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A Guide to Contracts in the Fashion Industry

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author/source: Holly Jade O'Leary

Aguidetocontractsinthefashionindustry 

Holly Jade O'Leary styling for Prangsta Costumiers. Coca Cola / Wing Productions (c)

 

A Guide to Contract Law

 There are multiple trading relationships within the fashion industry which should be governed by contract to ensure that payment is received, and protection against liability. 

These include:

 

1.0 Manufacturing Agreement

A manufacturing agreement occurs when a designer commissions a supplier to create items on their behalf.

The agreement such as should cover the following:

  • Quality control

  • Quantity

  • Shipment

  • Payments

  • Delivery dates

  • Product specifications

  • Manufacturers’ details and patterns

  • Ownership of Intellectual Property

  • Liability of the parties

 

2.0 Private label / white label contract

 Some clothing and furniture designers will commission a white label with premade designs to manufacture on their behalf, and rebrand with their logo, minimizing costs on CAD design and pattern cutting. Access a business to business supply of goods agreement template, drafted in the customer’s favour

Agreements with white label manufacturers should cover the following:

  • Quantity

  • Price

  • Payment options

  • Quality assurance

  • Right to sell under a specified trademark

  • Liability of the parties

 

3.0 Consignment Agreement

A consignment agreement, to be used where the seller (consignor) wishes to place goods on consignment before they are resold or used by the buyer (consignee). Goods will be stored at a facility or warehouse, under the control of the consignor, the consignee, or a third party. Title to the consigned goods remains with the consignor until it passes to the consignee on the happening of a specific event, which may be the onward sale to the consignee's customer, the removal of the consigned goods from the warehouse or consignment stock space at the facility, or when the consignee uses the goods. 

 

An agreement between a retail outlet and a designer which grants the designer the right to sell merchandise at its outlet for a specific amount of time. This will include the following:

  • Duration of the agreement

  • Terms of sale of the products

  • The percentage that each party will receive

  • Liability for lost or damaged goods

  • The effect of nonsale - typically all items that are not sold are returned to the designer

 

4.0 Showroom Agreement

 

This agreement occurs when a showroom allows a designer to showcase for an agreed amount of time, usually at fashion shows and PR events. This role is often managed by a Creative Agency. The showroom has the responsibility to introduce the collection to its new and existing buyers, and generate contracts, orders and shipping details on behalf of the designer. Access a Supply of Services precedent contract drafted in favour of the customer.

The terms of the contract will often include the following:

  • Payment options

  • Terms of the agreement

  • Commissions

  • Floor area, dimensions and space arrangements, such as rails, lighting and mirrors

  • Obligations of the showroom

  • Liability for lost or damaged goods

 

5.0 Independent Sales Representative

 A contract between a sales representative and a designer will occur when a designer gives the responsibility of initiating a trading representative, who will often introduce the designer to their new and existing customers, and pass orders, contracts and shipping to the designer. Independent representation contracts will also be handed to Creative Agencies - who manage branding, marketing and handling showroom opportunities, and PR agencies, who handle press relations, brand communications, feature writing, and celebrity styling on behalf of the fashion designer.

 

Access a supply of business to a business services contract, drafted from the customer's perspective:

Business to Business Service Contract (drafted from the customer's perspective)

Business to Business Service Contract (drafted from the supplier's perspective)

 

The terms of the contract should include negotiations on the following:

  • Duration of the agreement

  • Obligations of the representative

  • Payment terms

  • Exclusivity

  • Territories/Products covered

  • Commission/advances

  • Trade room/showroom fees

  • Termination notice

  • Percentage guarantee on orders placed

 

6.0 License Agreement

Once a designer has reached a level of recognition, another way to increase growth and volume, and geographical reach is to license its trademark across a range of products within a specific territory for a specific amount of time. A deed to assign the benefit of a contract is available to download from here.

A license agreement will typically include the following:

  • Duration of the agreement

  • Product assignments

  • Exclusivity

  • Sales Channels

  • Reserved Channels

  • Territories

  • Quality control

  • Royalty payments

  • Manufacturers to be used

  • Retailers to be used

  • Wholesalers to be used

  • Inspection of manufacturing facilities

  • Trademarks licensed

  • Ownership of intellectual property

  • Licensor’s right of termination

 

7.0 Distribution Agreement

 

A distributor will purchase items from a fashion designer at a wholesale price then distribute these to retail stores. 

