The stricken clause had allowed the courts to claim unlimited damages from anyone advocating or backing a boycott of Israel, without the accuser having to prove that he or she suffered any damages as a result.
The court did not, however, intercede in the greater part of the law, officially titled the Law for Prevention of Damage to State of Israel through Boycott.
The NGOs that petitioned for the cancelation of the law said in response that the court decision "delivers a severe blow to freedom of expression."
According to the law, proposed by Likud MK Ze'ev Elkin and enacted in July 2011, any call for an economic, academic or cultural boycott of Israel or bodies in Israeli territory, including the West Bank, is defined as "a civil injustice." Therefore, any organization or body targeted for a boycott can claim compensation from the initiators of the boycott, even if they do not suffer damages as a result. In addition, the law still allows the finance minister to halt state funding for any organizations participating in such a boycott.
In Thursday's ruling, the judges rejected petitions against clauses relating to administrative sanctions that the finance minister may impose on those calling for a boycott against Israel or undertaking to participate in such a boycott.
The judges did rule, however, to cancel the clause allowing the court to impose unlimited damages on someone calling for a boycott of Israel.
The ruling means that sanctions imposed by the state remain intact, as do civil claims. But while it will still be possible to sue an individual or organization over its call for a boycott of Israel, there will no longer be compensation claims for those who cannot prove damages, nor will there be the option of unlimited compensation.