International Commercial Arbitration – Israel’s Step Forward
6 April 2021
The Ministry of Justice has published for Comments a Draft for a new International Commercial Arbitration Law
Dear Clients and Colleagues,
The Israeli Ministry of Justice has recently published a draft of an international commercial arbitration bill proposal, which will, if enacted, take Israel a considerable step forward in its arbitration “friendliness”. Following the public’s comments, the proposed draft bill (‘the Proposal‘) may be brought to the Knesset (Israeli Parliament) for the legislation process.
The Proposal largely incorporates the UNCITRAL Model Law on International Commercial Arbitration (the ‘Model Law‘), with certain limited changes, in a specific standalone law, parallel to current Arbitration Law, 5728-1968 (the ‘General Arbitration Law‘).
While various rules that are contained within the Model Law have already been applied by the Israeli courts, the codification of the rules in a specific piece of legislation dedicated to international commercial arbitration, is a significant step in continuing the trend of increasing the ease of conducting commercial arbitration in Israel.
Inter alia, the Proposal specifically codifies the principle of non-interference of the Israeli courts in international arbitrations except where essential; and the arbitral tribunal’s authority to rule on its own jurisdiction (competence-competence).
The Proposal also incorporates the key rules of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958; the “New York Convention“, which are currently applied by specific regulations), with regard recognition and enforcement of awards. Notably, the Proposal gives primacy to valid international conventions to which Israel is a party over the rules of the Proposal.
The Proposal applies, by its definition, to any “international arbitration”, where the places of business of the parties are in different states at the time of the arbitration agreement; or the place of arbitration is outside the State where the parties places of business are; or a considerable part of the undertakings between the parties is to take place outside the state where the parties places of business are. The definition of “international arbitration” in the Proposal also includes arbitrations conducted in Israel, if they fulfill the above criteria. The Proposal will only apply to arbitrations not yet initiated as of the date of the Proposal’s enactment.
The Proposal states that it will not detract from any law that specifically disallows a matter to be determined by way of arbitration. The explanatory note on this proposed rule uses as an example, an arbitration clause in a standard form contract if the clause is determined to be a “depriving condition” in a standard contract, even if such a standard contract is concluded between two commercial entities.
The Proposal authorizes arbitrators to order interim measures, though not ex parte preliminary orders. It also provides for the enforcement of such interim measures by Israeli courts, whether the arbitral seat is in Israel or elsewhere. In addition, the proposal authorizes Israeli courts to order interim measures of protection with regard to arbitration proceedings, whether taking place in Israel or elsewhere.
According to the Proposal an Israeli court may not set aside an international arbitration award rendered outside of Israel. Rather, Israeli Courts may hear an objection to the enforcement or recognition of foreign arbitral awards, if and when a motion for such enforcement is brought to the court (whether under the New York Convention or otherwise).
The current General Arbitration Law allows parties to agree that their dispute will be appealable to a different arbitrator and/or (subject to a leave from the Israeli court), to the Israeli court. Conversely, the Proposal would allow parties to agree to an appeal before another arbitrator, but does not allow the parties to agree to have an Israeli court hear appeals of an international arbitration award, even if the arbitration seat is in Israel.
The Proposal adopts option I of the Model Law, requiring an arbitration agreement to be “in writing” (including exchanges of electronic communications etc.), also where the writing is a record of a previous oral agreement. Moreover, an arbitration agreement may be binding if incorporated by reference within the underlying contract; or where a party relies upon an arbitration agreement in its statement of claim/defense, and the other party does not deny the existence of such an arbitration agreement in its statement.
While the Proposal adopts the Model Law, certain specific deviations should be noted, such as: (a) the removal of clause 1(c) of the Model Law, so as not to allow parties to classify their arbitration as international, where the arbitration is actually domestic according to the criteria set out above; and (b) the allowance of immediate appeal of an arbitral tribunal’s decision regarding its own jurisdiction, though such an appeal does not necessarily prevent the arbitrators from continuing the proceedings pending a ruling by the court.
The Proposal may arguably be construed as a broadening of the types of substantive law which may be referred to, beyond those of specific States – for example, to include lex mercatoria (merchants’ law). While the Model Law uses the term “rules of law”, the Proposal uses the term “legal framework”, which may be broader than the term used by the Model Law. The explanatory note refers to “the law”, without specifying whether the parties are free to choose a set of rules of law other than a law of a particular State. The Proposal follows the Model Law in requiring the application of the provisions of the contract between the parties, as well as in referring to the applicable trade usages. It further empowers the arbitral tribunal to decide “in accordance with the principles of justice and equity” (ex aequo et bono), only if the parties explicitly authorize it to do so.
Over the last few decades, Israel has been making various strides in an effort to increase its arbitration “friendliness”. Thus for example, Israel is an active participant in the UNCITRAL work groups, and participated in the formulation of the 2013 UNCITRAL Arbitration Rules, in the UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration of April 2014, and the Singapore Convention on Mediation of 2019 (an update on which is concurrently being disseminated). Recently, Israel has also initiated, in collaboration with Japan, a Work Program in the field of dispute resolution in international high-tech related transactions.
In this regard, it should also be noted, that the Israeli Supreme Court has recently ruled, in LCA 8038/20 B.R.N Initiative & Investment LTD v. Haim and Moshe Mangad LTD et. al. (26 January 2021), that a court may allow a court-appointed liquidator to transfer a debt claim to arbitration.
The enactment of the UNCITRAL Model Law, if ultimately adopted, is an additional significant step by the Israel legislator, with expected additional positive effect on the “friendliness” of the Israeli legal system to International Arbitration.
We will continue to update if and when the Proposal is enacted. Of course, if any specific guidance is necessary, we would be more than happy to provide you with assistance.
The Litigation and Dispute Resolution Department
Herzog Fox & Neeman