What is an exclusive supply contract?

An exclusive supply contract (Exclusive Supply Contract), also known as Exclusive Dealing, occurs when one party trading with another imposes some form of restriction on the other’s freedom to choose with whom, in what, or where they deal.  Some examples of Exclusive Dealing may include:

• the supplier being restricted to supplying the goods in a specific geographical area, or through a particular channel; or
• restricting a purchaser from buying the same or similar goods from other suppliers.

This article outlines what an Exclusive Supply Contract or Exclusive Dealing is and when it may not be legal.

What is a supply contract?

A supply contract is a contract for the sale of goods from one party (Supplier) to another party (Purchaser).  Some everyday examples include a supplier providing:

• vegetables to a grocery;
• coffee beans to a café; or
• books to a bookstore.

What exclusivity clauses may Purchasers request?

Purchasers may request several exclusivity clauses within a supply contract, the most common of which are an exclusive:

• area clause; or
• product clause.

An exclusive area clause restricts the Supplier to supplying the specific goods in question to the Purchaser exclusively in a given geographical area.  This type of clause is useful in situations where the Purchaser does not want local competitors to have access to the same goods.

An exclusive product clause is similar in nature to the exclusive area clause, but instead requires that the Supplier sell the product only to you.  This can often apply to online businesses who do not have a definitive geographical location.

What exclusivity clauses Suppliers may request

Some common examples of exclusivity clauses which Suppliers may request include various terms, including an exclusive:

• dealing clause;
• channel clause;
• product clause;
• pricing clauses; and/or
• offers clauses.

An exclusive channel clause involves the Supplier restricting the purchases from selling through certain channels.  For example, the Supplier may not allow you to sell the goods online.  This can be useful in situations where the Supplier already sells their product online and does not wish to have competition in that market.

An exclusive product clause in this circumstance would involve the Supplier restricting the Purchaser from buying the same or similar goods from other Suppliers.  These clauses are useful where Suppliers do not wish to allow Purchasers to buy from their competitors in the future.

When is Exclusive Dealing illegal?

A blanket prohibition against Exclusive Dealing is provided for in section 47 of the Competition and Consumer Act 2010 (Cth) (Act).  That section prohibits corporations, in trade or commerce, from restricting, limiting or circumscribing^[1] any dealings with goods and services.^[2]  Further, Exclusive Dealing will only generally break the law where the conduct results in substantially lessening the competition in the relevant market.^[3]

To assess whether an Exclusive Supply Contract would substantially lessen the competition, it must be considered 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; or
• 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.

As a rule of thumb, the more exclusive the product and the more powerful the Supplier, the more likely it is that the level of competition will be substantially affected and that some pecuniary penalty will be imposed.^[4]  The Court has power pursuant to section 76(1) of the Act to make orders imposing pecuniary penalties upon corporations illegally engaging in Exclusive Dealing.  Before making such orders, the Court will consider the following factors:^[5]

• the size and financial position of the contravening company;
• whether the contravention was intentional;
• the period over which the contravention extended;
• whether the contravening conduct was systematic, deliberate or covert;
• whether senior management were aware of or involved in the contravention;
• whether the contravening company had a corporate culture conducive to compliance with the Act;
• whether the company co-operated with the Australian Competition & Consumer Commission;
• whether the contravener has engaged in similar conduct in the past; and
• the effect on the functioning of the market and other economic effects of the conduct.

Takeaways

It is essential that both Suppliers and Purchasers alike carefully consider whether any exclusivity arrangements exist, and whether these arrangements have the potential to lessen competition substantially in the relevant market.

Links and further references

Related articles

Changes to monetary threshold for consumer contracts

Deal fatigue in commercial contracts

Tortious interference with contract – what must be proven?

Legislation

Competition and Consumer Act 2010 (Cth)

Cases

Australian Competition and Consumer Commission v Oakmoore Pty Ltd [2018] FCA 1169

Australian Competition and Consumer Commission v Oakmoore Pty Ltd (No 2) [2018] FCA 1170

Australian Competition and Consumer Commission v Oakmoore Pty Ltd [2018] FCA 1472

 Australian Competition and Consumer Commission v Visa Inc [2015] FCA 1020

Australian Competition and Consumer Commission v Fila Sport Oceania Pty Ltd [2004] FCA 376

 Trade Practices Commission v CSR Ltd [1990] FCA 762

Further information about Exclusive Supply Contracts

If you need advice on Exclusive Supply Contracts, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Competition and Consumer Act 2010 (Cth) s 47(13).

[2] Competition and Consumer Act 2010 (Cth) ss 47(2) – (9).

[3] Competition and Consumer Act 2010 (Cth) s 47(10).

[4] Australian Competition and Consumer Commission v Oakmoore Pty Ltd [2018] FCA 1169, [81] referring to Trade Practices Commission v CSR Ltd [1990] FCA 762, [42]; Australian Competition and Consumer Commission v Oakmoore Pty Ltd (No 2) [2018] FCA 1170, [16]; Australian Competition and Consumer Commission v Oakmoore Pty Ltd [2018] FCA 1472, [74].

[5] Competition and Consumer Act 2010 (Cth) s 76; Trade Practices Commission v CSR Ltd [1990] FCA 762; Australian Competition and Consumer Commission v Visa Inc [2015] FCA 1020, [80]-[82].

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