Terminating distributors and commercial agents in Israel

10 November, 2022

It is not uncommon for agent-principal or distributor-principal relationships to end in litigation. Often a local representative of a worldwide enterprise does not take it well when a multinational enterprise decides to switch to another representative or to terminate the relationship in favour of setting up a wholly owned subsidiary. In such cases, the distinction between a distributor and a commercial agent becomes very important for companies with operations in Israel. This classification determines the applicable law.

While distribution agreements are primarily governed by general contract law, agency agreements are also governed by specific legislation, which offers the commercial agent additional rights and at times may make the termination of an agency agreement costly and more complex. General contract law does not compensate a distributor for loss of market or provide restitution of enrichment made by a supplier by utilising the market share and goodwill created by the distributor to its goods; agents are entitled to some compensation for a lasting increase of the supplier’s sales in Israel. The provisions of the specific act relating to commercial agents may apply even if the agreement determines that a foreign law should apply.

Distinguishing between distributor and commercial agent

The activities of a distributor and those of a commercial agent do not always vastly differ from one another. Both enter into an agreement with a supplier to promote the sale of the supplier’s goods, and both interact with retailers to do so. Therefore, at times the classification of a particular company as a distributor or as a commercial agent is not clear and is left to the courts.

The courts have held that the main defining character between a distributor and a commercial agent is whether the relevant party purchases the goods from the supplier and then sells them to their own clients (a distributor), or alternatively is an intermediary, acting to achieve a sale of the goods from the supplier directly to the client (a commercial agent).(1)

The classification is important as it determines the law governing the different contracts with the distributor and the commercial agent. Generally, distribution agreements are governed only by general contract law, as applied to long term contracts (relational agreements), while agency agreements are also governed by specific legislation.(2)

Implications of classification
The main significance of applying the Agency Contract Act (the Act) arises when a supplier wishes to terminate the agency agreement without cause.

If the Act does not apply to the agreement, then the agreement is governed by general contract law. General contract law provides that relational contracts between parties with an unspecified term can usually be terminated without cause at any time by giving a prior notice. (3)

Contract law also provides that when the parties specifically designate the length of the prior notice period in the agreement, this agreement is typically honoured by the court. The law does not provide a specific prior notice period. Therefore, when the agreement does not specify the prior notice period, the length of the period is determined by the courts on a case-by-case basis, taking into account considerations such as the length of the relationship and the investments made by the distributor.(4)

When the distribution agreement sets a specific term, after which the agreement may or may not be renewed at the supplier’s discretion, the distributor will normally have no cause if the supplier simply lets the agreement expire without renewing it.

Furthermore, pursuant to general contract law principles, a party to a distribution agreement that has been terminated can only claim loss of profit during the prior notice period to which it was entitled and did not receive. General contract law does not provide a distributor with compensation for loss of market or restitution of enrichment made by a supplier by utilising the market share and goodwill created by the distributor to its goods.(5)

The situation is different for the commercial agent. The Act stipulates that the terms provided in agency agreements can only deviate from the requirements of the Act to the extent that such changes are for the benefit of the agent (section 6 of the Act). Therefore, in situations where the terms of the agency agreement are less favourable to the agent than those of the act, the terms of the Act will prevail.

The Act provides the agent with two important rights relating to the termination of the agency agreement:

*the right to prior notice or compensation in lieu of such notice; and

*the right to compensation for the termination of the agency agreement itself.

A commercial agent that entered into an agency agreement for an unspecified term is entitled to a statutory minimum prior notice period before the termination of the agreement. The prior notice period increases over time up to a maximum of six months for an agreement that has been in force for six years or more.

Further, the commercial agent is also entitled to compensation upon termination of an agency agreement, for contracts brought about by the agent and for increased business with existing customers to which the agent contributed. The right to this compensation is dependent upon the occurrence of all of the following conditions:

*the agency agreement was in force for at least one year before its termination;

*the commercial agent was the primary factor in concluding the contracts with the new customers or the increase in business with existing customers; and

*the agreements with the new customers and the increase in business with existing customers benefit the supplier even after the termination of the agreement.

