Manufacture and distribution

Manufacture and supply chain

What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships?

Supply chains for fashion goods cover a series of elements ranging from the first conceptualisation of the product, through development and production, to the sale of the product, whether online or offline, to the end purchaser. As a result, there is no overarching legal framework that applies to all aspects of the supply chain or that applies exclusively to the fashion industry. Any supply chain is made up of a series of buyers, sellers and suppliers of both goods and services all entering into different types of contract. The impact of and application of the legal regime that applies to the supply of goods or services often depends on whether the transaction is between two businesses or a business and a consumer.

 

Contract law

The applicable contract law in England and Wales encompasses both statute and the common law and applies to all parts of the development, manufacture and supply of fashion goods. The basic principle is that contracting parties are free to contract as they wish, subject to some important protections for contracting parties, such as controls on the exclusion and limitation of liability arising from the supply of goods or services. The key sources of exposure to liability in supply chains are breach of contract, tort and breach of statutory requirements. In business-to-business relationships the Unfair Contract Terms Act 1977 prohibits the exclusion or limitation of liability for death or personal injury to a natural person or their estate resulting from negligence. This prohibition is replicated for business to consumer relationships in the Consumer Rights Act 2015. Other contractual restrictions on liability may be subject to reasonableness or fairness requirements.

In the Summer of 2020 new rules retrospectively changed the way that many contracts, both existing and future, work. The new rules, which came into force on 26 June 2020, are set out in the Corporate Insolvency and Governance Act 2020 and are designed to protect supplies of goods and services by prohibiting the termination of supply contracts by the supplier if the customer enters into certain types of insolvency procedures.   The new rules also introduced a new prohibition on exercising termination rights which pre-date certain insolvency procedures whilst the procedure is ongoing and a new prohibition on the supplier making it a condition of continued supply of goods and services during the insolvency period that pre-insolvency debts are paid.

 

Supply of goods or services

The supply of goods or services between businesses is subject to fairly light regulation. The supply of goods is primarily regulated by the Sale of Goods Act 1979 and the Sale and Supply of Goods and Services Act 1982 governs the supply of services. These statutory regimes cover the core aspects of the supply of goods or services, mainly by filling in any key gaps in supply contracts; for example, with implied terms. Most of the implied terms can be excluded completely or adopted in a modified format, although some are mandatory. For example, a term that tries to exclude or limit implied undertakings of title of goods is unenforceable. In comparison, the supply of goods and services to consumers is much more comprehensively controlled, in particular by the Consumer Rights Act 2015, although there is still some freedom of contract. The consumer law regime also fills gaps and implies terms into contracts with consumers as well as providing consumers with statutory protections. These protections include the quality of and fitness for purpose of goods or services and statutory remedies; for example, where goods or services are defective or not as described. There is also a broader legal framework encompassing the entire supply chain that gives consumers protection from defective goods. 

 

Contractual arrangements

The arrangements used in the fashion industry depend on which aspect of the supply chain is subject to a contract. Each type of contractual arrangement will usually have some boilerplate clauses that are common to many types of contract, some clauses that are specific to the type of contract and some clauses that are bespoke to the individual deal.

Supply agreements between businesses are often in writing, although they can also be oral or a mix of both. Ideally, though, these contracts take the form of a written agreement, signed by all parties (whether physically or electronically) that has deal-specific terms and that may also incorporate the standard terms and conditions of the supplier or purchaser. Alternatively, the parties may choose to contract just on the basis of one of the parties’ standard terms and conditions. Very occasionally the parties may contract on the basis of the statutory implied terms only.

Distribution and agency agreements

What legal framework governs distribution and agency agreements for fashion goods?

There is no dedicated legal framework for distribution agreements, such arrangements instead being subject to the general law that applies to supply agreements. There is a common law regime that applies to all agency arrangements and a statutory regime that applies to most commercial agency agreements generally but there aren’t any specific agency laws that apply exclusively to fashion goods.

 

Common law agency rules

These are fairly basic rules that govern the relationship between agent and principal. The primary focus of these rules is to govern the power of the agent to bind and give rights to its principal when dealing with a third party (for example, when the agent enters into a contract on behalf of its principal). The common law rules tend to protect the principal rather than the agent.

 

Statutory commercial agency rules

The statutory rules are set out in the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053). These regulations apply to commercial agents (both sales and marketing) and give more protection to the agent than the principal, especially in comparison with the common law rules. They only apply to the relationship between a ‘commercial agent’ and its principal. A ‘commercial agent’ is ‘a self-employed intermediary who has continuing authority to negotiate the sale or purchase of goods on behalf of another person (the principal), or to negotiate and conclude the sale or purchase of goods on behalf of and in the name of that principal’. These regulations apply to agents who sell or purchase goods on behalf of their principal, but not to services. The regulations set out the key duties of the agent and principal and provide key protections for commercial agents, such as the right to a payment upon the termination of the agency, minimum termination periods and the timing and payment of commission. Some of the regulations are mandatory and some may be derogated from, provided that it is not to the detriment of the agent.

What are the most commonly used distribution and agency structures for fashion goods, and what contractual terms and provisions usually apply?

Selective distribution systems are often a popular form of supply chain for suppliers of luxury goods such as perfume, high-end cosmetics and beauty products and fashion goods. This type of system allows a supplier to have more control over the resale of its products, minimising any devaluing of the value of its luxury brand. In a selective distribution system, the supplier only supplies specified (ie, selected) distributors who meet certain minimum criteria, such as: having financial stability and a minimum level of profitability; an approved business such as a retailer of luxury goods; suitable showrooms or sales premises; and the ability to display the goods in a suitable manner. In return, these distributors agree only to supply end users or other distributors or dealers within the approved network. These networks usually impose restrictions upon both the supplier and the distributor, primarily to protect the luxury status of the product, which inevitably can have implications for competition law.

