Contracts help create legal relationships between different parties. Businesses use contracts to outline arrangements and hold their partners accountable. A contract that you might require for your business is an exclusive supply contract. This article will explain what an exclusive supply contract in NZ is and outline its benefits.
What is an Exclusive Supply Contract?
An exclusive supply contract is a commercial contract in which one party agrees to supply the other with a particular product or service. The term exclusive implies that the supplier can only supply to certain individuals or entities, while the receiver may also have limitations on who they can receive goods and services from.
How Do I Define Exclusivity?
In exclusive supply agreements, the term ‘exclusivity’ can be considered in various contexts. Exclusive supply agreements may include exclusivity provisions that limit the supplier’s ability to provide goods or services in various ways.
Location
In an exclusive supply contract, you may only be able to supply to one party in a specific area. For example, suppose you are a retailer. You may, via an exclusive supply contract, mandate that you are the only retailer that can receive goods from a particular supplier in that area. Retailers do this in order to have the exclusive right to sell a product. This means that customers in that particular area will only be able to buy the product from your store.
Product
In exclusive supply contracts, the supplier may also grant the exclusive right to sell a particular product to one specific retailer. The difference between location exclusivity and product exclusivity is that with product exclusivity, the retailer may be able to sell the product at any location throughout the country; however, they will be the only retailer that stocks and sells that particular product or brand.
Selling Method
The party selling the products in an exclusive supply contract may restrict how the products are sold by the party receiving them. If you are a retailer, this may impact the way and means you use to sell the particular product. For example, if you are a supplier, you could restrict the retailer from selling your product online. You, as the supplier, may elect to do this in order to make your product appeal to a particular market. For example, you may want your product presented in a particular manner in a brick-and-mortar store.
Continue reading this article below the formRestrictions on Exclusive Supply Contracts
Certain restrictions may stop a business from entering into an exclusive dealing contract. If your business has substantial market power and it takes advantage of that power for an anti-competitive purpose, then the courts may find this activity illegal.
When a business is not constrained by competition, it possesses substantial market power. This means that a business must keep prices higher than a competitive level for a sustained period of time. If a business is able to keep prices higher than a competitive level, then it indicates that there is little competition in the market.
To determine if a business has utilised its significant market power, we must answer whether the business would have acted similarly without having that power.
Any of the following defines an anti-competitive purpose:
- to restrict the entry of another business into any market;
- to prevent or deter a business from being able to compete effectively; and
- to eliminate a business from any market.
Consequently, businesses should not enter into an exclusive supply contract and take advantage of their substantial market power for an anti-competitive purpose. If your business does this, the exclusive supply contract you entered into will likely be considered illegal.
To protect your business, ensure supplier contracts meet your business’ needs. Our free Commercial Contracts Checklist will help.
Key Takeaways
A contract is a legally binding document which creates a relationship between two parties and outlines the obligations of both parties to the contract. Both parties have to fulfil their contractual obligations, or the contract may be deemed breached by either party. Businesses often utilise an exclusive supply contract in their dealings.
This contract restricts a business from doing something. Exclusive supply contracts can limit a supplier’s or retailer’s ability to sell a product to other parties. In some cases, these contracts may be considered anti-competitive if they are used to exploit market power. This is illegal, and the Commerce Commission could bring a company to court for breaching the relevant laws and regulations.
If you need any legal assistance with commercial contracts, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
Exclusive can mean that your business restricts a supplier from selling to other businesses in a particular area or stops the supplier from selling their product to any other business. Exclusive could also mean that your business is restricted in terms of how it sells the product.
They can be legal when your business is not using the contract to take advantage of its substantial market power.
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