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Businesses frequently use exclusivity clauses in their contracts to avoid unwanted surprises and to manage competitive threats. It also strengthens the commercial relationship they have with other organisations.
Exclusivity clauses are an excellent way to establish more security for your business, whether you are the purchaser or the supplier. However, when using an exclusivity clause, it is important to ensure that it is carefully drafted so that it achieves its intended purpose.
What Is An Exclusivity Clause?
In contracts, an exclusivity clause prevents one party from dealing with others or in particular areas for the duration of their contract. It is often used in business between purchasers and suppliers.
For example, a particular supplier may have a product that is important to a purchaser, so they enter into a Supply Agreement. During this agreement, the parties may wish to ensure their dealings are exclusive to one another. To achieve this, the Supply Agreement could include an exclusivity clause which:
- Limits the ways and locations where the supplier may be able to sell their goods to other purchaser
- Prevents the purchaser from buying the same goods from another supplier
Why Do We Use Exclusivity Clauses?
Exclusivity clauses can be used to protect businesses and provide security for suppliers. If a supplier is providing goods for a business, an exclusivity clause can prevent the purchasing business from seeking the same product out with another supplier for lower rates and abandoning their agreement with their current supplier.
The same goes for the purchasing business. It would be detrimental for a business if their supplier started conducting sales with another instead of theirs, as this would increase the level of competition. Therefore, if drafted correctly, an exclusivity clause protects both parties from having the rug pulled out from underneath them.
What Is A Supply Agreement?
A Supply Agreement is an agreement between two parties, where one party (the supplier) provides a particular good or service to the other party (the purchaser) for a contracted period of time.
The Supply Agreement will normally include details regarding:
- The products to be supplied
- Quality and standard of the product
- The start and end date of the contract
- Payments and rates
- Delivery methods and timing
- Dispute resolution
| Example Ariel owns a vegan cafe, where she promises her customers her food is made only from fresh, organic products. Henry is a supplier that grows fresh produce and is checked for quality before each purchase. Ariel enters into an agreement with Henry and their agreement includes the supply of apples, bananas, pears and various greens delivered to Ariel’s store multiple times a week for the next six months by Henry. An agreement of this nature is considered a Supply Agreement. |
What Is An Exclusivity Clause In A Supply Agreement?
An exclusivity clause in a Supply Agreement would do either or both of the following, depending on how it is drafted:
- Prevent the supplier from providing the same products to another business, or
- Prevent the buyer from purchasing their products through another supplier
These clauses would be effective for the duration of the agreement, unless the clause itself specifies otherwise.
| Example Let’s refer back to the example with Ariel and Henry. If an exclusivity clause was included in their agreement, Henry would not be able to supply any of his fresh, organic produce to other vegan cafes or restaurants within the same competing locality as Ariels cafe. Similarly, the clause can also work to prevent Ariel from buying produce from a supplier other than Henry. |
What Are Some Types Of Exclusivity Clauses?
Like we mentioned, the effect of an exclusivity clause will depend largely on how it is drafted. For example, an exclusivity clause might restrict a business from buying similar goods from another supplier. Alternatively, it could restrict a supplier from selling their goods in a particular region or location.
Each business has different needs, so there are different types of exclusivity clauses and it’s vital that you choose the type that works for your business.
Generally, how you rely on an exclusivity clause will depend on whether you are the purchaser or supplier.
I’m A Purchaser – What Types Of Exclusivity Clauses Can I Use?
If you are the purchaser in the Supply Agreement, you have two main types of clauses here:
- Area clause
- Product clause
An area clause generally prevents the supplier from selling their goods to another business in the same region, or a location specified in the contract. If you’re concerned about local businesses in your area using the same goods from that supplier, an area clause is worth including in your agreement.
A product clause, on the other hand, focuses more on restricting the supplier’s actions. In other words, it requires the supplier to only sell their products to you. This is particularly helpful for eCommerce businesses whose competitors aren’t limited to one geographical location, so this clause would essentially limit competition in the online space, too.
I’m A Supplier – What Types Of Exclusivity Clauses Can I Use?
If you’re a supplier in an agreement, some common types of exclusivity clauses you can choose from include:
- Dealing clauses
- Channel clauses
- Product clauses
- Pricing clauses
A product clause would prevent the purchaser from buying similar goods from other suppliers. This way, you would be their exclusive supplier for that product and would restrict competition on your end.
A channel clause controls the mediums through which a purchaser may sell their goods. For example, it may restrict a business from selling through an online marketplace.
What Does The Law Say About Exclusivity Clauses?
Section 47 of the Competition and Consumer Act 2010 deals with exclusivity clauses and determines that if a clause’s primary function is to eliminate all competition, the clause will be considered illegal.
Whether the clause is legal or not will be decided by considering three key factors:
- If there is an impact on the competition in the market for that product
- Whether a shortage of that product would occur from a refusal to supply
- If it will negatively impact the accessibility of that product for other consumers
How Do I Know If My Exclusive Dealing Is Legal?
Any exclusivity clause you create or are asked to sign should not have the sole purpose of eliminating competition. Exclusivity clauses can be useful in ensuring stability and security for the parties involved, however, in order to achieve this, the clause must be worded carefully.
Therefore, it’s always wise to have a legal professional draft any agreements, particularly ones that deal with exclusivity clauses so you can avoid illegal actions. Doing so can save you from potential disputes in the future.
Next Steps
Exclusivity clauses can protect your business and provide greater security in your dealings. It can limit your competition in the market so you’re one step closer to achieving your business’ goals.
However, it’s important to ensure that the clause isn’t drafted in a way that is illegal. In other words, you want to make sure that its effect isn’t extreme to the extent that it unfairly affects the market.
Our lawyers can help you draft an exclusivity clause that is legal and consistent with what your business wants to achieve. We offer a Supply Agreement package where you can chat to our expert lawyers on the right steps for your business.
There are other ways you can manage your competition in the market, too. Our lawyers also offer packages for Non-Compete Agreements which restrict employees from working with your competitors and, if drafted correctly, can remain in effect even after they stop working for you.
If you would like to further discuss your options regarding exclusivity clauses or Supply Agreements, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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