K3 Insights

These arrangements might appear to be an essential tool for enhancing your business' prospects. However, in some instances, they could be unlawful. This note explores how best to walk the exclusivity tightrope.

What do These Clauses Look Like?

Exclusive dealing clauses are generally designed to protect a business’ interests by granting the contracting party exclusive rights to certain products, services, or business opportunities, usually in exchange for an obligation to source from only one supplier. Such exclusivity can be imposed for limited timeframes or for the duration of the contract.

Sounds Great! What’s the Catch?

Exclusive dealing clauses are unlawful where they have the effect of substantially lessening competition in the market in which the business operates.¹ Such conduct is considered anti-competitive and is prohibited, on the basis that it can distort markets and disadvantage consumers through higher prices, less choice, or reduced quality.

Key issues – What is the relevant market, and what is the strength of the position(s) of the relevant parties?

Anti-competitive conduct is strongly policed by the New Zealand Commerce Commission. Breaches are punishable by:

• For individuals, fines of up to $500,000 and (depending on the offence), up to seven years in prison.
• For companies, large fines (millions).

What should I look out for?

Exclusivity clauses are powerful tools in business-to-business contracts. However, care should be taken with their implementation to ensure they do not have the purpose, effect, or likely effect of substantially lessening competition.

Consider:

• Is the agreement or clause you are presenting, or that you have been presented with, likely to substantially disadvantage your competitors or harm consumers "in your market"?
• What is the likely effect? While impossible to be definitive without context, if your deal will have a 10% impact on the market, you should be concerned.
• Should some reasonable limitations be included to mitigate these effects, such as a geographical limit?

If you are faced with an agreement that fixes ultimate resale prices, divides or allocates markets, or restricts output, take pause, as these practices may unfairly impact consumer choice and ultimately be declared unlawful. If you’re unsure, reach out to one of our team for expert advice.

¹There are some exceptions – for example, individual restraints in employment agreements (although these come with their own minefields), and agreements between the seller and purchaser of a business to protect the goodwill of that business (e.g., a clause providing that the seller of a business will not compete in the same area for a certain period).