Why exclusive arrangements can boost outcomes – and when they risk breaking competition law
These arrangements might appear to be an essential tool for enhancing your business’ prospects. However, in some instances, they could be unlawful. This article explores how best to walk the exclusivity tightrope.
Exclusive dealing clauses are generally designed to protect a business’ interests by granting the contracting party the exclusive rights to supply certain products, services, or business opportunities, usually in exchange for enhanced or favourable customer terms and conditions. Such exclusivity can be imposed for limited timeframes, or for the duration of the contract (depending on the term).
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:
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:
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 & ultimately be declared unlawful. If you’re unsure, reach out to one of our team for expert advice.
This article was provided by K3 Legal
[1] There 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).
