Arbitration clause in an apartment purchase: the Supreme Court held that the arbitrator must apply the Sale (Apartments) Law

The ruling: LCA 59471-05-26 Finkel v. Birkat Ha'aretz Ltd. (Supreme Court, Justices Mintz, Willner and Stein, 6 July 2026). The judgment was given by Justice David Mintz, and the other two justices concurred. (Hebrew)

Background and facts

A buyer of an apartment in Netivot sued the company in the Tel Aviv-Jaffa Magistrates' Court for 75,000 ₪ over construction defects, and the company applied to stay the proceedings under section 5 of the Arbitration Law, relying on an arbitration clause. His widow argued that the clause bypasses the Sale (Apartments) Law, whose provisions are mandatory.

The deceased bought an apartment in Netivot under a sale agreement dated 6 April 2014. On 1 January 2025 he filed a monetary claim of ₪75,000 in the Tel Aviv-Jaffa Magistrates' Court, alleging construction defects and that the apartment was not built in accordance with the agreement, the technical specification, the binding standards and the requirements of the Sale (Apartments) Law. An engineer's opinion was attached to the claim. After a default judgment was given and later set aside, the respondent company applied to stay the proceedings under section 5 of the Arbitration Law, 5728-1968, relying on an arbitration clause in the agreement.

The plaintiff, the deceased's widow, objected. She argued that the arbitration clause provides that the arbitrator is not bound by substantive law, and so it bypasses the provisions of the Sale (Apartments) Law, which are mandatory. Under section 7A(a) of the Sale (Apartments) Law, 5733-1973, the Law's provisions cannot be contracted out of except in favour of the buyer or a subsequent buyer. The respondent replied, among other things, that it acted as an execution contractor in a purchase group project, that on receiving the apartment the deceased signed a handover protocol in which he undertook to refer future disputes to an arbitrator, and that a broad arbitration was already under way between the purchase group and the respondent before an arbitrator who is a senior judge of a monetary rabbinical court.

The Magistrates' Court granted the application and stayed the proceedings. The Tel Aviv-Jaffa District Court denied leave to appeal (21 April 2026). A third-instance application for leave to appeal was then filed with the Supreme Court.

What was the legal question?

The Supreme Court defined the question as follows: what is the status of an arbitration agreement in which the parties released the arbitrator from substantive law, where the dispute between them includes, at its margins, claims under the Sale (Apartments) Law? Is the agreement void because it bypasses mandatory provisions, or can the dispute be heard in arbitration while the buyer's rights are protected in another way?

What did the Supreme Court decide?

Justice Mintz proposed treating the application as if leave to appeal had been granted and an appeal filed, under regulation 149(2)(b) of the Civil Procedure Regulations, 5779-2018, because the application raises a question of principle that needs clarification. The result: the appeal was allowed in part. The dispute will be heard in arbitration, but claims arising from the Sale (Apartments) Law will be decided according to substantive law. No order for costs was made.

The "focus of the dispute" test

The Court restated the long-standing rule that in areas the legislature regulated in a mandatory way, the dispute cannot be referred to arbitration, under section 3 of the Arbitration Law, which provides that an arbitration agreement has no effect on a matter that cannot be the subject of an agreement between the parties. However, as noted in the judgment, this rule applies only where mandatory legislation is at the focus of the dispute. Here, the Court held, the dispute focuses first and foremost on claims of breach of the company's obligations under the agreement, that is, on contract law and general sale law, while claims under the Sale (Apartments) Law are "ancillary and even marginal".

In such a situation, the Court explained, there is no justification for saying that the dispute cannot be referred to an arbitrator. A different conclusion would lead to split proceedings, inefficiency and even conflicting decisions, especially where a broad arbitration is already under way between the purchase group and the respondent.

The arbitrator must apply mandatory provisions, even when released from substantive law

Under section 2 of the Arbitration Law and item 14 of the First Schedule, the default is that the arbitrator is not bound by substantive law, the rules of evidence or the rules of procedure that apply in the courts. Such a release lets the arbitrator take considerations of justice and fairness into account and bring the dispute to a quick end. But, and this is the heart of the ruling, the release does not apply to statutory provisions that cannot be contracted out of. In the Court's words (in Hebrew):

"פירוש הדבר הוא אפוא כי אין כל מניעה שהבורר ידון ויכריע במחלוקות הנטושות בין הצדדים, ובלבד שבעניינים הקשורים לזכויות המערערת על פי חוק מכר (דירות), הוא ידון לפי הדין המהותי"

That is: there is nothing to prevent the arbitrator from deciding the disputes between the parties, provided that on matters relating to the appellant's rights under the Sale (Apartments) Law, the arbitrator rules according to substantive law.

The Court relied on remarks by Smadar Ottolenghi in her book Arbitration: Law and Procedure, as quoted in the judgment, according to which releasing an arbitrator from substantive law does not free the arbitrator from provisions that prohibit contracting out, including section 7A of the Sale (Apartments) Law. In the Court's words, if an arbitrator may rely on substantive law by choice, there is nothing to stop the arbitrator from doing so out of duty:

"אם בורר יכול להסתמך על הדין המהותי מתוך בחירה, ברור שהוא יכול לעשות כן מתוך חובה."

That is: if an arbitrator can rely on substantive law by choice, the arbitrator can clearly do so out of duty.

The Court added, referring to earlier case law cited in the judgment, that in suitable cases a similar result can also be reached through the Standard Contracts Law, 5743-1982.

