February 17, 2013

Commercial Agency Now Regulated by Statute

Orit Gonen, Partner
Orit Gonen

Partner

Gilat, Bareket & Co.
Sonia Shnyder, Attorney at Law
Sonia Shnyder

Attorney at Law

Gilat, Bareket & Co.
Lior Glassman, Partner
Lior Glassman

Partner

Gilat, Bareket & Co.

The recently enacted Commercial Agency Agreement Law, in effect as of April 2012, introduced mandatory minimum termination notice (redeemable by suppliers through payment) and additional compensation to commercial agents for developing local goodwill.

Until recently, Israel had no specific statute regulating the relationship between manufacturers (or suppliers) and their commercial agents. The law of commercial agency and distributorship has until now been court-made, based on general provisions of contract laws, general agency laws and other applicable laws.

The legal regime governing commercial agency changed this year after the Israeli legislature passed the new Commercial Agency Agreement (Commercial Agent and Supplier) Law, 5772 – 2012 (the “Law“), which went into effect as of April 27, 2012.

Background: Commercial Agency under Earlier Law

The Law signifies a departure from the earlier judge-made law, which was characterized by flexibility and case-by-case application. Prior to the enactment of the Law, commercial agencies were governed by general contract laws, and as a general rule the courts in Israel would enforce the contractual terms agreed upon between the parties, including the length of agreed-upon termination notice and the amount of compensation, if any. In addition, specific rules have evolved in respect of commercial agencies and exclusive distributorships that are unlimited in time, the leading authority being the Supreme Court judgment in the Travenol case.1

Who is a commercial agent and what is a commercial agency?

The Law defines a “commercial agent” as

“a person engaged in identifying customers or in an activity designed to result in the conclusion of a contract between a supplier and a customer in connection with the purchase of goods marketed by the supplier.”2  

A “commercial agency agreement” is defined as 

“an agreement for consideration between a supplier and a commercial agent in which the supplier empowers the commercial agent on an ongoing basis to identify new customers or additional transactions with existing customers, where no employment or partnership relations exist between the parties.”  

Does the new Law apply to Distributors?

Given its definition of a commercial agent and a commercial agency agreement, the new Law does not, on the face of it, directly affect distributorships, under whose terms distributors buy and resell goods. 

Under earlier law, while the courts recognized the distinction between agents and (primarily exclusive) distributors, such distinction was held not to affect the parties’ duties and the right to compensation, if any, in case of termination of the relationship between the parties.

Duties of the Parties

The Law expressly provides that the parties to a commercial agency agreement owe a fiduciary duty to each other.  The trust nature of the relationship between the parties was already recognized in earlier case law, where the courts held that such agreement could not be specifically enforced due to its fiduciary nature.3 

Termination Notice in Agency Agreements of Unspecified Term and Redemption of Notice

Court-made termination notice and compensation under earlier law

Under earlier law, the Travenol court made it clear that when an agreement is not limited in time and does not include any stipulations as to the method of termination thereof, it may be terminated by the manufacturer/supplier through reasonable notice – i.e., notice that would allow the agent or the distributor to recoup its investment, receive reasonable profit and reorganize toward other business. Failure to give reasonable notice entitled the agent/distributor to compensation. The courts repeatedly emphasized that no hard-and-fast rules could be set for establishing appropriate length of reasonable notice and thus the amount of compensation in each case ought to be determined according to its particular circumstances.

Larger compensation was awarded where the manufacturer’s products were central to the agent/distributor’s business, where the agent/distributor invested more resources in promoting the products or where the products had not been  marketed in Israel or were unknown in the market before the agency/distribution agreement and required greater promotional effort.4

Mandatory termination notice and redemption of notice under new Law

Under the new Law, termination of a commercial agency agreement for an unspecified term is to be effected by way of written termination notice. Moreover, minimum advance notice is mandated, which ranges from two weeks’ notice required in the course of the first half-year of the agreement to six months’ notice for agreements lasting more than five years.5 The parties are allowed to agree on longer termination notice, provided the agent is entitled to termination notice no shorter than that given to the supplier.6

Mandatory advance notice may be redeemed through payment of compensation calculated based on the agent’s average profits in the half-year preceding the termination (or in the second half of the contractual period, according to the shorter period) multiplied by the notice period.7The court may vary such compensation if it deems just to do so having regard to changed market or industry conditions.  

