The Right to Terminate a Distribution Agreement in Israel
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The Right to Terminate a Distribution Agreement in Israel

March 10, 2018
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A manufacturer is working with a the distributor for many years and during the period the distributor is improving the distribution line and running it successfully. At some stage, the manufacturer wishes to terminate the relationship with the distributor and may even sell the distribution line to a new distributor. Is the manufacturer permitted to do so? Will the manufacturer be obliged to compensate the distributor for this?

In contrast to an agency agreement by which an agent acts as the manufacturer's long arm (and in fact transactions are entered into between the manufacturer and the customer directly), a distribution agreement is an agreement between a manufacturer and a party under which the same party will be responsible for operating the distribution line (or even building it in the first place), purchasing the products from the manufacturer and selling the products to the customers. The distribution line may be exclusive (for example, exclusive distributer in a country for a foreign manufacturer's goods) or without exclusivity, and may be limited to a certain area or a general right to distribute. Unless otherwise provided in the distribution agreement, the distributor purchases the products from the manufacturer and sells them to its customers, and the distributor is the one taking the risk of purchasing and selling the products. The distributor may appoint sub-distributors or agents acting on its behalf and act to close transactions with potential customers. Of course, under the agreement it is possible to determine any condition that the parties are interested in and sometimes a distributor reduces the risk taken and acts in a way closer to an agent than to a distributor.

In the Vita Pri Hagalil holding given at the beginning of 2018, a case was discussed in which a company notified the distributor who acted as such for 10 years that the relationship is terminated and in fact sold the distribution line to another distributor. The company did give the distributor advance notice, as was required under the distribution agreement, but refused to compensate the distributor for the termination of the distributionship. The Court reiterated that, insofar as an agreement signed with the distributor is not for a fixed period (notwithstanding the long period in which it was in force), it may be canceled unilaterally by each of the parties, subject to giving reasonable notice in advance. The prior notice period is subject to interpretation according to the circumstances of the case. In 2012, the Israeli legislator regulated the manner of revocation of agency agreements under the Agency Contract Law (Commercial Agent and Supplier), 2012, but did not deal with distribution agreements, however, the dates set forth in the law may also be used in analogy to such agreements.
Israeli caselaw sets that as long as the distribution agreement does not stipulate otherwise, the distributor does not hold any proprietary right in the distribution line or reputation of the product itself, even if the distributor developed the market or even created the product's reputation in the distribution area, and the distributor has only contractual rights. Therefore, unless the agreement provides otherwise, the manufacturer may at any time not only terminate the distribution agreement but also sell the distribution line to another and is not obligated to compensate the distributor for that.

A correct formulation of the distribution agreement is very important for both sides. Thus, for example, in the Vita Pri Hagalil case, because of the language of the distribution agreement, the manufacturer was not required to pay significant compensation to the distributor despite the termination of the contract and the sale of the distribution line. Therefore, it is recommended prior to the establishment of an agreement between a manufacturer and a distributor or agent to consult with an attorney knowledgeable in the field in order to form a comprehensive contractual agreement that will anchor these issues and prevent future legal uncertainty and unnecessary litigation.