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Arbitration

Can parties to an Israeli arbitration agree that the arbitrator will decide according to equity and conscience rather than strict law?

Yes. Section 13 of the Arbitration Law 5728-1968 expressly permits parties to authorize an arbitrator to decide "according to their best judgment" (al pi shikulo hadaath) — in equity and good conscience rather than strict Israeli law. This gives the arbitrator authority to reach a fair outcome even if it departs from applicable legal rules. The authorization must be explicit in the arbitration agreement; an arbitrator cannot assume this authority without it. Once granted, it significantly narrows the grounds on which a dissatisfied party can challenge the resulting award in court.

Under Section 13 of the Arbitration Law 5728-1968, an arbitrator must decide according to Israeli law unless the parties have explicitly agreed otherwise. The "best judgment" (equity) authorization changes this default entirely. When parties grant this power, the arbitrator may disregard a technically applicable legal rule if its strict application would produce an unjust result in the circumstances of the case. Israeli courts have confirmed that awards issued under such authority are valid and are not open to challenge simply because they diverge from a strict legal analysis. The International Commercial Arbitration Law 5784-2024 contains a parallel provision under Section 28, allowing parties in international disputes to designate equity, trade usages, or a different body of rules as the governing standard in place of Israeli law.

Equity-based arbitration is used most often in long-term commercial relationships where the parties value a fair commercial outcome over legal technicality — construction disputes, franchise terminations, and partnership dissolutions are common examples. The benefit is that a respected industry expert can craft a balanced resolution both parties can live with, without being constrained by rigid contract interpretation. The risk is that the narrow grounds for challenge under Section 24 of the Arbitration Law make it very difficult to overturn an equity award — even one a party considers poorly reasoned. A party who regrets granting equity authority after seeing the award will find Israeli courts give arbitrators extremely wide deference. The clause must be drafted carefully to specify which categories of dispute the equity authority covers, and both parties should clearly understand before signing that the standard of review in court is far narrower than for a law-based award.

⚖ In Practice
  • Governing law: Section 13, Arbitration Law 5728-1968; Section 28, International Commercial Arbitration Law 5784-2024
  • Competent authority: designated arbitral institution or ad hoc arbitrator; District Court for challenge proceedings
  • Requirement: equity authorization must appear explicitly in the arbitration agreement — courts will not imply it from general language
  • Challenge grounds: an equity award can still be challenged under Section 24 (fraud, natural justice, public policy) but not solely for departing from strict law
  • Most common use cases: construction disputes, long-term commercial partnerships, franchise and distribution relationship terminations

From the full guide: The Israeli Arbitration Process: A Step-by-Step Guide

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Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

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