How to Protect a Distributor's Rights in an Exclusive Distribution Agreement
by Advocate Moshe Kahn from Moshe Kahn Law Firm
An Israeli distributor usually faces a long haul before being appointed as exclusive distributor in Israel for a foreign supplier. When this involves the distribution of products with a significant market share and sales volume, the foreign supplier will almost always examine several candidates and distribution options before selecting the exclusive local distributor for its products.
When, at long last, a draft of the distribution agreement is submitted to the selected exclusive distributor, he will be told that it is a "standard" agreement and that he need only scribble his signature. At this stage, the distributor is liable to sign the contract immediately without conducting any negotiations, in order to satisfy the supplier and to avoid being characterized, right from the start of the business relationship, as a troublemaker.
However, there are several issues in an exclusive distribution agreement that are essential for an exclusive distributor, so it is nevertheless advisable for the distributor to carefully study the agreement conditions offered to him and not to hesitate to conduct negotiations with the supplier, if necessary, primarily in connection with the following substantive matters.
1. Preventing competing distribution
We sometimes encounter exclusive distribution agreements in which the supplier retains the option of continuing to distribute, to one extent or another, by itself or through others, the products, or some of despite the exclusivethe products, which are the subject of the agreement distribution rights that have ostensibly been granted to the distributor for the period of the agreement. From the standpoint of the local distributor, this is a problematic condition since he is liable to find itself competing with the supplier itself (or someone else acting on the supplier's behalf), in selling and marketing the same products in the same market.
It is therefore advisable for the distributor to insist that the exclusivity in the agreement remain absolute. Alternatively, if the agreement allows the supplier to distribute products in the exclusive distribution area not the through distributor, this permission can be demarcated and restricted in the agreement to defined and specific cases (such as distribution only to certain customers) and the distributor ensured of suitable monetary compensation for such direct sales.
2. Exclusivity area
Standard distribution agreements grant the distributor exclusivity to distribute the products in the territories of the State of Israel, inside the Green Line, which means that the regions of Judea and Samaria are not included in the exclusive distribution area. This is not just a political issue. The agreement must also address the question of these areas in order to prevent a situation in which a Palestinian entity, which received the right to distribute the same products in the Judea and Samaria region, will cause distribution of the products in Israel at lower prices, thus competing with the Israeli distributor. The difference in the price levels between Israel and the Occupied Territories stems, inter alia, from the fact that distributors in Israel must invest large amounts in marketing the product.
Actually, there is now a flow of products from the Judea and Samaria areas into the boundaries of the State of Israel. This often causes great damages to Israeli distributors.
An attempt should therefore be made to extend the agreement's exclusive distribution rights to the Judea and Samaria Territories or, alternatively to establish a mechanism in the agreement, to prevent the flow of products into the area of the State of Israel, and to supervise that prevention.
3. Supplier's liability for the quality of his products
This is one of the issues on which it will be difficult for the exclusive distributor to compromise with the supplier because in the matter of product liability, Israeli law also considers the importer liable for any damage caused by the use of the imported product (see, for example, the Defective Products Liability Law, 5750-1980, Articles 1 (2) and 2 (a).
Therefore, in order to protect himself from lawsuits (including personal injury claims resulting from use of the product) the distributor must demand that the supplier include an unequivocal undertaking in the agreement to bear exclusive liability for the quality of its products (once they leave the factory) and for full indemnification of the distributor in any case in which a lawsuit is brought against the distributor in connection with the quality of the products.
The distributor should also see to it that the supplier undertakes full liability for indemnifying him in other cases in which he may be sued when he is not responsible, such as a case in which the supplier's product is infringing the intellectual property rights of a third party or violating any other provision of the law.
The distributor should also verify the existence of suitable product liability insurance coverage by the supplier, and he should strive to have the coverage extended to cover the distributor’s liability for any claims by consumers or other parties.
4. Period of the agreement
Standard distribution agreements are likely to establish an initial agreement period of only one year and at the end of that period the agreement will be renewed for an additional year each time, unless one party notifies the other of its desire not to extend the agreement.
The supplier frequently makes renewal of the initial agreement period contingent on a minimum purchase by the distributor during the agreement period. That is a legitimate demand.
On the other hand, we must remember that a new distributor requires a period of time to establish itself in the market and to build itself a suitable marketing system. These activities also require a substantial investment on the part of the distributor. It would therefore be legitimate to demand of the supplier that the initial agreement period be at least two years to enable the distributor to recoup at least part of its investment in launching the products and in building a marketing system for them.
5. Returning defective products
The level of customer satisfaction with any product is measured, among other things, by the option of returning defective products. The distributor must demand that the agreement include an agreed-upon mechanism for returning defective products to the supplier and for compensating the Distributor in the event that such products are returned.
6. Applicable law for the agreement and mechanism for resolving disputes
In the nature of things, the standard agreement will include a mechanism for resolving disputes, establishing that the agreement will be subject to the law of the supplier's country and that the courts in that country will have exclusive jurisdiction to hear any action connected to the agreement which is brought by either of the parties.
That is a very inconvenient situation for an Israeli distributor who, in the event of any dispute with the supplier, is liable to find himself embroiled in legal proceedings in a remote country, in a foreign legal system.
A possible solution that can be proposed for such cases is Alternate Dispute Resolution through the ICC (The International Chamber of Commerce). This involves arbitration that is conducted according to commercial principles. It can be agreed in advance that the arbitration will be conducted in the English language and in an agreed location.
7. Return of inventory at the end of the engagement
The distributor must demand that the agreement include a mechanism that will enable the distributor to return to the supplier, upon termination of the agreement and against suitable consideration, the inventory of the supplier's products that remain in the distributor's possession. This will prevent a situation in which, at the end of the agreement period, the distributor is left with inventory that cannot be sold at market prices.