International arbitration: what really applies in Israel

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

A contract between an Israeli company and a foreign party, with an arbitration clause. There are three practical questions: is the clause valid, what happens if the other party files a claim in court anyway, and how the award is enforced in the end. Each has an answer in a text, but not in the same text.

Let us start with a clarification: since 14 February 2024 Israel has had a separate law for international commercial arbitration, the International Commercial Arbitration Law, 5784-2024, which is based on the UNCITRAL Model Law (section 1). It applies to international arbitration in a commercial matter, and the Arbitration Law, 5728-1968 does not apply to such arbitration (section 3(a)); an arbitration is “international”, for example, when the parties’ places of business are in different jurisdictions (section 3(c)). The Law applies only when the seat of the arbitration is in Israel, except for the provisions on a stay of proceedings, interim relief, and recognition and enforcement of awards (section 3(b)), and only to proceedings that began on or after the day it came into force (section 48). The analysis below under the 1968 Law applies to domestic arbitration and to proceedings that began before the new Law.

Is the clause valid: the writing requirement

Section 1 of the Arbitration Law, 5728-1968, defines: “‘arbitration agreement’: an agreement in writing to refer to arbitration a dispute that has arisen between the parties to the agreement or that may arise between them in the future, whether or not the agreement names an arbitrator.”

Two points in the definition. First, writing: this is a substantive requirement, and an arbitration clause agreed orally is not an arbitration agreement under the 1968 Law. In international commercial arbitration the requirement is more flexible: it is enough that the content of the agreement is recorded in some way, even if it was made orally or by conduct, and an agreement in an electronic message that can be stored and retrieved is regarded as an agreement in writing (section 8 of the 2024 Law). Second, “or that may arise between them in the future”: an arbitration clause in a contract, before any dispute has arisen, is fully valid. In an international transaction, this clause also decides where the enforcement of a breached contract will take place, so it should not be approved as standard wording.

The other party filed in court: a stay of proceedings

Section 5(a): “Where a claim has been filed with a court in a dispute that it was agreed to refer to arbitration, and a party who is a party to the arbitration agreement has asked to stay the proceedings in the claim, the court shall stay the proceedings between the parties to the agreement, provided that the applicant was willing to do everything necessary for the arbitration to be held and continued, and is still willing to do so.”

The proviso at the end is the whole case. A party that refuses to appoint an arbitrator, does not pay its share of the fee, or drags out time loses the right to a stay. And section 5(b) adds that the application can be filed in the statement of defense or in another way, but no later than the day on which the applicant first argued the merits of the claim. Even when the application was filed in time, the court may decide not to stay the proceedings if it sees a special reason why the dispute should not be heard in arbitration (section 5(c)).

The section that makes it international

“Where a claim has been filed with a court in a dispute that it was agreed to refer to arbitration, and the arbitration is governed by an international convention to which Israel is a party, and the convention sets provisions on a stay of proceedings, the court shall exercise its power under section 5 in accordance with those provisions and subject to them.”Arbitration Law, 5728-1968, section 6 (unofficial translation), Nevo text

This is the channel. The Arbitration Law does not contain international rules of its own; it refers to the convention and makes the court’s discretion subject to it. And when it comes to enforcing awards, the convention is the New York Convention.

Enforcing a foreign arbitration award

The Regulations for the Implementation of the New York Convention (Foreign Arbitration), 5738-1978 (תקנות לביצוע אמנת ניו-יורק (בוררות חוץ), התשל״ח-1978), define in regulation 1 the “New York Convention” as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards signed in New York on 10 June 1958, “which is in force with respect to Israel from 7 June 1959”. Regulation 2 provides that the regulations are made to implement the Convention and are to be interpreted together with it.

Regulation 3(a) lists what must be attached to an application to confirm a foreign arbitration award, first of all “the original arbitration award, authenticated in accordance with Israeli law, or a certified copy of it”. Regulation 4 deals with the situation in which an application to set aside the award or to suspend it was filed at the same time with a competent authority in the place where it was made: then the court may postpone the proceedings to another date, and may even order the other party to provide suitable security.

