An arbitration clause in a consumer contract: is it binding?

Service page: Class actions and consumer claims lawyer.

What exactly is an arbitration clause, and why do companies include it?

An arbitration clause is a paragraph in a contract (in terms of use, in a sign-up contract, on the last page that nobody reads) that says: “Any dispute between the parties will be decided by a private arbitrator, and not by a court.” Sounds technical? It is not. What the company is really saying is: “If you want to sue us, you will not be able to do it in the ordinary court.”

Why do companies like this? Because arbitration is expensive, cumbersome and hard for the average consumer to reach. In the Small Claims Court, the court fee is 1% of the amount claimed, and not less than NIS 50 (regulation 6 of the Small Claims Adjudication (Rules of Procedure) Regulations, 5737-1976 (תקנות שיפוט בתביעות קטנות (סדרי דין), התשל״ז-1976)). With a private arbitrator, it is thousands of shekels, and many people simply give up.

Is an arbitration clause in a consumer contract binding under Israeli law?

Usually not. The Standard Contracts Law, 5743-1982, sets a presumption that a term in a standard-form contract providing that every dispute between the supplier and the customer will be decided by arbitration is an unfair term (section 4(8)), and a court that finds it unfair will cancel or change it (sections 3 and 19); and the Consumer Protection Law, 5741-1981, applies despite any waiver or agreement to the contrary (section 36). The basic idea: a consumer cannot “agree” to contract out of rights that the law gives them. Such a term is open to cancellation, because the consumer did not “choose” freely: they received a ready-made adhesion contract in which not a word can be changed.

The court examines whether it is an unfair term having regard to all the terms of the contract and to the circumstances (sections 3 and 19(b)), for example when: the clause is buried deep in general terms in small print; the costs of the arbitration are so high that the consumer cannot actually conduct a proceeding; the clause completely takes away the consumer’s ability to file a collective claim; or the consumer has no practical choice, because one supplier dominates the market and there is no alternative to switch to.

What do you do when you receive a demand for arbitration?

First of all, do not panic. Arbitration is not a court order. Here are the practical steps:

Step 1: check the clause itself. Is it written prominently and clearly, or buried in clause 47 of 52 in terms of use in 9-point type? A court will ask exactly this question.

Step 2: check the amount in dispute. If the amount suits the Small Claims Court (up to NIS 39,900), file a claim there directly. The company can ask for the proceedings to be stayed because of the arbitration clause (section 5 of the Arbitration Law), and the court will decide, among other things, whether it is an unfair term. Such a request is filed no later than the day on which the company first made its arguments on the merits, and the court may decline to stay the proceedings if it sees a special reason why the dispute should not be decided in arbitration (section 5(b) and (c) of the Arbitration Law).

Step 3: if the company sent a demand for arbitration, send a letter back stating that you dispute the validity of the clause as an unfair term under the Standard Contracts Law, and file a claim in court.

Step 4: if you are not alone, because the company treats thousands of customers this way, consider a class action. There too, the arbitration clause will be examined under the presumptions of unfairness in section 4(8) and (10) of the Standard Contracts Law.

When is the clause valid after all?

Not every arbitration clause is invalid. If the transaction is between two businesses (not a private consumer), if the clause is fair, prominent and agreed separately, and if the costs of the arbitration are reasonable, a court may enforce it. In large business contracts too, where both parties are represented by lawyers and the negotiations are real, the arbitration will be binding. The problem is with mass consumer contracts: purchases made under website terms of use that nobody has read.

What is the difference between arbitration and the Small Claims Court?

Small Claims Court: a court fee of 1% of the amount claimed (at least NIS 50), filing online, a judgment at the end of the hearing, and you can apply for leave to appeal against the judgment (section 64 of the Courts Law [Consolidated Version], 5744-1984). Arbitration: the arbitrator’s remuneration of thousands of shekels, a private proceeding, and the arbitrator’s award can be set aside only on narrow grounds (section 24 of the Arbitration Law) or appealed if the parties agreed on an appeal. It is clear why companies prefer the second.