Quick Answer: In Israeli arbitration, two separate legal questions must be answered: (1) which procedural law governs the arbitration itself (always Israeli law when Israel is the seat), and (2) which substantive law decides the merits of your dispute. For the merits, Israeli arbitrators are required to apply the governing law the parties chose in their contract, whether Israeli, English, New York, or any other national law. The main exception is a narrow category of mandatory Israeli rules (on real property, consumer protection, and public policy) that no contractual choice can displace.

A foreign company signs a supply agreement with an Israeli technology firm. The contract says "governed by the laws of the State of New York." Two years later, a payment dispute arises and the parties end up before a Tel Aviv arbitrator. Does the arbitrator apply New York law? Or, sitting in Tel Aviv and knowing Israeli commercial law, does she quietly default to Israeli rules?

This is one of the most practically important, and frequently misunderstood, questions for foreign parties in Israeli commercial arbitration. The answer determines which statute of limitations applies, how damages are calculated, and whether a particular clause in your contract is enforceable. Getting it right from the start matters both at the contract drafting stage and when a dispute has already erupted.

1. Two separate legal questions

Every arbitration involves two bodies of law operating at once, and confusing them is one of the most common mistakes foreign parties make:

  • Lex arbitri: the procedural law of the arbitration. This governs how the proceedings are conducted: appointment of arbitrators, interim measures, confidentiality, grounds for challenging an award, and court supervision of the process. In Israel, this is always Israeli law when Tel Aviv or any other Israeli city is the agreed seat of arbitration.
  • Lex causae (also called the "applicable law" or "governing law"): the substantive law that the arbitrator applies to decide the merits of your dispute. Who breached the contract? What damages are recoverable? Was a particular clause valid? These questions are answered under the lex causae, not the lex arbitri.

These two legal regimes are entirely separate. Choosing New York law as your governing law does not make the arbitration a "New York arbitration." The procedural framework remains Israeli. Conversely, choosing Israel as the seat of arbitration does not mean Israeli contract law governs the substance of your dispute if your contract says otherwise.

In Practice: Israeli arbitrators trained under the Arbitration Law, 5728-1968 are fully accustomed to receiving written submissions on foreign law, either by agreement of the parties on the relevant foreign rules or through expert evidence from a qualified foreign lawyer. The Israeli Centre for Commercial Arbitration (ICCA) Institutional Rules (revised 2021) explicitly contemplate this at Rule 23(1), which requires the tribunal to "apply the rules of law designated by the parties." If both parties provide agreed summaries of the applicable foreign law at the outset, arbitrators will routinely decide on that basis without requiring live expert testimony, saving significant time and cost.

2. Domestic Arbitration Under the Arbitration Law, 1968

The Arbitration Law, 5728-1968 ("the 1968 Law") is Israel's domestic arbitration statute. It applies to arbitrations that are not "international commercial" within the meaning of the newer ICA Law: in practice, disputes between Israeli parties, or disputes where the seat is Israel and neither party has a domicile or principal place of business abroad.

The 1968 Law is notably thin on choice of law. Section 13 empowers the arbitrator to decide the dispute "in accordance with the agreement between the parties and, in the absence of agreement, as the arbitrator deems fit." Israeli courts interpreting Section 13 have taken the position that where parties have agreed on a governing law in their contract, the arbitrator is bound to apply it. This is consistent with Israel's general private international law approach, which recognizes party autonomy in commercial contracts.

Three practical considerations come up repeatedly under the 1968 Law:

  • Unlike the ICA Law 2024, the 1968 Law does not specify which conflict-of-laws rules an arbitrator should use when no governing law is chosen. Arbitrators have wide discretion and often look to Israeli private international law principles derived from the Choice of Law in Contracts Law, 5775-2010, which generally points toward the law of the country with the closest connection to the contract.
  • When parties have not chosen a governing law, or when foreign law is asserted but not properly proved, Israeli arbitrators conducting domestic proceedings frequently default to Israeli law. This can disadvantage a foreign party who assumed without expressly specifying that the law of their home jurisdiction would apply.
  • Under Section 24 of the 1968 Law, an Israeli court may vacate an arbitral award if the arbitrator "exceeded authority" or the award violates public policy (taqanot tzibbur). Applying a law other than the one the parties chose could, in principle, constitute an excess of authority, but Israeli courts rarely intervene on this ground and give arbitrators substantial deference on questions of applicable law.
In Practice (Section 24 challenge threshold): To succeed in challenging an award under Section 24(a)(6) of the Arbitration Law, 5728-1968 on the basis that the arbitrator applied the wrong governing law, a party must show that the error was so fundamental that it went to the heart of the arbitrator's authority. Israeli courts (including the Supreme Court in CA 10284/09) have consistently declined to re-examine substantive law choices made by arbitrators. The arbitrator's choice of law, even if arguably wrong, will very likely stand. The better strategy is to address governing law unambiguously at the outset of proceedings, not to hope for a court correction later.

