An Exclusivity Contract, also known as exclusive agreement or contract, is a binding legal document that restricts the signatories from buying, selling or promoting goods or services of another company or individual. In simpler terms, the company or individual works just for the organization that issues the contract. It helps to boost the contract issuer’s brand and gives it a competitive edge.
Purpose of Exclusivity Contract
The purpose of exclusivity contract is to protect both parties. Without the contract, the buyer of the service or product can always opt not to sell or promote the business partner’s service or products, and this would make it more difficult for the business partner to succeed in a highly competitive marketplace. On the other hand, the buyer ensures that the service or product is not available with any other entity in the market, so interested customers will always approach the buyer for the product or service.
When Do You Need Exclusivity Contract
You need exclusivity contract when both signing parties do not want each other to deal with other entities or individuals. It is used as a way to create a competitive advantage for both parties in a highly volatile and competitive marketplace. You should use this contract only if you are interested in being the exclusive supplier of products or services.
Inclusions in Exclusivity Contract
Some of the inclusions in exclusivity contract are:
- The duration that the exclusivity will stay in effect
- The geographical region where the exclusivity will be used
- Recitals and clauses to define the behavior of each party during the tenure of the contract
- A list of the product or service that will be exclusively sold and bought by the parties
- Cost of buying and selling the product or service
- Conditions for termination of the contract
- Penalties and fines should one party violate the terms of the contract
- Redressal methods in case of disputes
How to Draft Exclusivity Contract
When drafting an exclusivity contract for the first time, you can create an exclusivity agreement template that you can use for future contracts.
- State the names and addresses of the parties
- Mention the agreement creation date
- State that the parties are entering the agreement on free will
- Outline the agreed terms of the contract
- State which party will provide the goods or services
- The seller should not be allowed to sell, promote or solicit products or services from other parties
- The buyer is not allowed to buy product or services from another supplier
- List the goods and services
- Mention the selling price of all
- State the payment terms
- Highlight the quality standards and what happens if quality is unacceptable
- Warranty if any
- Entity responsible for the taxes on the products
- Termination of contract
Pros and Cons of Exclusivity Contract
Exclusivity contract has advantages and disadvantages that you should know before entering into the agreement.
Some pros are:
- Increased income for seller and buyer
- Seller enjoys more brand loyalty
- Can create excitement about launch of each new product
- Can leave behind the competition
- Be an exclusive provider to your target audience
Some of the cons of the contract are:
- Can cause the seller and buyer to lose other more lucrative business opportunities
- Does not provide flexibility
- Financial strain as the parties cannot benefit from other partnerships
Types of Exclusivity Contract
Many people associate exclusivity contract with the business world. However, this agreement can extend to other areas as well. Here are some of the different types of exclusivity agreement contract:
- Purchase and Sales Exclusivity Contract: It is the most common type of exclusive contract that involves buying and selling goods in a specific geographical region.
- Exclusive Service Contract: An exclusivity agreement for services allows just one party to provide the necessary services that a client requires in lieu of remuneration.
- Representation Agreement: It is mainly used between artists, athletes and celebrities and their agents. The agent will have a sample exclusive agreement that they tweak to suit the arrangement they have with their clients for their representation
- Publishing Contracts: It is between the author and book publishing house where the latter has exclusive publication rights to the creative work of the author, who retains the copyrights.
Key Terms/Clauses in Exclusivity Contract
Some of the key terms of exclusivity contract are as follows:
- Exclusivity: The terms and conditions of the exclusivity along with the start and end date
- Items: The items or goods that are part of the contract
- Resell Price: The selling price of the products or goods by the client or buyer
- Quality Standards: The expected standard of the products or services
- Payment: This section highlights the payment, taxes, discounts and any other monies that exchange hands between the two parties
- Termination of Exclusivity: Circumstances leading to termination of the contract and the penalties and fines for violating the agreement
What Happens When You Violate Exclusivity Contract
If you violate the exclusivity contract, the penalties would be as per the contract. The other party can terminate the contract or legally sue you. Legal action could limit your business activities as the other party could get an injunction to stop you from doing business with a competitor. Hence, it is best to get access to an exclusivity agreement sample to find out more about the terms and conditions imposed on both parties and possible penalties before signing such a contract.
Exclusivity contract can give both the buyer and supplier a competitive advantage. However, it is essential to understand the implications of getting into such a contract. You can learn more about the agreement by downloading a sample exclusivity agreement here.