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As reported in our post of January 11, Israel’s Knesset is considering adopting, for international arbitrations taking place in Israel, the Model Law of the United Nations International Trade Commission (commonly known as the “UNCITRAL Model Law”).
In the first two parts of this series, we examined the circumstances under which an Israeli court may cancel or vacate an arbitral award (under existing Israeli law) and the types of relief available from an arbitrator. We concluded that (a) adopting the Model Rule would not “improve” Israeli law as to these two issues, and (b) the neither of these two issues constitutes a justification for amending Israeli law to adopt the UNCITRAL Model Law.
In our third post, (i) we began discussing the “competence-competence” rule — which provides generally that an arbitrator has the jurisdiction to determine the scope of his own jurisdiction; (ii) we examined a statement made by one of the leaders of the Israeli UNCITRAL Camp to the effect that there is a “trend” under American law to adopt the competence-competence rule, and (iii) we demonstrated that, in fact, no such “trend” exists under American law.
We will continue (in this series) to address issues relating to the competence-competence rule. However, in this post, we begin addressing a second aspect of the Model Law that is very different from Israeli law – namely, the “default rule” under which three (3) arbitrators are appointed (unless the parties expressly agree otherwise).
Under current Israeli law (section A of the First Appendix to the Arbitration Law, 1968), when a court is asked to appoint the arbitrator(s), and when the arbitration agreement is silent as to the number of arbitrators, the court is required to appoint a sole arbitrator.
The sole arbitrator rule has been part of Israeli law for at least six decades.
Not only has the sole arbitrator rule long been codified under Israeli law, but that rule has also been the default rule of every Israeli arbitral institution that we have been able to identify.
A. Under Rule 3.1.2 of the arbitration rules of the Israeli Institute for Commercial Arbitration, the president of the institute is to appoint a sole arbitrator, unless the parties have agreed otherwise;
B. Two Israeli arbitral institutions have web sites that describe their services but do not display their rules – (i) the Israeli Center for Mediation and Arbitration, and (ii) the Center for Arbitration & Dispute Resolution. Based on the descriptions in their respective web sites, each institution has a default rule of a sole arbitrator;
C. Under rule 14 of the Institute for Arbitration and Dispute Resolution (Yitro), a sole arbitrator is to be appointed;
D. From 2011 through 2015, the Israeli Bar Association maintained its own arbitral institution, and under its rules, a sole arbitrator was to be appointed;
E. The Israeli Diamond Institution has its own arbitral forum, and access to the updated rules of that entity is restricted to its members. Therefore, our firm’s familiarity with those arbitral rules is limited to having seen the relevant version of the rules as it existed a few years ago. Having seen those rules (then), the default rule of the diamond exchange’s arbitral institution has (also) been for one arbitrator to be appointed.
In summary, there is a longstanding and clear tradition under Israeli law and practice that, absent an agreement by the parties for the appointment of a number greater than one arbitrator, in every case, a sole arbitrator will resolve the dispute.
Under these circumstances, changing the default rule from one arbitrator to three arbitrators should — by any objective standard – be an attention-grabbing change. However, as has been the case with respect to the Model Law’s competence-competence rule concerning the authority of an arbitrator to determine his own jurisdiction, the proposed statutory amendment regarding the number of arbitrators has received surprisingly little attention.
The proposed legislative amendment is to adopt Article 10 of the UNCITRAL Model Law as is. Article 10 of the Model Law is short. Here is its text:
Article 10. Number of arbitrators
(1) The parties are free to determine the number of arbitrators.
(2) Failing such determination, the number of arbitrators shall be three.
The legislative history regarding the proposed amendment says very little about this change.
The Pro-UNCITRAL Camp argues that parties are always free, at the contracting stage, to change the number of arbitrators from three. That is true, but, as a general rule, from a public policy perspective, it is unusual to legislate a new rule that contradicts decades of custom and practice in the field – absent a good explanation for the change.
More specifically, proposed civil legislation is usually preceded by some type of empirical data (or reasonable extrapolation) describing the anticipated consequences of the proposed legislation upon that segment of the public the activity (or conduct) of which is addressed by the legislation. In this case, that segment is Israeli companies involved in international business.
Therefore, an objective observer who sees proposed legislation that contradicts decades of arbitration practice would expect that, prior to proposing the statutory amendment, its proponents would be able to point to some empirical data indicating either (possibly both) that (a) Israeli companies involved in international business actually desire such a legislative change or (b) any downside to the default rule of three arbitrators is significantly outweighed by other aspects of the Model Law.
But no such empirical data has been identified. Based on our experience, we believe that no such data exists.
In fact, the only empirical data that we know of suggests that changing the default rule from one arbitrator to three arbitrators would be a mistake for the Israeli market. In 2013 our firm conducted a survey of in-house lawyers employed by Israeli companies that are active in international commerce. In that survey, we asked such in-house lawyers their views regarding various aspects of international dispute resolution. The third question of our survey was as follows:
In those cases over the past five years in which your company has been involved in a business-to business international negotiation, and the issue of including an arbitration clause in the contract was raised but ultimately rejected, the PRIMARY REASON that it was rejected was…
The survey provided each respondent with five possible reasons (responses) to question 3. More than 37% of the respondents said that the primary reason that the company rejected an arbitration clause was the expected costs of arbitration. That percentage – 37.5% — was approximately 16 percentage points higher than the second most popular reason, and it was double the third leading reason.
The fact that over a third of survey respondents stated that the expected costs of arbitration was the primary reason for deciding against an arbitration clause is not surprising. Empirical data from studies outside of Israel have long indicated that the cost of arbitration is a major consideration in the decision whether to include an arbitration clause.
Again, we know of no study after 2013 that in any way contradicts the conclusion that in-house Israeli lawyers view international arbitration as expensive.
Given the views of a high percentage of the Israeli decision-makers that international arbitration is expensive, there appears to be only one possible rationale for Israel to change its law to create a default rule that makes international arbitration even more expensive (sometimes three times as expensive). The only possible explanation would be that the expensive price of “becoming an UNCITRAL jurisdiction” is somehow worth it.
Who should make the determination that a default rule that increases the cost of arbitration is worth the “membership” in the “UNCITRAL Club?”
A related question is: Who is it who advocates for Israel to adopt the Model Law? The answer to that question is that, by and large, the support comes from Israeli arbitration practitioners – not from the in-house Israeli lawyers who make the decision as to whether to include an arbitration clause in an international agreement. Solely by way of examples:
a. Based on a Protocol of a session of the Knesset’s Law Committee held on 12 December 2023, it appears that quite a number of lawyers in private practice came to advocate for the adoption of the Model Law. The absence of any in-house lawyer should be telling;
b. When the Israeli news site News1.co.il ran a feature on that Knesset committee session, multiple lawyers in private practice were asked to share their views concerning the possible adoption of the model Law. None were in-house lawyers.
In our next blog post, we will continue to address the default rule of three arbitrators and whether Israel had/has an alternative to adopting that rule.