3. International Arbitration Under the ICA Law, 5784-2024

On 12 February 2024, Israel enacted the International Commercial Arbitration Law, 5784-2024 (the "ICA Law"), based directly on the UNCITRAL Model Law on International Commercial Arbitration (2006 version). It applies when an arbitration is "international commercial," defined in Section 2 to include, among other cases, situations where:

  • the parties' places of business are in different countries at the time the arbitration agreement was concluded;
  • the place of arbitration, the place of performance of the contract, or the place most closely connected to the dispute is outside Israel; or
  • the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.

For foreign parties contracting with Israeli companies, the ICA Law will almost always be the applicable procedural framework when Israel is the seat.

On choice of law, the ICA Law is far more explicit than the 1968 Law. Article 28 provides:

  • Article 28(1): "The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute." This gives full effect to the parties' governing law clause. The phrase "rules of law" rather than simply "law" is deliberate: parties can designate not just national law but also supranational rules such as the UNIDROIT Principles of International Commercial Contracts or the CISG, without tying them to a specific national legal system.
  • Article 28(2): If no governing law is chosen, "the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable." Arbitrators have flexibility and are not locked into Israeli conflict-of-laws doctrine; they may apply the rules they consider most appropriate for an international dispute.
  • Article 28(3): Only if the parties expressly authorize it can the tribunal "decide the dispute ex aequo et bono or as amiable compositeur," meaning on principles of fairness rather than strict law. This is rarely agreed in commercial contracts.
Advertisement
In Practice (ICA Law threshold): Whether the ICA Law or the 1968 Law applies can itself be contested. In a dispute between a US technology company (headquartered in Delaware, contracting from a US address) and an Israeli startup, the ICA Law almost certainly applies. But where the foreign party is a subsidiary incorporated in Israel, or where both parties are Israeli entities even though ultimate ownership is foreign, the 1968 Law may govern instead. If this distinction matters to your dispute strategy, raise the applicable statutory framework as a threshold issue at the first procedural conference, typically scheduled within 30 days of the arbitrator's acceptance of appointment under ICCA rules.

4. When foreign law actually applies: the procedural side

Getting your chosen law recognised in writing is one thing. Making it stick procedurally is another. Many foreign parties discover this gap only after the arbitration has started.

Israeli arbitrators, like Israeli courts under the Foreign Law Proof Ordinance [New Version], generally require the parties to establish the content of the foreign law they are asserting. Unlike some jurisdictions where a judge can take judicial notice of widely-known foreign statutes, an Israeli arbitrator will not simply assume they know English contract law or New York commercial principles. Parties typically establish foreign law in one of three ways:

  • An agreed statement signed by both sides summarising the relevant foreign rules (cheapest and fastest when the rules are not in dispute)
  • A written expert opinion from a lawyer qualified in the relevant foreign jurisdiction
  • Translated statutory texts and significant court decisions submitted as exhibits

Engaging a foreign law expert costs roughly NIS 15,000–50,000 (approximately USD 4,000–14,000 at current rates), depending on complexity. For disputes below NIS 500,000 in value, that cost alone can push parties toward agreeing to apply Israeli law as a pragmatic compromise, which is worth raising in any pre-arbitration mediation.

There is also the separability question. Israeli law treats the arbitration clause within a contract as a separate agreement from the main contract. If your contract says "governed by New York law" but is later found void for illegality under New York law, the arbitration clause survives unless the grounds for invalidity specifically target the clause itself (Article 16(1) of the ICA Law). The law governing that separability analysis is typically Israeli law as the law of the seat, even if New York law governs everything else. It is a wrinkle worth flagging early with Israeli counsel.

5. Mandatory Israeli Rules That Your Choice of Law Cannot Override

Party autonomy in choice of law is broad but not unlimited. Regardless of which governing law the parties have chosen, certain Israeli mandatory rules apply to contracts performed or affecting parties in Israel. An arbitral award that violates these rules risks being vacated by Israeli courts on public policy grounds under Section 24(a)(9) of the 1968 Law or Article 36(1)(b)(ii) of the ICA Law.

The most significant mandatory rules that foreign parties encounter:

