Distribution Agreements Under Israeli Law: Practice Tips Outline

Prepared by L. Marc Zell, Adv. and Sonia Shnyder, Adv., Zell, Goldberg & Co., Jerusalem and Tel Aviv, An Affiliate of the FANDZ International Law Group.

February 2002

1. Applicable Law.

a. Statutory. The Manufacturer-Distributor relationship is governed by general contract law derived from the following statutes:

i. Contract Law (General Part) – 1973

ii. Contract Law (Remedies for Breach of Contract) – 1970

iii. Unjust Enrichment Law – 1979

b. Judicial. Court decisions relating to the formation and termination of distribution agreements comprise a growing body of case law in Israel. Only decisions of the Israeli Supreme Court have binding force as precedent. Lower court decisions provide useful guidance with respect to drafting distribution agreements applicable to the Israeli market.

2. Formation and Modification of Distribution Agreements

a. Israeli courts have enforced not only written agreements but also verbal agreements where the conduct of the parties evidences mutual intent.

b. Conduct of the parties may also serve to modify the terms of an existing distribution agreement. The conduct must be consistent, evidencing a clear intent. An occasional deviation does not suffice.

c. The Israel Supreme Court has held that where a distributor claimed an exclusive distribution arrangement based on a verbal agreement where the distributor was not bound by any minimum purchase requirements, no such exclusivity would be enforced. Instead, the Court recognized the existence of a buyer-seller relationship.

3. Termination of Distribution Agreements

a. Many termination disputes can be avoided by the use of clear language in a written distribution agreement specifying the following:

i. The initial term of the agreement

ii. Whether it is renewable, and, if so, by whom, and how (for example, if the manufacturer has not notified the distributor of renewal within 90 days prior to the end of the initial term, the agreement will be deemed to expire at the end of the initial term without further action).

iii. The circumstances pursuant to which the manufacturer has the right to terminate prior to the end of the then-applicable term, including immediate termination for incurable breach.

iv. The amount of advance notice that the manufacturer is required to give to the distributor prior to termination. Courts will generally honor written provisions specifying this period of time.

b. Where there is no clear provision regarding notice of termination, Israeli courts tend to uphold the manufacturer’s right to nevertheless terminate, but will enforce an obligation to provide adequate notice through an award of compensatory damages in lieu of such adequate notice. The length of notice and amount of compensation are determined on a case-by-case basis.

c. The Israel Supreme Court has held that an agreement providing for an initial limited term followed by automatic annual renewals was not the equivalent of an unlimited term.

d. In rare instances, the Courts will uphold an immediate termination in the case of breach without imposing compensatory damages on the manufacturer. For example, where the distributor imports directly competitive products. In most cases, however, the manufacturer should give notice and an opportunity to cure, in order to satisfy the principle of good faith that is an established principle of Israeli case law.

e. The Israel Supreme Court has consistently refused to specifically enforce a distribution agreement as a remedy for an improper termination claim. Claims of a quasi-property right in the distributorship have been rejected thus far. Monetary compensation is the recognized remedy. The amount of compensation depends on the following group of factors, among others:

i. The distributor’s previous efforts to penetrate the market – investment of time, money and personal energy

ii. The relative difficulty of penetrating the local market, due to the novelty of the product or absence of prior distributor

iii. The length of time required to penetrate the local market

iv. The length of time needed for the distributor to recoup its investment

v. The expected profit to the distributor relative to expenses

vi. The extent to which the manufacturer would be “enriched” by distributing the products independent of the terminated distributor

vii. The length of the agreement

viii. The distributor’s reliance on the manufacturer’s products and inability to switch to another line of business

ix. The good faith of the parties, e.g. the manufacturer’s in making representations as to the continuation of the distributorship, the distributor’s in acting in reliance on the continuation of the distributorship despite its knowledge of impending changes of the manufacturer’s marketing strategy.

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