Separation Agreements

Abstract

Upon the termination of agreements that conclude complex and extended relationships, such as: management agreements, licence agreements, complex rental agreements, complex distribution agreements, etc., a need arises to explicitly define the rights and obligations of the parties at the time of the termination of the relationship and, of course, for the period beginning after such termination.

The objective of separation agreements is to manage the termination of the relationship between the parties, including the arrangement of payments, rights and obligations of the parties, even in cases where, in light of the complexity of the relationship, these were not addressed under the contract.

Separation Agreements – When Will They Be Used?

Relational contracts are lengthy contracts that regulate complex relationships between the parties. In contrast to isolated contracts (sometimes also called “transaction contracts”), which regulate short and specific relationships, such as sales agreements, etc., relational contracts regulate long-term relationships in which the rights and obligations of each party are detailed with a long-term view of the future, and will naturally have a broader scope.

Relational contracts are characterized by a complex and diverse relationships, and in many cases also by factual situations that will occur in the future that the original contract did not address at all. Hence, the contracts try to create a balance between the need for certainty and predictability and the need for flexibility and the ability to adapt to changing conditions. The criteria that are determined between the parties specify the distribution of risks as well as establishing an agreed solution regarding the continuation or termination of the relationship between the parties.

Examples of relational agreements are commonly of parties who regulate their rights and obligations in a wide variety of actions, such as: management agreements, long-term property lease agreements (complex buildings, hotels, etc.), operating agreements, licence agreements, distribution agreements, agency agreements and more. These are agreements that regulate complex relationships that refer to the many areas in which the parties operate, and relate to a period of many years.

For further reading, see the judgment of President (retired) Aharon Barak in Civil Appeal Leave 1185/97 The Heirs and Estate Administrators of the late Milgrom Hinda v. Merkaz Mash’an et al (published on 6.9.98).

Main Mechanisms

After the termination of a relational agreement, a large part of the rights and obligations of the parties continue to remain valid for many months and even years. Many issues in the relationship between the parties will still need to be regulated, including:

– Various payments between the parties and also to third parties

– Handling and payment for fixed stock

– Handling and payment for consumable stock

– Clearance of credit lines (between the parties and from third parties)

– Handling of current/future orders

– Confidentiality

– Intellectual property (reputation, customers, etc.)

– Continue receiving information from the activity after the end of the original relational agreement

– Future activity in the territory

Discussion of Payments

As mentioned above, one of the main issues that are discussed between the parties regards various payments between them. The payments can arise from several sources: the settlement of existing debts between the parties, the settlement of future debts, payment for stock, etc.

Arranging payment for existing debts is a relatively simple and straightforward operation. A problem may, however, arise between the parties when arranging payment for future activity, to which the party that is no longer responsible for the activity is entitled. Under relational agreements that are distribution agreements, agency agreements, etc., in some cases the distributor/agent has the right to receive proceeds also for transactions made in the territory he developed, after the agreement has been formally terminated.

The arrangement of these payments entails many mechanisms, such as: receiving information, access to bookkeeping records, intellectual property, and much more. In exceptional cases, the distributor continues to operate in the territory, sometimes even with the same customers, and there is a need to regulate the relationship between the parties with regard to those common customers. All of these issues are dealt with within the framework of a separation agreement between the parties.

Summary

When ending a joint and long-term relational system, there are many issues that must be settled between the parties to the contract. Separation agreements are meant to address all of these issues, some of which were expressed in the original contractual system between the parties, and some of which arose out of the changing circumstances of the relationship.

It is important to create an agreement that will enter into effect upon termination of the original agreement, one that will address all those issues and that will continue to apply between the parties, in order to provide a solution and application to complex situations.

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