Which law applies when client ends long-term commitment with supplier?

 Israeli courts frequently rule on disputes between a manufacturer (supplier) and a distributor whose relationship had continued over many years until one party unilaterally ended it to the dismay of the other. Such commercial relationships may be complex, especially when they involve exclusivity, when no written agreement exists, or when the parties did not agree in advance on a separation mechanism between them. While the majority of leading decisions of the Israeli courts relate to a situation where the manufacturer ends its relationship with the distributor, a ruling was recently handed down in a case where the circumstances were such that the client had ended its relationship with the supplier (the Maytronics case) [1]. Despite thefact that the case did not involve circumstances of termination of exclusive distributorship, the court held that the similarities between client-supplier relationships and exclusive distribution agreements justify applying the criteria applied in one to the other [2].

The leading decision in respect of how an exclusive distribution agreement of unlimited duration was terminated is the decision in the Travenol case[3], where it was held that a manufacturer is permitted to terminate the agreement via notice given reasonably in advance. The purpose of the reasonable notice was not unequivocaly determined in the Travenol case, and the purpose may be to allow the distributor to cover its expenses, derive reasonable profit from the transaction or make arrangements in seeking business as replacement toward the agreement’s termination. Failure to provide such notice in a reasonable period in advance would earn the distributor compensation. Duration of “reasonable period” is to be determined by circumstances on a case-by-case basis. Among the circumstances to be taken into account for its determination include: the centrality of the manufacturer’s products to the distributor’s business, the distributor’s investments in their promotion, the products’ presence in the market before the relationship between the parties commenced, and others.

In the Maytronics case, the plaintiff, NEKAR-GEFEG, a German company engaged in the production of electric motors, served as a supplier for the defendant, an Israeli public company engaged in the production of robotic machines for cleaning swimming pools. The parties’ relationship lasted for over ten years, the extent of which was sizable and constituted a significant part of the plaintiff’s operation. The agreement between the parties, signed a few years after their relationship commenced, was unlimited in duration and was not exclusive; the plaintiff nonetheless have become in a matter of years the sole motors supplier of the defendant. In 2006the plaintiff (the supplier)  notified the defendant  (the client)  on the need to raise the prices of the motors that it supplied to the defendant due to a rise in the price of raw materials. In 2007-2008 the defendant passed on to the plaintiff projections for orders for tens of thousands of motors. In October 2008 the defendant discontinued ordering motors, claiming that the plaintiff’s raising of the motors’ prices in 2006 constituted material breach of the agreement between the parties. On the other end, the plaintiff argued that in discontinuing its orders, it is Maytronics who is breaching the agreement.

The court held that in light of the extended commitment between the parties, what is known in legal jargon as a relational contract, Maytronics abandoning the agreement between the parties without advance notice constitutes breach of agreement. This determination was based on an analysis of the long-standing relationship between the parties and on the defendant’s presentation in respect of the order forecast sent to the plaintiff after the notice about the rise in the price of the motors.

The court further held that the appropriate remedy in this case is compensation and ruled on the reasonable duration of time for giving the prior notice (according to which the compensation would be determined). Based on the Travenol case and rulings that followed, in having given weight to the extended and comprehensive relationship between the parties and to the defendant being a main client of the plaintiff, and on the basis of the forecasts it relied on, that were handed over to the plaintiff and that encouraged it to make future arrangements in terms of purchasing raw materials, the court held that the period of prior notice should stand at one year.

The obvious conclusion from this ruling, as well as those earlier decisions of Israeli courts, is that long-term relationship contracts should be made in consideration of all circumstances of the parties’ relationship, and that absent a contrary provision in the parties’ agreement, both the manufacturer and the distributor must be prepared for a termination of the relationship that takes into account all those considerations guiding the courts when arriving to a decision on the question of whether termination of the parties’ relationship was done lawfully. One law applies to the manufacturer (supplier) and the distributor (client).