Gideon Fisher & Co: New Era for Agency Law in Israel10/11/2012

Adv. Benjamin Leventhal, Partner
Adv. Moran Joseph, Associate

At the end of April 2012, the new Agency Contract Law (Commercial Agent and Principal) of 2012, known as the Agent Rights Act ("The Act") went into effect.

The Act primarily seeks to address the previously common inequitable situation created by principals who decided - sometimes without providing any advance notice – to unilaterally sever the agency, often after the agent had already expended significant resources and time to advance the principal’s interests, and/or after already having successfully accomplished the principal’s goals.

Prior to the Act’s passage, there was considerable ambiguity in what constituted an "agent" or a "commercial agent," and as such, there was corresponding ambiguity as to the legal implications resulting from the agency relationship. Indeed, under prior applicable Israeli laws – in contrast to those of other countries – the term “agent” could refer to different actors under different legal relationships with differing sets of rights and obligations.

The Act was thus enacted to create uniformity, to provide a legal framework for agents and principals, to provide general protection to agents, and to curb the abilities of principals seeking to deprive agents of the fruits of their labor and investment. The great innovation of the Act is that Israeli law, for the first time, establishes clear protections and guarantees to local agents who exert significant efforts and resources in service of local or foreign principals.

The protections provided by the Act begin with a directive stating that the parties to an agency contract must act loyally toward each other1 . The Act also requires a unilaterally terminated agent to be compensated2 at specified rates which (provided certain criteria are met). Additionally, the Act mandates that advance notice3 be provided by the principal before terminating an agent who had been contracted for an unspecified period. The parties may also not derogate from (or contractually limit) the rights afforded to the agent under the Act4.

While it is true that the Act was passed primarily for the protection of the agent, in doing so, the principal's interests are also served in that the principal can now realistically assess the risks of severing the business relationships with the agent.

The Act states explicitly who is and who is not considered an agent, and thus indicating the implications of same. The Act also establishes a hierarchy of remedies to which the agent shall be entitled which correspond to the level of investment he or she has made.

Prior to termination, the required amount of advanced notice is a direct function of the extent of the relationship between the parties. The longer the agency has been in existence, the more advanced notice the principal must provide. This allows the agent to sufficiently prepare for the end of the agency agreement. The requirement to compensate the Agent upon termination is subject to satisfaction of certain conditions precedent. Furthermore, the amount of compensation to be provided by the principal is not a fixed amount, but rather is also dependent on the level of investment provided by the agent. The more the agent invested on behalf of the principal, providing the success for the principal, the more he will be entitled to upon termination.

Yet despite the Act’s purpose and protections, it is not perfect:

One problem is that the Act only provides compensation where the agency agreement was in effect for at least one year prior to termination. Thus, if an agent spends eleven months to meet his obligations under the agency agreement, the Act will in fact provide him NO remedy to compensate him for his investment. The Act’s disregard with respect to compensation for contracts terminated after less than a year effectively invites principals to internationally terminate the agency without consequence before the first year is up.

Another concern some may have with the Act is that its provisions in effect allow the principal to evaluate the “cost” of unilateral termination vis-à-vis the “value” of the agency. This reduces what should be a good faith relationship into a cold financial calculation. 

Yet another problem with the Act is that the amount of compensation to be paid is a function of the average monthly profit earned by the principal. “Profit” is inherently a measure which can be manipulated; it would have been better to determine the amount of compensation as a share of revenue, which is a more reliable measure. Alternatively, the Act could have provided for a system of compensation which more fully realizes the long term value created by the recruitment of any customers which are expected to only yield income at some distant point in the future.

Furthermore, the Act’s non-differentiation between profits earned in earlier and later months of the relationship is itself problematic, as profits may have well been artificially low at the start of the agency, or in some cases, artificially high at the end of the agency. This situation could influence an agent to improperly place the bulk of his efforts at one point during the agency while not utilizing his full potential during the other periods of the agency.

In conclusion, we note that the enactment of the Act was necessary. It was designed to protect agents whose status is often inferior to that of principals. However, like any law, the Act is subject to varying interpretations and, potentially, manipulations.

The Act, in its current version, does not solve all problems which may arise in an agency relationship. In addition, the Act provides that it “shall not derogate from any [other] provisions of the law.” This effectively opens the door for other statutes which provide different remedies to be taken into consideration, thereby adding uncertainty and ambiguity into principal-agent litigation.

It cannot be doubted, though, that when compared with the pre-existing state of the legislation, the Act establishes a legal framework for agency law which is much improved. This is because prior to the Act, the rights and responsibilities of agents and principals were determined to a large extent by general contract law principles and case law rulings.

The Act is thus definitely a large step in the right direction toward providing clearly defined, adequate and fair protection of agents’ rights. Still, in order to more fully realize this intent, we believe that a number of further modifications to the Act which address the issues raised herein would be appropriate. 

 

1 Section 3 of the Act
2 Section 5 of the Act
3 Section 4 of the Act
4 Section 6 of the Act