Your Israeli representative signs a contract, accepts a delivery, or settles a claim. Whether that bound your company, and for how much, depends on the authorization you gave, or on the conduct that implied one. Israel’s Agency Law, 1965 (Chok HaShlichut) sets the rules on that question, and the choices it gives a principal are far easier to use before a dispute starts than after.
One signature, and the law that follows it
Section 1 defines agency as the power of an agent to perform a legal act in the principal’s name or place, toward a third party. It is general legal agency: powers of attorney, representatives who sign contracts, and anyone who acts for you in front of others. Any legal act can be the subject of an agency, except an act that by its nature or by law must be done personally.
Section 2 is the rule that should concern every foreign principal: the agent is as the principal. The agent’s act, including the agent’s knowledge and intent, binds and entitles the principal. If your representative signs within the authorization, your company is bound, and what your representative knew and intended is treated as yours.
How agency is created, and why the written authorization matters
Under section 3, agency arises from an authorization in writing or orally, from the principal’s notice of it to the third party, or from the principal’s conduct toward either of them. That means an agent can exist in Israeli law without any document, simply because you let someone present themselves as your representative. The same section gives the other side a weapon: a person asked to deal with an agent may refuse to recognize the agency until a written authorization is shown and a copy is handed over.
The practical result is two-sided. Issue a written authorization that says exactly what your representative may do. Tell the people they deal with to ask for it. An authorization that is oral, or implied by conduct, is harder to prove and harder to limit. A counterparty may refuse to deal with the agent, and a deal the principal never meant to approve can end up in dispute.
What a general authorization does not cover
Section 5(a) says that, absent a limitation in the authorization, agency covers every act reasonably needed to carry out the subject of the agency properly. It then draws a hard line: without an explicit authorization, agency does not cover proceedings before a court, a tribunal or an arbitrator, and does not cover compromise, waiver or an act without consideration.
Such as: a foreign supplier gives its Israeli representative a broad authorization “to represent the company in Israel”. A customer sues. The representative settles for half the claim and signs a waiver. Because litigation, compromise and waiver need an explicit grant, the settlement may be challenged, and the question of who authorized what becomes the case.
Section 5(b) adds a narrow exception: an agent may take an urgent act that could not be foreseen and that is reasonably needed to protect the principal’s affairs in the matter, even outside the authorization. It protects you from an agent who does nothing. It does not replace a precise grant.
Acts without authority, ratification and the third party’s choice
Under section 6(a), when someone acts as another’s agent without authorization, or beyond it, the principal can approve the act afterwards. Approval after the fact works as an authorization from the start, unless it would harm a right that another person acquired in good faith and for consideration before the approval. Under section 6(b), a third party who did not know the agent lacked authority can choose, until it learns of the approval, between treating the agent as the counterparty and withdrawing from the act and claiming its damages from the agent. A corporation may also approve an act done for it before it was formed (section 6(c)).
The statute leaves the decision to the principal, and approval works retroactively. A principal who learns of an act nobody authorized should decide what to do with it deliberately, and put the decision in writing.
Section 7 deals with undisclosed agency. If the third party did not know the agency existed, or did not know who the principal was, the agent’s act binds the principal and the agent jointly and severally, and entitles only the agent. The principal may adopt the agent’s rights against the third party, unless that conflicts with the nature of the right, its terms or the circumstances. A foreign company whose local representative contracts in the representative’s own name can therefore be bound alongside the representative, jointly and severally.
What your agent owes you
Section 8 requires an agent to act loyally toward the principal and follow instructions. Unless the nature or terms of the agency imply otherwise, the agent must disclose to the principal all information and hand over all documents relating to the subject of the agency and account for the agent’s actions. The agent may not act as agent for different principals on the same matter without their consent, may not contract with himself, may not accept a benefit or a promise of a benefit from anyone in connection with the agency without the principal’s consent, and may not use information or documents obtained through the agency against the principal. The agent must generally avoid any conflict between the principal’s interest and his own or another person’s.
