As a business, you’re likely to be dealing with a number of people as part of your operations. However, in such a competitive market, you may wish to ensure that the business you’re working with is only engaging you.
This way, you can minimise competition for your business.
This is known as exclusive dealing and it walks a very fine line. On one hand, it can be a business savvy agreement and on the other, it can be an illegal way of unfairly reducing competition in the market.
It’s important to understand the legal implications of exclusive dealing so you can make it work for you rather than against you.
What Is Exclusive Dealing?
Exclusive dealing is when one party to a contract places restrictions on the other party regarding who else they can trade with and where. Generally, this restriction lasts for the duration of their contract and is used to ensure that other businesses in the same industry don’t start doing the same thing.
For example, a furniture company may order a particular type of wood and are the only ones in their locality that sell it. As a result, they might have an exclusive agreement with their supplier where they are the only furniture store in their locality the supplier is able to sell to.
Exclusive Dealing And Competition Law
There are multiple ways to conduct exclusive dealing and normally, they are all considered legal practices. However, if you are considering partaking in an exclusivity agreement, then it’s important that you are aware of your obligations under competition law.
What The ACCC Says About Exclusive Dealing
The Australian Competition and Consumer Commission (ACCC) oversees fair practices in the market. The ACCC is fine with exclusivity agreements, however, they are deemed to be illegal if a consequence of the agreement is lessening competition in the market.
Therefore, the agreement must have the purpose of actually protecting the business’ interests and have some kind of benefit for both parties involved. In other words, everything is fine as long as the agreement does not unfairly impact the competition in the market.
Vera is the owner of a seafood restaurant. Her business prides itself on having freshly caught seafood cooked at the restaurant daily. Vera’s supplier is Jack, who provides the fresh food to her each day.
Wanting to cement her business relationship with Jack, Vera decides to have a Supply Agreement between them that contains an exclusivity clause. The clause determines that Jack cannot provide seafood to anyone other than Vera.
This clause will likely be considered a breach of the ACCC regulations as it not only unfairly impacts Jack’s ability to do more business, but it can also prevent others from buying Jack’s fresh produce.
Rather, Vera’s exclusivity clause with Jack should state that Jack cannot supply seafood to any other competing seafood restaurant within 10km of Vera’s business.
In return, Vera can agree to only buy fresh produce from Jack for the duration of their contract.
Do I Need An Exclusivity Clause?
If you intend on having an exclusivity agreement with a party, then it’s important to have it written down as a clause in your contract. The most common is an Exclusivity Clause in a Supply Agreement.
Having exclusivity preferences in writing will ensure that any disputes or issues later down the track can follow a smooth process.
Even though verbal agreements are technically still legally binding, they are much harder to enforce when there is no written evidence of what was agreed upon. Exclusivity clauses can be tricky as one wrong misstep can be a breach of the ACL.
So, it’s always important to seek the help of a legal professional when drafting your business; contracts.
Is An Exclusivity Clause The Same As An Exclusion Clause?
No, exclusivity clauses and exclusion clauses are completely different (even though the names can get mixed up sometimes!).
Exclusion causes have to do with liability, whereas exclusivity clauses are more about security and competition.
Exclusion clauses are written to manage the amount of legal responsibility a business has regarding particular incidents. For example, businesses often insert exclusion of liability clauses in contracts with customers if the service they are providing involves a high level of risk.
How Else Can I Manage Competition?
There are other ways to manage competition that don’t involve exclusive dealing. Depending on what your main concerns are, there are a few other legal documents that can protect you from any unfairness that can arise from competition in the market.
A Non-Disclosure Agreement (NDA) is essentially a secrecy agreement. It prevents the other party from revealing or talking about your business’ inside information to an unauthorised third party.
This way, you can maintain the much needed confidentiality to run your business and manage competition.
Let’s say you’re telling a manufacturer the method for bringing your designs to life. You may have them sign an NDA so they cannot reveal that information to anyone else.
A Non-Compete Clause is another way to address the potential competition.
A Non-Compete Clause prevents a party that has or formerly had interest in your business (like an employee or a supplier) from working or associating with a business that is in competition with yours for a certain period of time.
For example, if any employee decides to resign and take another job, their employment contract with your business may have a Non-Compete Clause that prevents them from working with a competitor for the next 2 years.
Exclusive dealing can be beneficial for your business, but it’s important not to draft your exclusivity clause in a way that is unfair to the competition in the market. You don’t want the ACCC to interpret your clause as unfair as this could work against your business.
To summarise what we’ve discussed:
- Exclusive dealing is where one party prevents another from certain interactions during the contract
- Exclusive dealing is legal, however, according to the ACCC it must not reduce competition in the market
- If you’re thinking of dealing exclusively, make sure you have an exclusivity clause drafted (this is different from an exclusion clause)
- Other ways to manage competition include getting NDAs or Non-Compete Clauses in place
If you would like a consultation on exclusive dealing, you can reach us at 1800 730 617 or email@example.com for a free, no-obligations chat.
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