Commercial Agency Contracts in Israel

Practical Guide

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How are agency agreements regulated in Israel?

In Israel, up to 2012, in the absence of any specific act, commercial agency agreements were governed and regulated under the general contract laws, unjust enrichment and restitution law and torts laws.

In 2012 a new legislation was enacted – The Agency Contract Law (commercial Agent and Principal), 2012 which aimed to make some difference and provide more certainty as to what constitutes agency and as to termination of an agency agreement – inter alia reflecting to some degree on the EU Directive (however somewhat remote from the directive).

Nevertheless, many aspects of agency remained ambiguous, and many agency-related matters remained unaddressed by the new act of 2012, leaving many matters still under the regime and governance of the general contractual laws etc.

In said regard, it should be pointed out that the Israeli legal system is somewhat of a combination between common law with civil code influence, implementing contract base law alongside good faith principles, importance of the contract terms and wording on one hand but also intention of the parties, good faith of the parties etc. on the other hand.

What are the differences from other intermediaries?

According to the mentioned Israeli Agency contract law, an agent is who is engaged in finding clients or in activities for the purpose of entering into a contract between a client and a principal in connection with the purchase of goods that are marketed by the principal.

In order for a commercial relationship to be recognized as Agency for the purpose of the specific law, there are further criteria that if are not met – the commercial relationship will NOT be governed by the specific act - even if it has characteristics of Agency.
For the purpose of the specific Act Agency relationship should thus be a contract for remuneration between the principal an commercial agent, within which principal empowers the commercial agent, on a continuous basis, to find new clients or additional contracts with new clients for the purpose of purchase of goods without entering into an employment or partnership relationship with its principal.

In fact, any intermediaries or intermediary relationships that do not fall into the exact definitions of the said Agency contract law – will not be governed by the Agency contact law, and since no other specific laws exist for other intermediaries or intermediary relationships all other such commercial relationships are governed by the general contract laws, unjust enrichment and restitution law and torts laws.

As an example, as to how many commercial intermediaries are not included in the definition of a commercial agent, since the act defined an agent as whom acts for the purpose of finding clients for the purchase of Goods (defined as perceptible assets excluding real estate), and thus allegedly, most types of services are actually unincluded in the Act, and similarly since the act refers to business of Purchase of goods by a client, this allegedly precludes types of rental or leasing services for instance.

The Act also provides that it refers to an ongoing empowerment for Finding new clients or additional contracts with new clients, hence allegedly not referring to actual representation in negotiations or closing transactions, and thus if the "agent" was not the one that found the client, any "agency" like activity might be deemed not as commercial Agency activity under the Act.

How to appoint an agent in Israel

Under Israeli law, whereas in the Agency Contract Law there are certain requirements for written notices in certain aspects, the formation of an agency agreement can in fact be done in any manner reflecting actual consent and empowerment to act – it could thus be formed in writing, orally or by behaviour.

Since the Agency Contract Law provides as a precondition, non-partnership or employment relationship, there are no specific registration obligations to be complied with for the formation of the agency relationship.

Nevertheless, since the Agency Contract Law refers to an agency contract as one with remuneration and empowerment, as a common practice it would be expected to have or establish and adequate contract between the parties and some kind of letter of empowerment.

Applicable law to an agency contract in Israel

In general, in matters of Commercial Agency, parties are at liberty to provide for any choice of law, as well as any Jurisdiction they agree upon contractually, under free will.

A dispute between a Principal and an Agent may be adjudicated by the Israeli court, also in cases in which parties agreed upon foreign law (and did not provide for foreign jurisdiction). In such case, there will be a burden of proof of the foreign law, but Israeli court may rule according to the foreign law, assuming it does not contradict basic principles of law or public policy.

In the absence of a choice of law, the law to be applied will tend to be the domestic Israeli law, unless otherwise agreed upon or otherwise proved as the expectations of the parties in litigation. Nevertheless, for suing foreign entities in Israel plaintiff would need to apply for authorisation to serve lawsuit abroad based on adequate grounds.

It should be pointed out that the Israeli Agency Contract Law provides mandatory provisions (such as due notice before termination and regulated compensation) that are to be applied upon the agency relationship and cannot be amended unless in favour of the commercial agent. However, it has yet to be determined in case law whether such mandatory provisions are to triumph as a basic standard when applying foreign law in full or in part.

