The International Arbitration Review: Israel

Introduction

i Legal framework

The legal framework for arbitration in Israel is set in the Arbitration Law, 1968 (Arbitration Law) which governs all arbitrations conducted in Israel, domestic or international. The criterion for determining whether an arbitration is domestic or international is not defined in the Arbitration Law. However, Section 1 of the Arbitration Law defines a 'foreign award' as an award rendered outside Israel. Hence, an international arbitration is an arbitration the seat of which is outside of Israel.

While there is no specific law on international arbitration in Israel, the Arbitration law provides specific provisions regarding international arbitration concerning stay-of-court proceedings in case of arbitration agreements providing that the seat of arbitration shall be outside Israel and enforcement of foreign arbitration awards.

Additionally, recently the Israeli Ministry of Justice has drafted a bill of Law on International Commercial Arbitration, which is based on the United Nations Commission on International Trade Law (UNCITRAL) Model law. It is expected that the bill will be enacted as law soon, and that consequently, there will be two laws – the current law for domestic arbitrations, and the new law for international arbitrations.

ii The court system

The Israeli court system is comprised of three levels of courts – the Magistrates' Court, the District Court and the Supreme Court. In 2018, an amendment to the Arbitration Law changed the definition of the court having jurisdiction with respect to arbitration. Prior to the amendment, the court that had jurisdiction was the District Court. The amendment 'court' was made to 'the court having jurisdiction, in accordance with any law, in the matter agreed to be referred to arbitration'. Thus, the rules regarding substantive jurisdiction of the courts in court litigation apply also to arbitration. Therefore, in cases in which the Magistrates' Court would have jurisdiction in a case before it, it will also have jurisdiction on arbitration matters.

iii The arbitration agreement

Section 1 of the Arbitration Law defines an arbitration agreement as 'a written agreement to refer to arbitration a dispute which has arisen between parties to the agreement or which may arise between them in the future, whether an arbitrator is named in the agreement or not'.

The Arbitration Law requires that the arbitration agreement be in writing but it does not have to be signed. However, the signature could be used as a matter of evidence to prove acceptance by referring to the signature. When a party to an arbitration agreement is a legal entity, the law that governs the specific legal entity determines the conditions required for a signature to be binding.

Israeli courts have recognised that an arbitration agreement may extend to third parties in the case that the interpretation of the arbitration agreement leads to the conclusion that these parties expressly or implicitly agreed to be bound by the agreement. Third parties may be bound by an arbitration agreement by way of assignment, or when the circumstances are such that the objection by the third party is formal and artificial.

The Arbitration Law does not recognise an oral arbitration agreement. However, an oral arbitration agreement is considered to be a contract by the Contracts Law. Thus, while the Arbitration Law does not apply to oral arbitration agreements, the general provision of contract law applies.

iv Arbitrability

Under Section 3 of the Arbitration Law 'an arbitration agreement in a matter which cannot be the subject of an agreement between the parties is invalid'. According to Section 30 of the Contracts Law (General Part), 1973, a contract which in its formation, content or purpose is illegal, immoral or against public policy is void. The following matters cannot be settled by arbitration: criminal matters, claims regarding the juridical status of a person, inalienable statutory rights, real property rights of non-parties, and claims regarding mandatory statutory rights, such as employment rights.

It is usually accepted that, unless otherwise provided, the law governing the arbitration agreement is the same law that governs the contract.

v Enforcement of arbitration agreements

When a party files a claim before a state court in a dispute that is subject to an international arbitration agreement, the court will at first wait for the defendant's reply to see if it agrees to its jurisdiction or requests a stay of proceedings as a result of the arbitration clause. When a party does not object to the jurisdiction of the court, the court will hear the dispute submitted to it.

Stay of proceedings in domestic arbitrations is subject to Article 5 of the Arbitration Law. Under Article 5, the default position is that the court shall stay the proceedings, but it has discretion to refrain from doing so for special reasons. A defendant who seeks stay of proceedings as a result of an arbitration clause in domestic arbitration must show that it was willing and is still willing to pursue the arbitration.

