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From Kentucky to Jerusalem: Arbitration Jurisprudence

June 22, 2017

A daughter caring for her aging parents has them sign a power of attorney to allow her to assist them in various matters. Subsequently, the parents move into an assisted living complex. The daughter takes care of all the paper work, based on her power of attorney. The "paper work" includes an arbitration agreement, i.e. all disputes between the parents and the assisted living complex need to be adjudicated by arbitration, not a court of law. The power of attorney did not specifically mention the ability to enter into arbitration agreements. Is the arbitration agreement binding? In other words, if the parents (or representative in the name of the parents) want to file a law suit against the assisting living complex, must they do it through arbitration?  

 

On May 15th, 2017 the United States Supreme Court issued an important decision regarding the validity of arbitration agreements. The Supreme Court reversed the Kentucky Supreme Court's "clear-statement rule" that would require power of attorneys to specifically authorize the agent or representative to enter into arbitration agreements. Absent such clear authorization, the arbitration agreement is invalid. The Kentucky Supreme Court reasoned that because a trial by a jury is "sacred" and "inviloate", a representative could only deprive his or her principal of the right to a jury when expressly provided for.

 

The United States Supreme Court did not agree.

 

In a relatively short and focused opinion, the Supreme Court held that under precedent, state laws (including rules set by state courts) that discriminate against arbitration agreements are invalid, not withstanding the rights that are implicated when waiving a jury trial by signing an arbitration agreement.

 

I won't get into the details of the opinion here, but it I did find it interesting to see the Supreme Court's implicit disdain for the Kentucky court's ruling. The Kentucky Supreme Court justified the "clear-statement" rule by attempting to demonstrate that it did not specifically discriminate against arbitration, but rather could be applied to other types of agreements as well. For example, under the "clear-statement" rule a representative or agent would not be able to bind his or her principal to personal servitude or to consent to a marriage, unless the authorization was expressly written in the power of attorney. 

 

Naturally and expectedly, the Supreme Court did not like that comparison: "Placing arbitration agreements within that class reveals the kind of hostility to arbitration that led Congress to enact the FAA (Federal Arbitration Act, NS) [...] And doing so only makes clear the arbitration-specific character of the rule, much as if it were made applicable to arbitration agreements and black swans". 

 

Kindred Nursing Centers v. Clark, 581 U.S. ____ (2017).

 

From Kentucky to Israel 

 

What about in Israel? Do Israeli courts view arbitration agreements in the same class as "black swans"? To be sure, Israel has a detailed and well-enforced Arbitration Law, 5728-1968. My question is whether Israel has a rule similar to the (now defunct) Kentucky "clear-statement" rule? 

 

I did some research on the issue, but was unable to locate and Israeli Supreme Court jurisprudence on this topic.

 

In a Jerusalem District Court case from 2008 the court seemed to adopt a Kentucky conservative approach to arbitration agreements as a whole, and explicit authorization in particular. That case dealt with a real-estate dispute that was originally adjudicated through arbitration based on an arbitration agreement that was signed by the "Residents of the Building". In the subsequent court proceeding it was alleged that the "Residents of the Building" gave a power of attorney to several representatives and therefore the arbitration agreement is binding on all the residents of the building in dispute.

 

In a Kentucky State fashion, the Jerusalem District Court did not agree with that conclusion. Basing itself on Israeli precedent recognizing the basic rights to a trial, a waiver of such a right must be explicit: "A power of attorney that contains authorization to enter into a arbitration agreement is no small thing. Authorization to enter an arbitration agreement is essentially a waiver of two basic rights. First, the right to have access to a court. Second, the right to appeal". Therefore, reasoned the court, with out an express waiver of these rights, an arbitration agreement signed on behalf of a principal, is invalid.  

 

Iyad v. Ramila, civil action 7011/09 (10 Nov., 2008)

 

That decision was not appealed to the Supreme Court. Absent any similar law like the Federal Arbitration Act -- which "preempts any state rule discriminating on its face against arbitration" -- it could very well be that in the future, the Israeli Supreme Court would adopt a similar rule as the Jerusalem-Kentucky rule. 

 

       

 

 

 

 

 

 

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