Israeli Court Stays Claim Brought by 3rd Party Beneficiary — Referring It to Arbitration

© 2016 Sherby & Co., Advs.


Third-party beneficiaries (TPBs) often do not like being bound to arbitration agreements.  That is not surprising, because the TPB rarely has a direct role in negotiating (or drafting) the agreement that was entered into on its behalf and which contains an arbitration clause.  Nonetheless Israeli and other courts routinely hold that the TPB is bound by the arbitration clause to the same extent as is/was the contracting party.

In Israel, there is Supreme Court precedent going back thirty years holding that a TPB is bound by the arbitration clause in a contract of which he is a beneficiary.

Therefore, the result in the recent Magistrates Court case of Banit v. Banit (Jerus. Mag. Apr. 3, 2016) should not be a surprise.  Banit involved a family dispute as to a claim to entitlement from a trust established by second-generation family members (brothers/uncles).  The trust agreement contained a dispute resolution clause that included a combination of mediation and arbitration.  One of the nephews sued his uncle (a trustee under the trust) for failure to make a payment pursuant to the trust agreement, but the suit was filed without the plaintiff’s having first availed himself of the dispute resolution mechanism of the agreement.  The defendant filed a motion for a stay of the action, based on the arbitration clause.

It was undisputed that the plaintiff was a third party beneficiary under the trust agreement.

It is not surprising that the court granted the stay, but what is surprising is the extent to which the court addressed the arguments asserted by the plaintiff in opposing the stay motion.  The plaintiff’s main grounds for opposition was that the defendant was a party to other legal proceedings – which did not involve the plaintiff – concerning the agreement and that, by participating in such litigation, the defendant waived his right to invoke the arbitration clause against the plaintiff at bar.  The court eventually rejected that contention, but it did so only after a moderately in-depth review of the procedural posture of the other litigation.

Certainly there are situations in which a court must engage in a detailed factual analysis of whether a defendant waived his right to arbitrate.  But in Binat, where the only conduct that allegedly constituted a waiver was participating as a defendant in litigation that did not involve the plaintiff, it seems that the trial within the trial – namely, consideration of the defendant’s conduct in the other litigation – was unnecessary.

In any event, given the plethora of excuses that Israeli plaintiffs have created in recent years to avoid arbitration agreements, for ADR practitioners, it is reassuring that the trial court granted the stay.

Leave a Reply

Your email address will not be published. Required fields are marked *