  • Israeli real property law: The Land Law, 5729-1969 and the Land Registration Ordinance govern all transactions involving land registered in the Israeli Land Registry (*Tabu*). No choice of foreign law can change the rules on how Israeli land title is transferred, mortgaged, or encumbered. A clause in a foreign-law contract that purports to create a lien over Israeli property in a manner inconsistent with Israeli land law is unenforceable in Israel regardless of the agreed governing law.
  • Consumer protection: The Consumer Protection Law, 5741-1981 applies to transactions involving Israeli consumers. A governing law clause choosing a foreign jurisdiction cannot deprive an Israeli consumer of the minimum protections that Israeli law provides, including the right of rescission within 14 days for certain transactions and prohibitions on unfair contractual terms.
  • Employment law: Core employment protections under Israeli labor legislation (including the Severance Pay Law, 5723-1963, the Annual Leave Law, 5711-1951, and the Hours of Work and Rest Law, 5711-1951) cannot be waived by agreement. Section 30 of the Severance Pay Law expressly states that a right to severance pay "cannot be surrendered, attached, or transferred." A choice of foreign law that purports to deny an Israeli employee these rights will not be upheld.
  • Anti-monopoly and competition law: The Economic Competition Law, 5748-1988 (formerly the Restrictive Trade Practices Law) applies to conduct affecting Israeli markets regardless of the governing law chosen. Restrictive arrangements that would be permissible under a chosen foreign law may still violate Israeli competition law and render relevant contract provisions unenforceable in Israel.
  • Anti-money laundering: Israel's Prohibition on Money Laundering Law, 5760-2000 and the associated reporting requirements under the Israel Money Laundering and Terror Financing Prohibition Authority (IMPA) override any contractual framework. Payments structured to circumvent IMPA reporting thresholds (currently NIS 50,000 for cash transactions) cannot be validated by a foreign governing law clause.
In Practice (public policy threshold): Israeli courts apply the public policy exception narrowly. Not every violation of Israeli mandatory law automatically makes an award contrary to public policy for the purposes of Section 24(a)(9) of the Arbitration Law, 5728-1968. Israeli courts have repeatedly held that the exception is reserved for awards that "shock the conscience" or violate fundamental legal principles, not merely awards the court would have decided differently. An award applying New York contract law that reaches a result different from what Israeli law would dictate does not, by itself, offend Israeli public policy. The exception is most reliably triggered by awards involving fraud, corruption, violations of criminal law, or failure to allow a party to present its case.

6. Drafting an Effective Governing Law Clause for Israeli Contracts

The most controllable risk in an Israeli arbitration is the governing law clause itself. Ambiguity there consistently generates expensive threshold disputes. Here is what to get right at the drafting stage.

The clause should specify that the chosen law governs both the main contract and the arbitration agreement (noting that procedural matters such as appointment of arbitrators, timeline, and interim measures will still follow Israeli law if Israel is the seat). A serviceable formulation: "This Agreement, including the arbitration agreement set out in Clause [X], shall be governed by and construed in accordance with the laws of [jurisdiction], without regard to its conflict of laws principles."

For contracts between foreign parties and Israeli companies, the most commonly used governing law choices are:

  • Israeli law: familiar to the arbitrators, cheapest to apply, no foreign law proof costs, but the foreign party is fully subject to Israeli mandatory rules
  • English law: widely used in international commerce, well-developed commercial rules, accepted in Israeli international arbitrations, though Israeli arbitrators may need expert assistance on specific points
  • New York law: the natural choice for US-Israeli technology and investment deals; same practical considerations as English law
  • Swiss law: occasionally chosen for perceived neutrality; less commonly applied by Israeli arbitrators and therefore higher proof costs

Avoid split governing law clauses. A clause that says "the contract is governed by English law but disputes about the technology are governed by Israeli law" does not give both parties what they want. It creates a threshold dispute about which body of law applies to each issue. Unless there is a very specific commercial reason for the split, keep the governing law uniform throughout the contract.

For complex international supply or technology agreements, designating the UNIDROIT Principles of International Commercial Contracts (2016) as supplementary rules, with a specific national law covering what the Principles do not address, can provide a neutral international framework without extensive proof costs.

7. What to do when a dispute arises

When a dispute surfaces under an Israeli contract, the governing law issue needs to be addressed quickly and deliberately. Most problems come from leaving it vague and hoping it resolves itself.

  1. Within the first two weeks: read the contract carefully. Identify the governing law clause. Does it name a single national law without ambiguity? Check whether the arbitration clause itself contains a separate governing law provision. If the contract is silent or contradictory, you may still be able to negotiate the governing law with your counterparty before arbitration formally commences.
  2. Before filing: work out which statute governs your arbitration. Determine whether the ICA Law 2024 or the 1968 Arbitration Law applies. This affects the choice-of-law methodology the tribunal will use and has real procedural consequences. If in doubt, a qualified Israeli arbitration lawyer can tell you within 48 hours.
  3. In the Request for Arbitration: name your governing law. Under ICCA Institutional Rules (Rule 4), the Request must include the relief sought and a brief description of the dispute. Identify the governing law you are relying on explicitly in the Request. This flags the issue for the arbitrator from day one and prevents later arguments that it was raised too late.
  4. At the first procedural conference (typically 30–60 days after appointment): pin down the applicable law. Ask the tribunal to issue a procedural order confirming the governing law before any substantive submissions are due. Many experienced Israeli arbitrators do this proactively. Without that order, governing law disputes have a habit of resurfacing at the worst possible moment, usually just before the hearing.
  5. If foreign law applies: get the content agreed or briefed early. Discuss with opposing counsel whether you can submit an agreed statement summarising the relevant foreign law rules. This eliminates the NIS 15,000–50,000 expert cost and avoids satellite disputes about what the foreign law actually says. Where the foreign law is genuinely contested, instruct a qualified foreign expert as early as possible. Late-stage expert evidence disrupts the schedule and tends to generate adverse cost orders against the party responsible for the delay.
  6. Map out which Israeli mandatory rules apply regardless of your chosen law. If the dispute touches on Israeli real property, employment relationships, or consumer transactions, flag this to your Israeli counsel before substantive submissions are prepared. The intersection of your chosen law and Israeli mandatory rules may require specific arguments to the tribunal and should not be addressed for the first time at the hearing.