29/09/2011

Recently, a client gave us instructions to draft an agreement with a service provider. The agreement was to require the service provider to provide certain services exclusively for our client's benefit. The deal sounded great but is it legal?

Often in business it is tempting to buy from only one supplier or sell to only one customer. It makes life so much easier. Nice work if you can get it! In most cases, there are no problems doing this - in fact, frequently there are significant advantages.

So, it may be tempting for the business owner or manager to think, "I only want to deal with X so why should I waste my time with his competitors." 

No matter how large or small your business is, you still need to take care in these situations.

Providing services or supplying goods exclusively requires consideration of the Competition & Consumer Act, which used to be called the Trade Practices Act. (CCA). Two provisions generally need to be considered in these cases:

1. Section 45 - this states (in part, it must be stressed) that corporation A must not make a contract if the contract contains an exclusionary provision. An exclusionary provision is where A and B, who are competitors, enter a contract which prevents A and B supplying goods or services to (or purchasing them from) C. As our client was not contemplating entering a contract with a competitor and had no intention of preventing supplies or purchases, our review of section 45 was very brief. Our client had nothing to worry about. 
2. Section 47- this states that corporation A must not engage in exclusive dealing. Examples of exclusive dealing include:
   

   • if A supplies goods or services to B on condition that B does not buy goods or services from C, which is a competitor of A; or

   • if A refuses to supply B because B has purchased goods or services from C (which again is a competitor of A); or

   • if A purchases goods or services on condition that B, the supplier of the goods and services, will not supply the goods or services to anyone else or anyone in a particular place.  

In these examples (which are not exhaustive), if A carried out any of those activities, it is not in breach of section 47 unless its conduct has the effect of substantially lessening competition.

Fortunately for our client, its proposed agreement would likely have minimal impact on competition in a very competitive market, so it was free to pursue its plans.

In this case, our client had no issues and so could press ahead. However, others may not be so lucky. Sections 45 and 47 of CCA are extremely complex and catch a myriad of far less clear-cut cases than the ones listed here. 

If you think you might have inadvertently become involved in an exclusive arrangement, or that you might be a victim of such an arrangement, please call Gareth Johnson at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.