Exclusive Distribution Agreements: Protecting Your Rights
Are you seeking to become an exclusive distributor of a product in Israel? Aviv Lazar & Co. can help you ensure that your rights, as an exclusive distributor, are protected from the onset of establishing an exclusive distribution agreement.
Exclusive distribution means that you, as the exclusive distributor, are the only distributor appointed to sell a product in a given territory. This ‘territory’ could be a small geographical area, such as Tel Aviv, or a larger one such as the State of Israel.
Although exclusivity can be beneficial for the distributor because it reduces marketplace competition, the concept is rather complicated due to the terms found in many exclusive distribution agreements.
The following six elements outline the conditions that must be incorporated within an exclusive distribution agreement that protects distributor rights.
First, absolute exclusivity must be established in any exclusive distribution agreement. Within the agreement, if the supplier maintains any option which allows himself or others to distribute the product, the distributor may find himself fighting unwanted competition. If the provider is unwilling to give up his rights to distribute the product in the distributor’s territory, then it is important to ensure that the permission to do so is restricted by specific terms.
Second, it is important for exclusive distribution agreements to specifically outline the territory of exclusivity. If this territory is the State of Israel as a whole, then the agreement must establish whether or not Judea and Samaria will be included. If the regions included in the exclusivity area are not specified, then unwanted competition may commence between the Israeli distributor and another distributor granted permission to sell the same products in Judea and Samaria.
Third, it must be ensured that the supplier, rather than the distributor, is responsible for quality issues with the products. As a default, according to the Defective Products Liability Law 57-50-1980, the importer, or the distributor, is responsible for any damage caused to users of products. In order to protect yourself, as the distributor, you must demand that the supplier endures full liability for product quality in the agreement. If products do have quality issues, the agreement should also include a mechanism for the distributor to return the product, so as to not lose money from a supplier mistake.
Fourth, it is important to pay attention to the term granted in the exclusive distribution agreement. Generally, agreements give a term of one year, with extension contingent on selling a certain number of products. It is possible that it will be difficult to reach this minimum in the first year as establishing a new market can be challenging. To assist the distributor, in the process of establishing a new market, the first term should be marked as at least two years, rather than one, in the exclusive distribution agreement. This extension will give the distributor the necessary time to establish himself in the market.
Fifth, it is likely that the agreement will state that the court used for resolving disputes will be located in the supplier’s country of residence. If this country is not Israel, then the distributor can be at a serious disadvantage in the case of a legal dispute. It is essential to demand that the agreement is amended to use the Israeli court system, or an international court such as The International Chamber of Commerce, and that arbitration will be carried out in English, if not Hebrew, rather than the supplier’s native language.
Sixth, the agreement must include a provision which allows the distributor to sell back excess products to the supplier when the agreement is terminated. If this provision is not included the distributor may be subject to a great loss of funds.
The experts at Aviv Lazar & Co. are here to protect your rights in an exclusive distribution agreement. If you have any questions or concerns regarding an agreement presented to you, please contact us immediately.