There can be different types of supply contracts depending on the arrangement between the supplier and purchaser. A supplier is a party who supplies goods to another party, who is the purchaser. Suppliers and purchasers may want the arrangement to be exclusive, and decide to enter an exclusive supply contract. This can include:
- the supplier being restricted to supplying the goods in a specific geographical area, or through a particular channel, for example, online only; or
- restricting a purchaser from buying the same or similar goods from other suppliers.
Suppliers and purchasers need to be aware of the Competition and Consumer Act 2010 (the Act). This legislation outlines that certain exclusive dealings can be in breach of the law. This article will explore the different types of exclusive arrangements and exclusive dealings under the Act.
What Is a Supply Contract?
A supply contract involves the sale of goods from the supplier to the purchaser. Some typical examples include:
- a supplier providing tools to a tool shop; or
- a supplier providing clothes to an online fashion retailer.
What Is Exclusivity?
As a purchaser, you may want to ensure the supplier is restricted to supplying the specific goods you are purchasing exclusively to you in your geographical area and not to other purchasers in the same area. You might not want other businesses competing with you to sell the same goods in your area. The opposite would be a non-exclusive arrangement. In this case the supplier might supply the same goods to other purchasers within the same area.
You may negotiate with the supplier regarding where you can sell the goods. You may want to sell the goods online, at a market or in a shopfront. The supplier may want to restrict you from selling through certain channels. For example, it may not allow you to sell goods online.
As a purchaser, you might be purchasing a brand new product and be the first to sell the product in the market. Therefore, you may want to require that the supplier sell the product to you only. If you are selling the products online only and not in a store in a certain location, this may be most appropriate. However, if you are selling the goods at a shop front in one geographical area, then it may be more suitable for the clause to be exclusive based on geographical area as outlined above.
What Exclusivity Clauses Suppliers May Request
The supplier may want to restrict you from buying the same or similar goods from other suppliers. For example, they may want you only to buy Happy Socks and no other brand of socks.
The supplier might have signed an agreement with their manufacturer. This may have stated they must be the sole and exclusive supplier of products in a certain region. Therefore, the supplier may want to ensure that you, as the purchaser, cannot contract directly with the manufacturer relating to the supply of those products in the designated region. You will need to negotiate with your supplier about these commercial terms.
Under the Competition and Consumer Act 2010, certain types of 'exclusive dealing' can be in breach of the law. Exclusive dealing often occurs when one person trading with another imposes certain restrictions on the other's freedom to choose with whom, in what, or where they deal. However, where the exclusive dealing substantially lessens the competition in the relevant market, it is considered the be against the law.
There are many examples of types of exclusive dealing. The following involve a supplier refusing to supply goods or service unless you, as the purchaser, agree not to:
- buy goods of a particular kind or description from a competitor;
- resupply goods of a particular kind or description acquired from a competitor; or
- resupply goods of a particular kind acquired from the supplier to a particular place or classes of places
What Does Substantial Lessening of Competition Mean?
While you may notice that there may be exclusive dealing occurring, it needs to substantially lessen the competition in the market for it to break the law. To assess whether the contract would substantially lessen competition, consideration needs to be given to whether:
- there has been a real effect on the competition in the overall market for a particular product and its substitutes;
- the refusal to supply would substantially restrict the availability of that type of product to consumers;
- consumers' ability to buy a product and its substitutes are severely restricted because the business has imposed restrictions on the area as a condition of supply.
Once you have decided to do business with a supplier, you will need to determine whether any exclusivity arrangements exist, and if so, whether they have the potential to lessen competition substantially. In any case, it is a good idea to have an agreement between you and the supplier to reflect the exclusive terms in a supply agreement. These terms include the supply of goods to an exclusive geographic area, goods being exclusively supplied to you, and supplying the goods through an exclusive channel such as online or through shop front. You also need to be aware of what terms a supplier might include in an agreement they provide to you.