What Is an Exclusivity Agreement?

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Businesses often partner with other companies to accomplish strategic objectives, and those relationships sometimes include an exclusivity agreement - that is, an agreement to deal with each other exclusively with respect to a particular aspect of their business. A famous exclusivity agreement exists between Apple and AT&T regarding the distribution of the iPhone. Closer to home, many real estate listing agreements give the agent the exclusive right to sell the listed property. Exclusivity agreements strengthen certain business relationships to the exclusion of others. Frequently a company that's strong in its sector will contract with a crucial part of its supply chain, or team up with a powerful player in another market, to create a dominant force. In any event, exclusivity agreements help rapacious capitalists play nice.

Definition of Exclusivity

An exclusivity agreement is a contract between two or more entities to deal only with each other regarding a specific area of business. It usually doesn't establish a formal relationship between two businesses beyond that created by the contract, but rather takes it to the next level of commitment. An exclusivity agreement can also exist between two people in regard to some business intercourse they will endeavor upon together.

Features of Exclusivity

The essential feature of an exclusivity agreement is the covenant to not engage in a particular business activity with other parties for a specified period of time. The agreement usually restricts only one of the parties. This typically occurs in vertical buyer/seller relationship where a buyer agrees to buy exclusively from the seller. Or a manufacturer could agree to ship its products through only a certain distributor. Less common is the bilateral agreement that puts conditions on both parties.

Types of Exclusivity

In addition to buyer/seller relationships, exclusivity agreements sometimes come into play during business acquisitions. Because there can be heated competition and competing bids for a company, an acquiring company that makes progress in negotiations can have its target sign an exclusivity agreement preventing it from entertaining other offers from competitors. Individuals may enter into an exclusivity agreement when they agree to list their house exclusively with a real estate agency.

Function of Exclusivity

Exclusivity agreements create stability in a business relationship, which in turn provides predictability. The ability to foresee future costs and project business relationships is crucial to operating a large company. An exclusivity agreement shuts out competition, which tends to let costs stabilize and allows for a confident and efficient allocation of noncapital resources.

Consequences of Exclusivity

Within an exclusivity agreement there may be other terms, such as confidentiality, access to relevant data and conditions for termination. Once two businesses get in bed together, they may become privy to information about each other that could be valuable to the competition. But, at the same time, a certain level of cooperation might be necessary to maximize the synergy of the two companies. The exclusivity agreement can be tailored to the needs of the moment as well as future inevitabilities. Sometimes the agreement can be broken at any time, but with a penalty. In other cases it might be periodically renegotiated, or terminated upon certain conditions.



About the Author

Joseph Nicholson is an independent analyst whose publishing achievements include a cover feature for "Futures Magazine" and a recurring column in the monthly newsletter of a private mint. He received a Bachelor of Arts in English from the University of Florida and is currently attending law school in San Francisco.