Israeli law allows parties to a distribution agreement to freely determine its terms and conditions, with relatively few limitations.
These agreements are regulated mainly, but not exclusively, by contract law and jurisprudence. Israeli contract law is largely based on the German codes and several English common law doctrines. The relevant legislation includes the Contracts Law (General Provisions) – 1973, the Contracts Law (remedies) – 1970, the Unjust Enrichment Law – 1979, and The Sale (International Sale of Goods) Law – 1999, which made “The United Nations Convention on Contracts for the International Sale of Goods” legally binding in Israel.
In addition to the above, other legislation may have impact on distribution agreements. Israel lacks specific legislation regarding distribution (such as exists in many EU countries and several US states) and agency (as in German civil and commercial law). Therefore, and on top of the usual concerns affecting any distribution agreement (e.g. exclusivity and territory, minimum quota, warranties, products’ returns and recalls, intellectual property, parties’ status, remaining stock , termination, etc.), when advising on distribution agreements we consider, among other matters, the following:
- Permanent establishment: The 53 conventions signed by Israel regarding Avoidance of Double Taxation largely follow the OECD Model Convention. These conventions include definition of “permanent establishment” for tax purposes. This definition can include: a place of management, a branch and an office. Distribution agreements should be drafted in a way that minimizes the risk that the distributor or its facilities could be considered as a permanent establishment of the supplier.
- Antitrust: The Restrictive Trade Practices Law, 5748-1988 provides that no person shall be party to a restrictive arrangement unless it obtains the relevant regulatory approval. An exclusive distribution agreement could be classified as a restrictive arrangement. However, a series of rules issued in 2001 by the Antitrust Regulator exempted certain exclusive distribution, agency, and franchise agreements from this requirement. These rules will be valid until 15 March 2016 and chances are that their validity will be extended.
- Employment relationship: There are instances in which the supplier- distributor relationship might be scrutinized under the magnifying glass of employment law. An Israeli employment tribunal will usually look for indications of an employer-employee relationship such as: terms of payment (e.g. fixed price, monthly payment, or commission), distributor’s tax status (self-employed, partnership, etc), distributor’s freedom to set its priorities and activities against level of control exercised by the supplier, ways to report and format of the reports, distributor having other suppliers or activities, and so forth.
- Consumer protection: Provisions of the distribution agreement that are to be replicated back to back into the distributor’s arrangement with its own customers will need to be drafted in compliance with the Consumer Protection Laws 5741-1981 and its regulations. The agreement’s provisions for product guaranties and post-sale services should also take into account the Consumer Protection Regulations (Responsibility and Service Post Sales) 2006, which extends the responsibility of the manufacturer for post-sale activities to the distributor who has imported the goods.
- Product liability: According to the Liability for Defective Products Law, 5750-1980, the distributor that imports the goods is also liable for any damage caused by them. Therefore, it is common practice to include in a distributor agreement provisions that qualify the supplier as having sole responsibility for any liability arising in relation to the goods, provisions that extend the manufacturer’s insurance policy to cover possible customer claims against the distributor, and other provisions that cater for the full indemnity and compensation of the distributor in such cases.
- Compensation: A party to a distribution agreement wishing to terminate the agreement with no cause shall provide the other party a proper opportunity to make a reasonable profit from the engagement, to cover its investments and time to prepare and to locate alternative sources of income. The courts have ruled that this is done by way of issuing an advance notice.
- Governing law and forum: The Civil Law Procedure Regulations, 5744-1984 has specific provisions allowing Israeli courts to hear a case against a defendant that has no permanent presence in Israel. For example by acquiring jurisdiction over foreign defendants upon the service of a statement of claim. This can be done, among many other ways, through an authorized representative who is engaged at that point in time on behalf of the defendant in any activity. This is so even if the “representative” is specifically not authorized by the foreign defendant to receive such service. Under certain circumstances the distributer could be considered as such a representative of its supplier. This risk can be reduced by proper drafting of the distributor agreement and strict adherence to its terms.
- Financial services: When the product to be distributed is a financial service, other laws that regulate the relationship between supplier and distributor may apply e.g. Control of Financial Services (Pensions Counseling and Pension Marketing) Law 5765-2005.
For more information, please do not hesitate to contact Alejandro Skidelsky at alex@dglaw.co.il
