Termination of International Business in Israel, by our litigation partner Adv. Benjamin Leventhal
Israel – Termination of international business
Not what you would expect
When can you terminate, how should you terminate, and how much are you exposed?!
The outcomes of termination of a business relationship with an Israeli counterpart in Israel arise again and again as a question in many disputes between International corporations and Israeli counterparts, such as distributors or franchisees.
This is mainly because Israeli law does not include specific laws regulating or regarding distribution or franchising or other kinds of business ventures (except a relatively new agency law – referring in a limited manner to specific kinds of agency only) – and thus disputes in said regards are determined based on the general principles of contract law, the contractual and factual bases – obviously resulting in considerable uncertainty as to specific matters.
However, substantial case law, such as in the matter of Johnson & Johnson International that ended up paying compensation in the equivalent to over 1.5 Million US$, indicates the basics and threshold of what can be expected in such disputes, and, if implemented wisely, may assist in planning the disengagement or termination of a business relationship, in a manner that would be the least costly for the terminating party and minimize its exposure to a lawsuit.
In many cases, domestic parties invest many years and/or fortunes, in order to penetrate the domestic market with the foreign service or products, and to promote sales in the subject region, for the benefit of both the international corporation and the domestic party.
Nevertheless, often the international corporation decides for various reasons (such as establishing an “in-house” operation” in the target location or substituting the distributor/franchisee) to terminate the oral or written contractual relationship.
What are the legal foundations involved in such termination as per due notice of termination and corresponding compensation – if at all?
Generally, this issue arises in cases in which the contract does not specify a period of the business relationship, and, as a principle of law, contracts may be terminated by reasonable notice and subject to the fundamental good faith principle.
Contracts are not perceived as binding upon the parties indefinitely. The question is always what is the reasonable time for termination notice, and is the termination done in good faith (which is always a tricky and vague issue). Compensation is commonly awarded in accordance with what the courts find as the due notice period that may also entail compensation for damages related to said breach.
As always, there are exceptions, such as breach of trust toward the manufacturer/franchisor, that may have great impact on any due notice obligations, as far as justification for immediate termination that can be deemed immune to breach of due notice or good faith obligations.
The truth is the reasonability of the due notice varies from case to case!
However, Israeli case law is extremely sensitive to the actual reasoning of termination and how genuine it is, as opposed to asserting a tactical breach argument in an attempt to “justify” avoiding a due notice period or adequate compensation.
In this respect, in many cases simple “non-satisfaction” was denied as a legitimate argument for breach of contract, while safeguarding the freedom of contracts and the right to terminate an ongoing contract with due notice and good faith.
There are various common parameters referred to in the case law, to determine the adequate time of due notice, including, for instance, the magnitude of investment; the time required for rearrangement of business towards the new situation (including time required to find an alternative supplier product which can be marketed); the magnitude of the product/service out of the entire distributor’s business, etc.
Time and again, although not as binding rule, the due notice period seems to be in the range of around 12 months, as a balance between the right of termination and the reasonable time for rearranging the business in light of the termination. There were, however, cases in which due notice for termination was deemed as short as three months and as long as two years – but these are rather exceptional.
Another guiding point in the case law is the factor of exclusivity or non-exclusivity, as well as the concept that the longer the business relationship, the less the distributor/franchisee may expect compensation/reimbursement for investment – based on the concept that he has enjoyed the fruits of the investment.
The outcome of not providing such adequate due notice might result in actual compensation reflecting the loss of profit of the business in the last year before the termination, or for the whole term the court finds a due notice was in place, or, in cases of bad faith, even a longer period reflecting the damages.
In conclusion, given the legal regime in Israel, such exposure might be extremely considerable for any international or foreign business. It would, therefore, be vital and as a consequence of real value to plan the strategy of disengagement/termination of the business with the domestic counterpart in Israel, in advance and prior to executing it, and there are, indeed, adequate and wise strategies that may be implemented for the best result.
