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Israel Moves to Protect the Rights of Commercial Agents

A number of months ago Israel adopted a new law intended to protect the rights of commercial agents. In doing so, Israel moved closer to the rules implemented in various European Directives which have for years adopted the view that since the relationship between a manufacturer and a commercial agent is an inherently uneven one, commercial agents need further protection external to the contractual relationship existing between such parties.

In this article we shall provide a brief overview of the most salient provisions of the The Agency Contract Law (Commercial Agent and Principal), 2012 (“The Commercial Agency Law”, or the “Law”).

The Commercial Agency Law applies to a commercial agent who acts, for pay, and who is involved in locating customers or activities, which actions are intended to bring about a contractual relationship between a customer and a manufacturer, for goods marketed by such manufacturer.

A manufacturer is defined as a manufacturer of goods, or one who holds the rights to use the goodwill and trademarks relating to such goods and who markets such goods. The trademarks can be registered or unregistered.

The commercial agent is one who has been empowered contractually for a period of time to locate new customers or to bring about additional contracts for the manufacturer with existing customers and where the agent is not in a partnership or employee relationship with the manufacturer.

If there is no written agreement or if such a commercial agency agreement does not have a specified term and the manufacturer wishes to bring the agreement to an end, in such a case the Law provides for minimal prior notice periods, which vary according to the length of time that the agreement or relationship has been in effect, and range from a short two week notice period to a notice of period of six months where the agreement has been in effect for at least six years.

If such a commercial agency agreement is terminated, the manufacturer may compel the agent to cease its activities immediately, however in such event the manufacturer shall be required to pay the agent a ‘prior notice compensation’.

The ‘prior notice compensation’ shall be equal to the multiple of the average profits of the commercial agent for the prior notice period, in the half year preceding the termination, or the second half of the period of the agreement, according to the shorter period of the two. The court may fix a different measure of ‘prior notice compensation’ if it finds it appropriate, taking into account changes which may have taken place in the market conditions or the field in which the agent was acting.

If an agreement is terminated by one of the parties the commercial agent shall be entitled to compensation from the manufacturer in relation to the entry by the manufacturer into agreements with new customers or for a significant increase in the scope of activities of the manufacturer with existing customers, provided all of the following conditions are met:

  • The commercial agency agreement was in effect for a period of at least one year;
  • During the term of the agreement the commercial agent was the effective means for the agreements with the new customers or for the increase in volume with the existing customers;
  • The agreements with the new or existing customers shall bear fruit for the manufacturer also after the termination of the commercial agency agreement;
  • The commercial agency agreement was not legally terminated due to a breach by the commercial agent.

Provided that all of the above conditions are met, the compensation paid to the commercial agent upon termination shall be equal to the average excess monthly profit of the commercial agent, for every month in which the agreement was in effect, up to a ceiling of 12 months. The “excess” monthly profit is based upon, as stated above, agreements entered into by the manufacturer with new customers on an increase in volume with existing customers. The court may decide to lower the above compensation or to fix that no compensation shall be paid at all, if the circumstances so warrant.

One very important and overriding provision of the Law states that one cannot vary upon the provisions of the Law, other than for the benefit of the commercial agent!

The Commercial Agency Law seems to have a major lacuna in the fact that it does not address a situation in which the parties agreed contractually that foreign law shall apply to the agreement between them, which is a most common situation indeed. Does the application of such foreign law constitute a variation on the Law which is detrimental to the agent and therefore void? It would seem that way, but since the legislature did not find it appropriate to address this important question it shall fall to the courts in Israel to rule on this issue which shall inevitable arise, probably sooner rather than later.

Interpretation by Adv. Meir Fuchs, a partner in Gideon Koren & Co, is a member of the Bar in Israel and New York and specializes in international transactions.