The Limited Effectiveness of an Israeli Arbitration Award
A common problem arising from a common situation: Plaintiff and Defendant enter into a commercial contract with an arbitration clause calling for arbitration in forum X (the "Forum"). Plaintiff initiates arbitration proceedings in the Forum pursuant to the agreement and is issued an arbitration award. Plaintiff then wishes to confirm (i.e. enforce) the arbitration award in the Forum by filing a confirmation proceeding with a court in the Forum. However, the Defendant does not reside in the Forum, he/she/it resides in a foreign country. Can the court in the Forum assert personal jurisdiction over the foreign defendant?
This "common problem" isn't necessarily a problem under U.S. law and practice. Under the Federal Arbitration Act, an application to confirm an arbitration award may be made to the United States court in and for the district within which such award was made. In other words, if the parties to the arbitration agreement consented to arbitrate in the "Forum", then the application to confirm the award may be filed in a court in the Forum. For an example, see Ace Americans Ins. v. Hallier, 2015 WL 1326446 (D. Nevada, March 25, 2016) (Under the federal Arbitration Act, federal court sitting in district in which arbitration award is rendered may exert personal jurisdiction over the party opposing confirmation, wherever that party may be found).
This simple legal fact seems obvious and self evident. After all, the parties agreed to arbitrate in a certain geographical area and therefore the courts in that geographical area should be able to assert their jurisdiction over the case and the parties.
This intuitive fact, however, was recently undermined by the Israeli Supreme Court in Flacks v. Bisk, Civ. App. 1739/17 (31 Dec. 2017). In a split opinion, the Israel Supreme Court held that, under the current legislative regime, Israeli courts cannot assert personal jurisdiction over foreign defendants in arbitration award confirmation proceedings.
Why? If the parties agreed to arbitration in Israel in the first place, doesn't it go to reason that the parties also agreed that the Israeli courts could confirm (i.e. enforce) those arbitration awards? The Israeli Supreme Court did not agree with that logical and intuitive conclusion.
Essentially, the majority found no legislative source that would permit a court to exercise personal jurisdiction on the foreign defendant. Under Israeli law, a defendant is subject to personal jurisdiction if he is served with a summons and complaint while in Israel. Absent physical presence in Israel, a plaintiff needs to seek leave of court to serve a foreign defendant in a foreign country. Under Israel's long-arm statute, only certain types of claims justify the assertion of person jurisdiction on the foreign plaintiff. There are ten general areas that serve as sufficient reason to justify personal jurisdiction over the foreign defendant. Many of these areas are similar or identical to similar long-arm statutes in the United States.
Confirmation proceedings are absent from the list of those ten areas that can invoke Israel's long-arm statute. That was the basic gist of the Supreme Court's decision. Although one such area that allows for personal jurisdiction are cases arising out of contracts connected in someway to Israel, the majority held that a confirmation proceeding, although ultimately stemming from a "contract" (i.e. the arbitration agreement), is not an action pursuant to and stemming from a contract. Rather, a confirmation proceeding is an independent action pursuant to Israeli Arbitration Law. Therefore, the Court found that confirmation proceedings do not fall within the ambit of Israel's long-arm statute. The Court suggested to the Plaintiff to file a confirmation proceeding in the United States.
That is bad law and the Court did not deny that. It seems quite obvious that parties who agree to arbitrate in Israel should also be deemed to have consented to personal jurisdiction for subsequent confirmation/enforcement proceedings. As a matter of judicial policy, this decision not only undermines Israeli confirmation proceedings but Israel's arbitration regime. Foreign parties will be reluctant to agree to arbitration in Israel knowing that it will be difficult to enforce whatever arbitration award is issued.
Both justices for the majority wrote that the outcome is far from ideal, but, in a zealously conservative matter, held that it is upon the legislature to amend this absurdity.
For now, however, plaintiffs need to know that the effectiveness of an arbitration award in Israel is limited; attorneys should certainly be aware of this case and its consequences when drafting commercial contracts.