Make law-not settlements!
That was the concluding remark of our Litigation partner Benjamin Leventhal in a DRI conference panel on -whether to settle cases or not-in court and arbitration.
Adv. Leventhal insisted on the observation that court systems worldwide are missing their goal -of conducting trials in pursuit for justice- by urging parties to settle cases, whereas a common outcome of a settlement is that the client is not happy – and if so – and there is a reasonable case – why settle then?!
The panel that was held along wish international litigation colleagues Michelle Glassman Bock and Facundo Viel Temperley, and moderated by Karin Graf, was applaud by the big and distinguished audience.
Additional term in the national disciplinary institute of the Israeli Bar
SGL congratulates our litigation partner Benjamin Leventhal, for being chosen for an additional term as judge in the national disciplinary institute of the Israeli Bar.
staying on guard of the ethics of our marvelous profession.
boycotting or calling for boycott of Israeli businesses, products, cultural or academics, may be sued for damages in court. As published in an article of our litigation partner, Adv. Benjamin Leventhal on Ynet news
Litigation partner Benjamin Leventhal in an insightful article Re intenational arbitration published worldwide via legalmondo.
International Arbitration – 7 Essentials
Arbitration could be a strange world of wonders, but, on the other hand, if mastered professionally in the first place while planning and managing the process, arbitration could turn out to be a process that will be directed towards a winning strategy.
Much can be written about the arbitration process, but this article attempts to pinpoint 7 essentials that are a must in the tool box and knowledge of the arbitration lawyer.
1 – You must control your arbitral procedure – This may seem rather trivial. However, time and again, cases such as those this writer has scrutinized or managed indicate that when counsels who are aware of the “technicalities” and plan for them, they gain considerable advantages or at least control of the international arbitration.
2 – Precisely define your arbitration agreement/clauses – This essential cannot be emphasized enough, as to its importance and great impact over the arbitral process. This preliminary phase of any arbitration process – which is always based upon some kind of consent granting the jurisdiction to an arbitral tribunal – is the key for safeguarding interests.
3 – Cautiously choose and define the seat of arbitration– The seat of arbitration is not “just” the venue where the arbitration will take place – it is the country whose courts will have jurisdiction over the matters surrounding, supporting and enforcing the arbitration procedure.
This might have crucial relevance, even for the validity of the arbitration agreement itself, since each country has its own internal arbitration laws regulating arbitration and, thus, might interpret validity or non-validity of an arbitration agreement irrespective of the law applying to the arbitration or the intent of the parties initially. For example, some countries may not enforce an arbitration without a signed arbitration agreement, whereas others, such as Israel, might acknowledge consent for arbitration without a written document.
The seat of arbitration may also have a great impact even over interim measures. It is crucial to review what kind of interim measures are possible or impossible according to the law of the seat of the arbitration – some cases revolve around interim measures without which the arbitration might be meaningless.
The seat of arbitration might also have a great impact in light of the public policy in the specific country – which might not enable the validation or enforcement of an arbitral award counter to its public policy principles – and thus make an arbitral award worthless.
4 – Definition of the possible remedies and the exclusion of others – This is another essential that, for some reason, in practice is often overlooked, despite the obvious advantage this might have over the scope of the arbitration. Parties to an arbitration agreement have the power not only to provide the matters that are subject to arbitration and the applicable law, but also to control their legal exposure in arbitration – and, in fact, minimize or maximize it – if they just give thought to remedy definitions, rather than leave it inattentively hanging as a midnight clause.
For instance, a party might define that punitive or tort damages are included or excluded. Similarly, parties can provide to cap possible compensation (such as a certain value of the transaction), all in a manner so that the arbitration process can be navigated solely to what the parties, or any one of them, actually seek. This will contain and minimize the risk of the unexpected or unknown.
In this respect, it is also important to determine clearly what the scope of the arbitral tribunal authority might be – because what is not included might be determined to be excluded.
