Introduction

In one of its first decisions of 2016 concerning international arbitration matters, the Supreme Court reaffirmed its position in favour of staying local proceedings to allow a foreign arbitration to proceed. In Global Brands International Ltd v Life Style Licensing BV,(1) Israel's highest court rejected a request to appeal a stay issued by the district court based on a claim that the circumstances of the case fell within the exceptions of Article II(3) of the New York Convention. The Supreme Court thus upheld recent Israeli jurisprudence, whereby the termination of a contract does not necessarily terminate the arbitral agreement contained therein.

Facts

The claimant (an Israeli company) filed a monetary claim in the Israeli courts against a Netherlands-based company. The defendant petitioned the Tel Aviv District Court to stay the proceedings, arguing that the claims were governed by the arbitral clause of the agreement between the parties, in which they had agreed to settle all disputes by way of arbitration conducted in the Netherlands and subject to the rules of the Netherlands Arbitration Institute.

The claimant responded that since the other party had terminated the contract between them, the arbitration clause was null and void. As a result, it claimed that the matter was subject to the exception to referral to arbitration in Article II(3) of the New York Convention, whereby a stay should not be issued where a municipal court "finds that the said agreement is null and void, inoperative or incapable of being performed". The district court rejected this argument and granted the stay, on the grounds that the question of validity of the arbitral agreement was a matter for an arbitral tribunal to determine in a forum and manner chosen by the parties. The claimant asked for permission to appeal the stay before the Supreme Court.

Decision

The arguments raised by the claimant in its leave to appeal – which were essentially the same as those that it had already brought before the district court – were rejected by the Supreme Court. The claimant argued that following the termination of the contract, the arbitration agreement between the parties was null and void and therefore neither Israeli arbitration law nor the New York Convention allowed for the stay of proceedings in the case.

After dismissing the leave to appeal on the grounds that the claimant had raised no questions of principle or jurisprudence sufficient to justify leave as required by Israeli law, Justice Danziger reaffirmed the court's position that in matters related to international arbitration and the New York Convention, the staying of proceedings is a rule that is deviated from only in exceptional circumstances. No such exceptional circumstances existed in this case.

Addressing the claim that the arbitration clause was null and void, and thus fell into the exceptional grounds addressed in Article II(3) of the New York Convention, the court emphasised that even where an agreement has been terminated, the arbitration clause contained therein may not necessarily be terminated as well. Indeed, the court stated that it was settled law that in cases of a breach of contract and subsequent termination, the assumption is that the parties intended the arbitral clause to survive the termination and provide a forum for their claims. Further, Danziger noted that Israeli courts may resort to Israeli contract law's 'blue pencil doctrine', whereby the court can disregard a contract's invalid portions and still uphold any valid portion, including an arbitration clause.

Comment

In refusing to grant the claimant leave to appeal the stay of proceedings granted by the district court, the Supreme Court confirmed its commitment to giving effect to the agreement of parties to arbitrate and its policy of refusing to stay local proceedings when arbitration takes places only in exceptional circumstances.

For further information on this topic please contact Zvi Nixon or Lauren Sobel at E Landau Law Office by telephone (+972 2 561 8845) or email (nixon@elandau.co.il or sobel@elandau.co.il). The E Landau website can be accessed at www.elandau.co.il.

Endnotes

(1) RCA 1027/16 Global Brands International Ltd v Life Style Licensing BV, February 18 2016, published electronically.

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