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.

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