Termination Compensation

In the event a party terminates a commercial agency agreement that lasted at least one year (other than where the manufacturer terminates the agreement due to the agent’s breach), additional compensation is payable to the agent for transactions concluded with new customers or for a substantial increase of the supplier’s business with its existing customers, provided that the agent was the “effective factor” for such transactions or increase in  

business continue to benefit the supplier after the termination of the agency.8

Such compensation is calculated as one month’s average monthly profit (defined as average surplus monthly profit accrued to the agent in the three years preceding termination or in the entire contractual period if shorter than three years, where surplus profit is such as accrued to the agent in consequence of transactions with new customers or increase in business with the existing ones) multiplied by the number of years for which the agreement subsisted, up to 12 months.

The court may reduce or refuse such compensation where the court deems it just and proper to do so.

No Freedom contractually to exclude notice and compensation

Under earlier law, the courts would normally honor the contractual stipulation between the parties as to the length of termination notice (if any) and as to the entitlement to compensation upon termination (if any),9 provided that the relevant contractual provisions were clear, explicit and otherwise valid under the law of contracts and that the parties did not vary such provisions by their subsequent conduct.

Under the new Law, parties may agree to divert from the statutory provisions only in favor of the agent.10 The courts, however, retain the power to vary statutory notice redemption and to reduce or refuse statutory compensation to an agent.

Conclusion

The Law will have considerable impact on commercial agency relationships, which until now have not been specifically regulated by any statute. The concise terms of the new statutory regulation, however, leave open several essential questions pertaining to commercial agencies and distributorships.

It is currently unclear how the courts would treat an agreement that terminated after 11 months rather than after one year, which would have entitled the agent to the above-mentioned compensation, nor how the courts would treat an agreement concluded for a specified term (e.g., one year) and is thereafter automatically renewed each year or is actively renewed by the parties at the end of each year. It also remains to be seen how the courts would determine when an agent was an “effective factor” in concluding transactions or business growth. The mechanism of calculation of profits under the Law also remains to be clarified.

Finally, there is the question of whether the Law applies to agreements that commenced before its entry into force.

As to exclusive distributorships, which until the enactment of the Law were subject to a legal regime similar to that applicable to agents, it is in question whether the courts would infer from the enactment of the Law a need for enhanced protection for distributorships, would continue to follow the currently applicable case-law guidelines, or would narrow the protection afforded to distributors by way of a negative implication from the express statutory protection granted to agents.

While many questions related to the applicability of the Law and its practical application currently remain open, it is clear that its implications must be taken into consideration when concluding future agency – and possibly distribution – agreements. It may also be prudent to examine the existing agency and distribution agreements for their accordance with the new legal regime ushered in by the Law.

1 CA 442/85 Zohar et al v. Travenol Laboratories (Israel) Ltd, P.D. 44(3) 661 [1990] (“Travenol“).
2 Section 1 of the Law. A “supplier” is defined as either a manufacturer or the owner of the right to use the goodwill and the trademarks connected to the goods, that markets such goods.
3 Travenol at 680-683, 704.
4 By way of illustration, in Travenol, termination of an exclusive distribution agreement for an indefinite period after six years, during which the distributor had built a market for previously unknown products, entitled the distributor to compensation equal to the annual profit in the year preceding the termination. In a distributorship of simple products that required no special investment and that lasted for approximately nineteen years, notice ranging from three to six months was held adequate, depending, inter alia, on the extent to which each distributor’s business depended on the products (CA 47/88 Hirshtick et al v. Yachin Ltd., PD 37(2) 429 [1993]). Where a distributorship lasted at least sixteen years and the distributor was heavily invested in distributing the products, one-year advance notice was required (CA 355/89 Estate of Nicola Khinawi et al v. National Breweries Ltd. et al, PD 46(2) 70 [1992]).
5 Section 4(a) of the Law. 
6 Section 4(b) of the Law. 
7 Section 4(c) of the Law. 
8 Section 5 of the Law. 
9 E.g., see the dictum in Travenol at 706. 
10 Section 6 of the Law.