If the agent breaches these duties, section 9 gives the principal the contract remedies. Where the agent’s act toward a third party resulted from the breach and the third party knew of it, the principal may also cancel the act and claim from the third party the damages the agent owes. Under section 10, any asset that reaches the agent through the agency is held in trust for the principal, even if the agent never disclosed the agency to the third party, and the principal is entitled to every profit or benefit the agent received in connection with it.
Written reports, copies of signed documents and written instructions help document compliance with the section 8 duties and identify a breach. Keep those records alongside the authorization and the decisions the agent made.
The agent’s side of the ledger
The law also protects the agent, and a principal who ignores that pays for it. Section 11 requires the principal to indemnify the agent for the reasonable expenses the agent incurred and for the obligations the agent reasonably undertook because of the agency. Section 12 gives the agent a right of retention over the principal’s assets that came into the agent’s hands through the agency, including assets held in trust, to secure the agent’s fee and other sums due. Section 13 allows set-off between the debts the principal and the agent owe each other because of the agency. A fee dispute can therefore give the agent a basis to hold on to your assets that are in the agent’s hands.
Ending the agency without leaving a trail of apparent authority
Under section 14, agency ends when the principal or the agent cancels it, on the death of either, on loss of legal capacity or bankruptcy, and, for a corporation, on its liquidation. The rule does not apply when the authorization was given to secure the right of another person or of the agent himself, and that right depends on carrying out the subject of the agency.
Under section 15, an agent who does not know the agency has ended may treat it as continuing toward the principal. A third party who does not know may also treat it as continuing and, if the agent knew, has the choice under section 6(b). Section 18 treats a person as knowing a fact if a reasonable person should have known it or if notice was received in the ordinary way. Notify the agent and relevant counterparties through documented channels, keeping the notice and proof of delivery with the authorization.
Two more rules shape the authorization. Under section 16, an agent may appoint a sub-agent for the subject of the agency only with express or implied authority, or for an urgent act under section 5(b). Under section 17, a single authorization given to several agents is presumed to require them to act together, and a single authorization from several principals is presumed to be given by all of them together.
Selling goods through a commercial agent? A second statute may apply
If you market goods in Israel through an agent who finds customers for you on a continuing basis, the Agency Contract (Commercial Agent and Supplier) Law, 2012 is a separate statute that may also apply. It is limited to tangible goods other than real estate, and it has its own rules on notice and on the agent’s compensation when the contract ends, each with conditions of its own. Section 19 of the 1965 law keeps in force laws that govern a particular kind of agency. Our checklist for working with a commercial agent in Israel covers that side.
What a sound authorization contains
- The acts covered, a monetary ceiling per act and in total, the duration, and whether the authority is exclusive.
- An express grant or an express exclusion for each of the section 5 items: litigation, arbitration, compromise, waiver and acts without consideration.
- Reporting duties that make the section 8 duties provable: written reports, copies of every document signed, and a ban on commissions or benefits from the other side.
- Whether the agent may appoint sub-agents, and who must sign when there is more than one agent.
- An exit mechanism: how revocation is notified to the agent and to counterparties, and what happens to negotiations and documents in the agent’s hands when it is.
- A clear classification of the relationship: legal agent, commercial agent, distributor or marketer, because the statute that governs follows the substance.
“Under section 2, an agent’s act within the authorization binds the principal. The authorization is where its limits are set.”
Appointing or Terminating an Agent in Israel?
Under the Agency Law, the agent’s act within the authorization binds the principal. Every gap in the document is a gap in your protection.
Contact our firm before you sign an authorization or before you cancel one. We draft the authorization around your transaction, address each section 5 item expressly, and prepare the revocation and the notice to the agent and the counterparties.
Read also: Working With a Commercial Agent in Israel: 7 Points to Check | International Distribution Agreement: Template and Key Clauses | Your Contract Dispute Lawyer for Israeli Commercial Law
This article is for general information only and does not constitute legal advice. Laws and their application depend on the facts and jurisdiction and may change. Although we aim to keep this information accurate and current, we do not guarantee that it is complete or up to date. The article may contain omissions or errors. Reading this article does not create an attorney-client relationship with RNC Group. Before making a decision or taking action, seek advice from a qualified lawyer in the relevant jurisdiction.