Drafting an Arbitration Clause for Israeli Contracts

Why the Arbitration Clause Matters

In arbitration, the parties' agreement is the source of the arbitrator's authority. A poorly drafted clause can lead to years of satellite litigation before the merits are ever heard — or, worse, can result in an award that a court refuses to enforce. Conversely, a well-crafted clause provides a clear, enforceable path from dispute to resolution.

Under Israel's Arbitration Law, 1968, an arbitration agreement must be in writing. Courts interpret arbitration agreements broadly and will generally give effect to the parties' evident intent, but a clause that is ambiguous about scope, institutional rules, or seat of arbitration can generate expensive preliminary fights.

For international contracts, the stakes are even higher: the clause determines whether an award will be enforceable in over 170 countries under the New York Convention, and which country's supervisory courts will have jurisdiction to support or challenge the process.

Essential Elements of a Valid Israeli Arbitration Clause

At minimum, an arbitration clause that will be recognized and enforced under Israeli law must contain:

1. Agreement to arbitrate. Clear language that disputes "shall be" (not "may be") submitted to arbitration. Permissive language creates an option, not an obligation.
2. Scope of disputes. Define which disputes are covered — "any dispute arising out of or in connection with this contract" is the broadest formulation. Narrower language (e.g., "disputes about price") can exclude claims you intended to capture.
3. Written form. The arbitration agreement must be in writing, as required by section 2 of the Arbitration Law, 1968. This is satisfied by a clause in a signed contract, an exchange of letters, or an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by the other.
4. Arbitrability. The subject matter must be arbitrable under Israeli law. Family-status determinations, certain regulatory matters, and criminal proceedings cannot be arbitrated. Commercial and civil disputes are generally arbitrable.

Institutional vs. Ad Hoc Arbitration

This is one of the most consequential choices a drafter faces.

Institutional Arbitration

The parties designate an arbitral institution to administer the proceedings under the institution's rules. The institution appoints arbitrators (if the parties cannot agree), collects fees, manages communications, scrutinises the award, and provides other administrative services. The most commonly used institutions in Israel-related disputes include:

• Israel Centre for Commercial Arbitration (ICCA / ). The leading Israeli institution, administering proceedings under Israeli law with Hebrew or English as the language of proceedings.
• International Chamber of Commerce (ICC). The world's most-used institution for high-value international commercial disputes. ICC's Court scrutinises every award before it is rendered, a significant quality-control feature.
• London Court of International Arbitration (LCIA). Popular for transactions with English-law governing law.
• Singapore International Arbitration Centre (SIAC). Increasingly used for Asia-facing transactions.
• American Arbitration Association / International Centre for Dispute Resolution (AAA/ICDR). Common for US-party contracts.

Ad Hoc Arbitration

No institution is appointed; the parties and arbitrators manage the process themselves, often using the UNCITRAL Arbitration Rules as a procedural framework. Ad hoc arbitration can be cheaper for straightforward disputes but requires greater cooperation between the parties and may stall if a party becomes obstructive (for example, by refusing to participate in arbitrator selection).

For disputes involving Israeli parties only, ad hoc arbitration before a named arbitrator (e.g., a retired judge) is common practice. For international disputes, an institutional clause is strongly recommended.

Seat of Arbitration

The "seat" (or "place") of arbitration is the legal domicile of the proceedings — not necessarily where hearings take place physically. The seat determines:

• Which country's arbitration law governs the procedural framework
• Which courts have supervisory jurisdiction (for arbitrator appointment, interim measures, and challenges to the award)
• The nationality of the award for New York Convention enforcement purposes

Israel as Seat

Choosing Israel as the seat means the Arbitration Law, 1968 governs the proceedings. Israeli courts (typically the relevant District Court) provide supervisory support. This is appropriate for purely domestic disputes and for international disputes where both parties have a strong connection to Israel.

Foreign Seat

Choosing a neutral foreign seat (London, Geneva, Singapore, New York) is common in international contracts where neither party wants to litigate in the other's home courts. A foreign seat produces a foreign award enforceable in Israel under the New York Convention via the Foreign Judgments Enforcement Law, 1958.

Drafting the Seat Clause

Always specify the seat explicitly: "The seat of arbitration shall be [city], [country]." Do not confuse seat with venue; hearings can take place anywhere regardless of seat: "The seat of arbitration shall be London, England. Hearings may be conducted in Tel Aviv or such other location as the tribunal directs."

Governing Law

Two distinct governing-law choices need to be made:

1. Governing law of the main contract (substantive law). The law that determines the parties' rights and obligations — Israeli law, English law, New York law, etc.
2. Governing law of the arbitration agreement (procedural law). Usually the same as the seat's law, but can differ. If not specified, courts apply the law most closely connected to the arbitration agreement, which is generally the seat's law.

It is best practice to specify both in the contract:

"This Agreement shall be governed by and construed in accordance with the laws of the State of Israel. Any arbitration conducted pursuant to this clause shall have its seat in Tel Aviv, Israel, and shall be governed by the Israeli Arbitration Law, 1968."

Where the governing law of the contract differs from the seat's law, specify this clearly to avoid ambiguity.

