Exclusive clauses in commercial arrangements such as purchase and supply agreements, dealership agreements are commonplace in the supply chain. They are either encountered upstream (while purchasing a good/service) or downstream (while selling a good/service). Competition law recognizes two broad categories of exclusive agreements, i.e., (a) Exclusive Supply Agreements; and (b) Exclusive Distribution Agreements, based on whether the restriction operates upstream or downstream.
Exclusive Supply Agreements are defined under Section 3(4)(c) of the Competition Act, 2002 (“Act”) as agreements restricting the purchaser from purchasing/dealing with goods other than those of the seller. Exclusive supply agreements operate a restriction on the seller. Exclusive supply agreements are also known as ‘single branding’ agreements or ‘quantity forcing’ arrangements. Under EU Competition law, an agreement that induces the buyer to purchase more than 80% of his requirement from a particular seller/supplier constitutes a ‘single branding’ agreement.1 Exclusive Supply Agreements can be de jure as well as de facto.
A exclusive supply agreement operates as a direct restriction on the buyer/distributor/supplier from procuring/buying goods from a competing supplier or source. A exclusive supply agreement is when the seller manipulates the contract covenants in such a manner that the buyer is induced to concentrate all its requirements from a single seller. Usually, the seller acting on the prior knowledge of the buyer’s product/input requirement for a particular year specifies an off-take quantity in the contract knowing fully that the said specified quantity constitutes the majority of the purchaser’s total demand of a particular product during a specific period of time. Other examples of contractual clauses that induce de facto exclusivity include the imposition of minimum purchase requirements, minimum stocking requirements, conditional rebates, etc. Competition authorities particularly tend to view such off-take requirements as problematic when the contract also induces the buyer to disclose to the seller its requirement of a particular product for a particular year.
Another contractual clause that may result in de facto exclusivity is an ‘English clause,’ which obligates the buyer to report any better offer to the seller and permits a buyer to accept such an offer only when the supplier does not match it. It is also known as “meeting the competition” or “Right of first Refusal”. Incidentally, such clauses have the same effect as the Single branding clauses on competition since the buyer is obliged to reveal who makes the better offer, i.e. because they remove the free choice of the buyer to accept any improved offer (because they have to notify the supplier first). It may be noted that a fair competitive process is always full of uncertainties for the future outcome which makes every market player give the best offer in anticipation of the competition and any restriction that reduces uncertainties in the process of selection, is likely to adversely affect competition.
Aishwarya Says:
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