For instance, parties sometimes provide that the tribunal will have the jurisdiction to render awards as to questions of interpretation of the contract and its terms – but such a provision may be found to not provide jurisdiction as to breach of the contract – this might turn out to be a substantial obstacle for the enforcing party.
5 – Determining the applicable law – This has great relevance and importance for obvious reasons – and yet many times parties are found to have agreed upon an applicable law – such as British or Swiss law – without actually looking into said law and its possible implications for the matter in the case in dispute. It is indeed worth the extra effort to consult with counsel acquainted with the proposed applicable law while presenting the scope of interests to be protected and any possible downsides in the transaction.
6 – Determining and controlling arbitration costs – International arbitration could be extremely costly, especially if parties have not provided in advance for the terms for conducting the process. Parties could and should consider controlling costs, inter alia, by the following:
• Providing for a sole arbitrator rather than a tribunal of three
• Providing that the arbitration will be conducted by written submissions and affidavits only
• Providing limitation of document disclosure – especially while dealing with U.S. parties or under U.S. applicable laws (which may have extremely broad and often onerous discovery provisions)
• Providing in advance for short hearings and a limitation on the number of hearings
• Appointing an arbitrator to manage the arbitration without the administrative costs and fees usually involved when applying to an international arbitration institution
• Providing that the arbitrator is an expert in the fields relevant to the matter, in case specific expertise is required, therefore avoiding the need for appointment of an expert
7 – Ensuring that enforcement is possible – An essential element to be reviewed in advance, even before engaging in an arbitration agreement, is the possibility of enforcing the arbitral award. In general, the New York Convention of 1958 provides sufficient reference for this consideration. This may not always be the case. Thus, a technical review of the convention is sufficient to ensure enforceability in a particular case or situation.
There are instances in which legal or political considerations may preclude enforcement even when the target jurisdiction is part of the New York Convention. For instance: non-mutuality of enforcement among countries, an award that contradicts public policy of the target enforcement country, difficulties originating from conflicts of law – since the enforcing jurisdiction will usually apply its set of laws, rules and values.
Moreover, it is greatly advisable to explore in advance if the opposing party is solvent, where its assets are situated and the ability to enforce the award against such assets.
Our firm launched its innovative initiatives for resolving disputes on an accelerated timetable.
“On the spot arbitration” and “on the spot family mediation” were developed in order to provide a much needed potential solution for resolving legal disputes as quickly as possible.
“On the spot arbitration” – Years of managing legal disputes in courts and in arbitration led us to the conclusion that there is a real need for a responsible and efficient legal platform that can actually conclude legal disputes on an accelerated timetable!
Thus, our firm has established the concept of on the spot arbitration, in which the parties and their lawyers may initiate and conclude their legal dispute in a fast track procedure within 30 days, which is also focused and efficient – after which they obtain a binding legal arbitral award.
“On the spot family law mediation” – An innovative initiative of on the spot mediation, in which the parties may exhaust any possibility for resolution of their legal dispute through a fast track mediation process within 30 days.
The fast track mediation was initiated in order to provide an actual real time cost effective alternative to long lasting and not necessarily positive dramatic procedures in family law courts, and in order to provide the parties with a precise timetable, that in many cases, in the absence of such a precise timetable and mediation framework, may otherwise terminate any chance of settlement or agreement
Our firm has expanded! Advocate Benjamin Leventhal joined our firm and established the civil, commercial and administrative litigation department.
Adv. Benjamin Leventhal, who is well known in the field of litigation and dispute management, joined our firm as partner and established the civil, commercial and administrative litigation department.
Adv. Leventhal has dealt for many years with complex cases followed by the media and has represented considerable entities in all courts, including the Supreme Court and in international arbitration.
By joining the firm, Adv. Leventhal completes the development of the firm that now provides clients with a broad range of services for client matters.
Upon his joining the firm, the firm has established the “on the spot arbitration” initiative, to provide expeditious conclusions to civil and commercial disputes.