Exclusivity Agreements – advantages and risks

 What is an Exclusivity Agreement? An exclusivity agreement, also known as a lock-out agreement, is an agreement between parties which provides for certain restrictions on either or both for exclusivity in terms of  supply of goods, services or other dealings, sometimes for a stipulated time period,  to any other parties other than on the terms

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 What is an Exclusivity Agreement?

An exclusivity agreement, also known as a lock-out agreement, is an agreement between parties which provides for certain restrictions on either or both for exclusivity in terms of  supply of goods, services or other dealings, sometimes for a stipulated time period,  to any other parties other than on the terms of the agreement. Such agreements are also commonly used during periods of important or sensitive negotiation between parties who are considering entering into important business arrangements with each other. The agreement sets out covenants and restrictions for a party to not engage in a particular business activity with third parties for a specified period of time.

When to consider using an exclusivity agreement?

The obvious use of these Agreements is where there appears to be an opportunity to sell a product or service which is new or so attractive that preventing competition will secure a major advantage. From the other party’s perspective, they will want to ensure they have the right business partner and in all probability the most advantageous price, possibly at a premium, together with other advantages before allowing 1 person or entity to have exclusivity.

It can also be useful during business acquisitions by preventing the party from negotiating or entertaining bids from competitors. Such agreements, common in both commercial and property transactions, are also often referred to as lock out agreements.

Exclusivity agreements can be helpful and reassuring in many commercial contexts, including sales or distribution contracts or where a deal is too good to lose and where competitors are also interested. They are also useful where there will be significant outlay on planning or due diligence before an important and/or high value possible contract. another common use is with property transactions where the potential buyer wants to lock out other interested buyers. If you need advice about a property lock out or exclusivity agreement, my colleague James Swede is the person to contact.

What to include in an exclusivity agreement

It is also common for exclusivity agreements to contain terms such as confidentiality and termination. When entering into business relationships, a party may obtain and have access to highly confidential information and sensitive data which is valuable to competitors and consequently, a well drafted agreement should incorporate both the immediate and future needs of all the parties and to maximise business synergy.

Where parties enter into a long term exclusive arrangement it is worthwhile ensuring that the agreement makes provision for ongoing review and possible amendment so as to reflect  business needs.

Consider all aspects before committing

A party can no longer consider other opportunities once they have signed an exclusivity agreement and, therefore, careful consideration should be given to the possible downside as well as upside of such agreements and, as stated above, to possibly ensure some appropriate caveats or break opportunities are included. There is always a risk that the business venture may not succeed but a party would be tied to the exclusivity arrangement in the absence of appropriate negotiation and consideration of all the implications before entering into the agreement.

dserota-sbI have advised on numerous exclusivity agreements and provide a cost effective, practical approach. Please get in touch to discuss your requirements or for a free initial meeting.

commercial law • Debbie Serota

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