Most international companies prefer to operate in Israel through domestic business partners, rather than setting up their own local operation. These local partners – distributors or agents – assume all or part of the local marketing, sales and distribution efforts.
Engagements between international companies and their local partners are usually executed through distribution or agency agreements. Different legal provisions apply to these commitments, and the commercial and legal spheres clearly distinguish between the functions of distributor and agent.
Who is who?
Israel adopts the commonly used distinction between distributors and agents. In this context, a distributer is an independent local reseller who purchases goods from the international supplier, at its own risk and expense, and then distributes and sells them to local third parties. The distributor bears the direct economic risk of its distribution activity, the distributor’s profit (or loss) being the difference between the purchase price from the supplier and the sale price to third parties.
Unlike a distributor, a agent does not buy products and then resell them to third parties for its own account and at its own expense. Rather, it is an intermediary between buyers and the manufacturer (or supplier). The role of an agent is to forge the link between the supplier and the third parties, but without creating any contractual relationship between the agent and the third parties.
Protection of commercial agents
The law on agency contracts enacted in Israel ten years ago regulated, for the first time, the legal relationship between a supplier and a commercial agent. The purpose of the law was to regulate several aspects arising from an agent’s role solely as a broker:
- define the legal status of commercial agents;
- protect the rights of commercial agents against abuse by suppliers; and
- to anchor an agent’s fundamental rights at the end of the agency contract.
The law provides definitions for the terms “agency contract” and “commercial agent” and clarifies the distinction between a commercial agent and a distributor and other forms of marketing through third parties.
According to the law, the relationship with the local agent is qualified as either an agency agreement or a distribution agreement, depending on the substantive nature of the agreements between the parties and not the title that the parties have given to the agreement. Therefore, any party who acts as a representative of a supplier and assists in entering into signed agreements between the supplier and third parties, but does not actually purchase and resell the supplier’s products, would be considered an “agent”. “. On the other hand, any party that purchases products from a supplier and then resells them would be considered a “distributor” of that supplier.
Moreover, according to Israeli court rulings, even if the parties stipulate that the agreement between them is subject to foreign (i.e. non-Israeli) law, they would not be released from the cognitive provisions of the law. . For example, if the relationship between the parties is that of a supplier-agent under the law on agency contracts, their choice of a foreign law will not allow them to circumvent all the rights and obligations prescribed by Israeli law.
Termination of the agency
According to the law on agency contracts, in the event of the termination of agency relations, which were prescribed for an indefinite period, the agent is entitled to notice. The notice period will range from two weeks (for short-term appointments of up to six months) to six months (for long-term appointments of six years or more).
There are instances where agency relationships are terminated without notice, primarily due to vendor market considerations. In such cases, the law prescribes a payment mechanism instead of notice. This mechanism is based on the average monthly profit of the agent during the six months preceding the end of the agreement, or during the second half of the duration of the agreement (if the agreement lasted less than one year ), multiplied by the advance – period of notice to which the agent is entitled.
Sometimes the initial commitment between the parties is for a short fixed period, followed by a predefined extension period. However, in many cases, the relationship between the parties does not end when the first extension period expires, but rather continues without the parties having a clear end date for the engagement. Thus, the fixed-term contract essentially becomes an indefinite-term contract.
The parties also sometimes commit to a set of short-term agreements that renew automatically. In such cases, the agent may claim that the period of the appointment has essentially become an indefinite appointment, notwithstanding the express wording of the agreement. The agent may even allege that the supplier is trying to artificially affix the contractual clause in order to evade its legal obligation to give notice.
Therefore, it is important to check that the wording of the agreement between the parties accurately reflects the period of the relationship between them. When renewing the contract, it should be checked whether it is preferable to draft a new agreement or to extend an existing one, also taking into account the implications of the notice period.
Compensation in the event of termination
Sometimes, even after the termination of an agency contract, the supplier continues to benefit from the commercial agent’s investments. Such situations justify, by recognition of its quality and its particular rights, an additional remuneration to the agent for its success in the promotion of the activity of the supplier.
The agent may be entitled to this additional remuneration if the agency contract has lasted more than one year. The remuneration can reach up to 12 times the average monthly profit of the agent, generated as a result of the growth in sales of the supplier’s products during the period of relations between the parties. This right to compensation is at the discretion of the court and the right may arise whether or not the agent was an exclusive agent and whether the engagement was for a fixed or indefinite period.
To be entitled to compensation, the commercial agent must demonstrate a cumulative increase in supplier activity during the term of the agreement compared to the period preceding the agreement (e.g. commitments with new customers, significant growth in business with existing customers, etc.). The commercial agent must also demonstrate that the business growth continues to generate revenue for the supplier after the engagement with the agent ends. The commercial agent can claim compensation if he proves these two criteria (in addition to fulfilling the conditions relating to a commitment period of at least one year, and proving that the commercial agent was the ” effective factor” of the growth of the business of the Enterprise supplier).
However, the law does not entitle the commercial agent to compensation or commission in connection with a transaction between the supplier and a customer, even if the commercial agent was the effective factor in bringing about the transaction. , if the transaction with the client was signed only after the termination of the agency contract.
Thus, during contract negotiations, many commercial agents ask for the addition of clauses which will establish their right to benefit from post-contractual transactions, carried out thanks to their efforts during the duration of the contract. When drafting these conditions, it is important to ensure that they do not give a commercial agent the right to double remuneration, both contractual remuneration and statutory remuneration.
Distributors in Israel
Unlike agents, the business relationship between a supplier and a distributor was not separately regulated and continues to be determined in light of general contract law and the extensive case law dealing with the issue of termination of the contract between suppliers and distributors.
Thus, with regard to distribution contracts, there are no legal provisions imposing notice before the termination of relations or defining the minimum mandatory notice period. Court decisions in this regard have held that a distributor is entitled to reasonable notice. The notice serves to indemnify the distributor for its reasonable expectation that the contractual relationship will continue, to allow the distributor to recover its reasonable investments in building the market for the supplier and to sell the inventory still in its possession.
Similarly, no legal provision regulates the remuneration that a distributor may be entitled to receive at the end of the contractual relationship. According to case law, a long, continuous contractual relationship may actually reduce the remuneration due to the distributor, because the reasoning is that the distributor has had sufficient time to recoup its investment in building the market and derive the expected profits from the business.
In the absence of a regulatory provision regulating the termination of distribution relations, it is important to ensure that the distribution contract regulates the questions relating to the termination of relations between the parties. With respect to distribution agreements, there is no limitation that the commitments are subject to foreign law and foreign jurisdiction.
As with any new market, when entering the Israeli market, it is also necessary to consider local competition laws. Sometimes commitments between suppliers and distributors may include exclusivity agreements, and sometimes they may also include provisions allowing the supplier to influence the selling prices of its products to end consumers. Since these agreements could be considered restrictive trade agreements, it is important to review them to ensure compliance with Israeli competition laws.