Archive for May, 2010

Termination of a Distribution Relationship

Thursday, May 27th, 2010

According to the Israeli Law

Posted by: Roy Kubovsky, Adv.

A common way available to a foreign manufacturer who wishes to distribute and sell its products in Israel, is to appoint a distributor on it’s behalf in Israel (there are of course other ways which the manufacturer may choose, for instance development of an internal distribution system, etc). 

In general, the relationship between manufacturer and distributor is governed by a distribution agreement (whether oral or written) which is executed between the parties. Unlike the situation in most European countries, where there is specific legislation which regulates and deals with the relationship between manufacturer and distributor, in Israel this issue has yet to receive specific legislation and hence the Israeli Courts are forced to make use of mechanisms from other legal areas (such as contract law, agency law, unlawful enrichment, etc.) in order to deliberate and rule in cases brought before them which deal with these matters. 

Parties to a distribution agreement are free to determine the duration of the agreement, whether it will be for a given period (e.g. 3 years), an unlimited period (e.g. without time limit) or for a given period which renews periodically (e.g. 3 years with extensions of 1 year on a yearly basis). It should be noted that generally, along with the provision regarding the period of the agreement, the agreement will also include a provision regarding the period of the prior notice that should be given before termination. 

Theoretically, a case in which there is a provision in the agreement that determines the duration of the prior notice that a manufacturer should give its distributor before termination, is a simple case, and in such an event, all that is required from the manufacturer who wishes to terminate the relationship is to follow the provision. 

The more complicated case is when the agreement is for an unlimited period (whether this was the contractual consent in the beginning or whether circumstances led to it, for instance by an extension of a written contract beyond the original period), and it contains no provision regarding the prior notice period that should be given before termination. In these cases the Israeli Courts have ruled that since there is a presumption that the parties did not intend to create a contractual relationship for an unlimited time, such relationship can be terminated by giving reasonable prior notice.  

The reasonability of the prior notice is examined in accordance with the specific circumstances of each case and by two main guiding principles as follows: (i) the reasonable period of time since the beginning of the contractual relationship and until the termination – this period of time needs to provide the other side with sufficient time in order to reap enough profits from the relationship and to recover its investment and expenses (in a distribution relationship the general assumption is that the fruits of the investments are not immediately reaped) and (ii) the duration of the prior notice which was given – this period of time needs to provide the other side with sufficient time in order to organize its business towards the termination and to seek and find a new alternative source of income. Alongside these guiding principals additional criteria have been outlined by the Courts, in order to examine the reasonability of the notice, including the nature of the product; the period of time which was required in order to achieve penetration of the products into the market; the extent and timing of the investments and expenses the distributor had bear; the distributor’s expected revenues in comparison with the distributor’s investments; whether the distributor had concentrated all of its resources and its sources of income towards the manufacturer or whether it has alternative sources of income and so forth. 

When the notice which was given is unreasonable from the standpoint of either of the above two principles (or both of them), the manufacturer is in breach and hence the distributor is entitled to recover the damages it suffered due to the termination. As we mentioned above, the resonable period of time differs from case to case since it derives from each case circumstances, and while there are cases where the Courts ruled that a short period of time (3 months) is reasonable, in other cases the Courts have ruled that the the reasonable period of time needs to be significantly longer (one year or even more). 

We noted earlier that in theory, the simple scenario is when there is a provision in the agreement which determines the duration of the prior notice that should be given before termination. This “simple” scenario has of late become complicated when the Israeli District Court ruled that although there was a provision in the distribution agreement, which determined that the agreement can be terminated without cause by giving at least 3 months prior notice, this period of time is unreasonable and the reasonable period of time of the prior notice should be at least one year. This ruling was based on the fact that the relevant provision in the agreement used the words “at least” 3 months, from which the court has concluded that the parties did not intend that 3 months prior notice would be sufficient for any and all kinds of circumstances, but rather that for any case a prior notice of less than 3 months would be insufficient.  

To summarize, a manufacturer who wishes to terminate a distribution relationship should examine the case circumstances in light of the forgoing principles and criteria, and such especially when the agreement does not refer to the duration of the prior notice it should give before termination. In addition, it our recommendation, if the termination will eventually lead to legal dispute, to have legal consultant from the preliminary stage, when the decision to terminate the contractual relationship is taken, in order to perform steps and procedures to shorten the prior notice period. 

In light of the forgoing precedent, it is also important to carefully draft the provision regarding the prior notice period, in a way that will leave no doubt whatsoever about the specific period of the prior notice that should be given and considered sufficient in any case circumstance, and in a way which will deprive any possibility to interpret it otherwise.

Thursday, May 20th, 2010

The implications of Israel becoming a member of the OECD

Posted by: Gadi Ouzan  & Dani Rinot 

The Organization for Economic Cooperation and Development (OECD) has officially accepted Israel as a full member to its organization. 

The organization was founded in 1961 as a club of developed, democratic and liberal countries, whose representatives meet and work to coordinate their policies in the economic, social environment and financial fields. 

Israel has been trying to join the organization for the past 20 years, but although economically inferior countries have been accepted easily, Israel was not granted an opportunity to join. 

 The implications  of becoming a member of the OECD for a relatively small country like Israel are significant , therefore the Governor of the Bank of Israel, Professor Stanley  Fischer and Israel’s Finance Ministry have decided to rank the matter at top priority and enter into a special process in order to meet the tough acceptance criteria of the OECD. 

The acceptance to the OECD was made possible thanks to Israel transforming into a developed country with a free market while also strictly adhering to responsible and balanced economic policies in recent decades. These policies include reduction of Israel’s debts, maintaining fiscal and development policies, cutting taxes and enhancing capital market efficiency. 

 Israeli authorities believe that the accession to the organization highlights the satisfaction corporations have in Israel’s economy. 

There are many implications to the accession to the OECD:
As Israel is recognized as a member of the leading economies of the world, we believe that it would strengthen investors’ confidence in Israel’s economic standing, thus increasing investments into Israel. 

Additionally, the accession is expected to improve treatment on social issues such as poverty and social inequalities.   This new status serves as a reminder that these issues should be dealt with in a timely and efficient manner. 

Finally, the OECD’s approval reaffirms Israel’s status as a leading economic and technological power.