Teaming up with others and forging great new relationships can help you achieve far more thaAs an “exclusive” distributor of a new product, you might think you have secured a great deal for your company and have the market all to yourself, only to find that this is not the case when you try to enforce the terms of the deal.
To be an “exclusive”, “sole” or “preferred” partner to your counterparty might seem to be pretty clear, but you may find that the actual terms of the deal do not reflect your expectations.
Unfortunately, the terms “exclusive”, “sole” or “preferred” do not have defined legal meanings and they won’t necessarily take precedence if there are conflicting arrangements in your contract. The courts will interpret these terms differently, depending on the context and the precise wording of the actual contract terms.
For example, the use of “sole” can mean that the business granting exclusive or sole status is not allowed to appoint another party to carry out the relevant activity. However, does this mean that having appointed you as “sole” distributor the business will be competing with you by carrying out the activity itself, or not?
Similarly, “preferred” partner may only mean that you have approved supplier or distributor status, and that you are just one amongst many “preferred” partners. It does not automatically mean that you are the only “preferred” partner and you will get the right of first refusal on every transaction. Unless you have negotiated the terms of the contract carefully, you may not get even the minimum volumes that you had anticipated.
Some typical interpretations:
- “Sole” may mean only that the business granting sole status cannot appoint a third party to carry out the relevant activity (but it can still engage in the activity itself).
- “Exclusive” can mean that the same as “sole” but, in addition, the business granting exclusivity is not allowed to engage in the relevant activity itself.
- “Preferred” usually only means a form of approved status. Don’t assume It should not be assumed that it confers a right of first refusal.
In all of these cases, the terms of the contract need to be carefully defined so that both parties have the same understanding and the position is clear.
Territory and Volumes
The other arrangements around your “exclusive”, “sole” or “preferred” partner status are also important – these include territory (geographical area), sales targets or minimum volumes, and time limits.
Some typical questions to consider:
- If you are a product manufacturer, do you want different distributors in different geographical areas? Will you allow one key distributor to have exclusivity in each area?
- Do you want to specify sales targets, so that if the distributor does not work hard enough and does not make sufficient sales, you can remove their “exclusive” status?
- As a distributor making sales, does the contract give you the level of exclusivity you need across a big enough territory or geographical area?
- Is there a time limit on the exclusivity which is too short to allow you to gain reasonable traction and market share?
- If you have to accept that the manufacturer is going to compete with you, then can you get their commitment to some minimum volumes that they will place through you?
Other issues to watch out for
Definitions of the products or services involved can be very important. Does the definition of products include new versions that might come along in the future? Will you still have “exclusivity” for those new versions?
Historical dealings between parties that were previously exclusive could mean that the same exclusivity status will be implied into the contract if an oral agreement is made for the relationship to continue.
With commercial or distribution agents, different jurisdictions around the world have different rules, and the applicable law in that jurisdiction may state that a commercial agent has automatic exclusivity.
With any form of exclusivity, there is a potential risk that competition is being inappropriately or unfairly restricted, and EU and UK competition law should always be considered. Where there are long-term commitments, or where parties have significant market share, or where parties are competitors, and there are exclusivity terms involved, then competition may be being restricted. The question whether such a restriction of competition may affect trade can be complex and depends on the circumstances of the particular case.
In conclusion, and where Devant’s advice can help
- Don’t rely on an implied meaning of “exclusive”, “sole” or “preferred” without expressly stating what they mean.
- Make sure that the activities which are either allowed or prohibited in the exclusivity scope are carefully defined.
- Think about sales targets – do you need them, and if so are the targets themselves appropriate and reasonable? What should happen to the exclusivity status if they are not met?
- Think about seeking minimum value or volume commitments, if the “exclusivity” is not as wide as you anticipated.
- Consider carefully the definitions of “Products”, “Services”, “Territory” and time limits – are they appropriate for the intended scope of exclusivity?
- Don’t forget to consider rules in different jurisdictions and competition law risks where appropriate.