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What Is An Exclusivity Clause
An exclusivity clause is a contractual provision where a contractual party agrees to refrain from doing business with a third party in relation to the object of the contract or for specific aspects.
In other words, an exclusivity clause is a contractual clause where a party agrees to “exclusively” deal with the other party on mutually agreed elements.
For example, an exclusive distributor is a distributor who has accepted to be the sole and only distributor for its client.
This means that the distributor cannot accept distribution offers or distribution contracts with any other client that may violate the exclusivity clause.
In some commercial situations, including exclusivity terms may be beneficial to the parties.
In the context of the purchase and sale of goods, the exclusivity provision provides the buyer reassurance that the seller will not sell the same goods to a third party or a competitor.
If the terms of an exclusivity agreement are violated, the non-breaching party may have the right to claim contractual penalties, claim damages, or file a lawsuit seeking an injunctive relief preventing the other party from doing business with a third party.
You can have the exclusivity language found in many different types of commercial contracts such as service agreements, supply agreements, franchise agreements, distribution agreements, or others.
Keep reading as I will tell you what are the main benefits and drawbacks of using exclusivity wording in your contracts.
Why Use An Exclusivity Clause
You would want to use an exclusivity clause to make sure that your business partner does not do business with third parties or specific entities.
In essence, the exclusivity protects you by prohibiting your contracting partner to do business with another.
For example, a phone manufacturer may want to exclusively deal with a specific phone service provider.
By limiting the number market exposure, the phone manufacturer is able to generate excitement for its phone products giving the ability to charge a premium.
As a result, the exclusivity clause not only allows your business partners to deal with you and not the competitors but it’s also an effective marketing tool to improve your bottom line.
Common Contracts Using Exclusivity Language
You can potentially find an exclusivity provision in any commercial contract.
However, there are certain types of contracts that tend to include an exclusivity provision more often than others.
Here are a few contracts where you may find an exclusivity contract clause:
- Supply contract
- Partnership agreement
- Employment contract
- Service contract
- Franchise agreement
- Procurement contract
- Distribution agreement
Benefits of Exclusivity Clause
There are a number of benefits to negotiating an exclusivity clause in your contract.
The first benefit is that you can limit your contracting partner’s ability to work with others thereby giving you a competitive advantage.
For example, a phone manufacturer may want to sign an exclusivity clause with a phone service provider to prevent the phone service provider to offer the competitor’s phone.
This can lead to a significant advantage for the phone manufacturer who is able to limit the competitor’s reach.
Typically, a party accepting to grant an exclusivity will charge a premium compensating it for the potential loss of business opportunities it could have had by doing business with only one client or partner.
Another important reason why it’s beneficial to have an exclusivity clause is that you’re able to control how your products and services are delivered to the market.
For example, a producer of luxury goods would not want any retailer to carry its merchandise.
As a result, the luxury goods manufacturer will enter into an exclusivity arrangement with designated retailers who can help preserve the brand’s image.
By limiting the number of places where a customer can buy your product, you can create a sense of exclusivity and desirability for your product.
Drawbacks of The Exclusivity Clause
Although there are benefits in incorporating exclusivity clauses in your contracts, you should be mindful of the potential drawbacks.
The first important drawback is that by requesting an exclusivity, you are potentially putting your contracting partner at a financial disadvantage.
Many businesses would not want to enter into a contract in such a way as to be barred from other business opportunities.
As a result, it’s generally very difficult to negotiate an exclusivity clause in your commercial contract unless there business transaction provides both parties with real and concrete advantages.
In most cases, your contracting party will probably refuse to sign exclusivity with you.
Another important drawback is that negotiating an exclusivity clause can lead to a more complicated contracting process.
If your contracting partner is open to negotiating an exclusivity clause, it will be very likely that the parties will implicate their contract attorneys to negotiate a provision that will suitably benefit both parties and avoid any potential pitfalls.
Exclusivity Clause Example
Let’s look at a few examples of exclusivity clauses to better illustrate the point.
One typical example where you’ll have companies negotiate an exclusivity is in commercial lease agreements.
When you have a shopping strip or office building with anchor tenants, the anchor tenant will demand exclusivity in such a way that the landlord does not offer commercial space to another tenant operating in a similar business as that of the anchor tenant.
For instance, if you have Walmart as the anchor tenant in a shopping center, Walmart will demand an exclusivity preventing the landlord from renting commercial space to Target or another competitor.
Another example of using an exclusivity clause is in service agreements.
Imagine that a company enters into a large software implementation contract with a software implementer.
The client will demand that the service provider act exclusively for the client during the implementation phase and for a certain period of time after.
The objective here is to prevent the service provider to enter into a contract with the client’s competitors preventing the possible “leaking” of the client’s confidential information, know-how, knowledge, and experience acquired by the service provider working for the client.
Breaking an Exclusivity Clause
What happens if you break an exclusivity clause?
The first question to ask is to assess whether the contract allows you to break the exclusivity.
In some cases, the parties can negotiate an “exit” option where one or both parties may put an end to the exclusivity in certain cases.
For example, the parties may sign an exclusivity engagement for a period of six months or twelve months after which it will lapse.
If your exclusivity is set to lapse, you may want to let the passing of time get you out of your exclusivity.
However, if you are bound in the exclusivity and you want out, your contract may provide for some penalties or liquidated damages for you to pay and get out of the contract.
Breach of An Exclusivity Clause
In some cases, the contract is firm and you have no legal path to break your exclusivity.
In that case, if you violate the terms of your contract, the other party may file a lawsuit against you, seek damages, and take injunctive relief measures against you.
Also, when you get out of your exclusivity, you should evaluate your post-termination obligations to ensure you comply with them.
In certain cases, you will be restricted to do business in a certain industry or with certain companies.
Be sure to carefully read the terms of your contract.
Exclusivity Clause FAQs
Let’s look at a few common questions related to exclusivity provisions.
Are exclusivity clauses legal?
Yes, exclusivity clauses are perfectly legal.
However, depending on the nature of the contract you are signing, you may have specific laws and statutes that may govern the exclusivity.
For example, exclusivity clauses in employment contracts will typically need to observe state laws where in some cases it may be illegal.
How do you negotiate exclusivity?
If you’re not sure how to negotiate your exclusivity, your best option is to consult with a commercial attorney.
In general, you’ll need to assess the pros and cons of entering into an exclusive engagement.
Are you adequately compensated for the exclusivity?
Are there important opportunities that you will miss out on?
How long is the exclusivity?
What are you prevented from doing?
Make sure you fully understand the terms of your “exclusivity clause”.
How long does the exclusivity provision last?
The duration of an exclusivity clause is really a function of your contract and the result of your negotiations.
In some cases, the exclusivity period may last only a few months whereas in other cases it may be for a number of years.
An anchor tenant signing a twenty-year commercial lease agreement will probably demand exclusivity for the entire commercial lease term.
On the other hand, a small service contract may have exclusivity for a few months only.
Exclusivity Provision Takeaways
So there you have it folks!
In a nutshell, exclusivity clauses are designed to prevent a contracting party from dealing with third parties in a certain business sector and for a certain period of time.
The main reason why they are used is to prevent your contracting partner to do business with your competitors.
Another reason why exclusive clauses are used is for a company to tightly control the distribution and market availability of its products and services.
This can lead to the potential of being able to charge a premium and to ensure that the commercialization channels through which the products and services are sold are qualified, competent, and boost the brand’s image.
Now that you know what an exclusivity clause is all about, why it’s used, and its pros and cons, good luck with your contract negotiation.
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