Exclusivity agreements limit a person's ability to engage in commercial activities, in return for some other benefit. You need to take great care when agreeing to enter into an exclusivity agreement because they have serious implications for your ability to earn money. If an exclusivity agreement is written correctly, it has the potential to create new opportunities for you and your business.
Author: Farrah Motley, an Australian business lawyer and Legal Principal of Prosper Law.
What is an Exclusivity Agreement?
An exclusivity agreement is a serious document and involves one or more parties agreeing to limit their business activities with other people in return for a benefit from the other party.
Think of it like a marriage (yes, it's really that serious!).
An exclusivity agreement can arise in the context of:
sale of goods
The effect of an exclusivity agreement depends on how it is worded.
Below is an example of an exclusivity clause for the submission of a tender for a construction project:
Party A and Party B each warrant to the other that they will to deal exclusively with one another for the purpose of submitting a Tender for the Project.
If the Tender is successful, Party A and Party B must negotiate in good faith to attempt to agree to the terms of a contract for the delivery of the Project.
If the Tender is not successful, this exclusivity arrangement will automatically expire upon receipt of written notice from the Principal confirming that the Tender has not been won by the parties.
Either party may terminate this exclusivity arrangement in the event that:
(a) the other party breaches a material term of this exclusivity agreement; or
(b) the parties are unable (having used their best endeavours to agree to the terms of a contract) to reach agreement for the delivery of the Project.
Below is an example of an exclusivity clause in a memorandum of understanding:
Party A and B agree that they will not engage in any commercial activities with a competitor of the other Party, without the written consent of the other Party.
Below is an example of an exclusivity clause which might be found an a non-disclosure agreement or confidentiality agreement:
Party A agrees not to disclose any confidential information received from Party B for any reason whatsoever, and must ensure that it works exclusively with Party B in relation to the subject matter of the confidential information.
Let's take a look at how the wording of an exclusivity agreement can create or limit opportunities for businesses and individuals.
How Exclusivity Agreements can Create and Limit Opportunities
Exclusivity agreements can limit the other party's ability to deal with your competitors
Limiting a party's ability to deal with and choose your competitor over you is a very enticing promise in exchange for entering into an exclusivity agreement.
Where this commonly arises is in the context of bid teams, consortiums and joint ventures for tender submissions and bids. A team of two or more parties will commit and jointly invest in a tender submission, in the hope that the team will win the bid and pool their resources together to deliver what was promised.
However, the terms of the exclusivity agreement can sometimes be forgotten about when the project is one and another contract takes its place and overrides the exclusivity agreement. If one of the parties has the ability to terminate the contract or reduce the scope during the delivery phase, the terms of the exclusivity agreement were ineffective.
The risk of a party approaching your competitor is more likely to arise during the delivery phase, not the tender phase. Because of this, it's important to make sure that the key terms of the exclusivity agreement find their way into the main contract.
Exclusivity agreements can create certainty of supply
Whether it's good or services, an appropriately worded exclusivity agreement can give one or more of the parties comfort that they will receive a supply. This can reduce procurement costs and create efficiencies by having one (or a main) supplier.
Alternatively, if the goods and/or services are needed at short notice or at a particular point in time, the exclusivity agreement can be worded so as to anticipate and deal with this requirement.
Exclusivity agreements can create certainty of income
Exclusivity agreements have the potential to give one or both parties comfort that they will receive revenue or income. They have the potential because if they are not worded fairly, one party may be committing to only supply goods or services to the other party, and limiting their customer base, without any guarantee that the other party will buy.
If there is no guarantee that a party will buy goods or services, you need to make sure that you or your business have the ability to terminate the exclusivity agreement. If you don't have a right to terminate the agreement, you or your business could suffer significant detriment by limiting income-producing opportunities in exchange for an empty commitment.
Exclusivity Agreements can be Illegal
Some Australian laws prohibit the use of exclusivity agreements in certain situations. For example, the Competition and Consumer Act 2010 (Cth) makes it unlawful for one person trading with another to impose some restrictions on the other's freedom to choose with whom, in what, or where they deal. Exclusive dealing is defined in s 47 of the Competition and Consumer Act 2010 (Cth) and is against the law only when it substantially lessens competition.
The case of ACCC v Oakmoore has resulted in the highest penalty ever imposed on an individual person for breaching the prohibition on exclusive dealing. It was also the first instance where the Court imposed a penalty on a company for being “knowingly concerned” in a contravention of the exclusive dealing provisions in the Competition and Consumer Act 2010 (Cth).
Need to speak to a commercial lawyer?
Prosper Law can help you with your exclusivity agreement or adding an exclusivity clause into a contract. Contact us today for a fixed-fee, no obligation quote.
Want to read more? Check out The Ultimate Legal Guide to Building Information Modelling.
Author: Farrah Motley | Legal Principal
PROSPER LAW - A Commercial Law Firm for Businesses
M: 0422 721 121