Stay of proceedings in international arbitrations (i.e., arbitrations not seated in Israel) is governed by Article 6 of the Arbitration Law. The Article incorporates the enforcement provision of Article II(3) of the New York Convention which, by implication, denies the court any discretionary power and directs it to 'refer the parties to arbitration' unless it finds that any of the exceptions enumerated in the Article – that is, that the agreement 'is null and void, inoperative or incapable of being performed' – exist. Despite broad international acceptance of the mandatory referral rule in Article II(3) of the Convention, Israeli courts have not fully recognised it. Although there are instances where a court's rhetoric suggests recognition of this principle, a close analysis of the case law reveals that in fact Israeli courts have failed to follow a uniform discourse on the issue and in some cases concerning the enforcement of international arbitration agreements, the courts apply rules regarding domestic arbitration, thereby increasing their discretion in not staying proceedings.

vi Selection, appointment and challenge of arbitrators

The parties are free to appoint any person they wish to the tribunal. They may agree on the method of selection of the tribunal. They may agree that the tribunal will be composed of a sole arbitrator, two arbitrators, three arbitrators or more. Thus, the parties may agree that the number of arbitrators will be uneven or even. The parties may entrust the role of appointing the tribunal to a third party or to the court. When the parties do not agree on the method of appointment of the tribunal, or when their method fails, they may apply to the court and request that it appoint an arbitrator. When the parties agreed to appoint an arbitrator each and one of the parties fails to do so, the other party may file a motion to the court for the appointment of that arbitrator.

The Arbitration Law requires that the arbitrators act loyally towards the parties. Accordingly, they have to disclose any circumstances that may affect their impartiality or independence. The Arbitration Law does not impose on the arbitrators any obligation to disclose existing or potential conflicts of interests, but according to the caselaw they are expected to do so. Courts have applied the rules concerning the impartiality and independence of judges by analogy to arbitrators.

A party may challenge an arbitrator before the court having jurisdiction once the circumstances giving rise to the challenge arise. It may do so during the arbitration, but also after the award is rendered, by way of a motion to set aside the award. However, if the party chooses to wait until after the award is rendered, it must raise an objection to the jurisdiction during the arbitration, so as not to lose the right to object.

vii Separability and competence-competence

The Arbitration Law does not include a provision on the separability of the arbitration agreement. However, it is usually accepted that an arbitration agreement is separate from the main contract. When the arbitration agreement itself is tainted by the same defects as the main agreement, such as an agreement signed by someone who had no authority to do so, or someone who lacks juridical capacity, the arbitration agreement will be considered to be null and void.

The Arbitration Law does not address the issue of 'competence-competence'. The case law on the matter is that if the parties expressly empower the tribunal to rule on its jurisdiction, it may do so. However, if the parties did not empower the tribunal to do so, it would be up to the court to rule on the matter. When the parties did not empower the arbitrators to rule on their jurisdiction, they cannot do so and the court may intervene and rule on the matter at the request of a party. An arbitrator may request that the court rule on any jurisdictional issue by way of a case-stated procedure. The courts have full discretion to review either positive or negative rulings on jurisdiction by arbitral tribunals. The court will address any jurisdictional objection without taking into account any prior decision rendered by the tribunal on the matter, unless the parties empowered the tribunal to rule on its jurisdiction by way of an award. In such a case, the court will review the award in a setting-aside procedure.

viii Interim and provisional relief

The Arbitration Law does not refer to the arbitrator's power to issue interim measures. The question as to whether the arbitrator may have that authority or not is not settled in Israeli case law. The common perception is that an arbitrator is not authorised to issue any such measures and that the power is entrusted only with the court. However, the parties may agree to empower the tribunal to do so. It should be mentioned that, even in the event that the parties empower the tribunal to grant such measures, its decisions will bind the parties only, not third parties.

The Arbitration Law empowers the court to grant preliminary and interim relief in support of arbitration. The court will grant such relief following the same criteria it applies in public litigation. Article 16 of the law provides that the court shall have the same powers in arbitration as it has in an action brought before it to order interim measures, such as interim attachment of a property, interim injunctions and the prevention of a party to depart Israel. Thus, the competent court has the authority to order any kind of interim measure that is available to the court in general.

In arbitrations seated outside Israel, the court has jurisdiction to order interim relief. The most common relief is the attachment or protection of property.

ix Procedural rules governing the arbitration

The parties are free to agree on the rules governing the arbitral procedure. Failing any agreement, the First Schedule of the Arbitration Law applies. The First Schedule provides the Tribunal with power to rule on procedural matters. The First Schedule of the Arbitration Law provides for the following default rules:

