It’s very common when sitting to the table to negotiate a service, supply or distribution contract, between a Startup and a big company, that the latter requires to include in the agreement provisions referring to exclusivity in the sale, service or distribution from the Startup.
It may occur in these cases that the Startup, hypnotized by the possible benefits of the agreement for the business and convinced that he must close the deal as son as possible before losing the chance, makes concessions of exclusivity that in the long run can turn out to be much more costly.
So is always necessary to be properly prepared on all the aspects of the agreement before sitting at the negotiation table. Regarding exclusivity, some concepts to consider are the following:
Reciprocity or Bilateral Nature of the Clause: In every process of negotiation the parties are expected to make some compromises. If for one party on the negotiation the exclusivity is a relevant subject at the time to close the deal, it should be willing to give something in exchange for it. On the other hand, exclusivity implies (opportunity) costs for the party that is obliged to grant it, so it should be entitled to ask for a corresponding compensation.
On some cases the parties will mutually offer exclusivity considering future possible businesses. In some other cases a party can offer the other one a prize, over the value of the agreement, for the exclusivity granted. This type of provision are generally accompanied with the obligation of reimburse the integrity of the prize in case of a breach on the exclusivity provision (not considering the possible damages that the breach may produce).
Exceptionality of the Clause: Exclusivity, as a rule, is not presumed. That is to say, that it always should be expressly agreed in the contract to be enforceable by the interested party.
However there are some cases where the exclusivity is absolutely justified due to the type of relation the contract is generating. One matter where this is very common is the selling of knowledge or know-how, where the buying party is acting in the belief that is getting and edge over his competitors, so is very common for this type of contracts to grant very strong exclusivity provisions.
Determination of the scope of the Clause: As relevant as the other concepts is to have in mind that is necessary to limit the field of action of the exclusivity provision, because if it is agreed without limitations, the opportunity costs will be huge.
The most common criteria used to limit the scope of action of exclusivity are time (term) and space (geographic zone). Some other criteria that can be used are the industry, a specific client segment or a line of products. In some cases exclusivity merely states the prohibition to hire with some companies or with direct competition.
It seems pertinent to expose how exclusivity provisions or agreements may affect the market in general from the point of view of Antitrust. In this sense, the National Economic Prosecutor has ruled on several occasions stating that: exclusivity only attempts against Antitrust when it prevents the competitors of the contracting party (who request or require exclusivity) the ability to compete in the market.
For example, the case where there is only one company who sell or distribute any specific and necessary compound or technology for a productive process. If the bigger buyer demands exclusivity from the seller, it will leave the competitors unable to access this compound or technology, artificially distorting the market.
On a future post we will address the topic of exclusivity in relation to the labor contract.
Santiago Henriquez C., Lawyer
Picture: Caitlin Wynne (CC0)