Number of Arbitrators

Under the Arbitration Law, 1968, the default is one arbitrator unless the parties agree otherwise (section 7). Most institutional rules provide three arbitrators as the default for disputes above a certain value.

• Sole arbitrator. More cost-efficient; appropriate for smaller disputes (below USD 500,000) or where the parties trust each other to agree on a neutral appointee.
• Three arbitrators. Each party appoints one co-arbitrator; the two co-arbitrators (or the institution) appoint the presiding arbitrator. Provides greater legitimacy for high-value or complex disputes but significantly increases costs.

Specify the number clearly: "The dispute shall be resolved by a sole arbitrator" or "The dispute shall be resolved by a tribunal of three arbitrators, each party appointing one arbitrator and the two party-appointed arbitrators jointly appointing the presiding arbitrator within 30 days of their appointment."

Language of the Proceedings

The default language under the Arbitration Law, 1968 is not specified — in practice it defaults to Hebrew for domestic disputes. In international contracts always specify the language explicitly: "The language of the arbitral proceedings, including all submissions, hearings, and the award, shall be English."

Where the parties have different native languages, consider whether to permit submissions in multiple languages with translation — this adds cost but may be essential for fairness.

Multi-Tier Dispute Resolution Clauses

Many contracts — particularly in construction, technology, and joint-venture contexts — require the parties to attempt negotiation or mediation before commencing arbitration. A typical multi-tier clause:

"In the event of any dispute arising out of or relating to this Agreement, the parties shall first attempt to resolve the dispute through good-faith negotiation between senior representatives for a period of 30 days from written notice of the dispute. If the dispute is not resolved within that period, either party may refer it to mediation administered by [institution] under its mediation rules. If mediation fails within 60 days (or such longer period as the parties agree in writing), either party may refer the dispute to arbitration in accordance with the following clause—"

Israeli courts will generally enforce pre-arbitration steps that are clearly defined and time-limited. Vague requirements to "endeavour to negotiate" may not be enforceable as conditions precedent to arbitration. Make the trigger, duration, and failure condition precise.

Common Drafting Mistakes

1. Pathological Clauses

A "pathological" clause is one that is so defective it cannot be given effect. Examples include naming a non-existent institution, using permissive language ("disputes may be submitted"), or providing for contradictory dispute resolution mechanisms in different contract provisions.

2. "Asymmetric" Clauses Without Clear Drafting

Some contracts allow one party (typically a lender or licensor) to choose between litigation and arbitration while requiring the other party to arbitrate. Such clauses are valid in Israel but must be drafted precisely. Courts will scrutinise them and may refuse to enforce vague unilateral options.

3. Failing to Separate the Arbitration Agreement from the Main Contract

Under the doctrine of separability (section 4 of the Arbitration Law, 1968), the arbitration clause survives termination of the main contract. Ensure the clause is drafted to cover disputes about the validity, termination, or rescission of the contract itself — not just disputes "under" it. Use: "arising out of or in connection with this contract, including any question regarding its existence, validity, or termination."

4. Specifying an Unsuitable Arbitrator

Naming a specific individual as arbitrator without a backup mechanism is risky — the named person may be unavailable, conflicted, or deceased. Instead, specify the qualifications required (e.g., "a retired District Court judge with experience in commercial disputes") and the appointment mechanism.

5. Omitting Confidentiality Provisions

The Arbitration Law, 1968 does not impose confidentiality. If confidentiality is important, include an express provision: "The arbitral proceedings and any award shall be confidential and neither party shall disclose any information about the proceedings to any third party without the prior written consent of the other party, except as required by law or to enforce an award."

6. Not Addressing Emergency Relief

By the time an arbitral tribunal is constituted, urgent interlocutory relief (attachment orders, injunctions) may be needed. Israeli courts retain jurisdiction to grant interim relief regardless of an arbitration agreement (section 38 of the Arbitration Law). If you want the option of emergency arbitration as an alternative, select an institution that has emergency arbitrator rules (ICC, LCIA, SIAC, ICCA all do).

A Korean electronics manufacturer entered a distribution agreement with an Israeli retailer containing the following arbitration clause: "Any dispute shall be submitted to arbitration in Tel Aviv." No institution was named, no number of arbitrators was specified, no language was chosen, and no governing law was stated. When the Israeli retailer terminated the agreement and refused to pay a NIS 1,400,000 outstanding invoice, the Korean manufacturer's attempt to commence ICCA arbitration was met with an objection from the retailer that the clause had not designated ICCA — it had not designated any institution. The District Court in Tel Aviv spent four months resolving the preliminary jurisdictional dispute, ultimately holding that the parties had agreed to ad hoc arbitration under the Arbitration Law 1968 and appointing a sole arbitrator at an additional cost of approximately NIS 35,000 in legal fees on the preliminary issue alone. The arbitrator was appointed fourteen months after the original dispute arose. The lesson: a clause that says only "arbitration in Tel Aviv" saves four words and costs a year of delay — specify institution, number of arbitrators, language, and governing law every time.

Model Clauses

Domestic Israeli Arbitration (ICCA)

International Arbitration (ICC)

Multi-Tier (Negotiation ? Mediation ? Arbitration)

Frequently Asked Questions