Compensation of NIS 1,335,403 Because of the Violation of an Exclusive Distribution Agreement in Israel

Published: 16 Sep 2020

On January 31, 2000, an exclusive distribution agreement was signed between Israeli companies, Dessco Wood Products (1987) Ltd. and Yaad Pirzul 1984 Ltd. (hereinafter: "Dessco") and a Chinese company called Taiming Enterprise Holdings Ltd. (hereinafter: "Taiming”). The essence of the agreement was the exclusive distribution of Taiming products - metal rails and drawers, designed for kitchens and furniture, in Israel and the Palestinian Authority. The agreement was signed for one year, extended for another year, and then was extended to an unlimited period of time because of the mutual satisfaction of both parties. The last extension was made by oral agreement.

After a long period of commercial relations, on 9/2013, Dessco found out that Taiming was secretly selling its products to the Formica Averbuch Center (Marketing) Ltd. (hereinafter: "Averbuch"), a direct competitor of Dessco, without the knowledge or the approval of Dessco.

The sale of Taiming's products in Israel by Averbuch caused a drop in Dessco's revenues and profits, as Dessco was not informed by Taiming on the cancellation of the exclusive distribution agreement.

Dessco filed a claim with the court, alleging that Taiming had violated the exclusive distribution agreement signed by the parties and canceled the agreement without giving any prior notice. For the damages caused, Dessco demanded a compensation of NIS 4,000,000.

Taiming argued in its defense that, in 2013, it found out that Dessco had distributed products in Israel that were of a competing Chinese company, DTC, without Taiming’s approval. As a result, the volume of sales of Taiming products in Israel declined significantly, while the volume of sales of the competing company (DTC) increased constantly. This, Taiming argued, was a violation of the distribution agreement between the parties.

The court ruled that the distribution agreement signed by the parties was turned to be an agreement that is indefinite in time. Such an agreement may be revoked by either party, provided that the other party has been notified with a reasonable advanced notice.

Taming's announcement of the agreement’s cancellation was provided to Dessco on March 8, 2014, as a surprise, without any prior notice.

After the court reviewed the judgments dealing with the amount of time to be given as prior notice, the court ruled that the reasonable period of time is one year’s notice when canceling the excuse distribution agreement.

However, the court reduced the notice period to only 8 months because of the fact that Dessco distributed products in Israel that competed with Taiming's and thus, created a conflict of interest for Dessco (which was supposed to exclusively distribute Taiming products), and also harmed the sales of Taiming products in Israel.

The court held that this reduction is because of a proper legal policy that does not support violation of trust relations that apply between a foreign producer and a local distributor, as well as the creation of a built-in conflict of interest in the distribution relations by that distributor.

In an analysis of the profit generated by the sale of Taiming's products in Israel, the court concluded that the profit of Dessco for 8 months was NIS 835,403. Therefore, this amount is the sum of the compensation due to Dessco, because of Taiming’s failure to give prior notice of the cancellation of the distribution agreement.

The court also ruled that Dessco should be awarded compensation for the sale of the Taming products to Averbuch. In 2013, Taiming sold 50,000 items of drawers and rails to Averbuch. The profit that was denied to Dessco in respect of the quantity of these products is approximately NIS 500,000 and therefore, the court ruled in its right to award Dessco additional compensation in this amount.

In conclusion, Dessco's claim against Taiming was accepted, in part, and Taiming was required to pay Dessko a sum of NIS 1,335,403, because of its failure to provide prior notice to cancel the exclusive distribution agreement, and because of violation of this agreement.

*File 42076-05-14, Yaad Pirzul 1984 Ltd. and others against TAIMING ENTERPRISE HOLDING CO. LTD., The judgment was given on December 16, 2018 in the Central District Court of Lod.

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Eyal Soref

Firm: Soref & Co. Law Office
Country: Israel

Practice Area: Litigation

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