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FAQ: Israeli Distribution Law

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Does Israeli law distinguish between distributors, sales agents, and sales representatives?

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.

What are the primary distinctions between a distributor and a sales agent?

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.

Is an Israeli-based distributor or sales agent required to register with any office of the Israeli government?

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.

Is it necessary to execute a formal agreement for either a sales agency relationship or a distribution relationship to come into existence under Israeli law?

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.

From the perspective of the non-Israeli manufacturer or supplier that wishes to sell into the Israeli marketplace, what are the main disadvantages under Israeli law in using a sales agent as opposed to a distributor?

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.

Does the appointment of an Israeli distributor necessarily mean that the distributor has exclusivity in Israel?

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.

What constitutes “reasonable” notice of termination to an Israeli distributor?

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.

When a manufacturer/supplier is found to have terminated a distribution agreement without giving proper notice to the Israeli distributor, what relief/remedies is/are available to the (terminated) distributor?

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.

When a manufacturer/supplier is found to have terminated a distribution agreement without giving proper notice to the Israeli distributor, can the distributor obtain an injunction, prohibiting the manufacturer/supplier from working with another Israeli distributor?

It is extremely rare for an Israeli court to issue an order enjoining a supplier from appointing (or working with) a replacement distributor.

Separate from the issue of advance notice, is a terminated distributor in Israel entitled to compensation arising from the termination?

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.

Is a terminated sales agent entitled under Israeli law to compensation arising from the termination?

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.

Is an Israeli distributor entitled to compensation for any improvement in the good will of the manufacturer's product in the Israeli market?

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.

Does Israeli law recognize any right of a distributor to transfer its distributorship?

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.

Does Israeli law recognize any right to compensate the terminated distributor for sales made after termination – whether made directly by the manufacturer/supplier or by a new distributor?

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.

Does Israeli law recognize any right to compensate the terminated sales agent for sales made after termination?

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.

Would a liquidated damages clause in a distribution agreement be enforceable under Israeli law?

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.

Would a force majeure clause in a distributorship agreement be enforceable under Israeli law?

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

Would a force majeure clause in a sales agency agreement be enforceable under Israeli law?

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.

Would an Israeli court enforce a choice-of-law clause in a distributorship agreement?

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.

Would an Israeli court enforce a choice-of-law clause in a sales agency agreement?

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.

Is the United Nations Convention on Contracts for the International Sale of Goods part of Israeli law?

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.

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