Many foreign and multi-national manufacturers and service providers have distributors and agents in Israel. In the course of doing business, a foreign manufacturer can decide to disengage from the agent or distributor. Unfortunately, all too often such disengagement quickly develops into a legal dispute, and ends up being very costly for the foreign manufacturer both in legal fees, and in funding the eventual settlement. In my experience, having dealt with over a dozen of these 'divorces', there are certain steps the manufacturer can take, both at the inception of the relationship and when winding it down, in order to improve its position in such a dispute, and sometimes to avoid a dispute completely. Below is an informal and not exhaustive list of such steps. First, some steps that you should consider at the inception of the relationship:
1. Distinguish a Distributor from an Agent: in 2012 Israel enacted the Agency Contract Law (Commercial Agent and Supplier) - 2012, which provides special rights to 'commercial agents.' These rights include the right to a notice period, and the right to compensation at the end of the agency relationship. These rights are mandatory, and cannot be contracted away. However, commercial agents are defined in a way that excludes most distribution relationships. At the time of negotiating the agency / distribution agreement it is important to analyze whether your Israeli representative is a distributor or an agent, and whether or not the law applies
2. Make sure the relationship is governed by a detailed written contract: all too often we see instances of distribution relationships based on a 'gentlemen's agreement' or on some informal email exchange or a letter drafted many years ago. Such an informal agreement, almost without exception, works to the detriment of the foreign manufacturer, because it is a perfectly enforceable agreement under Israeli law, and also allows the distributor or agent to develop expectations and make extreme claims for compensation. Even where a formal agreement exists, sometimes the agreement is allowed to expire, and the parties continue with their course of conduct. Other times, the parties deviate in various ways from the written agreement, giving rise to claims that the agreement has been orally modified. The absence of a clear written instruments would allow the distributor / agent to make various unsupported claims about what the parties intended or agreed to, and base them on alleged oral promises as well as on concepts such as 'good faith' or 'fair dealing.' A written contract allows the manufacturer to use its bargaining power to clarify exactly what the Israeli distributor or agent is entitled to;
3. Foreign law and foreign jurisdiction clauses are enforceable and will protect you: An Israeli distributor or agent will be much less likely to go to court if this court is situated in a foreign country. Israeli courts routinely enforce foreign jurisdiction and foreign governing law clauses (except in certain consumer contracts) and such clauses provide significant protection.
4. A Contract for a fixed period is better than a contract for an indefinite period: Israeli law allows a distributor that is party to a distribution agreement for an indefinite amount of time a 'reasonable' notice period prior to termination. How long is 'reasonable' notice? Depending on the facts, courts have required a notice period of anything between one month and two years. However, if the contract term expires, a distributor is usually not entitled to renewal. In addition if a contract can be terminated for convenience, with a set notice period (e.g. 90 days) courts will usually, but not always, enforce this period.
Fast forward several years (sometimes several decades) and the manufacturer wants to terminate the relationship. Sometimes a manufacturer will part with a distributor for reasons that are unrelated to the distributor's performance: the manufacturer may have merged, for example, with another company that has its own distributor in Israel and it makes no sense to have two distributors in the same territory. In other instances, the reason for termination has to do with dissatisfaction with the distributor's performance, whether or not this dissatisfaction does not rise to the level of a breach of the distribution agreement. Typically, once the distributor learns about this intention it will push back hard, try to persuade the manufacturer not to terminate it, and, if the manufacturer holds fast, try to obtain a significant monetary settlement. Distributors usually argue that they have made significant investments that they are entitled to recoup, and that through their investment and business acumen they have created a market share for the manufacturer's products and therefore it is unfair for the manufacturer and the new distributor to unjustly enrich themselves. Of course, at this point much depends on whether or not the manufacturer followed the steps listed above at the inception of the relationship, but there are several important steps the manufacturer can take and some mistakes to avoid:
1. If you are unhappy with your distributor - create a paper trail: Assuming that the breakup is related to the distributor's performance (and as explained above, this is not always the case) it is important to create a paper trail that documents the manufacturer's claims, and the opportunities afforded to the distributor to improve its performance. Such evidence can be of significant value if the case reaches litigation.
2. Be transparent, and engage with the distributor as early as possible: Disputes that accompany termination of distributors are often made worse when the distributor feels that it was treated unfairly or that it received a cold shoulder from its longtime business partner. If possible (and, for business reasons, it is not always possible) it is better to be transparent with the distributor, and give it as much notice as possible. Also, under Israeli law, the distributor is not entitled to a cash compensation but to a reasonable notice period, if such notice period can be provided. If the manufacturer engages with the distributor when such advance notice can still be given, the distributor will have a difficult case to make. However, if (as often happens) the manufacturer first commits to a new distributor, and only then breaks the news to the old distributor, usually a cash settlement is the only currency with which the manufacturer can pay.
3. Assume that everything you say is taped: It is legal in Israel to audio record any conversation one is party to. Such recordings are admissible as evidence, and are often used at trials. Therefore, you should assume that any discussion or negotiations your employees are having with your Israeli distributor or agent are being recorded, and can and will be used against you.
4. Do not extend credit: when distributors learn that the distribution relationship is about to end, they often decline to pay outstanding invoices as a mode of 'self-help' for the damages that they allege they suffered. Therefore, if you are aware that you are about to end the distribution relationship, you should try to make sure that the distributor is current on all of its obligations, and to provide new goods or services only against cash or a letter of credit.
5. Do not fear ending up in court: In our experience, a foreign manufacturer will get a fair hearing in an Israeli court. In recent years courts have become more efficient and service oriented, and court cases are usually resolved within 1-3 years (down from an unacceptable 5-10 years a decade or so ago). Litigation is never a walk in the park, and a negotiated solution can save both parties a lot of money and hassle. However, if the distributor or agent makes unrealistic demands, you can (with proper legal support) push back and insist on your rights.
The author is a partner in Meitar, Liquornik. Geva, Leshem, Tal and co law firm.
Published by Globes [online], Israel business news - www.globes-online.com - on April 5, 2017
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