What to check before you sign an arbitration clause

1. That the clause is in writing and worded as an arbitration agreement, and not as a recommendation to go to mediation.
2. The place of arbitration and the governing law: two separate matters that people tend to mix up. The place of arbitration decides which court supervises.
3. That the country where confirmation will be sought is a party to the New York Convention. This is the check that decides whether the award will be worth anything.
4. The language of the proceeding, the number of arbitrators and how they are appointed: the lack of an appointment mechanism is the common reason for getting stuck at the first stage.
5. Interim relief: whether you can go to court for interim relief without this being regarded as a waiver of the arbitration.

And as for the domestic award: section 24 of the Arbitration Law lists the grounds on which the court may set aside an arbitration award, at the request of a party. This is a closed list, and it is narrow on purpose: judicial review of arbitration is limited by its nature. In international commercial arbitration seated in Israel, an objection is made only by an application to set aside, on the grounds in section 43 of the 2024 Law and within 90 days of receiving the award.

Frequently asked questions

Does Israel have an international arbitration law?

Yes, since 14 February 2024: the International Commercial Arbitration Law, 5784-2024, applies to international arbitration in a commercial matter, and the Arbitration Law, 5728-1968 does not apply to such arbitration (section 3(a)). The Law applies to arbitration proceedings that began on or after the day it came into force (section 48). Other arbitration continues to be governed by the 1968 Law, and alongside it by the Regulations for the Implementation of the New York Convention (Foreign Arbitration), 5738-1978.

What is international arbitration?

Under section 3(c) of the International Commercial Arbitration Law, 5784-2024, an arbitration is international if one of the following applies: the places of business of the parties to the arbitration agreement were in different jurisdictions when it was made; the seat of arbitration set in the agreement or under it, the place where a substantial part of the obligations is to be performed, or the place with which the subject of the dispute is most closely connected, is outside the jurisdiction in which the parties’ places of business are located; or the parties have expressly agreed in writing that the subject of the agreement relates to more than one jurisdiction. The Law applies to such arbitration in a commercial matter (section 3(a)).

Must an arbitration clause be in writing?

Yes. Section 1 of the Arbitration Law defines an “arbitration agreement” as an agreement in writing to refer to arbitration a dispute that has arisen between the parties or that may arise between them in the future, whether or not the agreement names an arbitrator. In international commercial arbitration, too, the agreement must be in writing, but it is enough that its content is recorded in some way, even if it was made orally (section 8 of the International Commercial Arbitration Law).

What happens if the other side files a claim in court?

Section 5(a) provides that the court will stay the proceedings at the request of a party to the arbitration agreement, provided that the applicant was willing to do everything necessary for the arbitration to be held and continued, and is still willing to do so. Section 6 applies the provisions of an international convention to which Israel is a party, insofar as it sets provisions on a stay of proceedings. In international commercial arbitration, section 9 of the International Commercial Arbitration Law applies: the court will stay the proceedings and refer the parties to arbitration, unless it finds that the agreement is void, inoperative or incapable of being performed, and the application must be filed no later than the first pleading on the merits of the dispute.

How do you enforce a foreign arbitration award?

The Regulations for the Implementation of the New York Convention (Foreign Arbitration), 5738-1978. Regulation 1 defines the Convention, which was signed on 10 June 1958 and is in force with respect to Israel from 7 June 1959. Regulation 3(a) lists the documents that must be attached to the application for confirmation, first of all the original arbitration award, authenticated in accordance with Israeli law, or a certified copy of it. In international commercial arbitration, sections 44–45 of the International Commercial Arbitration Law apply: the award is recognized and enforced on a written application, regardless of the place where it was made, and the court may refuse only on the grounds listed in section 45, subject to the provisions of the New York Convention, which prevail (section 3(a)).