Legal briefing | Commercial Law, Commercial & Technology, Competition, Supply of goods and/or services, Trading Law, Agency & distribution |

Exclusivity: some do's and don'ts

Overview

All too often, businesses believe that they have secured a valuable commitment to exclusivity – only to discover that, when they come to enforce it, the relevant contractual provisions aren't watertight. In this briefing, we look at how to avoid the most common pitfalls and ensure that your exclusivity provisions achieve your commercial objectives.

Who is allowed to do what?

It is often assumed that terms such as "exclusive", "sole" or "preferred supplier" have clearly understood legal meanings and will override any other, potentially conflicting wording. In practice, however, the courts can often interpret them differently, depending on the contractual context and the precise words used. The text box below outlines the most common interpretations. The key point is not to rely solely on these terms, but to spell out exactly what activities are intended to be permitted and/or prohibited.

For example, in Honeyrose Bakery v Lola's Kitchen (2015), Honeyrose was appointed to be Lola's "exclusive" supplier of cupcakes. But the agreement also contained a clear carve-out allowing Lola's to manufacture the products itself. The court therefore concluded that Lola's had not agreed to withdraw from this activity altogether. Honeyrose may have drawn undue comfort from the fact that the word "exclusive" was used – when in fact, its appointment might more accurately have been described as "sole" (see text box below).

Sole, exclusive, preferred: what's the difference?

  • "Sole" is usually understood to mean only that the business granting sole status cannot appoint a third party to carry out the relevant activity (but can still engage in the activity itself).
  • "Exclusive" is usually understood to mean that the same as "sole" but, in addition, the business granting exclusivity is prevented from engaging in the relevant activity itself.
  • "Preferred" usually only confers approved supplier/counterparty status. It should not be assumed that it confers a right of first refusal. If that is what is intended, it is best to say so expressly.

Overview

Minimum volume/value commitments

Even if Honeyrose had felt obliged to accept the carve-out, it could still have protected itself by negotiating a commitment from Lola's to purchase a minimum volume or value. Although this would have fallen short of full exclusivity, it could have provided meaningful protection against Lola's decision to self-supply. Unfortunately for Honeyrose, the agreement did not contain any enforceable minimum purchase commitment.

Watch out for definitions

The meaning of defined terms such as "Products", "Services" or "Territory" can be crucial in defining the scope of exclusivity and require careful review. A salutary example is Globe Motors v TRW Lucas Varity (2016), which concerned a long term exclusive purchasing agreement for electric motors used in power steering systems for cars. The customer, TRW, decided to use another supplier to provide motors for one of its newer steering systems. The Court of Appeal ruled that, despite the long term nature of the agreement, the definition of "Products" did not cover the next generation of motors, so TRW was free to buy elsewhere.

Competition law

An exclusivity clause which is 100% watertight from a contractual perspective can still be challenged if it infringes either EU or UK competition law (in which case the exclusivity will be unenforceable and in some cases, the parties may even be at risk of fines). The application of competition law to such clauses can be complex and requires a detailed analysis in each case.

However, concerns may arise in any of the following situations, where you should consider seeking further
advice:

  • The exclusivity is long term i.e. 5 years or more;
  • The parties are competitors;
  • The market share of one or both parties is above 30%;
  • An exclusive distributor is appointed for a territory within the EEA but the distributor is required to refuse unsolicited orders from outside the territory (i.e. the agreement includes a ban on so called "passive sales"); or
  • The exclusive agreement forms part of a network of similar agreements which, taken together, could have the effect of making it difficult for other businesses to enter the market. An example would be where an established supplier has signed exclusive supply contracts with a significant proportion of retail outlets, effectively "locking out" competitors seeking to distribute their products through the same channels.

Exclusivity do's and don'ts

  • Don't rely on terms such as "exclusive" or "sole" without spelling out what they mean.
  • Do expressly define the activities which are permitted or prohibited by the grant of exclusivity.
  • Do consider seeking minimum value or volume commitments, in case the scope of exclusivity is not as broad as you hoped.
  • Do look carefully at definitions of "Products", "Services" or "Territory" – are they broad enough to confer the scope of exclusivity you need?
  • Don't forget to consider competition law risks

Overview

Note: this briefing deals primarily with exclusivity in a supply or distribution context; different considerations may apply in other contexts such as M&A or certain types of financial services.

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