This article has been written by Saroj Chauhan, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.

Introduction

We are all familiar with the meaning of exclusive or exclusivity, which clearly means granting specific rights to a specific person or restricting access to a specific person or area. We frequently see exclusivity clauses in contracts or agreements, which ensure that the other party is restricted from performing certain acts or deeds that are required of him under the contract. Exclusive agreements are highly prevalent practices among distributors and suppliers, and we will learn about exclusive agreements in this article. 

What do we mean by exclusive agreement?

Exclusive dealing is usually characterized as a circumstance in which a marketing channel carries only one manufacturer’s goods in a specific product category. For example, exclusive dealing occurs when McDonald’s offers just Coca-Cola.

An exclusive agreement is one in which two or more parties agree to buy items solely from the seller named in the agreement. The understanding that the buyer will not receive or solicit the items given by the seller from anyone else for the duration of the agreement is the most important component of an exclusivity agreement. As a result, it follows that the seller is the buyer’s sole source of such items. In a vertical buyer/seller relationship, where a buyer promises to buy exclusively from the seller, this agreement is common.

Parties are forbidden from entering into anti-competitive agreements when doing business in India. Anti-competitive agreements are those that have or are likely to have a significant adverse effect on competition (“AAEC”). Agreements might be horizontal or vertical. The Competition Act of 2002 (“Act”), on the other hand, recognizes intellectual property rights and allows its owners to apply reasonable limits to protect them. Similarly, because exports have no impact on Indian markets, the Act exempts agreements between exporters. The Competition Commission of India (“CCI”) has been given the right to order any firm or person to amend, cease, and not re-enter into anti-competitive agreements, as well as impose a penalty of up to 10% of the previous three years’ average turnover.

Given the CCI’s power, companies doing business in India must be aware of agreements that could be deemed “anti-competitive.”

The question now becomes, what constitutes anti-competitive behavior? The key criterion of anti-competitive agreements, according to Section 3(2) of the Act, is their AAEC within India… It’s important to remember that Section 3(2) of the Act states that even if an agreement is made outside of India, the CCI has the authority to investigate it if it has an AAEC in India.

In general, in exchange for exclusivity, exclusive distribution agreements will impose certain limitations on the distributor. New geographical markets must be developed, sales targets must be met, and marketing and promotion costs must be kept to a minimum.. As a result, when a third party violates an exclusivity agreement, it is essentially exploiting the exclusive distributor’s investments to decrease prices and unfairly compete with the latter.

Section 3(3) states that an agreement has AAEC if any of the parties indicated above, including cartels, engage in identical or similar trade of goods or provision of services, and there is a practice that is carried out or a decision that has been made, that can either –

1. Directly or indirectly determine the purchase or sale prices;
2. Limits or controls production, supply, markets, technical development, investment, or provision of services;
3. Shares the market or source of production or provision of services by way of allocation; of the geographical area of the market, or type of goods or services, or number of customers in the market or any other similar way;
4. Directly or indirectly results in bid-rigging or collusive bidding.

When deciding whether an agreement has an appreciable adverse effect on competition under section 3, the Commission must take into account all or all of the following factors-

1.  creation of barriers to new entrants in the market;
2. driving existing competitors out of the market;
3.  foreclosure of competition by hindering entry into the market;
4. accrual of benefits to consumers;
5. improvements in production or distribution of goods or provision of services;
6. promotion of technical, scientific, and economic development using production or distribution of goods or provision of services.

Difference between exclusive and non-exclusive agreement

The distinction between exclusive and non-exclusive agreements pertains to how vendors and customers interact. Exclusive agreements bar competitors for a fixed length of time, whereas non-exclusive agreements allow competitors to participate, which is often used as a motivator. It’s critical to understand the differences between exclusive and non-exclusive distribution agreements so you can choose the proper one for your product distribution.

Who are the parties/who enter into the exclusive agreement?

Manufacturers and merchants frequently enter into exclusive dealing or requirements contracts, which are generally legal. In general, exclusive dealing happens when one person trading with another places constraints on the other’s ability to choose who, what, and where they trade. Only when exclusive dealing significantly reduces competition is it illegal.

Essential clauses 

1. Appointment of distributor

The clause must specify or discuss the distributor’s appointment, noting that the distributor is the only distributor in the territory (name of the area), as well as the fact that the distributor has no right to make any commitments on behalf of the manufacturer.

• Sample clause 

The company designates the distributor as the territory’s sole distributor for the products. The exclusive authority of the distributor in the territory shall be to solicit orders for the products in line with the conditions of this agreement. The distributor is not authorized to make any commitments on behalf of the company.

2. General duties 

The clause shall have a description about the general duties which the distributor is required to perform in respect of the product that can include marketing or advertisement of the product, proper assistance by the distributor after sales to purchase of the product, providing training to its salesperson about the product so that they can educate on explain, clarify the doubts of the potential buyer of the product.

