Exclusivity Clause

Written by: David Curle

4 minute read

What is an Exclusivity Clause?

An exclusivity clause grants exclusive distribution rights, exclusive licenses and other exclusive rights. It can also be an obligation to purchase all of a party’s requirements for a product or service from the other party and prohibitions against selling products or services to competitors. Exclusivity clauses can appear in service, supply, distribution and intellectual property agreements.

Parties engage in exclusivity agreements for various reasons, but they often are in place to protect both parties. They can protect sellers by ensuring that buyers won’t opt out and purchase from another seller, and they can benefit the buyer by ensuring that the seller can’t make the goods available to other buyers, who might compete with the buyer.

Another common example of an exclusivity agreement is in commercial leases in shopping centers. Commercial landlords often offer a tenant the exclusive right to sell certain types of goods.

Why Do Exclusivity Clauses Matter?

The exclusivity clauses in an organization’s contracts can have a big impact on the overall value of the enterprise. A buyer considering purchasing a shopping center, for example, will want to look at all the underlying leases in order to understand exactly what limitations they put on the ability to attract various types of businesses as tenants.

Exclusivity clauses are often not carefully drafted. Determining the exact scope of an exclusivity can be difficult if terms like “sole,” “exclusive,” and “preferred” are not well defined. A contract review to extract and analyze exclusivity clauses will expose those risks.

How Do You Review Exclusivity Clauses in Contracts?

After locating all exclusivity language in each agreement, key pieces of information to focus on when reviewing exclusivity provisions include:

  1. Scope. As mentioned above, determining the exact scope of an exclusivity can be difficult if certain terms are not well defined. Additionally, having a clear understanding of which product(s) and/or activity(ies) are covered by the exclusivity provision helps the parties ensure compliance with applicable exclusivity provisions.
  2. Territory. Many exclusivity provisions provide for a defined territory in which exclusivity obligations or rights apply. It is important to understand what the defined territory is, so that a party’s actions do not result in a breach of the exclusivity provision.
  3. Carve-outs. Exceptions to the exclusivity clause are important to note. As seen in the second example below, these carve-outs provide the obligated party with some flexibility that may be needed, if, for example, the parties agree that certain products may be self-sourced, or sourced by other suppliers.
  4. Exclusivity Period. The length of time during which exclusivity obligations are in force should be defined. Accordingly, start and end dates are key details to understand if an exclusivity provision is included in an agreement.

As with the review of any contractual provision, it’s also important to be aware of other provisions in the agreement that may affect the interpretation and operation of exclusivity provisions. Such other provisions (like minimum volume/value commitments) may provide suppliers with some protection in the event that carve-outs render an exclusivity provision toothless.

Examples of Exclusivity Clauses

Example 1

  1. EXCLUSIVITY 26.1 Seller covenants and agrees that during the Term hereof it shall not produce, manufacture, distribute, sell or otherwise supply beverages, either directly or indirectly, that compete, either directly or indirectly, with the production, manufacture, distribution or sale of carbonated and noncarbonated beverages, isotonic beverages or fruit beverages of Buyer, its division, subsidiaries or affiliates.

Example 2

CUSTOMER shall exclusively use and sell the Products at the XYZ; provided, however, that CUSTOMER shall be permitted, during the term hereof, and in its sole discretion, to purchase any or all oil and air filters from a foreign (non-domestic) supply source.

Example 3

2.1 Appointment. ABC hereby appoints XYZ as its exclusive, worldwide distributor for the sale, purchase and resale of the Products into the Lubricating Grease Market in the Territory subject to the terms and conditions of this Agreement. XYZ accepts the appointment and agrees to purchase the Products from ABC under the terms and conditions of this Agreement.

Example 4

ABC owns exclusive rights to manufacture and commercialise the YYY ® Test and related products and consumables. (B) ABC and XYZ wish to enter into an agreement to appoint XYZ to Promote and Distribute the Product in the Territory on an exclusive basis, all on the terms of this Agreement.

Example 5

Your company’s designation as our exclusive distributor of the Products to the Customers will be for a period of one (1) year.

Example 6

ABC hereby grants to Licensor a fully paid, worldwide, exclusive (even as to ABC) sublicense under the Licensed