Note that the commercial agent will not be entitled to compensation for termination if the agency agreement was terminated for cause, due to the agent’s breach of contract. The court may also deny the agent such compensation or lower the amount (but not increase it) if the court finds it appropriate under the circumstances.

Agreements containing foreign choice of law provision
Does the legislation apply to agreements with international suppliers, in cases in which the agency agreement or distribution agreement stipulates a foreign law as the governing law? To address this question, the difference between a distribution agreement and an agency
agreement must be distinguished.

Generally, the law provides that contracting parties are free to choose the applicable law governing their agreement. This choice is respected by the courts unless proven to be contrary to “public policy”, which is unlikely when the applicable law designated in the agreement is a well-established western law system (such as EU and US law systems). It is therefore unlikely that a choice of law provision contained in a distribution agreement designating a western foreign law as the applicable law would not be honored by the court.

The answer may be different if the agreement is determined to be an agency agreement. As mentioned above, in situations in which the terms of the agency agreement are less favorable to the agent than those of the Act, the terms of the Act will prevail. Therefore, the question is, would the choice of law provision be respected (in accordance with the general rule), or would it be ignored due to the compelling force of the Act? There is no settled law relating to this question.

Some courts have disregarded the provisions of the Act as a result of a foreign law provisions in the agreement. However, those rulings were not detailed decisions but rather short side comments that are not binding precedents.(6)

A somewhat analogous discussion was conducted by the Supreme Court in a class action in Facebook Inc v Ben Hamo(7) in which the Court examined whether a choice of law provision in Facebook’s terms and conditions that stipulated California law as the applicable law, should be honoured. The Court decided that it should. Note that in the matter of Facebook v Ben Hamo the contract in question was a contract of adhesion (standard contract) which is governed by different specific legislation. However, a comment that may be relevant to
this discussion was made by judge Meltzer suggesting that foreign law provisions should be given effect only as long as they are not used to bypass a local mandatory law (such as the Consumer Protection Act, 1981-5741).

Following Facebook v Ben Hamo, a few district court decisions have adopted its rationale. Recently, there has been another shift towards favoring mandatory legislating over choice of law preventing, with the Supreme Court decision in Troym Miller Ltd v Facebook Ireland Ltd.(8)

For further information on this topic please contact Dror Varsano or Sivan Barasch.

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(1) See for example Civil Action (Tel Aviv District Court) 2449-06 Muzhari v Tnuva Cooperative Center for the Marketing of Agricultural
Products in Israel Ltd (published in Nevo, 28 April 2013).
(2) The Agency Contract Act (Commercial Agent and Supplier), 5772-2012.
(3) Civil Appeal 442/85 Zohar v Trebnol Laboratories (Israel) Ltd, PD 44(3) 661 (1990); Civil Appeal 355/89 Hinawil estate et al v
MivsheletBira Leumit Ltd et al, PD 46(2) 70 (1992).
(4) Civil Appeal 9099/96 Yediot Ahronot Ltd v Firstenberg, PD 53(5) 1 (1998).
(5) Civil Appeal on Leave 371/89 Leibowitz v A at J Eliyahu Ltd et al, PD 44(2) 309 (1990).
(6) See Civil Action (Central District Court) 38342-03-13 Myers Marketing (1981) Ltd v Spanesi s p a (published in Nevo, 25 June 2013);
Class Action (Tel Aviv District Court) 20020-09-19 Hotels.com v Eldad (published in Nevo, 6 October 2020).
(7) Permission for civil appeal 5860/16 (published in Nevo, 31 May 2018).
(8) Permission for Civil Appeal 1901/20 (published by Nevo, 26 July 2022) (see “Israel’s Supreme Court’s judgment further undermines the validity of applicable foreign law clauses in contracts between global corporations and their Israeli consumers”).

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