• Sample clause 

1. Distributors will make every effort to market the products and increase their sales in the territory. Distributors shall also offer reasonable support to the company in connection with the company’s promotional activities for the products. Distributors must also offer reasonable “after-sale” support to product purchasers and engage in other sales-related activities as necessary to promote the products and the company’s goodwill in the territory. 
2. Distributors must submit a written report to the company every month by the 15th of the next month detailing product sales and marketing activities for the previous month. This report dubbed the monthly “Sales and Marketing Report,” is divided into two sections: “Product Sales Report” and “Marketing Activity Report.”. 
3. Orders written should be included in the product sales report, as well as the customer’s name and address, the product or products ordered, and the date of sale. The marketing activity report shall include a general synopsis of activities, such as advertisements, articles, trade shows, etc. The distributor will devote adequate time and effort to perform its obligations. 
4. Without the prior written authorization of the company, the distributor shall neither advertise the products outside the territory nor solicit sales from purchasers situated outside the territory. The distributor’s task is to solicit orders from all potential customers in the territory including individuals, businesses, government entities, resellers, dealers, retailers, and others.

3. Reserved Rights 

The clause shall make it clear that by agreeing to the manufacturer reserved rights certain rights even if any right is given to the distributor, all the rights reserved by the manufacturer shall be mentioned and drafted exhaustively. 

• Sample clause 

1. 1. The company reserves the right to exhibit, advertise, promote, attend trade events, and solicit and sell directly to any end-users or other retail purchasers inside the territory.
   2. The company also maintains the right to form any agreements, partnerships, alliances, joint ventures, OEM contracts, or other business relationships with manufacturers, suppliers, or other third parties.
   3. Any direct sales or leads of products produced by the company in the territory shall be credited and attributed to the distributor, with the exception that such sales will not count toward any quarterly or yearly minimum sales quotas that the distributor may be subject to anywhere in this agreement.

4. Conflict of interest 

Under this clause, the distributor undertakes or warrants that he is currently not representing any line of products or will not represent in the future that is in the competing nature of the product of the manufacturer. 

• Sample Clause 

1. Distributor represents and promotes no lines or products that compete with the Products at the time of this agreement. Distributor shall not represent, advertise, or otherwise try to sell within the Territory any lines or goods that, in Company’s opinion, compete with the Products covered by this Agreement throughout the length of this Agreement. 
2. Company shall be provided with a list of the companies and goods that Distributor presently represents, and Distributor shall tell Company in writing of any additional businesses and products when it’s the marketing of those new businesses and goods begins. Whether a product is competitive or not is solely up to the maker to decide.

5. Independent contractor 

The clause shall mention that the relationship between the manufacturer and distributor is of independent contractor. the distributor is not the employee of the manufacture  or agent or partners, or this transaction between the manufacturer shall not consider joint venture 

• Sample clause 

The distributor is an independent contractor, and nothing contained in this agreement shall be construed to;

1. 1. give either party the power to direct and control the day-to-day activities of the other;
   2. constitute the parties as partners, joint venturers, co-owners, or otherwise; or 
   3. authorized distributor to create or assume any liability on the company’s behalf for any reason distributor is not a company employee and is not entitled to any of the company’s perks. The distributor is responsible for paying any income taxes and other taxes on monies earned under this agreement. The distributor is solely responsible for all financial and other obligations associated with his or her business.

6. Purchase and sale of products

The clause shall have the incorporation of the description of terms and conditions of sale of the products. the manner of placing the request for the product by the distributor to the manufacturer.

• Sample clause 

1. The company agrees to sell the products to the distributor, and the Distributor agrees to buy them from the company, under the terms and conditions set out in “Attachment: terms and conditions of sale of products,” which is incorporated herein by reference.
2. All orders for the products must be sent to the attention of the controller in writing through fax or mail (normal postal mail and other delivery methods are permitted). All fax orders must be followed up with a written order addressed to the controller’s attention by mail. All orders will be validated through email from the controller.

7. Product warranty 

The clause shall mention the process of availing the warranty of the product by the end-user or customer i.e who is responsible for repairs or changing the product which has defects and is in warranty period.

• Sample clause 

Any warranty for the products will be provided directly from the distributor to the product customer. The purchaser must contact the distributor directly to arrange for the repair, return, or replacement of any allegedly defective products under any such guarantee. When it comes to warrantable repairs, returns, or replacements, the distributor will have sole authority to deal with customers. Distributor shall notify the company separately upon receipt of any such warrantable products to arrange for return or credit for these defective products. The company reserves the right to determine whether these products are defective and to replace or credit them.

8. Product availability

The clause shall mention that if there is any delay in delivering the order placed by the distributor as per the agreed time and conditions then under such circumstances the manufacturer shall inform the same distributor timely so that the distributor further can inform about the delay in product to customers. further, if there is any delay due to Force majeure i.e delay in delivering the product due to any situation which is beyond human control then the manufacturer is not liable or responsible to the distributor or any other person.

