Wednesday, May 16, 2012

Exclusivity Clauses

In LinkedIn there was a question about whether a contract that had a defined term also needed to have a specific term for an exclusivity requirement for it to be enforceable. The answer to that is the parties may, but are not required to establish a specific term for the exclusivity. Exclusivity terms are the same as requirements contracts where the requirement is to purchase one hundred percent (100%) of the demand from the supplier. Without a specific period the exclusivity commitment would end when the contract expired. If the exclusivity term was specified to survive the expiration of the agreement, it would most likely be considered unconscionable, and may not be enforced by the court. It would be forcing the buyer to continue to purchase from the supplier without any agreed terms or at any terms the Supplier elected to sell under.

Normally exclusivity requirements may be for a shorter period than the contract term. Whether the parties to the contract would agree to a shorter term for exclusivity would really be dependent upon several things. Exclusivity may be required because one or both of the parties made an investment that they need to recover. In that case in considering a shorter period the question would be what did the parties in the relationship invest and at what point in time or volume will they have that investment fully liquidated?

Exclusivity may also be desired for a competitive advantage where a buyer may want to restrict the supplier’s sales to competitors. In that case from a supplier’s perspective they would want to consider what value they potentially gave up to get that restriction and how long they want the buyer’s commitment to compensate them for that value they gave up. The buyer will consider how long they
will really get a competitive advantage from the exclusivity and will then want to be free to source wherever its best for them. Exclusivity clauses for competitive advantages usually are shorter in duration than exclusivity clauses used to protect investments.

In a separate post “Requirements Contracts” I describe conditions a buyer should include in their agreement that make the requirements commitment conditional upon performance and on-going competitiveness. Those same conditions should also be applied for any exclusivity commitment
Where the supplier is requiring the buyer to purchase 100% of their needs from them.

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