Exclusivity clauses: What are they and issues to consider before signing one

By Sinead O’Brien.

An exclusivity clause is a restriction within a contract which prevents a party from entering into an arrangement with a third party.

An example would be somebody selling their home giving exclusive rights of sale to one estate agent preventing the instruction of other estate agents to sell the same property. Another example would be a drinks company such as Pepsi stipulating exclusive distribution with a vendor which would prevent them stocking Coca-Cola.

In PR and marketing, exclusivity clauses are often included in client contracts to prevent an agency working with a client’s key competitors.

If you are being asked to sign an exclusivity agreement (or to agree to such a clause which is buried in a lengthy contract) the first question you should be asking is whether this is something that you really want to agree? Does the exclusivity meet your commercial objectives?

For the party committing to the exclusivity it may not be beneficial to exclusively restrict services to only one client which could mean other business opportunities have to be turned away. Ask yourself, would you be losing out on better and more profitable opportunities by accepting the exclusivity restriction? If yes, can you negotiate for increased remuneration or other compensation as the ‘price’ to agree to the restriction?

Alternatively, for the party who is giving the benefit of exclusivity, is it sensible to do so? In the estate agent example, would the chances of finding a buyer be greatly increased by using more than one agent?

In PR and marketing, would the party obtaining the benefit of exclusivity be overpaying an agency for services which could be provided on a non-exclusive basis without much difference to that party?

If you unwittingly breach an exclusivity clause, this could lead to a contractual dispute which could result in Court proceedings to claim monetary relief by way of damages and/or an injunction to prevent a party from further breaching an exclusivity clause – all of which might lead to unwanted legal costs.

So, how can you avoid this? Should the terms of exclusivity be uncertain then the clause is more likely to be unenforceable. You should therefore carefully consider the following factors before agreeing to (or seeking) an exclusivity provision:

1 Activity:

The exclusivity of the activity in question should be expressly defined i.e. set out exactly what is and/or what is not permitted. For example, does the exclusivity apply to all services provided for under the contract or just an aspect of the service? In this regard, try to avoid sweeping statements of exclusivity as, subject to pre-contract negotiations, this might provide that the clause is more likely to be unenforceable. It would be better to say that an agent is prevented from providing PR and marketing to a third party in a specified location as opposed to being prevented from providing all services to any third party.

2 Territory:

The scope of the exclusivity should also be limited in terms of applicable territory. This could be that the exclusivity only applies to a specified town or city or, alternatively, it could be as wide as being applicable to a particular country or continent. For example, a London PR agency specialising in the legal sector might be happy to agree an exclusivity clause with a law firm based in an overseas jurisdiction, such as Brussels, but not for a law firm based in the capital which may severely curtail pipeline.

3 Duration:

The exclusivity of the activity should be for a specified duration. Best practice would be to enter into a term of exclusivity that would not be considered excessive otherwise it may be unenforceable. What would be a reasonable period will depend on the circumstances of each case but it would usually be for the term of the contract.

4 Terminology:

It may be that the clause does not use the word ‘exclusive’ and instead uses a similar alternative word such as the word ‘sole’. There is no clear cut legal definition to these terms so these need to be defined or elaborated on in the contract itself as to what is meant by their use. Essentially, the more specific you can be with what you want to achieve the better!

5 Anti-competitive:

Consider whether the clause itself is likely to be anti-competitive. This consideration is largely applicable to larger entities with market dominance, but the point is that an otherwise adequately drafted exclusivity clause may yet be unenforceable if it breaches competition law.

As always, carefully read a contract before entering into it and watch out for what could be an unwanted exclusivity clause!

Sinead O’Brien is an associate in the dispute resolution team at Goodman Derrick LLP.

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