Information about distribution agreements, including exclusive distribution, sole distribution, non-exclusive distribution and selective distribution a selection of distribution templates can be accessed below:

 

Distribution Agreement (exclusive)

A “sole distribution agreement” is one whereby a supplier appoints a distributor as its only or sole distributor within a territory, but the supplier reserves the right to supply the products directly to end-users. The meaning of the term should always be clarified within the agreement.

Such an arrangement combines the advantages of exclusive distribution for the distributor, with the advantage for the supplier that it is free to promote the products itself within the territory and to continue to deal with any customers it may have had in the territory before the appointment of the distributor. Such an agreement would contain similar provisions and restrictions to those in an exclusive arrangement, but it would afford more control by the supplier over the territory, should the distributor fail to meet the required minimum purchase targets.

The Vertical Restraints Guidelines (which relate to competition legislation) also refer to “dual distribution”, where a supplier of goods or services also acts as a distributor of those goods or services in competition with its independent distributors (who may or may not be sole distributors). Sole distribution is, therefore, a form of dual distribution.

 

Distribution Agreement (non-exclusive) 

 A non-exclusive appointment gives the supplier complete freedom both to sell directly and to appoint other distributors within the territory. The terms of the appointment will be far less onerous on the distributor than those within an exclusive or sole appointment, as it will need to compete with the supplier and other distributors in terms of both pricing and promotion of the product.

 

International Distribution Agreement

Laws governing the appointment and operation of a distributorship vary from country to country, and the supplier should always seek advice from a local lawyer on any particular local requirements.

 

Selective Distribution Agreement

A supplier, in appointing a distributor as part of a selective distribution system, agrees to appoint additional distributors only if they meet certain criteria. This effectively limits the number of additional distributors who will be appointed within the territory. Selective distribution arrangements are perceived as particularly suitable where the nature of the product requires an enhanced level of service or advice at the point of sale to the customer and where the supplier or manufacturer will be required to provide after-sales support. Owing to their potentially exclusionary nature, such arrangements can cause competition law problems. However, examples of products for which a selective distribution system has been held to be justified include high value cosmetics, pharmaceutical products and electrical goods.

Usually, as part of the arrangement, distributors must also agree only to sell on the products to end users or to other approved distributors. In this manner, the supplier retains tight control over the manner in which its products are marketed and it will generally have greater influence over the marketing of the product.

A distribution agreement will include the following terms:

  • Territories

  • Channels

  • Reserved channels

  • Product classifications

  • Exclusivity

  • Trademarks licensed

  • Ownership of intellectual property

  • Duration of the agreement

  • Terms of the sale of products

  • Royalty payments

  • Delivery terms

  • Obligations of the distribution

  • Brand’s right to terminate

 

7.1 Pre-contractual considerations

Given the comparatively large degree of autonomy granted to a distributor to promote and sell the supplier’s products, it is critical to ensure that the selected distributor is financially and commercially sound. The supplier should:

  • Carry out research into the proposed territory to identify potential distributors with a good knowledge of the product type and, preferably, a proven track record.
  • Ensure the distributor has the necessary financial standing and resources to fulfil the contract properly, which will include the purchase and maintenance of adequate stocks of the product, meeting promotional and advertising costs, and sometimes providing an after-sales service.
  • Check the creditworthiness of the distributor, particularly as the contract products are supplied on credit and the supplier may be wholly dependent on the distributor for payment in respect of sales into the relevant territory.
  • Scrutinise the distributor’s other commitments to ensure they will not conflict with or hamper effective promotion and sales of the contract products. In this context, the distributor’s existing product range and the presence of any competing products will be an important factor.

7.2 Competition laws

Under the EU and UK competition rules, there is a specific framework for the assessment of vertical agreements. A vertical agreement is one that is entered into between businesses operating at different levels of the economic supply chain, and includes, for example, agency and franchising arrangements as well as distribution agreements.

Most distribution agreements will benefit from the automatic (block) exemption afforded to vertical agreements and therefore fall outside the scope of the EU and UK prohibitions anti-competitive agreements, provided that criteria for the block exemption are met.

 

8.0 Apparel / textile factoring contracts

 

Factoring is what happens when a fashion designer or company loans from a financial institution against the value of a contract, in order to fulfil the order, as the brand’s payment may not be received until the items have been sold, to ensure steady cash flow. 

