Arbitration Clauses in International Agreements

This week, the Israeli Knesset completed legislation of the International Commercial Arbitration Law, 2024, which aims to create a uniform model that different countries can adopt. In essence, this new law is based on the adoption of the Model Law on International Commercial Arbitration formulated by the United Nations Commission on International Trade Law (UNCITRAL), which is a uniform model of laws applying to arbitration proceedings.

To date, 87 countries and 117 jurisdictions around the world have adopted the Model Law, such that the international commercial arena already considers it as the “accepted rules of the game.” The Model Law’s purpose is to provide considerable commercial certainty to parties to an arbitration proceeding, which are often incorporated and operate in different countries. This helps parties unfamiliar with and that may even recoil from the intricacies of local legislation in other countries.

This law is great news for the Israeli economy and for parties to international commercial agreements, who will now be able to plan ahead in an informed manner, knowing they can choose between the various international dispute resolution tracks Israeli law now offers.

International Arbitration as Opposed to Domestic Arbitration

According to customary practice and the law’s provisions, parties to a commercial agreement may agree to an alternative mechanism for dispute resolution, which is usually prescribed in an arbitration clause in the agreement itself. Up until now, the only law regulating arbitration proceedings in Israel was the Arbitration Law of 1968. The key shortcoming of this outdated law was that it did not distinguish between local arbitration proceedings (i.e., when both parties to the arbitration proceeding are Israelis) and international arbitration proceedings (i.e., when there is an international component to the arbitration proceeding). This was especially pertinent, since, in many instances, agreements contain both local and international aspects, and it was often unclear what set of rules applied to the arbitration proceedings. 

This major shortcoming is resolved with Israel’s new International Commercial Arbitration Law. The law defines international arbitration as a proceeding in which at least one aspect of the dispute has a foreign component, e.g., the country where the commercial activities are being carried out, the country of incorporation of one of the parties to the agreement, the country where the agreement was signed, or the country where the engagement was executed.

Highlights of the New Law

According to the new law, as soon as it is determined that a particular arbitration agreement falls under the definition of international arbitration, the legislature applies a separate track for this arbitration, which regulates both substantive and procedural aspects.

A central principle underlying the law is the autonomy of the parties to the arbitration agreement, in the sense that the law recognizes the parties’ right to choose an alternative dispute resolution mechanism, with minimal intervention by the Israeli judicial system. For example, Section 6 of the International Commercial Arbitration Law imposes explicit restrictions on Israeli courts’ intervention in the arbitrator’s authorities, except in the limited instances that the law recognizes, such as when an arbitrator grants temporary relief that the court itself is not authorized to grant.

No less important, the International Commercial Arbitration Law presents, for the first time in Israel, a clear mechanism for granting and enforcing interlocutory orders. Up until now, Israeli law allowed parties to obtain interlocutory orders from two parallel sources, an arbitrator or a court with jurisdiction in Israel. However, due to various aspects relating to the possibility of enforcing interlocutory orders issued by an arbitration institution, up until now, it was preferable for the parties to refer to a competent court in Israel.

The International Commercial Arbitration Law resolves this problem by establishing a clear, simple, and effective mechanism for enforcing interlocutory orders issued by an arbitration institution (in Israel or abroad), with the starting point being that Israeli courts will approve enforcement of these orders unless there are specific grounds for not approving enforcement, such as an arbitrament that contradicts public policy.

On the other hand, from a procedural point of view, the new law grants broader authority and greater flexibility to arbitrators during the arbitration proceeding. It also prescribes liberal procedural regulations for arbitration proceedings. On the one hand, the law stipulates the requisite contents of statements of claim, while, on the other, it grants the arbitrator the discretion to decide the document disclosure proceedings and to appoint experts.

Scope of Proceedings and Future Questions

International arbitration, as defined in the International Commercial Arbitration Law, raises questions about the scope of the proceedings sheltered under it. These questions arise because foreign companies serving as performance contractors in projects in Israel (mainly infrastructure and construction projects) often establish special-purpose corporations that they register in Israel, whether due to tax considerations or the State’s requirements, since it acts as the principal client in national infrastructure projects. In such instances, the provisions of the International Commercial Arbitration Law will not apply, and the arbitration proceeding will be subject to the relevant provisions of the arbitration law.

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Barnea Jaffa Lande’s Litigation international arbitration practice is at your service to answer any questions about the new law or any other topic.

Adv. Moran Bickel is a partner in the department.

Adv. Lina Makhuli is an associate in the department.