It is amazing that people who are charged with observing the law and are well versed in it do not take the trouble to insert a compulsory arbitration clause into partnership agreements. After all, the Arbitration Law offers an option to clarify and settle lawsuits by means of an award of an arbitrator, who will hear the parties and decide the case justly and discreetly. To remove any doubts, an arbitration clause may be included in any legal contract between parties to prospective civil actions.
The arbitrator’s status is similar to that of a judge whose decision is binding on the parties. The Arbitration Law is designed to provide a response to the needs of parties involved in a dispute to reach expeditious and binding decisions not through the courts system. When the Law was originally legislated some 30 years ago, it became popular and the majority of contracts that were signed during the early years following its introduction included a compulsory arbitration clause. However, the attraction of arbitration seemed to dwindle over the years, with fewer and fewer contracts including such a clause.
Compulsory arbitration has both advantages and disadvantages. The Law stipulates that any person is qualified to be an arbitrator. There is no impediment to the arbitrator`s being a specialist in the area of arbitration. Such specialization can eliminate the need to summon some of the expert witnesses that are required in regular court proceedings. The arbitrator can take advantage of personal knowledge.
The advantages of arbitration are the provision of an expeditious, legal judgment within three months, with an additional option for a further three months. This means that an award will be rendered within six months from the date the arbitration submission agreement is signed, unless otherwise agreed by the parties. The arbitration award is final and non-appealable, except in certain cases where an arbitration award may be annulled, usually on grounds of mala fide on the part of the arbitrator.
Other advantages are as follows:
- Efficiency - since the arbitration is not dependent on the court secretariat or the heavy case load imposed on the courts.
- Convenience - since the process is conducted in coordination between the parties and the arbitrator, at times convenient to them and according to a previously agreed schedule, rather than according to regular legal procedure.
- Focus - on the issue under dispute.
- The arbitrator is known and acceptable to both parties, who rely on his award, where a specific arbitrator has been selected, or at least he is appointed to the position by a person so authorized under the arbitration clause.
- Flexibility – since there is no obligation to adhere to substantive law and/or laws of evidence.
- Arbitration meetings are also held in a comfortable, calm atmosphere rather than in a courtroom are kept strictly confidential from other parties, and especially from the media and commercial competitors.
The disadvantages of arbitration are that the arbitrator’s authority is restricted solely to the issue under arbitration before the litigants who are parties to the arbitration, but does not involve third parties or other matters that are in dispute between the parties, respecting which it has not been agreed in advance that they are included within the framework of the arbitration. Another difficulty is that both parties must agree to refer the dispute for arbitration. It is usually easier to reach such agreement at the time of entering into the contract, and not when a divisive conflict already exists.
On one hand the option of conducting arbitration proceedings not according to the laws of evidence and not according to substantive law saves time and complex proceedings. On the other hand, such saving could result in an arbitration award that it not sufficiently founded and is non-appealable. Thus, it is advisable to pay due consideration to whether to require in the arbitration submission agreement to apply the laws of evidence to the conducting of the arbitration proceedings or at least that the arbitration award should be rendered in accordance with substantive law, including grounds.
Arbitration proceedings are preferable to mediation as they are final and binding. Nonetheless, this advantage could turn into a disadvantage where a party to the dispute is afraid of being unable to appeal the final award. Either way, it is always possible to refer to mediation proceedings by consent between the parties before resorting to arbitration or the courts.
The cost of arbitration
should be lower than the cost of conducting regular court proceedings, since normal court proceedings include the basic cost of the court fee at a rate of 2.5% of the amount of the claim. Furthermore, the duration of a regular court proceedings and the dependence on laws of evidence result in substantial legal costs. Another possible expense arises if and to the extent that one of the parties decides to appeal an award rendered against him. In arbitration proceedings the fee may be agreed in advance or may be determined on the basis of the arbitrator’s hourly rate or per meeting. Some of the costs of expert witnesses can be saved in areas relevant to the arbitrator’s own field of expertise. It is important to know that even if a claim has already been filed in court, it can still be referred for arbitration and the court fee will be refunded.
It is advisable for an arbitrator not only to be familiar with the subject under dispute, but also to be a jurist, especially since certain issues may arise during arbitration, such as claims of limitation, an increase in the amount of the claim in the course of arbitration, an intermediate award, interim relief, permitted rates of interest and so forth. An arbitrator who is not a jurist may submit to the court a motion for clarification (consultive case). However, additional payment will then be required for the attorney representing the arbitrator in such a motion.
A duly executed arbitration agreement may not be annulled by either of the parties; it must be made in writing and signed by both parties. It is recommended that all disputes between the parties within the jurisdiction of the arbitrator’s decision be included in the agreement, so as to avoid future disputes about any additional conflicts that may arise in the course of arbitration, including the arbitrator`s decision on the matter of the validity of the arbitration agreement itself.
An arbitration clause will not necessarily be honored by the court where the joinder of other parties to the hearing is required, where there is public interest in the hearing and under other circumstances. However, in most cases the courts validate and even encourage settlement of disputes by means of arbitration.
An arbitrator’s role is similar to that of a judge. He must act in good faith and treat each party equally. An arbitrator should be treated as a public servant and any injury or insult to him is tantamount to injury to a public servant. He is bound by fiduciary duty and must have "clean hands" vis-à-vis the parties. He is prohibited from any personal involvement or prior acquaintance with either of the parties in any manner that might constitute a conflict of interests or partiality, except where there is no fear of partiality and full and proper disclosure is made in writing of a prior connection between the arbitrator and a party to the arbitration.
An arbitrator has the authority to summon and question witnesses and award costs as in court. It is advisable that arbitration proceedings be recorded in written minutes and/or on tape. The duty of proper disclosure applies to all parties in arbitration proceedings, to which end all arbitration sessions and meetings are held in the presence of all parties. Applications for arbitration by any of the parties must be submitted only in writing.
Last November the legislator published the Amendment to the Arbitration Law (Amendment No. 2), 5769-2008 (hereinafter: Amendment No. 2). The Amendment adds two consensual routes of appeal in the arbitration proceeding. The bill was presented at the initiative of the author of this article, as far back as 2004, with a resolute faith and determination that ultimately led to a change in the law.
In summary, when entering into a contract it is worthwhile to consider the inclusion of a compulsory arbitration clause. It is proposed to identify the prospective arbitrator or arbitrators and not leave his/their identity to the discretion of a third party such as the Head of the Bar Association or the Head of the Association of Contractors and Builders. This ensures that the identity of the arbitrator is known, that he is well versed in and qualified to conduct arbitration proceedings, and that he has the necessary know-how in the filed. In contracts pertaining to building defects, it is recommended that the arbitrator should be an engineer; in the case of liquidation of partnerships it is recommended that he be an accountant; and so forth. In any event, it is recommended that he should also be a jurist. A dispute can of course be referred for arbitration after the contract has been executed and even after the case has been referred for clarification in court.