In order to establish the effectiveness of choice of law, it is utterly recommended to provide specifically also the court preferred to have exclusive jurisdiction for any disputes arising out of or in connection with the agency agreement or relationship.

Dispute resolution clauses in agency agreements in Israel

Any disputes arising from an international agency agreement or relationship may be submitted to the jurisdiction of a foreign judicial court or foreign arbitrators, in the sense that no specific limitation exists upon such attempt.

Nevertheless, a party may attempt to acquire Israeli jurisdiction by submitting to Israeli court and arguing or establishing Israel as an adequate forum, or parallel jurisdiction.
In general, Israeli courts safeguard and respect clauses of international arbitration or of a foreign court defined to have exclusive jurisdiction, unless extremely considerable merits exist to rebut such jurisdiction.

Israel is also a party to the New York Convention "Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1058", and accordingly recognises and enforces arbitral awards.

How to terminate an Agency contract in Israel

Under Israeli law, agency agreements may be entered into for a fixed or an indefinite period of time.

A party to an agency contract for an unlimited period may terminate the contract by prior notice to the opposing party within a reasonable time in writing, and there are minimum definitions of periods for such notice based on the duration of the commercial agency engagement until the time of the notice.

The termination notice periods are as follows:
During the first six months from entering the contract – two weeks; During the period beginning from the seventh month from contract until the end of first year – one month; During second year from entering the contract – two months. During third year from entering the contract – three months. During forth year from entering the contract – four months. During fifth year from entering the contract – five months. During sixth year from entering the contract – six months.

It is also possible to terminate immediately by paying compensation for the equivalent period of the due notice based on a profit calculation of the agent for a certain period as defined in the Act, namely, profit in the past 6 months or during the second half of the contract duration.

It should be noted – the due notice of termination or according compensation, are not the only remedies available by the agency contract law or under applicable additional laws as mentioned above.

Termination indemnity for agency agreements in Israel

Upon termination of the agency agreement, the agency contract law provides compensation from the principal for the transactions of the principal with new clients or for the significant increase of the scope of the principal's business with existing clients - subject to 3 considerable conditions:
(1)The Agency contract was valid for at least one year (2) the commercial agent was the efficient factor in the transactions or increasing the scope of the business; (3) the principal derives benefits from the transactions or increases the scope of business also after the conclusion of the period of the agency contract.

The amount of the compensation is defined by the Agency Act as equal to the average monthly profit for each year in which the agency contract was valid, but no more than twelve months.

It is important to note that the Act does not limit possible compensation based on other sources of law, and specifically states that it is without prejudice to other sources of law.

It should be noted nevertheless that Israeli case law has yet to determine whether actually possible in fact to seek compensation according to said act in addition to further compensation based on other sources of law.

The Act also provides that the principal shall not be obligated to pay compensation if the principal duly terminated the contract due to infringement.

In addition to the above, entitlement for damages could be argued, based on tort laws, or contract laws, for instance in case of breach of loyalty each party owes towards each other.

Other peculiarities

Most statutory provisions governing agency agreements in Israel within the Agency Contract Law are of mandatory nature or may be amended only in favour of the commercial Agent.

Israeli law thus provides specific outlines concerning termination and its implications, including allegedly mandatory compensation, all alongside the general freedom of contract and further.

Careful review, however, of the basis for compensation in the Agency Contract Law, indicates the Act is not necessarily in favour of the Agent (because of the strict definitions, preconditions, criteria and limited scope) nor necessarily in favour of the Principal (in light of the starting point of compensation) – nevertheless given the current provisions in the Act and some ambiguity of the Act, situation might be exploited in favour of the principal which may manage a termination incident with a clever and carefully planned strategy incurring relatively minimal monetary damage.

Additionally, it should be noted, the amount of compensation to be paid to the Agent, if the agent is at all eligible, is a function of the average monthly profit earned by the principal as opposed to share of revenue. Common knowledge indicates profit may be calculated and presented in various manners and is not a definitive or objective figure.

The Act, in its current version, does not solve all problems which may arise in an agency relationship or its termination, and thus effectively still enables the application of other statutes which provide other or different remedies that should be taken into consideration.

As case law in said regard is still "in the making", much is to be considered upon addressing such an agency contract or its termination.

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