Exclusivity Agreements - Issues to Consider

Exclusive contracts are used as a means of monopolising various commercial arrangements to the exclusion of other third parties.

But all too often, there’s a failure to comprehend the impact exclusive arrangements may have on the parties. This includes a failure by the parties to consider the legal and commercial ramifications of the arrangements. 

Best practice is to always obtain formal legal advice prior to entering into an exclusivity agreement (various issues can arise including in relation to competition laws). But here’s our list of things you should also consider before going exclusive.

1. Long Term Contracts

If your contract is more than a year long, you need to have a long think about whether exclusivity is appropriate. Short term exclusivity arrangements may be helpful to your business. But for lengthy contracts of 3-5 years plus, you need to think very carefully about whether exclusivity is an appropriate course of action for your business. Where will your business be in that time? While you may be convinced that exclusivity is the right thing to do now, make sure you consider the issues below before you make a final decision.

2. Complex Organisational Structure

The more sophisticated and complex the corporation, the more likely it is that exclusivity will prove to be an issue later down the track. Big corporations change, bend and flex with time and businesses often change direction as they go. A decision you make today may be considered a very bad strategic decision in 5 years’ time.

3. Change of Management

While proponents within your organisation may decide that exclusivity is absolutely essential at this time, think about whether there’s anything driving this particular arrangement that is unique to this particular transaction. Management and leadership teams change. Assume that somewhere down the track, management may decide to exit the exclusive arrangement. What then, would be the implications?

4. Relationships Driven

Many contracts function well because of a good relationship between the parties. If that relationship changes, you may not want to be in an exclusive arrangement. Take for example, where the key client lead changes and there’s no longer the spirit of cooperation between the parties.

5. Change Of Policies or Procedures

People and organisations change their minds/strategic direction all the time. Sometimes corporate policies and procedures change with the result that the exclusive arrangement is considered bad for business. Assume you’ll probably want to change tact sooner rather than later while considering whether exclusivity is right for you.

6. Significant Exit Costs

Have a think about what the contractual exit costs are if you do decide to terminate an exclusivity agreement before the expiry of the agreed contract term.

This article does not constitute legal advice and is provided for general information only. If you have any queries, please contact Nadia Mansour at Elisian.

© Copyright 2016, Elisian Pty Ltd.


The 5 Most Common Contracting Mistakes

1. Not knowing who you're dealing with

Sounds obvious but most people just don't do this. Failing to undertake a basic due diligence is one of the most fundamental contracting mistakes. Who are you dealing with? What is the legal structure of the entity you're dealing with?

Often these questions are key to understanding who it is your contracting with and getting your contract documentation accurately described from the outset. Due diligence is important because it not only ensures you are dealing with the right contractual entity, you might also get an insight on your financial risk exposure if your due diligence raises anomalies.

2. Focusing on price and not skills & value adds

We all know that price and budget generally dictates contract awards. But, let's be clear. You get what you pay for.

Don't just focus on price, focus on the true capabilities and reputation of the service provider.

You don't hire staff without a CV, background checks and references. So do the same thing with your contractors.

Track records of completed projects and testimonials can help with this process but knowing which Key Personnel will provide the services can also be imperative if you're looking for specialised expertise. And understanding operational capabilities is also critical.

3. Unrealistic deliverables expectations

Most organizations fail to accurately scope their contract requirements before going to market. If you haven't done this, then expect pandemonium. If it's in your head (or someone else's head), but not articulated clearly on paper and not understood by your service provider, you've failed before you've begun.

Being realistic about what you want, the amount of time things will take and the proven skills of the service provider must be at the forefront of every contracting decision.

Most organisations rush this process only to suffer with months of delays later down the track because they failed to do the ground work.

4. The "my way or the highway" approach

Let's face it. No one likes to feel second best or like they're being ripped off. Most organisations protract contract negotiations by stomping their feet and insisting on their terms and their terms alone. This approach might have worked when you were 5 and wanted mummy and daddy to get you a new bicycle but in the real world it can only be described as unhelpful.

Take a conciliatory approach, have regard to your counterparty's concerns and comments and always work towards a mutually acceptable solution.

Having this positive approach only strengthens the spirit of cooperation between the parties.

5. Not showing the love

Ok, so maybe you don't need to get all loved up and cosy with your provider. But once you've got a contract you have to do the work to maintain that relationship. That means speaking regularly and meeting regularly to fine tune or sort any issues. If you nurture the business relationship, you'll be more likely to nip issues in the bud before they become significant issues that manifest into bigger problems.

Happy contracting!

Nadia Mansour