• Sample clause 

The company will do its best efforts to fill the distributor’s orders in a reasonable and timely manner. The company must advise the distributor immediately of any known or anticipated delays in filling new or previously placed orders, as well as the estimated duration of any delays so that the distributor can accurately portray this information to existing or potential customers. Company shall not be liable to a distributor or anyone else for any failure or delay in filling accepted orders if the failure or delay is caused by a stroke, accident, labor dispute, acts of nature, freight embargo, war, civil disturbance, vendor problems, or any other cause beyond company’s reasonable control.

9. Sample products 

The clause shall mention the ownership of the sample product if any given to the distributor, about the service of the product if required the conditions in which they need to put, further when and how the sample products sent by the manufacturer shall be returned.

• Sample clause 

The company does not distribute or loan product samples to its distributors as a matter of policy. The following statement shall apply in the uncommon circumstance where a product sample is delivered or loaned to a distributor. Any product samples delivered by the company to the distributor shall remain the company’s property. During the time the product sample is in the distributor’s control, the Distributor is solely responsible for keeping each product sample in correct working order. Distributors must arrange for the return of each product sample to the company in good condition, less reasonable wear and tear, within thirty (30) days after receiving written notice from the company.

10. Trademark and trade names 

The clause gives a full description about the use of the trademark and trade names of the manufacturer if permitted then to what extent by the distributor.

• Sample clause

During the term of this agreement, the distributor shall have the right to advertise within the territory under the trademarks, service marks, and trade names that Company may adopt from time to time (“company’s trademarks”), and to indicate to the public that it is an authorized distributor of company’s products. No right, title, or interest in the company’s trademarks is granted to the distributor by this agreement. Distributor shall not challenge or aid anyone in challenging company’s Trademarks or registration thereof or try to register any trademarks, service marks, or trade name confusingly similar to those of company, during the term of this Agreement or afterward. Company indemnifies distributor for all use of company’s trademarks.

All presentations of the company’s trademarks that the distributor plans to use must first be submitted to the company for written approval of design, color, and other details (which shall not be unreasonably withheld) or must be exact duplicates of those used by the company.

11. Confidentiality 

Such a clause will often contain restrictions on who needs to know the confidential information and state consequences, should such information be revealed to anyone outside of that circle. The clause can be as open or limited as you would like – it can go as far as to state the names of the people to whom the information can be shared, or simply state that the information must be limited to anyone within the business with which you are contracting. Of course, things are easier when you are contracting with just one person.

• Sample clause 

Distributor acknowledges that, as a result of its relationship with Company, it will have access to confidential and valuable information and documents about Company’s business goals, customers, technology, and products, which would be jeopardized if such information were leaked to third parties.

The distributor agrees not to divulge any confidential information provided to it by the company to any other party. The distributor will treat all information as confidential unless otherwise instructed. The company will inform the distributor, upon request, whether it deems any specific information or materials to be confidential. Beyond the description supplied by a company, the distributor shall not disclose any technical description of the products.

Distributor shall not use or disclose any confidential information of company if this agreement is terminated, and the distributor shall not make or have produced any devices, components, or assemblies based on company’s patents, inventions, copyrights, know-how, or trade secrets.

12. Export law 

The clause shall mention that in case distributor is willing to export the product to other countries then who will be liable for legal compliances and take the approvals as per the prevailing law of the country, and if exporting the product do distributor needs to take any approval from the manufacturer or not 

• Sample Clause

The distributor understands and accepts that the products may be subject to export controls and limitations. Distributor acknowledges and certifies that the products, or any component thereof, are not being or will be acquired, shipped, transferred, exported, or re-exported, directly or indirectly, into any country subject to export restrictions and controls. The distributor is solely responsible for ensuring that export laws are followed. 

Without limiting the generality of the foregoing obligation, distributor hereby expressly agrees that it will not, and will cause its representatives not to, export, re-export, divert or transfer any Product to any destination without prior written authorization from the company and the Indian Government Export Administration Regulations or other export control rules and regulations ban a corporation or person from doing so. 

Upon the company’s request, the distributor shall make its records available to the company for the company to confirm the distributor’s compliance with its duties under this section. distributor will hold the company harmless from any claims arising from distributors exporting of the product.

Conclusion

It is concluded from above that exclusive agreements which have an anti-competitive nature are not legal. However, the exclusive supply and exclusive distribution agreement are legally entered between manufacturer and distributor. The question of whether any exclusive agreement is anti-competitive or not is decided by the CCI. Further, when drafting the exclusive distribution agreement the clauses like an independent contractor, product warranty, and mentioned above need to be drafted carefully.

References 

1. https://www.sec.gov/Archives/edgar/data/1169394/000108503705001442/laseragt.htm
2. https://indiankanoon.org/doc/118499818/
3. https://www.mondaq.com/india/trade-regulation-practices/250048/anti-competitive-agreements-tests-and-tribulation
4. https://www.mondaq.com/contracts-and-commercial-law/597538/10-golden-rules-for-engaging-with-a-distributor

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