Israel: The Value Of A Benefit That Was Produced By Using Someone Else's Assets

Background

Sometimes a person or a corporation makes use of an asset that is not owned by them but by someone else, with this use being by virtue of the fact that they have the "power" rather than a legal right to do so. The user has the ability to take the right or use the asset without needing to obtain the owner's permission and/or consent.

In some cases, the use or performance of the action causes the owner damage for which the law allows him compensation under the laws of torts. In other cases, the mere use does not cause the owner damage. For example, temporary use of real estate does not necessarily reduce its value. Nevertheless, a legal result in which a person takes the property of another without causing him damage and without being required to make compensation for such use, goes against the principles of the legal system.

This is where the laws of unjust enrichment¹ come into the picture, allowing the owner of the property (whose right was taken from him) to file a claim for restitution under the laws of unjust enrichment, due to the taking or use of another's property. Such a claim is based on the fact that the beneficiary took the owner's property or used it for his personal benefit, without obtaining the approval of the owner of the right/property. Temporary use is considered, for this matter, as having taken the property for the duration of the use.

The Rationale for the Relief of Restitution

In essence, the restitution relief is intended to return to the plaintiff the benefit that accrued to the defendant due to the unlawful taking of the right at the plaintiff's expense. Where under the laws of torts, the plaintiff's claim is to be compensated for the damage caused to him (assuming he endured such damage), here the goal is to transfer the economic value of the benefit (the enrichment) that has accrued to the defendant as a result of the unlawful taking of the plaintiff's right.

This distinction is important in those cases where, despite the defendant's infringing actions, the plaintiff suffered no damage, or only insignificant damage, but the defendant gained a very valuable benefit. In such cases, when the defendant's profit as a result of an unlawful action at the plaintiff's expense exceeds the latter's damage, the plaintiff will prefer to sue on the grounds of restitution that exists under the laws of unjust enrichment².

This restitution is not absolute, and the court has the authority to grant an exemption from the obligation of restitution or to reduce it if the enrichment did not put the plaintiff out of pocket or if there are circumstances under which the obligation of restitution becomes unjust³.

The Shafir Civil Engineering Case

The Shafir judgment⁴ dealt with a classic case of one party having used the other party's property. Shafir, a company that performs large infrastructure works, won a tender to perform a dirt project. When huge amounts of dirt are excavated, there is a need to find a place to put it all. Shafir decided to place the huge amounts of dirt on land that was partly owned by the plaintiffs, without having received their consent beforehand. The plaintiffs demanded the immediate removal of the piles of dirt from the land, but Shafir, which did not deny its obligation to remove the dirt, took about two years to complete the removal.

In its action, Shafir committed an act that establishes a tortious cause for the plaintiffs based on the tort of trespassing as well as a cause of restitution under the laws of unjust enrichment (taking someone else's property). Even though in this case it was possible to commence proceedings on both grounds (under the laws of torts and of unjust enrichment), it is clear that the plaintiffs cannot benefit cumulatively by receiving both compensation for the damage and restitution of the benefit, and they must settle for the higher of the two possible reliefs. In that case, the benefit that accrued to Shafir exceeded the damage caused to the plaintiffs, and the question came down to by which criterion should the value of the benefit that accrued to Shafir be assessed.

One way to assess the value of the benefit for the defendant is to determine what the proper usage fees are. In this context, it is necessary to find out what would be the amount required by the owners of the property for granting a permit for the use that was made of their rights. The rationale for this criterion is that Shafir saved itself the cost associated with obtaining the owner's consent, and the benefit it reaped must be evaluated according to the cost of obtaining this consent (agreement on usage fees).

The second way is based on a criterion of the profit that was generated for Shafir. Here we will examine the benefit that Shafir derived from the use of the property, that is, what is the benefit that was derived as a result of the use of the plaintiffs' land. Sometimes the benefit is the income it received, and sometimes the benefit is manifested in the fact that it avoided a large expense that it would have had to incur had it not used the plaintiffs' land.

According to the ruling of the Supreme Court, the two ways of evaluating the benefit (proper usage fees versus the infringer's profits) can be both examined according to a subjective measure and according to an objective measure. In principle, a ruling made in accordance with the laws of unjust enrichment will be based as much as possible on the concrete case. However, objective measures are used in many cases as a convenient and reliable way to assess the actual events. Therefore, when appropriate usage fees need to be determined or the profit that was generated, it is generally accepted and justified to use data that show the market prices.

As a general rule, when dealing in the taking of a proprietary right, which is usually fully protected under the legal system, the decision between the two criteria will be made according to the plaintiff's choice. That is, the owner of a proprietary right whose right has been violated, unlawfully, should be allowed to choose the higher of these two criteria⁵. Since the plaintiff's right was taken away from him without him having given his consent, it is appropriate to allow the plaintiff the choice between retroactive acceptance of the transaction, while charging the user of the right a retroactive consent fee, and rejecting the transaction, while charging the user restitution of the profits generated from the unlawful taking of the right. This rule is also justified in terms of policy considerations (in contrast, when the matter deals in the taking of a contractual right, the Supreme Court found that the plaintiff will not necessarily be entitled to choose between the generated profit and the proper usage fees).

Additional exceptions to the rule that allows the plaintiff to choose between proper usage fees and restitution of the infringer's profits are when the taking of the right was done in good faith, without the defendant knowing that the right is taken and immediately stopping the infringement after having discovered this, as well as in a situation where there is great discrepancy between the profit that was actually generated and the accepted usage fees for the specific use.

In the Shafir case, it was determined that it must be charged with the "profit" that was generated in the sum of the effective cost it would have incurred if it had placed the dirt on adjacent land with the approval of its owners, as well as the costs of transporting the dirt to that place.

In conclusion

When a person performs an action of the type of taking or using the property of another, he is exposed to a legal claim that is meant to compensate the other for the damage caused to him, or to return to the latter the benefit that arose from that action, at the choice of the plaintiff, in the absence of exceptions.

The evaluation of the value of the benefit will be done, as a rule, according to a subjective examination, but may also be according to objective criteria.

Footnotes

1. The Unjust Enrichment Law, 5739 – 1979 (hereinafter, the "Law")

2. Civil Appeal 290/80 S.G.M. Hanionim Ltd. v. The State of Israel (P.D. 3(2) 633).

3. Section 2 of the Law; Civil Appeal 7156/10 Yarkon Company Ltd. v. The State of Israel – The Israel Lands Administration [published in Nevo].

4. Civil Appeal 2019/21 Shafir Civil and Marine Engineering Ltd. v. David Matsliach [published in Nevo].

5. Civil Appeal 2287/00 Shoham Machinery Ltd. v. Harer [published in Nevo]; Civil Appeal 6744/20 The State of Israel – The Israel Land Authority v. Taber [published in Nevo].