Legal Updates

No need for prior notice for termination of a breached distribution agreement unless the supplier took its time to terminate it.

March 3, 2019

A distributor in Israel signed an exclusive distribution agreement with a German supplier for lighting products, to be valid for one year. The agreement was later extended by conduct but no other agreement was signed. On a visit to Israel, the supplier discovered that the distributor intends to sell its activity and wrote to the distributor that it is concerned about the idea and maintains the right to find another distributor. The distributor nevertheless signed an agreement for the sale of its activity, in which it left itself as a distributor of the particular supplier's products for a period of 3 years, in consideration only for reimbursement of expenses, and for that period appointed the purchaser as an exclusive sub-distributor. The agreement also provided agreed compensation in case the supplier terminates the distribution agreement. Many months after the signing of the sale agreement and shortly before the sale agreement came into effect, the distributor notified the supplier of it and the supplier clarified that it does not recognize this agreement. About three months later, the supplier terminated the distribution agreement, with immediate effect.

The Court rejected the claim of the distributor for compensation due to the termination without notice of the distribution agreement. A distribution agreement for an unlimited period may be terminated at any time, subject to reasonable prior notice and good faith. Here, the distributor acted in bad faith and breached the trust of the supplier and therefore the supplier was entitled to terminate the distribution agreement without prior notice. However, because the supplier chose not to terminate the agreement immediately but procrastinated three months, the distributor’s right to advance notice was recreated, even though as a relatively short period in view of the distributor’s breach of the agreement. Nevertheless, the distributor sold the activity to a third party when it knew that the supplier opposes the sale, and therefore the agreement also expected a situation in which the supplier would terminate the distribution. In addition, in a period of three years, the distributor was to act in return for reimbursement of expenses only, and therefore neither the distributor nor the purchaser suffered any damage and the claim was rejected.