Distribution agreements: what governs termination and notice

Service page: Commercial contracts lawyer: drafting, review and enforcement.

A distribution agreement looks simple at the start and becomes complex at the end. Most disputes in this area are not about what was written, but about what was not written, and first among them: how much notice must be given before termination.

The starting point is that Israel has no law regulating distribution agreements, and no duty of advance notice set by law. The arrangement is contractual, and the general law restrains it. Note the classification: a distributor that buys the goods and sells them in its own name is not a “commercial agent”. But if the other party only finds customers who contract directly with the supplier, the Agency Contract (Commercial Agent and Supplier) Law, 5772-2012 (חוק חוזה סוכנות (סוכן מסחרי וספק), התשע״ב-2012) applies, which sets a minimum advance notice and compensation on termination (see agency agreement).

The main restraint: section 39

“In performing an obligation arising from a contract, a person shall act in an acceptable manner and in good faith; and the same applies to exercising a right arising from a contract.”Contracts (General Part) Law, 5733-1973, section 39 — Nevo text (unofficial translation)

The second half of the section is the one relevant to distribution. Even when the contract gives a right to terminate “at any time and for any reason”, exercising the right is subject to good faith. This is the point of leverage for a distributor that invested in building a market and received a termination notice of one week.

Alongside it, section 12 applies to the negotiation stage, and section 25 to interpretation: when the contract is silent on the length of the notice, the question of interpretation becomes central, and what was said and written during the negotiations comes back into the picture. Note: in a business contract made or renewed on or after 7 January 2026 that does not set how it is to be interpreted, the contract will be interpreted according to its wording alone, unless the wording of the contract alone leads to an unreasonable result, or a contradiction arises between its provisions (section 25(a)(2), as worded in Amendment No. 3, 5786-2026), so it is worth writing what was agreed in the negotiations into the contract itself.

Termination and breach: the tools in the Remedies Law

• Section 6 defines a fundamental breach: a breach about which it can be assumed that a reasonable person would not have entered into the contract had they foreseen it and its results, or a breach that the contract states will be treated as fundamental.
• Section 7 sets the right to rescind: for a fundamental breach, immediate rescission; for a non-fundamental breach, after an extension is given to cure it and it is not cured within a reasonable time.
• Section 3 gives a right to enforcement, subject to exceptions, including a contract whose performance requires an unreasonable degree of supervision.
• Section 10 limits damages to damage “that the party in breach foresaw or should have foreseen, at the time the contract was made, as a probable result of the breach”. This is the foreseeability test, and it decides whether the distributor’s investments in marketing can be claimed.

The last section is the key: a distributor that wants to claim back investments in marketing and in stock needs these investments to have been foreseeable to the supplier when the contract was made. The way to make sure of this is to write them into the contract.

Exclusivity: three questions to answer in writing

1. What the scope of the exclusivity is: territory, product line, type of customer, or a combination of them.
2. What happens with direct sales: may the supplier sell itself within the territory, including through an online website? This is the most common point of failure in agreements written before the age of online commerce.
3. What the minimum targets are, and what the result of not meeting them is: loss of exclusivity, or grounds for termination.

As for vertical restrictions and restrictive arrangements, a distribution agreement may fall within competition law. An arrangement between people who run businesses, under which at least one of the parties restricts itself in a way that may prevent or reduce competition, is a “restrictive arrangement”, including a restriction relating to price or to dividing the market by place of business or by type of customer (section 2 of the Economic Competition Law, 5748-1988 (חוק התחרות הכלכלית, התשמ״ח-1988)), subject to the exceptions in section 3. It is prohibited to be a party to a restrictive arrangement without the approval of the Competition Tribunal, a temporary permit, an exemption or a block exemption (section 4). This is a separate check worth doing before signing, especially when it comes to setting resale prices or geographic barriers.

What to write in the agreement to prevent the dispute

• A length of advance notice graded by the length of the relationship: the simplest solution to a question the law does not answer.
• Handling of stock on termination: does the supplier buy it back, at what price, and within how long?
• What happens to the customers and the data: who holds the customer list, and what the distributor may do with it after termination.
• Trademarks and marketing materials: the license to use them, and when it ends.
• A dispute resolution mechanism and governing law, especially when the supplier is foreign.
• Express recognition of the distributor’s investments, if there are any, in order to pass the foreseeability test in section 10.

And what is worth knowing before drafting: Israeli law has no general requirement that every change to a commercial contract be made in writing. If you want such a requirement, write it into the contract.

Frequently asked questions

Is there a law in Israel that regulates distribution agreements?

No. There is no distribution law and no statutory duty of advance notice. The arrangement is contractual, and general contract law applies on top of it. Note the classification: a distributor that buys the goods and sells them in its own name is not a “commercial agent”. But if the other party only finds customers who contract directly with the supplier, the Agency Contract (Commercial Agent and Supplier) Law, 5772-2012 applies, which sets a minimum advance notice and compensation on termination (see agency agreement).

What restrains a sudden termination of a distribution agreement?

Section 39 of the Contracts (General Part) Law, 5733-1973: “In performing an obligation arising from a contract, a person shall act in an acceptable manner and in good faith; and the same applies to exercising a right arising from a contract.” The second half also applies to exercising a right to terminate that was worded as unconditional.

When can you cancel because of a breach?

Section 7 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970, gives a right to immediate rescission for a fundamental breach as defined in section 6, and for a non-fundamental breach, after an extension is given to cure it and it is not cured within a reasonable time.

Can you sue to recover investments in marketing?

Section 10 of the same Law limits damages to damage that the party in breach foresaw or should have foreseen, at the time the contract was made, as a probable result of the breach. Mentioning the investments expressly in the contract makes them foreseeable.

What is the difference between a distributor and an agent?

An agent is usually an agent in the legal sense of agency: agency is “the authorization of an agent to perform a legal act toward a third party in the name of or instead of the principal” (section 1(a) of the Agency Law, 5725-1965 (חוק השליחות, התשכ״ה-1965)), and the agent’s act binds and benefits the principal (section 2). A distributor, by contrast, usually buys from the supplier and sells to its customers in its own name and for its own account. So in agency, the act toward the customer binds the supplier, and in distribution the customer usually contracts with the distributor itself. On agency agreements, see Agency agreements: legal structure and rights.