Exclusivity: think before you ink

POSTED BY Andrew Wallace
16 July 2013

posted in Consumer Law | Exclusive dealing

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A recent high-profile stoush involving two Australian retail giants and a fashion designer has shone the spotlight on exclusivity arrangements. Whatever it is you do, if you’re looking at entering into an arrangement under which you’ll do that on an exclusive basis for the other side, there are three things it’s critical for you to think through.

Let’s look at the showdown across the Tasman first. It involved department stores Myer and David Jones and fashion designer Kym Ellery. Ellery had signed a contract with Myer in which she agreed that she wouldn’t supply a clothing label to any other Australian retailer with 15 or more stores. Myer sued Ellery alleging that in supplying certain clothing to rival David Jones, she had breached her contract with Myer. Ellery’s position was that the contract didn’t prevent her from supplying the particular clothing to David Jones or, alternatively, that the restriction was unenforceable. After what was no doubt a very expensive exercise for all involved, the parties reached a confidential settlement, Ellery issued a public apology to Myer, and has been allowed to sell her labels to both Myer and David Jones.

So, what about those three critical things? You shouldn’t sign up to an exclusivity restriction unless you ensure that:

  • You get what’s fair in return. By agreeing to exclusivity you are giving up your ability to provide your products or services to other customers, and therefore other potential sources of revenue. Are you adequately compensated under the arrangement for what you’re giving up?
  • The scope of the restriction is appropriate, both in terms of its duration and geographic reach. Are there any products, services or regions that ought to be carved out, i.e. not be subject to the restriction?
  • You’ve got strong-enough "outs”, by making the exclusivity conditional on, for example, minimum quantities being bought or used by the person you’re entering into the contract with. This way, if the arrangement isn’t working out, you’ll have the right to terminate the contract outright or at least convert it to being on a non-exclusive basis so that you can go elsewhere.

Exclusivity arrangements can of course arise in many contexts. Another one is as part of the sale and purchase of a business. Often a potential buyer will want the seller to give it exclusivity while its due diligence investigations are completed. That is, essentially for the seller to agree that they won’t talk to any other potential buyers at the same time; this provides some protection to the buyer for the time and money they’ll be spending looking into the deal. Sellers should be asking themselves a number of questions including how long the exclusivity ought to apply for and, just as importantly, if they’re agreeable in concept to providing exclusivity, the right point in time at which to give it.

Exclusivity can be a valuable tool in whatever context it’s used, for both sides to a contract. As always, the important thing is to carefully think through what’s being proposed and its implications. As the Ellery situation shows, granting exclusivity can have significant commercial consequences, and parties that have the benefit of exclusivity arrangements will act quickly to protect them.

This article was first published in the Your Law column in the Sunday Star Times on 7 July 2013.

POSTED BY Andrew Wallace
16 July 2013

posted in Consumer LawExclusive dealing

VIEWED 4329 TIMES

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