The arbitrator's expertise

The plaintiff argued that the arbitrator, a judge of a monetary rabbinical court, is not versed in the Sale (Apartments) Law. The Court rejected this. First, the deceased himself agreed to the arbitrator, so it is hard to argue now that he is unsuitable. Second, it is hard to regard a person whom both parties saw as fit to decide the dispute as unable to understand and apply the general law, even if his training is mainly in Jewish law.

What the ruling does not decide

The ruling does not decide whether a dispute centred on mandatory provisions of the Sale (Apartments) Law can be referred to arbitration, and it does not rest on whether the respondent sold an apartment or acted as an execution contractor. The decision was also influenced by the special circumstances of that case.

To avoid overstating the conclusions, the limits of the ruling matter. First, the plaintiff did not argue outright that a dispute raising claims under the Sale (Apartments) Law can never be referred to arbitration, so the Court did not have to decide that question in full. The wording of the judgment suggests that where the mandatory provisions of the Law are at the focus of the dispute the conclusion may be different, but that question remains open. Second, the respondent argued that it did not sell an apartment but acted as an execution contractor for a purchase group, and the ruling does not rest on that question. Third, the Court stressed the special circumstances: a broad arbitration already pending between the purchase group and the company, and the deceased's express consent in the handover protocol.

What does it mean in practice?

An arbitration clause in a purchase from a developer is not void just because it is one, so it is worth checking before signing. However, the arbitrator must rule according to the Sale (Apartments) Law, and a provision that reduces the buyer's rights to the buyer's detriment is not binding.

For the buyer. Do not assume that an arbitration clause in a purchase from a developer is void just because it is one. If the dispute is mainly about breach of contractual obligations, the court is likely to stay the proceedings and refer the matter to the arbitrator, so the arbitration clause is worth checking before signing, not after: who the arbitrator is, who chooses the arbitrator, which forum, who pays the fees. On the other hand, the buyer's rights under the Sale (Apartments) Law, for example under sections 4 and 4B, are not taken away: the arbitrator must rule on them according to the law, and a clause that tries to reduce them to the buyer's detriment is not binding.

For the contractor and the seller. The ruling strengthens the validity of arbitration clauses, but warns against drafting them so as to bypass the Sale (Apartments) Law. Wording such as "the arbitrator shall not be bound by substantive law" is not enough to release the arbitrator from the provisions of the Law that apply to the buyer. Such a clause will serve the contractor mainly where the dispute is contractual or factual, not where it concerns defects defined by the Law.

For a party to proceedings. An application to stay proceedings under section 5 of the Arbitration Law must be filed no later than the day on which the applicant first argued the merits of the claim, and the applicant must be ready to do everything needed for the arbitration to take place. The court may decline to stay the proceedings if it sees a special reason why the dispute should not be heard in arbitration. A party who wishes to challenge a decision under section 5 must apply for leave to appeal, under regulation 150 of the Civil Procedure Regulations, 5779-2018.

What to do in practice

Read the arbitration clause before signing, and in a claim, place the Sale (Apartments) Law arguments at the centre of the statement of claim. If an application to stay proceedings is filed, respond on time and in detail, and in the arbitration itself, ask that the award address the Sale (Apartments) Law.

• Before signing: read the arbitration clause. Check whether a specific arbitrator is named, whether the arbitrator is released from substantive law, and what the arrangement is for the arbitrator's fees and costs. If the contract contains a waiver or limitation of rights under the Sale (Apartments) Law, ask to remove or narrow it.
• In the claim: frame the focus of the dispute correctly. Where the defects claims rest on the Sale (Apartments) Law and on the inspection and warranty periods, it is worth presenting them at the centre of the statement of claim and not as a side issue. This is relevant to whether the dispute is suitable for referral to arbitration.
• If an application to stay proceedings is filed: respond on time and in detail. Address the validity of the arbitration agreement, the identity of the arbitrator, the circumstances of signing and whether there is a special reason not to stay under section 5(c) of the Arbitration Law. If the application is granted, consider applying for leave to appeal on time.
• In the arbitration: ask that the award address the Sale (Apartments) Law. If the arbitrator is released from substantive law, ask expressly that the claims under the Law be decided according to its provisions, and that the award give reasons.
• Deadlines: a defect that has been discovered requires written notice and timely action. You can calculate the inspection and warranty periods with the inspection period calculator, and read about a letter to the contractor in the article on notice to the contractor.

Case law and sources

• LCA 59471-05-26 Finkel v. Birkat Ha'aretz Ltd. (Supreme Court, 6 July 2026). Hebrew.
• Arbitration Law, 5728-1968: sections 2, 3, 5, and the First Schedule, item 14. Hebrew.
• Sale (Apartments) Law, 5733-1973: sections 4, 4B, 7A. Hebrew.
• Civil Procedure Regulations, 5779-2018: regulations 149(2)(b), 150. Hebrew.
• Case law and literature quoted in the judgment are mentioned in this article as cited there.

Checked on 23 October 2026.

About the author

Adv. Amos Ilan is an advocate (licence no. 35320) and a notary (licence no. 214444). The office is at 17 Tzahal Street, Ness Ziona, and handles real estate transactions, construction defects, condominium disputes and civil litigation. Alongside his legal work he has practical knowledge, not based on formal training, of engineering, property appraisal, and electrical and building systems, and he personally conducts the cross-examination of experts in construction defects cases.