Exclusive sourcing clause: Overview, definition and example
What is an exclusive sourcing clause?
An exclusive sourcing clause in a contract ensures that one party is the only provider of a specific product or service for another party, often for a set period or under specific conditions. It prevents the party receiving the product or service from sourcing it from other suppliers during the agreed-upon term. This clause can provide stability for the supplier and guarantee the buyer a consistent source of supply.
For example, in a manufacturing contract, a company may agree to purchase all of its raw materials from a particular supplier for the duration of the contract, excluding other suppliers. This is a common clause in supplier agreements or franchise deals.
Why is an exclusive sourcing clause important?
An exclusive sourcing clause is important because it creates certainty for both parties in the contract. For the supplier, it ensures a steady stream of business, often in exchange for more competitive pricing or other benefits. For the buyer, it guarantees a reliable and consistent supply of goods or services.
This clause can also simplify logistics and reduce the complexity of dealing with multiple suppliers. However, it can also limit flexibility, which is why it’s crucial for both parties to assess whether this type of exclusivity aligns with their long-term business goals.
Understanding an exclusive sourcing clause through an example
Imagine a retail company that enters into an agreement with a clothing manufacturer to supply all of its branded shirts for a five-year period. The exclusive sourcing clause would ensure that the retail company purchases all of its shirts from that manufacturer, preventing them from buying shirts from other manufacturers during that time.
In another example, a food distributor may agree to source all of its organic produce from a specific farm for a set period. By including an exclusive sourcing clause, the distributor ensures that the farm has a guaranteed customer for their produce, while the distributor gets priority access to high-quality organic goods.
An example of an exclusive sourcing clause
Here’s how an exclusive sourcing clause might look in a contract:
"The Buyer agrees to purchase 100% of its electronic components exclusively from the Supplier for the duration of this Agreement. The Supplier shall provide all required components at agreed-upon prices, and the Buyer shall not source such components from any other supplier during the term of this Agreement."
Conclusion
An exclusive sourcing clause helps guarantee a consistent supply of goods or services by creating a clear, single-source relationship between the buyer and supplier. It can benefit both parties by providing reliability and stability, though it requires careful consideration to ensure it aligns with long-term objectives. For businesses, this clause is a useful tool in securing both supply chain reliability and financial predictability.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.