AGENCY CONTRACT LAW (COMMERCIAL AGENT AND PRINCIPAL)

Introduction

On April 27, 2012 Israel’s new Agency Contract Law (Commercial Agent and Principal) 2012 (the “Law”) came into force.  This legislation has markedly improved the position of commercial agents, providing them with two significant rights: prior notice of termination of the agency contract and compensation on termination for the agent’s efforts to increase the principal’s clientele and goodwill.

 

Background

Before the enactment of the Law, general principles of commercial and contract law in Israel governed commercial agency contracts. However, these principles did not address the specific characteristics of commercial agency agreements nor did they take account of the particular differences between commercial agents and other intermediaries.  Moreover, in practice, commercial agent’s agreements were often biased against the agent in favor of the principal. 

Case law provided commercial agents with rights upon termination of an agency agreement based on the agent’s investment and development of the principal’s interests.  Nonetheless, the courts did not set down definitive guidelines with respect to such rights.  In fact, they generally found that the commercial agency contracts in dispute were not illegal and they relied on the agreements.  The rulings on the whole seemed to be biased against the agents in favor of the principals.  The new law redresses the balance. 

 

Agency Contract Law (Commercial Agent and Principal) 2012

The commercial agency contract is a contract whereby the principal empowers the commercial agent to continuously find new clients, or to conclude additional contracts with existing clients, for the purpose of purchasing goods that are marketed by the principal.  The Law defines what constitutes a commercial agency contract and it provides for the fiduciary duty of the principal and agent towards one another.  It pertains to a person or to a legal entity that is engaged in locating clients or in activities that will lead to the conclusion of a contract between the principal and a client for the purchase of goods, marketed by the principal.  The Law does not relate to the principal’s business partners or distributors of his goods.

The definition of “principal” according to the Law is not only a manufacturer of goods but also a dealer who is the authorized user of the goodwill and trademarks associated with the goods. 

There are two main mechanisms for safeguarding the commercial agent’s rights under the Law: termination of the agency contract for an unlimited period and compensation for termination of the contract.  

The Law provides that a party to an agency contract of indefinite duration, or in circumstances where the terms of the contract were extended without agreeing a fixed expiration date, will be by reasonable prior written notice.  The notice period varies from two weeks to six months, depending on how long the contract has been in force on the date that notice is given.  The Law also provides that the principal has the right to terminate the commercial agency agreement immediately, subject to payment of compensation in lieu of prior notice. In the event that the contract provides for longer notice periods than those specified in the Law, the period of prior notice of termination to be provided by the principal must not be shorter than that of the agent.

The second safeguard built into the Law relates to compensation.  The Law states that upon termination of the contract by either party, the agent will be entitled to compensation from the principal for the principal’s transactions with new clients or for the significant increase in the scope of transactions with existing clients if, and to the extent that: (a) the commercial agency contract was valid for at least one year; (b) the new transactions or increase in the scope of business with existing clients was attributable to the agent; and (c) the principal derives benefits from the transactions or an increase in the scope of business even after the conclusion of the period of the commercial agency contract.

Under the Law, the amount of compensation should be equal to the average monthly profit for each year in which the commercial agency contract endured, but for no more than 12 months.  “Average monthly profit” is defined as the average monthly surplus profit that was attributed to the commercial agent during the shorter of: (a) three years prior to the termination of the commercial agency contract, or (b) during the period that the contract was valid.  “Surplus profit” is defined as profit due to the principal’s transactions with new clients or to the significant increase in the scope of the principal’s business with existing clients, attributable to the agent.

The Law also provides that (a) the commercial agent is not entitled to compensation if the principal terminates the contract due to the agent’s infringement; and (b) the courts are entitled to reduce the level of compensation, or to award no compensation, when it is just and right to do so under the circumstances. 

 

Summary

The new Law safeguards the commercial agent’s rights through its provisions regarding termination of a commercial agency contract and by providing for reasonable compensation for benefits gained by the principal as a result of the agent’s efforts.  By prescribing the specific elements of the commercial agency contract, the Law strives to find an equitable balance between the parties, safeguarding the commercial agent’s rights while at the same time protecting the principles of freedom of contract.   

 

This Newsletter has been prepared by Y. Ben-Dror Law Offices for informational purposes only and does not constitute legal advice. This Newsletter is not intended to create and the receipt of it does not constitute an attorney-client relationship. Readers should not act upon this Newsletter without seeking professional counsel. For further information concerning the above, please contact Yossi Ben-Dror.