obligation, and the profit was unlawfully gained.

¹⁴³ Supra, n. 41.

¹⁴⁴ See text at nn. 51–60.

¹⁴⁵ See supra, n. 60.

¹⁴⁶ Cf. sec. 52 of the Contracts (General Part) Law. The profit to which the beneficiary or the principal are entitled is a type of real substitute, and the possibility of the beneficiary or the principal to sue the third party by virtue of the original undertaking of the third party towards the trustee or the agent is a type of transfer. On sec. 52 see Cohen, N. “The Effect of an Exemption Clause on a Quasi-Contractual Right to Receive Money Acquired by the Contracting Party from a Third Party” (1980) 7 Iyunei Mishpat 460, 481 et seq.Google Scholar

¹⁴⁷ See Aviam v. State of Israel (1970) (I) 25 P.D. 665, 670–1. The Court emphasized that an employee who received a bribe must return all the money he received to his employer, even if he gained it through a criminal act, so that “a sinner shall not profit”. See Yoran, , “Muzzling the Threshing Ox” (1972) 28 HaPraklit 15.Google Scholar

¹⁴⁸ See Restatement, Contracts 2d s. 193, according to which a promise inducing violation of fiduciary duty is unenforceable on grounds of public policy. See also Jerusalem Industrial Co. Ltd. v. Agion, supra n. 8. This demonstrates the fact that the law will not allow a corrupt trustee to benefit from the fruits of his wrongdoings. On the application of s. 570 of the Restatement 1st (which preceded s. 193) see Colonell v. Goodman (1948) 78 F Supp. 845. A third party promised to pay a company director a sum of money for the director's services to the third party, as a consequence of which the company lost an important client. The director's action against that third party failed. See also McEwen v. Star Kist Foods Inc. (1966) 251 F. Supp. 33. Under Israeli law, such an action will not necessarily fail, in view of sec. 31 of the Contracts (General Part) Law, but even then, in the final analysis the beneficiary/injured party will be entitled to the amount received by the trustee from the third party by virtue of sec. 15 of the Trust Law, (and sec. 10(b) of the Agency Law).

¹⁴⁹ Shiff would have been considered a constructive trustee of this money. See supra, n. 141.