What does exclusivity mean in contracts, and should you opt for exclusive or non exclusive contracts for your business? Let's explore.
What is exclusivity?
Exclusivity means that one party is restricted from buying, selling or otherwise partnering with other parties than the one on the other side of the contract. Exclusivity is used in contracts to limit what one party can do, usually to the commercial advantage of the other party.
Exclusivity is a powerful concept in contract law and you should think carefully before binding yourself, or indeed the other party, to an exclusivity provision, due to the restrictive consequences this can have. Exclusivity’s meaning in practice can have far-reaching implications, depending on how it fits in to the other elements of the contract you're drafting or signing.
Exclusivity examples
You can check out a range of exclusivity language at sites like Law Insider and LexisNexis, or you could check out clause language in our free-to-download templates, like our offer letter template, MSA template and non-disclosure agreement template.
What’s an exclusive contract?
An exclusive contract is a legally binding agreement between at least two parties, which sets out that goods/services are to be purchased from only one seller, making that seller the exclusive provider of the goods/services.
An example of an exclusive agreement might be a sponsorship agreement, where an athlete agrees only to wear sporting apparel made by a particular company. A company like Nike might pay millions of dollars annually to have someone like Serena Williams wear their clothing exclusively.
The nature of an exclusive contract is fairly restrictive, in that it limits one party’s ability to enter into relationships with other providers. However, if you’re able to secure an exclusive contract, it may create a competitive advantage for your business, as competitors will be blocked from contracting with your counterparty for the duration of the contract.
To agree to being bound to an exclusive contract, the counterparty might need a larger incentive than you’d otherwise be prepared to offer - for example, a larger fee, or more favourable commercial terms.
It’s not uncommon for employment contracts to contain exclusivity clauses, to stop employees from undertaking additional work for other companies. This might mean that freelance or consulting work isn’t allowed during the term of employment, for example.
An exclusive contract is not to be confused with an exclusivity contract. This is an agreement, the express purpose of which is to ensure that one party negotiates exclusively with the other for a defined period of time. Read more about exclusivity agreements.
What’s a non exclusive contract?
Non exclusive contracts are contracts that don’t include exclusivity provisions that stop one party from engaging with others. In fact, they may include an explicit non-exclusivity clause that makes it clear that competitive vendors or partners can be engaged.
If exclusivity is absent, then one party is less incentivized to offer favourable commercial terms, so the other party might get a slightly worse deal than if they’d contracted under exclusivity.
The most common example of this, which many of you will be familiar with, is the use of exclusive and non-exclusive contracts in real estate. Let’s look at that example now.
Exclusive right to sell
An exclusive right to sell in real estate means the seller selects just one agent to sell their house.
If an individual is selling their house, they might partner with a real estate broker, and sign a contract that gives that broker the exclusive right to sell. In return for being the preferred partner here, the real estate broker might offer to reduce their commission - say, to 1% rather than 2%.
However, if the seller isn’t convinced the broker will do a good job, they might sign a contract giving that broker a non-exclusive right to sell - and sign a similar contract with a couple of other brokers.
As they don’t have exclusive rights, they’ll probably charge more commission - say, 2% - but now there are three different agents working to sell the house, so they might achieve a sale faster, and for a higher price, due to the competition driven by having multiple brokers.
Sales contracts can be a key pain point for scaling businesses, particularly if they're managed through a mixture of Word, email, electronic signature and shared drives.
Do you need an exclusive contract or a non-exclusive contract?
In the specific real estate example, it depends whether you’re looking for a fast sale or to minimise the amount of its proceeds you have to give up to the broker. Your priorities here should guide your decision.
More generally, if you’re comfortable restricting your ability to partner with a range of suppliers by agreeing to exclusivity, then you’re likely to receive better commercial terms in exchange, like a lower price.
However, if flexibility and the freedom to engage with a range of suppliers are important to you, then it’s a good idea to resist exclusivity and contract under non-exclusive terms.
Find out more
Find out more information about contract jargon and terminology here. Alternatively, if it’s the contract process, and not their content, that’s causing headaches for your business, get in touch below to find out more about all-in-one contract automation.
