Can an Israeli arbitral tribunal award punitive damages?

The Israeli damage model is restorative, not punitive. The Contracts (Remedies for Breach of Contract) Law 5731-1970 — Section 10 — states that the injured party is entitled to compensation for loss caused by the breach that was foreseeable at the time of contracting. The Torts Ordinance (New Version) applies the same compensatory framework to civil wrongs. Punitive damages as a concept, awarding amounts designed to deter the wrongdoer beyond what the claimant actually lost, have no home in Israeli civil law. This flows from the civil law tradition Israel shares with continental European systems, as distinct from the common law tradition of the UK and United States. The arbitrator's authority under the Arbitration Law 5728-1968 and the International Commercial Arbitration Law 5784-2024 is to resolve the dispute in accordance with the applicable law chosen by the parties; departing from that law by awarding punitive sums constitutes an excess of authority. To understand the full scope of challenges to Israeli arbitral awards, see the guide on challenging an arbitral award in Israel.

There are two routes around this limitation. First, the parties can insert a contractual liquidated damages clause specifying a pre-agreed sum payable on breach. Israeli courts enforce such clauses unless the amount is "grossly disproportionate" to actual anticipated loss under Section 15 of the Contracts Law. A well-drafted liquidated damages clause can achieve a significant deterrence effect without characterizing the amount as "punitive." Second, where the arbitration agreement designates a foreign law — such as New York or English law — as the governing substantive law, the tribunal may apply that law's rules on damages, including punitive damages if available under the chosen law. The resulting award may be enforced in Israel provided it does not violate Israeli public policy under Section 28 of the Arbitration Law — and Israeli courts have not treated a punitive damages award under a foreign-law-governed agreement as automatically contrary to public policy.

From the full guide: Challenging an Arbitral Award in Israel: Grounds and Process

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