Legal Updates

An exclusive distribution agreement may be created by behavior of the parties

December 16, 2018

A Hong Kong registered manufacturer of metal products appointed an Israeli company as its sole distributor in Israel and in the Palestinian Authority. The agreement required that the distributor refrain from distributing competing products and set minimum quantities under which the agreement will be renewed each time. Later in a letter to a third party, the manufacturer declared that the distributor is the exclusive distributor. The distributor also began to import competing products, but the manufacturer did not terminate the agreement in light of representation of the distributor that the parallel import would be in low quantities – which later was discovered not to be true. Later, the manufacturer began selling to another distributor, refused to honor orders, and after that terminated the agreement.

The Court held that the manufacturer breached the distribution agreement by selling to other distributors and by terminating the agreement without prior notice, but the distributor's conduct in distributing competing products constitutes a contributory fault that reduces the compensation. An exclusive distribution agreement may be entered into by virtue of behavior of the parties and when the parties conduct themselves as if they have an exclusive distribution agreement, which is not limited in time, an agreement is created. Similarly, when the manufacturer did not terminate the agreement when the distributor began to import a competing product and even confirmed in writing that he knew of it, an amendment of the agreement was created by behavior, allowing the import of a competing product. An agreement without a defined period can be terminated by advance notice, but it is not possible to terminate only some of its conditions, such as a condition of exclusivity, and therefore the manufacturer breached the agreement by selling to the competing distributor. Termination of the agreement without prior notice constitutes a breach, but the compensation in respect thereof is reduced due to the contributory fault of the distributor who distributed a competing product without the manufacturer's approval.