Don't Let Vendor Exclusivity Provisions Sneak Up on You
Just like any business, credit unions can find themselves trapped by these seemingly harmless provisions in legal contracts. While you can avoid them, it takes vigilance.
If you've ever been involved in contract negotiations, you know that they are often carried out under tight deadlines. Then, like most legal documents, the contracts are put on a shelf where no one will venture into their murky waters of legalese. However, this can lead to some very unpleasant surprises-especially true for those exclusivity provisions that lie in wait within the contracts.
Let's look at an example. Imagine that you have spent months searching for a provider of a particular service and finally find one. You've signed an agreement for this service with Vendor A and have proudly announced it in a press release. Then the surprise comes. You receive a telephone call from your representative at Vendor B. The rep informs you that he read about your agreement with Vendor A, and that your agreement with his organization stipulates that Vendor B is your exclusive provider of this type of service during the term of your agreement-which, by the way, has three more years to run.
This kind of contractual-exclusivity provision is very common, and it needs to be identified and understood immediately. Unfortunately, contractual-exclusivity provisions can be drafted in a number of ways, and there is no set language that invariably identifies them. The only sure way of discovering them is through a painstakingly careful reading of your contracts. A third-party legal review can also be extremely beneficial.
In all your vendor agreements, be on the lookout for phrases like "exclusive provider" or "sole provider" of particular products or services for certain periods of time. Often they come with automatic extensions as well. This is called a requirements contract, and it essentially has the same effect as an exclusive-provider contract.
In general, businesses should be free to contract with whomever they want, and exclusivity provisions represent a significant restraint on that freedom. By the same token, the exclusivity provision gives the party receiving the benefit of exclusivity (the vendor) something of value, which may be the entire basis for the original agreement.
It is also important to make sure that the products and services covered by the exclusivity provision are crystal clear. In a vendor relationship, this means expressly identifying the products and services to be utilized. This can be more difficult than it seems at first, especially with services that may overlap other similar services that are not intended to be covered by the grant of exclusivity. It is also not advisable to tie the scope of the exclusivity provision to the types of services provided by the vendor. That's because the vendor might develop new services or acquire another business and expand the scope of this provision to the detriment of the other party.
The bottom line is that you need to comb through your agreements carefully and identify any exclusivity provisions they may contain. Of course, legal language isn't the most fascinating verbiage to study, but the diligence always pays off. Basically, you need to make sure you understand how these exclusivity provisions will limit what you can do while they are in effect. Just as important, this information needs to be shared within your organization so that people know how these limitations affect their responsibilities.
So let's return to our example. You are now on the horns of a serious dilemma. An existing vendor (Vendor B) is claiming that it has an exclusive-provider agreement with you. However, you have just negotiated, signed and announced a new agreement with Vendor A that apparently conflicts with Vendor B's agreement. That's a problem with no easy solution.
Depending on how the language in your agreement with Vendor B is written, you may already be in breach of contract by entering into the new agreement with Vendor A. You may also be considering backing out of your arrangement with Vendor A to avoid additional liability or to mitigate your damages. However, as you consider this course of action, you wonder if that would cause you to breach any of the provisions of your new agreement with Vendor A. What to do? Answer: Don't get yourself in this situation in the first place.
Exclusivity provisions can really become a trap for the unwary. Do the work it takes to make sure you're not one of them, and seek out organizations that will assuredly work in your best interest and do not concern themselves with excluding the competition. These organizations simply seek to provide complimentary products or services that will ultimately benefit your credit union.