 

This is also widely known as asset-based lending or invoice finance. Factoring ensures that the company can pay their employees and suppliers, and have a steady cash flow and ability to market the business and working capital. Access a supply of services agreement for use in business-to-business transactions drafted from the customer's perspective is available to download from here.

 

A contract with a factoring company will be based on the following terms:

 

  • The business client enters an agreement with the factoring company for them to manage their sales ledger and credit control for an agreed amount of time (usually 24 months)

  • In exchange, the business provides an agreed amount of cash upfront, typically 70 - 85% 

  • When the end client pays, the factoring company will release the final amount of the invoice to the business client, minus their fees. 

  • Disbursements - Another word for ‘extra fees’. Invoice factoring companies may charge additional fees, i.e. same-day bank payments, receiving letters, credit checks, admin errors etc.

  • ‘Disclosed’ vs. ‘Confidential’ factoring Most factoring facilities are ‘Disclosed’, i.e. the business client’s customers are aware that they are paying invoices to a factoring company. Some are ‘Confidential’, where the customers are unaware.

  • ‘Approval Period’ and ‘Refactoring Fee’ If an invoice is left unpaid by a customer for a certain number of days (the agreed ‘Approval Period’), it will not be funded by the factoring company. This means that the business incurs an additional ‘Refactoring Fee' and the invoice is ‘recoursed’ back to the business (the business will have to pay back any funds previously advanced against the invoice). It is usually a percentage and charged against the invoice value, including VAT.

  • CHOCCS Stands for ‘Client Handles Own Credit Control’. In some circumstances, the business client will choose to maintain their ongoing responsibility for credit control.

  • Credit insurance, ‘Recourse’ and ‘Non-recourse’ Many factoring facilities include credit insurance - titled as ‘Non-recourse’ facilities. This means that the balance of an unpaid invoice will be recovered via the insurance company should the business customers default, or go into insolvency. In the event of ‘Recourse’, if there is no credit insurance, the business will have to pay back any funds previously advanced. 

  •  Security – debentures, personal guarantees and warranties  An invoice factoring company will require security against the business in the form of assets, a personal guarantee from the company’s director or warranty.

  • ‘High involvement limit’, ‘concentration limit’ or ‘debtor exposure limit’ In certain circumstances a factoring company requires that only a certain percentage of a business client’s sales ledger can be made up of a single customer, to mitigate risk.

 

The impact of Brexit has caused the pound to weaken against the euro, making it more expensive to import products, but equally in has significantly increased export opportunities for designers. When trading on lengthened payment terms and across seasons it is important to have an understanding of currency exchange to minimise risk and financial outlay. Gaining an understanding of the cash flow, margins, stock to sale ratio and trading environments, secured by a comprehensive legal framework will enhance your brand’s opportunities and enable you to effectively enter the conversation with investors. British luxury trading representative The Walpole is a founding member of the European Cultural and Creative Industries Alliance (ECCIA) http://www.eccia.eu and alongside 4 other European creative industries associations seeks to promote and enhance relations throughout Brexit and continue to protect creativity through securing intellectual property rights, encouraging emerging talent development and craftsmanship and improving business relations. 

 

5.0 Assignment of Rights

 

A fashion designer will often enter into an agreement to hire freelance staff often via an art director to oversee makeup artists, hairstylists, wardrobe stylists, models, location, and photographers to generate editorial campaigns and lookbooks for each season.

An agreement for the assignment of intellectual property rights, drafted from the assignee's perspective is available to download from here: 

Assignment of Intellectual Property Rights (Assignee's perspective)

 

An agreement for the assignment of intellectual property rights, drafted from the assignor's perspective is available to download from here:

Assignment of Intellectual Property Rights (Assignor's perspective) 

 

The contract should include the following:

  • Assignment of rights from the photographer - license or purchase of images

  • Amount of images 

  • Format of images

  • Payment schedule

  • Location

  • Duration of photoshoot

  • Date of editorial proofs

  • Concept and mood board of shoot

  • Quality assurance

  • Consent form

  • Delivery and return of garments

  • Ownership of intellectual property - if this is a particularly creative shoot the IP may be shared between the designer, art director, designer, stylist, make up artist, hairstylist and photographer, and in certain cases the designer will wish to secure the IP to ensure that the shoot is not replicated on another campaign. 

  • Professional indemnity assurance

  • Public liability insurance

 



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