An exclusivity clause is part of the larger legal contract that binds the party to work exclusively with the issuer of the contract. Essentially, the party will agree to not work for other competitors or compete with the business they are currently working for.
Though prima facie Non-Compete Clauses might seem similar to exclusivity clauses, they are different in several key respects. Non-compete clauses are concerned with protecting the confidential information of a business. A common example is a client list. They are used to protect a business from competition with individuals or companies who have had access to this sort of information.
However, it’s important to note that these clauses are concerned with the working arrangements of parties involved, not the information they procure through their employment.
Why Do I Need An Exclusivity Clause?
Exclusivity clauses are an important part of contracts that require a party to not work for other employers or compete with the business of the opposite party. This is because a skilled worker is a valuable asset. They contribute immensely to the success of the business. Their skills are also transferable to similar businesses.
For example, a quality scaffolder’s skills are not inherently linked to a specific scaffolding business or project. They can transfer these skills to any number of different companies. These sorts of situations present a danger to the company that employs skilled workers like our rhetorical scaffolder. What’s to stop someone from setting up shop nearby and taking all the business of their former employer? This is what the exclusivity clause tries to prevent.
In the construction context, exclusivity clauses are extremely diverse in their operation. They can constrain contractors, suppliers, or even separate companies. The specifics of the clause’s operation will depend on the circumstances of the particular case, but should always be reviewed by a contract lawyer before being signed or being made part of the final contract.
Why Are Exclusivity Clauses Important?
An exclusivity clause can protect both parties involved in a given contract. Such a clause will typically prevent one party from opting out of selling or utilizing the other party’s business. But it also protects this first party by restricting what the other can do with their goods and services.
If an exclusivity clause is in place, the party bound by it will be obligated to do or not do certain things as long as it is in effect. At its core, this creates two things.
The first is a competitive advantage for the business. No other party can access or utilize the party bound by this clause. Competitors are shut out from dealing with the bound party.
The other is the continued use of a skilled worker for the length of the clause. Though this is largely facilitated by the broader contract, the exclusivity clause ensures the sole use of the skilled worker throughout the period.
There are also two other key benefits of exclusivity clauses to both parties involved in its use. The party bound by the clause becomes an exclusive provider of services or goods to a business. This can be financially rewarding, and provides a level of certainty and stability that might be lacking in other working arrangements.
Likewise, the binding party receives certainty as to the supply of services and goods. This is also great for long-term planning.
What Should An Exclusivity Clause Include?
Typically, an exclusivity clause will state that one party cannot pursue or even consider offers made by other interested parties. This will usually come into effect after a letter of intent has been signed. This letter is essentially a document outlining the understanding between the parties which they intend to formalise later in a legally binding agreement.
Exclusivity clauses are very complex, with quite large stakes at play, and thus should always be reviewed by a contracts lawyer. For a building contractor, an unfair exclusivity clause could see them miss out on opportunities which hold no conflict with their employer.
In contrast, if a building company implements a weak exclusivity clause, they might find themselves lacking workers to complete the project.
There will also usually be some form of start and end date on the operation of such a clause. Ideally, an exclusivity clause will help to protect both parties short term and long term interests.
Break Free Clauses
However, business relationships are complicated. There are circumstances in which things like construction projects no longer go ahead. This could be for a variety of reasons. Perhaps the local council might have rejected approval after the contract had been signed. Those under the contract might still have been denied opportunities for other work by virtue of the exclusivity clause contained in the contract.
For this reason, many contracts that include exclusivity clauses will also include a break free clause. This clause helps to recover some or all of the costs associated with a construction project, if the project does not go ahead or is canceled before your work is completed and your payment is due. There are two main types of these clauses.
The first is known as cost recovery. Under this type of break free clause, where a construction contractor is engaged by the hirer on an exclusive basis, and the hirer or company owner decides that the contractor’s services are no longer required, the contractor will be entitled to be compensated by the hirer for all reasonable costs incurred by the contractor in relation to those services until that time.
Referring back to the prior example of the scaffolder, if materials have been purchased to create scaffolds for a canceled construction project, the scaffolder will be entitled for compensation for the cost of that purchase.
The second is called lump sum payment. Under this type of break free clause, where a construction contractor has been hired under an exclusivity clause, but the hiring company decides that the contractor’s services are no longer necessary, the hirer will compensate the contractor with a lump-sum payment to cover costs incurred by the contractor in relation to those services.
Although at face value these look relatively similar, they have very different effects. The first provides compensation for all reasonable costs incurred by the contractor. The second only provides a set lump sum. What clause is right for a given construction worker depends on their type of business, and should always be assessed by a specialist contract lawyer. Importantly, these clauses do not allow the party being bound to break the exclusivity clause.
Limitations Of Exclusivity Clauses
By its nature, exclusivity clauses put the party being bound under potential financial strain. They cannot take advantage of the compensation or other benefits that might come with other better opportunities. This drawback is especially bad if the construction project you are being involved in is long term in nature.
If you think these better opportunities might come your way, it is not a good idea to be bound by these clauses, and advice from an expert contract lawyer should be sought for alternatives.
However, exclusivity clauses do not operate completely free of legal constraint. They are illegal where the relevant conduct “results in substantially lessening the competition in the relevant market.”
Although this is highly unlikely to come up in a small business context, if there has been a real effect on on the market for a product, the availability of the product would be substantial reduced through the clause, and the consumers ability to buy such a product would be severely affected through the operation of an exclusive dealing clause.
Exclusivity clauses in the construction context are by no means simple. Sometimes obscured by their complexity, is the very real impact they can have on both the signing party. They can essentially restrict what work you can conduct, and consequently your income.
If you need help figuring out how such a clause applies to you, get in touch with us, and we can guide you through the process.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or firstname.lastname@example.org for a free, no-obligations chat.
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