Israel's pro-arbitration position was recently affirmed by a district court decision refusing to grant injunctive relief that would have the effect of staying International Chamber of Commerce (ICC) arbitration even in the face of foreign insolvency proceedings.(1) The Tel-Aviv District Court rejected an application for a temporary injunction to prevent an Israeli party from continuing arbitral proceedings with the ICC and ordering it to submit any claims solely to the South Korean court overseeing the petitioner's insolvency proceedings. The court ruled that the claimant did not meet the necessary threshold of proof that it had a prima facie case or that it would suffer irreparable harm if the relief were not granted. The court further ruled that the claimant's main purpose was a clear attempt to evade ICC procedures.
Israeli engineering, procurement and construction contractor Electra Solel Boneh Pumped Storage Gilboa Ltd (Israel) entered into a contract with South Korean firm Kyungdong Civil Engineering regarding the construction of a power plant in Israel. Following an alleged fundamental breach of contract by Kyungdong, Electra commenced ICC arbitral proceedings in accordance with the arbitration provision in the agreement between the parties. In response, Kyungdong informed Electra of its position that an arbitrator should by appointed by the ICC. The following day, Kyungdong sent Electra notice that as insolvency proceedings against the company had been initiated in South Korea, in accordance with South Korean law, all actions against the company were suspended.
Electra did not withdraw the arbitration request with the ICC, but following Kyungdong's instructions before notice of the insolvency proceedings, it requested the ICC to appoint an arbitrator. Kyungdong repeated its objections to the continuation of arbitral proceedings to the ICC, which notified the parties that all such objections to its jurisdiction would be addressed and decided by the ICC arbitrator in due course. The claimant's additional requests for stay of the arbitral proceedings were rejected by the ICC, which continued to maintain that questions of jurisdiction would be determined by the arbitrator.
Kyungdong then petitioned the Israeli district court for an injunction ordering Electra to discontinue the ICC arbitral proceedings against it and prevent Electra from beginning or continuing any actions against Kyungdong other than with the South Korean liquidation court.
Kyungdong argued that Electra, the ICC and the Israeli courts were bound by the decisions of the South Korean liquidation court, claiming that once liquidation proceedings had been initiated, the arbitration agreement between the parties was null and void. To rule otherwise, it argued, would allow Electra and other parties with an arbitration agreement to bypass the liquidation proceedings and gain a preference over other claimant's to Kyungdong's assets. Further, Kyungdong argued that to allow proceedings to continue before the ICC would lead to multiple proceedings with potentially contradictory results in parallel jurisdictions, thereby impairing the corporate restructuring proceedings in South Korea and prejudicing Kyungdong's other creditors. Kyungdong also argued that international courtesy and mutual respect required recognising South Korean court decisions.
Electra responded that Kyungdong had failed to lift its heavy burden of proof that the case at hand was one of the rare instances in which the courts should stay international arbitral proceedings. It further claimed that Kyungdong's petition to the Israeli court had been made only after the ICC had rejected all of its earlier requests on the matter in a further effort to avoid the arbitration that had already begun.
Electra argued that the South Korean court's decisions were of no extra-territorial effect beyond its national borders and that once the ICC had rejected Kyungdong's preliminary claims on the matter and ordered the continuation of arbitration, the ICC's determination on the matter was binding. It further claimed that the Israeli court lacked the jurisdiction to stay the ICC proceedings on the basis of the decisions of the South Korean liquidation court, which had not been accorded formal recognition in Israel. Without such recognition, accepting Kyungdong's petition would require the Israeli court indirectly to recognise a South Korean decision.
The district court refused to grant any injunctive relief, declaring that Kyungdong was far from meeting the necessary tests for such relief, which are even more stringent when the relief requested involves staying arbitral proceedings.
The regular tests for granting injunctive relief under Israeli law are:
- the existence of a prima facie case for the success of the petitioner's case; and
- the petitioner being able to show that it will suffer irreparable harm if the relief requested is denied.
However, the district court added that it is long settled case law that where the relief involves staying arbitration, the bar for meeting both tests is higher. The reason, explained the court, is that delaying arbitral proceedings has a negative impact on the efficiency of the arbitral process itself, which is one of the system's chief advantages. Thus, in order to protect the very institution of arbitration, courts must be convinced that a higher standard of proof with regard to both tests has been met.
In the case at hand, the district court was not convinced that the petitioner had a prima facie case or that irreparable harm would be caused by continuing with the ICC proceedings. On the contrary, it stated that the petition was precisely of the sort that the courts should deny, as it appeared intended only to delay or prevent the arbitration process. Indeed, the court stated that Kyungdong was unable to prove that any of the relevant circumstances required judicial intervention before the hearing on the merits.
Further, the court reminded the petitioner that the ICC had already determined that it was free to present all its pleadings with respect to jurisdiction before the arbitral tribunal, despite the on-going liquidation proceedings in South Korea.
The district court also rejected the petition on the grounds that to accept Kyungdong's position would mean granting incidental recognition to a foreign court's decision, because Kyungdong had not formally applied for the recognition of the decision pursuant to the Recognition of Foreign Judgments Law 1958. Since Kyungdong's entire case rested on the foreign decision, recognising it would be central to the petitioner's primary case and not incidental.
In the case of a stay of arbitration, the court stated that foreign judgments must first be directly and properly recognised by the Israeli courts if a stay is to be granted. Arbitral proceedings cannot and must not be stayed on the basis of incidental recognition of a foreign court decision. This is even more so the case where recognition of a foreign judgment involves complicated questions relating to the extra-territorial jurisdiction of liquidation courts.
Finally, the court noted that the injunctive relief requested was effectively identical to that requested by Kyungdong in its main claim – that is, stay of arbitral proceedings – and that the closer the identity of the injunctive and permanent relief, the less likely a court is to grant the relief at the preliminary stage of proceedings.
The district court rejected the argument that the existence of liquidation and corporate reorganisation proceedings in a foreign jurisdiction is prima facie grounds for granting injunctive relief, the effect of which is the staying of arbitral proceedings. Instead, it reaffirmed the Israeli courts' long-standing interest in protecting arbitration by requiring that a party petitioning the court to delay arbitral proceedings meet a stringent burden of proof in preliminary proceedings.
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 ([email protected] or [email protected]). The E Landau website can be accessed at www.elandau.co.il.
(1) Originating Motion (Tel Aviv) 662-10-16 Kyungdong Civil Engineering (South Korea) v Electra Solel Boneh Pumped Storage Gilboa Ltd. (Israel), January 9 2017.