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Frequently Asked Questions – Israeli Distribution Law

 
   
 

Yes – under Israeli law, the rights of a sales agent are governed by a 2012 statute, the “Agency Contract (Commercial Agent and Supplier) Law (the “Statute”), whereas the rights of a distributor are (generally) governed by case law. An intermediary that is given the title “representative” will usually be deemed to have the status of a sales agent. Top of Page

A distributor usually purchases goods for its own account and takes the risk of being able to sell them at a profit. A sales agent does not assume such risk but (in most cases) is compensated (solely) on a commission basis. In other words, after the customer (procured by the agent) pays the manufacturer/supplier for the goods, the supplier pays a commission to the sales agent.  Top of Page

Generally no, but there are exceptions, depending upon whether the imported product requires a license. By way of example, the Israeli importer of a medical device would usually register with the Ministry of Health; even assuming that such importer serves as the manufacturer's distributor, there is no requirement to file with the Israeli government a copy of the importer's distribution agreement. Top of Page

No – in fact, in many cases, Israeli courts have recognized that these kinds of relationships (both distributorships and sales agencies) have been formed simply by the exchange of letters or e-mail messages. Sometime they have been formed by handshakes. But such a bare-bones agreement is not recommended, because it frequently leads to disagreements (including those arising from cultural differences) and to litigation. Top of Page

With respect to Israeli sales agents, because their rights – the primary one being entitlement to advance notice of termination – are codified by the Statute, a supplier cannot “contract out” of those rights. With respect to Israeli distributors, because a distributor is entitled to “reasonable notice” of termination – and reasonableness is always a fact-intensive and thereby litigation-ripe inquiry – a manufacturer/supplier faces many uncertainties in terminating its relationship with its Israeli distributor. Top of Page

No. Absent an express statement from the supplier that the distributorship is an exclusive one, an Israeli court will look at multiple factors to determine whether the parties intended exclusivity to be a term of their agreement. Those factors include the practice in the industry and the reasonable expectations of the parties. Sometimes a statement made by the manufacturer/supplier to a third party will be used by the Israeli court to infer an intention to confer exclusivity. For example, when a manufacturer listed on its website various countries – including Israel – in which it has exclusive distributors, such evidence was considered a strong indication of the manufacturer's intention to confer exclusivity upon its Israeli distributor, even though the written communications between the parties included no mention of exclusivity. Top of Page

Although the answer is always fact-specific (and often industry-specific), Israeli courts are guided by two principles – (a) trying to ensure that the distributor has had sufficient opportunity to see the fruits from its investment in promoting the supplier's product, and (b) trying to ensure that the distributor has sufficient time to adjust to the consequences of termination. Top of Page

For such a terminated distributor, the primary remedy available under Israeli law is money damages. Case law has recognized various theories of recovery by a distributor that was not given sufficient notice – including reimbursement of expenses, loss of future profits, and indemnification regarding claims asserted by others in the supply chain who relied upon the (terminated) distributor as being able to deliver the goods.  Top of Page

Termination of a distribution agreement by the manufacturer/supplier generally would not, in and of itself, give rise to any entitlement to compensation to the Israeli distributor. As noted above, when proper notice is not given, the Israeli distributor may sue for compensation for the resulting damage.  Top of Page

As indicated above, the Israeli sales agent is entitled to advance notice based upon the length of the agency relationship. The general rule is that the sales agent will be entitled to 30 days' notice for each year of the agency relationship. The supplier may “buy-out” the sales agent, and thereby avoid the notice requirement, by paying compensation to the agent. In most cases, the amount of the buy-out will be calculated by multiplying the (statutory) notice period by the average profits of the sales agent during the six months prior to termination. Top of Page

So far Israeli case law has refused to recognize any right to compensation for the distributor resulting from improvement in the good will of the manufacturer's product.  Top of Page

As a general rule, under Israeli law there is no such right. Several cases have recognized an exception when the distributor paid money for the right to an exclusive distributorship over specified territory – but those cases arose in the field of food distribution, and none involved an international distribution agreement. Top of Page

Generally no, but some Israeli cases have recognized such a right based on the conduct of the parties and/or the custom in the industry. Top of Page

Yes, under certain circumstances. The Statute provides generally that a terminated Israeli sales agent (that served in such capacity for a year or more) could be entitled to compensation for “new clients” or for having caused a “significant increase” in the supplier's business. In order to be entitled to such compensation, the sales agent must prove that it was the “procuring cause” for bringing in new clients and/or increasing business in Israel. Top of Page

Israeli law generally recognizes the enforcement of a liquidated damages clause in a contract, provided that (i) the contract does not fall within the definition of a “standard” contract under the Standard Contract Law (1982), and (ii) subject to the right of the party opposing enforcement of the clause to prove that, at the time of contracting, the amount of liquidated damages bore no reasonable relationship to the likely foreseeable damages arising from a breach. Top of Page

Yes, but Israeli courts generally construe force majeure clauses narrowly – which means that careful drafting is essential.  Top of Page

As would be the case with respect to a force majeure clause in a distribution agreement, in connection with a sales agency agreement, an Israeli court would likely construe such a clause narrowly. Moreover, to the extent that the force majeure clause is clearly unfavorable to the sales agent, such clause could be deemed to run counter to the “anti-derogation” provision of the Statute and, therefore, not be enforceable by an Israeli court. Top of Page

So long as the substantive law chosen in the distribution agreement bears a reasonable connection to the contractual relationship between the supplier/manufacturer and the Israeli distributor, an Israeli court will usually enforce a choice-of-law clause that calls for the application of the law of a jurisdiction other than Israel. Top of Page

Since the Statute went into effect, no case has addressed the specific issue of the enforceability of a choice-of-law clause calling for non-Israeli law in a sales agency agreement. Nonetheless, it is likely that an Israeli court would not enforce that kind of clause in a sales agency agreement because such a clause would probably be deemed to run counter to the “anti-derogation” provision of the Statute. Top of Page

Yes, the UNCISG is part of Israeli law, but it is common for parties to Israeli distribution agreements to stipulate expressly that the convention does not apply. (Because a sales agent is not party to the international sales agreement, the UCISG is almost never relevant to the sales agent's agreement.) Top of Page