What Is A Vertical Agreement?

As a business, you’re likely to be dealing with a number of people as part of your operations. However, in such a competitive market, you may wish to ensure that the business you’re working with is only engaging you. 

This way, you can minimise competition for your business. The need to do so is most common in the supply chain.

For instance, you may wish to ensure that the distributors you’re working with have an exclusive arrangement with you and no one else. To protect your business, it’s highly advised to capture this in writing through a Vertical Agreement.

When Do I Need A Vertical Agreement?

A Vertical Agreement is required where one party wishes to place restrictions on the other party regarding who else they can trade with and where. This is most common between parties in the supply chain.

Generally, this restriction lasts for the duration of their contract and is used to ensure that other businesses in the same industry don’t start doing the same thing. 

For example, a furniture company may order a particular type of wood and are the only ones in their locality that sell it. As a result, they might have an exclusive agreement with their supplier where they are the only furniture store in their locality the supplier is able to sell to.

However, Vertical Agreements should only operate to the extent that they do not significantly reduce or threaten healthy competition with other businesses. In this case, a Vertical Agreement could actually be in breach of the law.

Vertical Agreements and The Law

There are multiple ways to conduct exclusive dealing and normally, they are all considered legal practices. However, if you are considering partaking in an exclusivity agreement, then it’s important that you are aware of your obligations under competition law.  

This is because competition laws aim to strike a balance between exclusivity and maintaining competition with other businesses, which is good for any market.

Essentially, it’s important that your Vertical Agreement does not significantly reduce competition in your market.

Vertical Agreements Block Exemption

On 1 June 2022, the EU Vertical Block Exemption Regulation (“VBER”) came into force, as well as the UK Vertical Agreement Block Exemption Order (“VABEO”).

Both of these revised regulations sought to introduce stricter regulations to ensure that Vertical Agreements did not contain any excessively restrictive clauses or requirements with respect to reducing competition.

As a business, it’s your obligation to ensure your Vertical Agreement is compliant with these revised regulations to avoid breaching competition laws.

Generally speaking, the UK has a stricter approach to governing Vertical Agreements and as such, it’s advised that you seek the help of a legal expert who can ensure you agreement is compliant with both these revised regulations and existing competition laws in the UK.

Essentially, the agreement must have the purpose of actually protecting the business’ interests and have some kind of benefit for both parties involved. In other words, everything is fine as long as the agreement does not unfairly impact the competition in the market. 

Example Vera is the owner of a seafood restaurant. Her business prides itself on having freshly caught seafood cooked at the restaurant daily. Vera’s supplier is Jack, who provides the fresh food to her each day.  Wanting to cement her business relationship with Jack, Vera decides to have a Supply Agreement between them that contains an exclusivity clause. The clause determines that Jack cannot provide seafood to anyone other than Vera.  This clause will likely be considered a breach of Vertical Agreement regulations as it not only unfairly impacts Jack’s ability to do more business, but it can also prevent others from buying Jack’s fresh produce.  Rather, Vera’s exclusivity clause with Jack should state that Jack cannot supply seafood to any other competing seafood restaurant within 10km of Vera’s business. In return, Vera can agree to only buy fresh produce from Jack for the duration of their contract.

Do I Need A Distribution Agreement?

When it comes to the supply chain, it’s always advised to have the details of your arrangement in writing. Since there are multiple parties involved, and several key matters to consider, it’s always worth protecting your business’ interests by signing a legally binding agreement.

This way, if there is any damage or loss, you can follow a clearly set out procedure that all parties agreed to from the outset.

This is where a Distribution Agreement comes in. A Distribution Agreement is a legally binding contract between a manufacturer or supplier and a distributor. Commonly, it covers matters like payment, details of goods, marketing and promotion, training, defects rectification and exclusivity.

At Sprintlaw, our lawyers can help you draft a Distribution Agreement that is tailored to your business’ specific needs. Get in touch with our team to learn more.

How Else Can I Manage Competition?

There are other ways to manage competition that don’t involve exclusive dealing. Depending on what your main concerns are, there are a few other legal documents that can protect you from any unfairness that can arise from competition in the market. 

Non-Disclosure Agreement

A Non-Disclosure Agreement (NDA) is essentially a secrecy agreement. It prevents the other party from revealing or talking about your business’ inside information to an unauthorised third party. 

This way, you can maintain the much needed confidentiality to run your business and manage competition. 

Let’s say you’re telling a manufacturer the method for bringing your designs to life. You may have them sign an NDA so they cannot reveal that information to anyone else. 

Non-Compete Clauses

A Non-Compete Clause is another way to address the potential competition. 

A Non-Compete Clause prevents a party that has or formerly had interest in your business (like an employee or a supplier) from working or associating with a business that is in competition with yours for a certain period of time. 

For example, if any employee decides to resign and take another job, their employment contract with your business may have a Non-Compete Clause that prevents them from working with a competitor for the next 2 years.  

Key Takeaways

Having Vertical Agreements can be beneficial for your business, but it’s important not to draft your exclusivity clause in a way that is unfair to the competition in the market.

If you need help with a Distribution Agreement, or you would like a consultation on your options moving forward, you can reach us at 08081347754 or [email protected] for a free, no-obligations chat.

---