  1. the arbitration shall be before a sole arbitrator unless a greater number of arbitrators has been stipulated;
  2. in an arbitration before an even number of arbitrators, the arbitrators shall, on the demand of one of them, appoint an additional arbitrator. Where an additional arbitrator has been appointed, he or she shall be the chairperson of the tribunal;
  3. in an arbitration before an uneven number of arbitrators, the arbitrators shall elect a chairperson from among themselves;
  4. the arbitration chairperson may fix the place and time of the arbitration sessions and decide anything concerning the procedures thereof;
  5. the decisions of the arbitrators, and the award, shall be made by a majority of votes. In the absence of a majority for the final award, the opinion of the chairperson shall prevail. An arbitrator left in the minority may record his or her dissenting opinion in the award;
  6. where an umpire has been appointed in an arbitration, he or she shall assume his or her functions after the other arbitrators, or one of them, have or has given him or her and the parties written notice that there is no majority vote for the final award. Upon assuming his or her functions, the umpire shall take the place of the other arbitrators;
  7. where an arbitrator assumes his or her office as an additional arbitrator, umpire or substitute arbitrator, the arbitration shall continue from the stage that it has then reached, unless the arbitrator otherwise requests;
  8. the arbitrator may direct the parties to answer interrogatories, to disclose and produce documents and to do any other thing connected with the conduct of the arbitration, as a court might do in an action brought before it;
  9. where the arbitrator orders a party to do anything connected with the conduct of the arbitration, and without any justifiable cause that party does not comply with the order, then, after warning that party, the arbitrator may dismiss the claim, if the order was made against the plaintiff, or strike out the defence and decide the dispute as if the defendant had not submitted a defence, if the order was made against the defendant;
  10. the arbitrator shall not hold a session in the absence of a party unless he or she has warned him or her, in writing or orally, that he or she will proceed at that session in his or her absence if he or she does not attend;
  11. before taking evidence, the arbitrator shall warn the witness that he or she must testify truthfully, otherwise he or she will be liable for the penalties prescribed by law;
  12. where the determination of the dispute involves a matter requiring expert knowledge, the arbitrator may, at any stage of the proceedings and after giving the parties a suitable opportunity to state their cases, direct that the matter be referred to the opinion of an expert appointed by him or her. A copy of the opinion shall be delivered to the parties, who may oppose it and demand an examination of the expert as if he or she were a witness on behalf of the arbitrator. The arbitrator may refrain from hearing the evidence of other experts on a matter he or she has referred to an expert, if he or she has notified the parties on that in advance and they have not objected;
  13. the arbitrator shall place the arbitration file at the disposal of the parties, at any reasonable time, for inspection and copying;
  14. the arbitrator shall act in such a manner as appears to him or her most conducive to reaching a just and speedy determination of the dispute, and he or she shall decide to the best of their judgement according to the material before them. The arbitrator shall not be bound by substantive law, by the rules of evidence or the rules of procedure applicable in the courts;
  15. the arbitrator shall state his or her reasons for the award;
  16. the arbitrator shall make the award within three months from the day on which he or she started to deal with the dispute, or on which he or she was called upon to deal with it by a party by a written notice, whichever is the earlier date. Nonetheless, the arbitrator may extend that period by up to three additional months;
  17. the arbitrator may submit to the court's opinion a legal question arising in the course of the arbitration, or the whole or part of the award, by way of a case stated;
  18. the arbitrator may grant a declaratory award, a mandatory or prohibitive injunction, an order for specific performance and any other relief that the court is competent to grant, and he or she may also make an interim award that determines the subject-matter of the arbitration in parts;
  19. the arbitrator may issue directions as to the whole or part of the parties' expenses, including the attorney's fee, and his or her fees and expenses, and he or she may direct to deposit these sums or to provide security for their payment. Unless the arbitrator otherwise directs, the parties shall pay him or her his or her fees and expenses in equal shares;
  20. the arbitrator shall retain the arbitration file for seven years after the completion of the arbitration; and
  21. a document concerning the arbitration sent to the arbitrator, or to a party by registered mail with a certificate of delivery, shall be deemed to have been delivered to the addressee on the date indicated in the certificate of delivery or in the certificate of refusal to receive the document.

x The arbitration award

The Arbitration Law provides that an arbitration award shall be in writing and signed by the arbitrator, indicating the date when the award was signed. When the arbitration tribunal is composed of more than one arbitrator, the signatures of the majority of the arbitrators are sufficient, if it is indicated in the award that the other arbitrators are unable or unwilling to sign it. Unless otherwise agreed by the parties, the award must be reasoned.

