Commercial arbitration: the process, advantages and disadvantages

Service page: Commercial contracts lawyer: drafting, review and enforcement.

What is commercial arbitration?

Commercial arbitration is an alternative way of resolving business disputes outside court. Instead of a judge deciding the dispute, an independent third party (called an arbitrator, or a panel of arbitrators) hears both parties and makes a legal decision. In a standard-form contract, for example with consumers, the position is different: a term providing that every dispute between the supplier and the customer will be decided in arbitration is presumed to be an unfair term (section 4(8) of the Standard Contracts Law, 5743-1982). For the routes in a consumer dispute, see Consumer class actions.

In Israel, commercial arbitration is governed by the Arbitration Law, 5728-1968, and international arbitration in a commercial matter seated in Israel, in a proceeding that began on or after 14 February 2024, by the International Commercial Arbitration Law, 5784-2024. Arbitration is often used in business disputes, both domestic and international.

Arbitration is a real alternative to court: it can be faster, less expensive and less public.

Did you sign an arbitration clause? What it means in practice

For there to be an arbitration, the parties first have to agree to it. Usually, an arbitration agreement is included in the contract between the two parties.

In the contract, the parties write something like: “Any dispute arising from this contract will be resolved by arbitration and not by a court.” That is an arbitration agreement. One line like this decides who will rule and under which procedure, so it is checked as part of legal support for commercial contracts, not after the dispute has broken out.

• Mandatory arbitration: if the contract provides for arbitration and one party goes to court anyway, the other party may ask for the proceedings to be stayed, no later than its first statement on the merits, and the court will stay them unless it sees a special reason why the dispute should not be decided in arbitration (section 5 of the Arbitration Law).
• Arbitration agreed later: even without an arbitration clause in the contract, the parties can agree in writing, after the dispute has broken out, to refer it to arbitration: an arbitration agreement can apply to a dispute that has already arisen (section 1 of the Arbitration Law).

The Arbitration Law applies to an arbitration agreement made in writing (section 1), and the stay is not automatic: the court stays the claim only at the request of a party to the agreement who is ready to go ahead with the arbitration (section 5(a)).

The arbitration process: the main stages

An arbitration goes through several stages:

• Choosing the arbitrators: the parties choose the arbitrators, usually one arbitrator or three, according to the contract; if no larger number was set, the arbitration is before a single arbitrator (item 1 of the First Schedule to the Arbitration Law). The arbitrators should be independent and have experience in the field of the dispute.
• Statement of claim and statement of defense: each party files documents that set out its arguments: claims, defense and evidence.
• Presenting evidence: each party brings evidence (documents, testimony) that supports its arguments.
• Hearing: each party presents its position before the arbitrators, as in a court hearing, but usually shorter and more flexible.
• Arbitration award: the arbitrators issue a decision (called an arbitration award), which is final and binding on both parties.
• Enforcing the award: if a party refuses to comply with an arbitration award, the other party files an application with the court to confirm the award; once confirmed, it has the same effect as a court judgment and can be enforced through enforcement proceedings at the Execution Office (section 23 of the Arbitration Law).

How long the process takes depends on the dispute and on what the parties agreed. Unless agreed otherwise, the arbitrator gives the award within three months of the day they began to deal with the dispute or were asked in writing to begin dealing with it, whichever is earlier, and may extend the period by up to three more months (item 15 of the First Schedule to the Law); the court may extend it beyond that (section 19).

Why choose arbitration? The main advantages

Arbitration has several advantages over court proceedings:

• Speed: arbitration is usually faster than court. A court case can take years; an arbitration usually takes months.
• Cost: arbitration can be less expensive than court, provided the dispute is not very complex.
• Confidentiality: arbitration is private, not public as in court. This can matter to businesses that want to keep disputes confidential.
• Arbitrators’ experience: the parties can choose arbitrators with experience in a particular field. This can help in complicated disputes (such as technology disputes).
• Flexibility: the arbitration process can be flexible: the parties can agree on their own rules for their arbitration.
• Finality: an arbitration award is final, with no appeal (as a rule). This saves long rounds of litigation.

For parties who want to end a dispute quickly and privately, arbitration can be an excellent solution.

What to know before you agree: the disadvantages of arbitration

Arbitration also has some disadvantages:

• No appeal: if the parties did not provide for an appeal, there is no appeal against the arbitration award. The court may set it aside only on the grounds listed in section 24, for example the lack of a valid arbitration agreement, acting beyond authority, denying a party a proper opportunity to make its case, or an award that is contrary to public policy, and an application to set it aside is filed within 45 days (section 27). An error of law in itself is not one of the grounds.
• Lack of transparency: unless agreed otherwise, the arbitrator must give reasons for the award (item 15A (טו1) of the First Schedule to the Law). In addition, the confidentiality of arbitration prevents the public from learning from the dispute.
• Quality of the arbitrators: unless provided otherwise, the arbitrator is not bound by the substantive law, the rules of evidence or the rules of procedure (item 14 of the First Schedule). Anyone who wants a decision according to the law must provide for it in the agreement, and this is also a condition for agreeing on an appeal to the court with leave (section 29B).
• Costs: in a small or simple dispute, arbitration may be more expensive than court proceedings, because the parties also pay the arbitrator; unless the agreement provides otherwise and the arbitrator did not direct otherwise, they bear the arbitrator’s remuneration and expenses in equal shares (item 18 of the First Schedule to the Arbitration Law).
• Lack of coercive powers: for coercive powers the arbitrator needs the court: summoning witnesses and measures against a witness who does not comply, as well as attachment of assets, a stay of exit from Israel, mandatory injunctions and prohibitory injunctions, are given to the court also in a matter that concerns arbitration (section 16).

For small or simple disputes, a court may be better than arbitration.

How is international commercial arbitration different from arbitration in Israel?

The main difference is the applicable law: international arbitration in a commercial matter seated in Israel, in a proceeding that began on or after 14 February 2024, is governed by the International Commercial Arbitration Law, 5784-2024, which is based on the UNCITRAL Model Law, and not by the Arbitration Law, 5728-1968 (sections 3 and 48 of the new Law). Arbitration is international, for example, when the parties’ places of business are in different jurisdictions (section 3(c)). Three more concepts worth knowing:

• UNCITRAL Rules: the United Nations Commission on International Trade Law (UNCITRAL) has published rules of procedure for arbitration, which the parties can adopt in the arbitration agreement.
• Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention): a convention that requires its member states to recognize and enforce arbitration awards made in another state, subject to defined grounds for refusal. Israel has been a party to the Convention since 1959.
• ICC, LCIA, SIAC: these are the largest international arbitration institutions. They handle international arbitrations and provide arbitration rules.

International arbitration can be a good route for international disputes, because it keeps the parties from being dragged into foreign courts.

When is it better to choose arbitration over court proceedings?

Arbitration is a good fit for:

• Business disputes (B2B): B2B contracts usually include arbitration.
• International disputes: the parties choose the seat of the arbitration and the arbitrators, instead of litigating in a foreign court.
• Complex technical disputes: arbitrators can have experience in technology.
• When the parties want confidentiality: arbitration is private.

Arbitration is not a good fit for:

• Small disputes: arbitration can be expensive.
• When a party needs urgent interim relief: the court has power to grant attachment of assets, mandatory injunctions and prohibitory injunctions also in a matter that concerns arbitration (section 16(a)(5) of the Arbitration Law), but you have to apply to it separately for that.
• When an important legal question is at stake: arbitration is private and does not create a precedent.

All in all, arbitration is an excellent tool for commercial disputes, provided that the arbitration clause in the contract is drafted correctly.