Import and export

Do any special import and export rules and restrictions apply to fashion goods?

There are no special import and export rules and restrictions that apply to fashion goods. However, there are general import and export rules for raw materials, components or finished goods that may apply.

The UK and EU announced on 24 December 2020 that they had reached a deal, pursuant to the Trade and Cooperation Agreement (TCA), that determines the framework for the new UK-EU relationship with effect from 1 January 2021.  The key elements of the TCA are:

 

Tariffs

  • Goods 'originating' in the EU-UK free trade area will not be subject to import tariffs or other customs duties or quotas.
  • Goods that fail to satisfy the relevant preferential origin rules will be subject to normal World Trade Organization (WTO) import tariffs (ie, the EU Common Customs Tariff or the Global UK Tariff).
  • Movements of goods (of whatever origin) solely for the purpose of repair will not be subject to customs duties.

 

Rules of origin

  • To benefit from the no-tariffs provision, a product must originate in the UK or EU. This means that EU materials used in UK production, and UK materials used in EU production, will help satisfy the preferential origin rules under the TCA.
  • The TCA provides for a number of ways in which a product's origins can be determined, revolving around where a certain proportion of a product's components are made and where it is assembled. Goods wholly obtained in the EU and/or UK will benefit from tariff-free trade. Goods produced using components originating from outside the EU and/or UK will need to meet product-specific origin requirements, which are allocated by tariff custom code in the TCA.
  • Proof of origin can be provided through self-declarations of origin, so there is no need to obtain origin certificates from customs authorities.

 

 

Customs formalities

  • Although import tariffs will not apply in most cases, customs formalities will apply and declarations will be required for imports and exports.
  • The TCA provides for mutual recognition of Authorised Economic Operator (AEO) status, which means certain simplified procedures will be available for AEOs.
  • Businesses may use a third party, such as freight forwarders or customs agents, to act as their representatives.
  • The TCA includes a protocol for UK-EU cooperation in relation to combatting value added tax, customs, and excise fraud.

 

Product standards regulation

  • There is no cross-recognition of conformity standards. This means that, with a few exceptions, products will have to undergo two separate conformity assessment processes so that they can be placed on both the EU and UK markets.
  • However, the TCA will allow self-declaration of conformity with EU product rules for low-risk products.

 

Importers/exporters of fashion goods will need to verify whether or not the goods being imported/exported are subject to or exempt from tariffs, quotas, or both, and the rules of origin.  They will also need to comply with the appropriate and applicable customs formalities and product standards for their goods.

Corporate social responsibility and sustainability

What are the requirements and disclosure obligations in relation to corporate social responsibility and sustainability for fashion and luxury brands in your jurisdiction? What due diligence in this regard is advised or required?

Corporate social responsibility and sustainability disclosures (and reporting) by companies are typically undertaken on a voluntary basis in the UK. However, in accordance with EU Directive 2014/95/EU, The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 do place obligations on certain large organisations that have at least 500 employees to include disclosures on environmental matters (including the impact of the company’s business on the environment), social matters and respect for human rights in a Non-Financial Information Statement (NFIS). In particular, this requirement applies to any listed company (or companies that undertake regulated financial activities) that is not a small or medium sized enterprise (SME) and has at least 500 employees (or is a parent company). The report must contain a description of policies pursued by the company, any due diligence processes implemented in respect of these policies and a description of principle risks in relation to these matters. Where an organisation meets these requirements, the NFIS for financial years commencing on or after 1 January 2017 should be reviewed to ensure compliance. In relation to the environment, there are various mandatory reporting requirements in relation to energy usage, greenhouse gas emissions and carbon efficiency that may be applicable, especially to larger and listed fashion companies in UK. Eligibility requirements vary by scheme and need to be considered according to business size, energy usage and operations on a company-by-company basis.

 

Modern slavery

The Modern Slavery Act 2015 is designed to combat modern slavery and, as well as imposing specific criminal offences on those directly undertaking modern slavery, human trafficking and exploitation, it also places a mandatory reporting obligation on companies that supply goods or services, have a global turnover of at least £36m, and carry on their business, or any part of it, in the UK. Such companies are required to publish a statement setting out the steps that they have taken to eliminate modern slavery and trafficking in their business and their supply chains. The statement must be published on the organisation’s website with a link to the statement in a prominent place on the homepage. Where this provision applies, the current statement, and previous statements starting from the financial year ending on or after 31 March 2015, should be reviewed as modern slavery is a particular risk within the supply chain of fashion and clothing brands. As a matter of best practice, it should include information about policies in relation to modern slavery and human trafficking, risks and risk management, supply chains and due diligence undertaken on supply chains, and the effectiveness of such measures. The UK government has indicated that it will amend the Act to make it a legal requirement for the statement to cover these particular matters. 

What occupational health and safety laws should fashion companies be aware of across their supply chains?

All organisations in England and Wales are required to comply with the Health and Safety at Work etc Act 1973 (HSAWA) and specific requirements of subordinate legislation (which is often very industry- or activity-specific, including, for example, working at height and chemical usage). The general duties of the HSAWA place requirements on organisations to ensure an absence of risk to their employees and those who may be affected by their ‘undertaking’. This is interpreted widely and means the business of the organisation. As such, a company may be liable for the actions or omissions of its contractors (for example, considering especially high-risk areas such as textile manufacturing and transportation) which could include those in its supply chain. In addition, any safety issues with products that arise could result in liability through the HSAWA. Potential liability under the HSAWA would need to be considered on a case-by-case basis. Failure to ensure an absence of risk so far as is reasonably practicable is a criminal offence liable to an unlimited fine.

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