The tribunal may award a monetary relief and, unless otherwise agreed by the parties, it may grant a declaratory award, a prohibitive award, a specific performance award or any other relief that the court may grant in proceedings before it. Unless otherwise agreed by the parties, the tribunal is empowered to award costs, including legal fees, in addition to the tribunal's costs and fees. Generally, the tribunal will allocate legal costs to the prevailing party. While in public-court litigation the courts tend to award nominal costs, in arbitration tribunals, especially in complex arbitrations, real costs tend to be awarded. As for awarding interest, if parties agree on the interest to be awarded, the tribunal will be bound by the agreement. If the parties do not agree on the interest, the tribunal has the authority to award interest in accordance with the Ordering of Interest and Linkage Law, 1981.

xi Setting aside the arbitration award

According to Article 24 of the Arbitration Act, an arbitration award may be set aside for the following grounds:

  1. the arbitration agreement was not valid;
  2. the award was made by an arbitrator not properly appointed;
  3. the arbitrator acted without authority or exceeded the authority vested in him or her by the arbitration agreement;
  4. a party was not given a suitable opportunity to state his or her case or to produce his or her evidence;
  5. the arbitrator did not determine one of the matters referred to him or her for determination;
  6. the arbitrator did not assign reasons for the award although the arbitration agreement required him or her to do so;
  7. the arbitrator did not make the award in accordance with law although the arbitration agreement required him or her to do so;
  8. the award was made after the period for making it had expired;
  9. the contents of the award are contrary to public policy; and
  10. a ground exists on which a court would have set aside a final, non-appealable judgment.

The Arbitration Law provides that the court may dismiss an application to set aside an award, notwithstanding the existence of one of the grounds specified above, if it is of the opinion that no miscarriage of justice has been caused.

An application to set aside the award must be filed to the court within 45 days of the date of receipt of the award. However, in the case that a party filed an application to confirm the award, the party who wishes to set aside the award must file the application to set aside within 15 days of the date of receipt of the application to confirm.

The parties may agree that the award will be subject to appeal before one or more arbitrators. In this case, the grounds for setting aside the award by the court are two: (1) the contents of the award are contrary to public policy, and (2) a ground exists on which a court would have set aside a final, non-appealable judgment.

The parties may also agree that the award shall be subject to appeal before the court. In such cases, the court may grant leave to appeal, and will grant the appeal if it considers that the award is based on a fundamental error in applying the law, which caused a miscarriage of justice.

xii Appealing an arbitration award

The parties cannot exclude the court's power to set aside the arbitration award. They may, however, limit the scope of review when they agree that the award will be subject to appeal before an arbitrator, or expand the scope when they agree that the award shall be subject to appeal before the court. This means that, if the parties opted for a possibility of appeal on the arbitration award before an arbitrator, the grounds for setting aside the award in the appeal (or the award at the first instance in the case that no appeal was filed) will be limited to two extreme grounds: public policy and the case of annulling a non-appealable judgment.

The limitation of the grounds of setting aside the award make the option of appeal before an arbitrator a risky option. Parties should be cautious in choosing this option, as there is no real benefit in it.

When the parties agree that the award will be subject to appeal before the court and the court grants leave to appeal, it will review the award on the merits. The court does not grant leave to appeal easily, as its tendency is not to interfere in arbitration awards.

When the parties agree that the award will be subject to appeal before an arbitrator, the grounds for setting aside the award will be limited to two: (1) the contents of the award are contrary to public policy, and (2) a ground on which a court would have set aside a final, non-appealable judgment.

xiii Enforcement of foreign arbitration awards

Israel is a signatory to the New York Convention. It ratified the Convention in 1959, and in 1974 it incorporated the provisions of the Convention by way of an amendment to the Arbitration Law. Enforcement of a foreign award is subject to the New York Convention. The court will examine whether the requirements of the Convention are fulfilled. Generally, the Israeli courts are considered to take a pro-enforcement stand on foreign arbitration awards.

As for awards set aside by the courts of the seat of arbitration – there is no precedent on the matter, but it is reasonable to think that the courts will take into account this fact when deciding whether to enforce any such awards. When an award is subject to setting-aside proceedings before the courts of the seat, Israeli courts would stay proceedings until the court of the seat has rendered its decision.

The year in review

i Developments affecting international arbitration

The main development that is expected to affect international arbitration is the bill of the law on international commercial arbitration, which was suggested by the Ministry of Justice. Once enacted into law, there would be two arbitration legislations – one for domestic arbitration and one for 'international arbitration' as defined in the arbitration bill. The bill adopted the UNCITRAL Model Law definition of 'international arbitration' but left out the possibility of the disputing parties to agree that their arbitration is international.

