What Is an Exclusivity Agreement?

Commonly used in the business world, the term “exclusive” describes any arrangement whereby one party has the sole right to engage in a particular activity to the exclusion of everyone else. For example, a company might agree to buy widgets from a single supplier, and no one else, for a set amount of time. Exclusivity crops up in all sorts of situations, from supply and distribution agreements to commercial leases and business sales.

Exclusivity occurs when a party agrees to deal with another party, and only that party, for a certain activity and for a specified period. It essentially “locks out” the prospect of doing a deal with anyone else. Exclusivity is a common feature of many types of business transactions, such as:

• Supply agreements. For example, if Abbott Productions LLC agreed to buy stationery only from Costello Paper Inc. for a set amount of time, then Costello would be Abbott’s exclusive supplier.
• Distribution agreements. If Abbott Productions LLC appointed Costello Paper Inc. to be its sole distributor of stationery in respect of a particular territory or a particular customer group, then Costello would be Abbott’s exclusive distributor for that sector. 
• Business negotiations. If Abbott Productions LLC intended to sell its business to Costello Paper Inc. and needed time to negotiate the sale, then the parties could agree to negotiate exclusively with each other such that Abbott could not pursue an offer from another potential buyer during the agreed exclusivity period. 
• Commercial leases. In this case, the biggest and most attractive tenant in a shopping mall, known as the anchor tenant, might insist on a clause that gives it the exclusive right to sell certain goods from that location to prevent the landlord leasing a nearby unit to a competitor. 

An exclusivity agreement is a legal contract, or sometimes a clause in a larger contract, which lays out the terms and conditions of the exclusivity arrangement. The overriding purpose is to define the relationship between the two parties – who is supplying what product or service to whom – and to confirm that the parties are dealing only with each other to the exclusion of everyone else.

Exclusivity is rarely intended to last forever, and the agreement should always specify duration. This can be anything from a few weeks to several years. When the exclusivity period is up, the parties can seek relationships with other third-party partners or targets. Depending on the nature of the exclusivity, there may need to be provision for early termination if the relationship is not working out or negotiations are not going well. In other words, the parties can walk away.

Exclusivity can help businesses create a competitive advantage by limiting with whom their business partners work. For example, if Company X was selling handbags made by Company Y, then signing an exclusivity agreement would restrict Company Y from selling or promoting the handbags through any other channels. Company X could then develop a brand identity around those products and make them appear exclusive in the sense that customers could not get the handbags anywhere else. This adds to their perceived value; something which Company Y could exploit in the price tag.

With an exclusive distribution agreement in place, a business could improve its logistical efficiency. For instance, if a manufacturer’s products are being distributed exclusively by Distributor A, then the manufacturer only has to worry about one set of ordering, shipping and invoicing logistics.

For negotiation-based exclusivity, exclusivity agreements give the parties breathing space to get a deal together with less chance of a leak. It also establishes a concrete time frame for the deal, as both parties are incentivized to conclude negotiations before the exclusivity period ends.

Read More: JDA Agreements

Exclusivity prevents a party from dealing with anyone else, which means it cannot take advantage of other opportunities that might spring up during the exclusivity period. Businesses must have a firm view of the competitive landscape before entering into these types of arrangements.

The other drawback is inherent in the agreement itself – exclusivity agreements are legally binding contracts and violating them can come with some stiff fines and penalties. Legal advice is essential for anyone contemplating signing such an agreement.