It is expected that the adoption of the new law will bring challenges for Israeli courts which will have to deal with the adoption of the law and the need for unification which the Model Law aims to achieve. This is especially true because under the arbitration bill, the court having jurisdiction would not be the District Court in all cases, but the court that would have otherwise had jurisdiction.

ii Arbitration developments in local courts

In February 2021 the Supreme Court rendered a decision concerning its ability to order a party that opposes enforcement proceedings pursuant to the New York Convention, to provide security for costs as a condition for hearing its objections.2 In this case, the appellant argued that the court has no jurisdiction to order security for costs as a condition for hearing of its objection to motion to enforce the award. The court referred to Article 6 of the New York Convention which provides that the party objecting to the enforcement may be ordered by the court requested to enforce the award to provide security in case that an application for the setting aside the award has been made to the court where the award was rendered. The court held that if according to the New York Convention it may order the provision of a security when there is an application to set aside the award, then there is no doubt that it could do so when there is no such application in the country where the award was rendered. Moreover, the Court held that according to Article 29 of the Arbitration Law the court has jurisdiction to set conditions for the hearing of a motion to set aside an award and that this provision applies also to objections to enforcement proceedings pursuant to the New York Convention.

In April 2021 the Supreme Court rendered a decision concerning the procedure that has to be taken regarding the recognition and enforcement of a foreign arbitration award.3 The Supreme Court held that the confirmation of an award in the country where it was rendered does not prevent a party from applying to the court to recognise and enforce the award pursuant to the New York Convention. In fact, the Court held that even if the award was confirmed as a judgment, the correct path to enforce it in Israel would be according to the New York Convention and as a foreign judgment. The Court added that generally if the award is set aside in the country where it was made, it will not recognise or enforce the award pursuant to the New York Convention save for exceptional cases, such as where the decision to set aside the award was rendered by a court that is not independent or biased.

In April 2021 the District Court of Tel Aviv rendered a decision regarding a motion to stay proceedings as a result of an arbitration clause providing for arbitration in Florida.4 The parties entered into an agreement that included an arbitration clause. A few years afterwards, Verso entered into another agreement with a third party, albeit in a related matter, which included an arbitration agreement with Israel as a seat of arbitration. A dispute arose between Verso and PAA and Verso filed a request for arbitration in Florida. A few hours later, PAA filed a claim against Verso in Israel. Verso filed a motion to stay the proceedings as a result of an arbitration clause and PAA filed a motion to order Verso to stay the arbitration proceedings until the court rendered its decision. The Court dismissed both motions. With respect to Verso's motion, the Court held that the fact that it entered into the agreement with the third party, which includes a different arbitration clause, means that there is a possibility that there would be two proceedings on the same matter – one in Florida and one in Israel, which may lead to contradicting decisions. This, according to the court is a ground to refuse staying the proceedings. With respect to PAA's motion, the court held that in fact it is requested to order an anti-suit injunction regarding the arbitration in Florida. The Court held that such a motion would be granted in exceptional cases and that this is not the case.

In March 2022 the District Court of Jerusalem rendered a decision concerning the enforcement of an arbitration agreement pursuant to the New York Convention in the framework of a motion objecting to the service of process of a statement outside the jurisdiction.5 The Court ruled for the defendant and ordered the stay of the proceedings. It held that the interpretation of the arbitration agreement should be broad as it held that 'all disputes arising in connection with this Contract shall be finally settled under the Rules of UNCITRAL . . . in London'. The Court held that the wording of the clause was wide and that it concerned all disputes between the parties. The court held that as the New York Convention applies to the case it has limited discretion in refusing to stay proceedings and that save for the conditions set in the Convention and those set by caselaw it shall stay the proceedings.

iii Investor–state disputes

In the past year there has not been any investor–state disputes concerning Israel.

Outlook and conclusions

While there has not been a major change in Israeli law and caselaw concerning international arbitration, it is expected that with the enactment of the law on international commercial arbitration, the courts will be faced with new challenging decisions.

Footnotes

1 Zvi Bar-Nathan is vice chairman and Daphna Kapeliuk is a partner at Goldfarb Seligman & Co.

2 LA 152/21 Gadi Bitan v. Lite Venture Holding Ltd (11 February 2021).

3 LA 44/21 BA Science (2009) Ltd v. Luminety Networks Ltd (21 April 2021).

4 CC 855-10-20 Verso America LLC v. PAA Production Adam Investment Ltd (28 April 2021).

5 CC 4958-05-21 Migdal Insurance Company Ltd v. MECS Inc-Dupont Clean Technologies (30 March 2022).

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