Q&A: manufacture and distribution of fashion goods in Hong Kong

Manufacture and distribution

What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships? (What initiatives are you seeing from a legal perspective to address global supply chain issues?)

The supply chain for fashion goods encompasses a wide range of business activities, from development and manufacturing to distribution and sale of goods. Hong Kong does not have legislation specific to fashion goods. Instead, the applicable laws will depend on the particular activities undertaken by the parties. The development, manufacture, and supply chains for fashion goods are governed by general contract law in Hong Kong. Parties are generally free to negotiate the terms of their contracts, subject to certain statutory provisions, for example, restrictions on the exclusion and limitation of liability and implied terms in contracts for the sale of goods and services. Supply chains for fashion goods commonly involve distribution agreements, sale of goods agreements, sales representative agreements (or agency agreements), and franchise agreements. Contractual arrangements will often be based on standard terms and conditions of the supplier or purchaser, with varying degrees of negotiation depending on the counterparties.

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

Distribution and agency agreements for fashion goods in Hong Kong are governed by general contract law, comprised of statutory rules and common law.

Distribution agreements are subject to Hong Kong competition law, including the requirements of the Competition Ordinance (Cap 619), which prohibits anti-competitive conduct and conduct amounting to an abuse of market power in Hong Kong. Parties should ensure that any exclusive dealing clauses or selective distribution agreements, both common arrangements in the fashion industry, will not contravene the Competition Ordinance. Agency agreements are not generally subject to the Competition Ordinance.

Agency agreements are governed by the common law principles and rules regarding agencies, which relate to the relationship between agent and principal, including the power of an agent to bind the principal, and the respective rights of the principal and third parties in such dealings. Parties to agency agreements may be able to contract out of the relevant common law provisions to the extent permitted by the law. Further, the Factors Ordinance (Cap 48) governs the rights and obligations of mercantile agents, which are defined as agents in the business of buying, selling or consigning goods for sale, or raising money on the security of goods.

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

Distributors are commonly appointed on an exclusive or non-exclusive basis. Further, selective distribution systems are commonly used by high-end fashion brands. Under a selective distribution system, the supplier will agree to supply goods only to those distributors who meet certain minimum criteria, including, for example, financial stability and level of profitability. The purpose of a selective distribution system is to maintain brand image, as suppliers will retain more control over the resale of their goods. Since a selective distribution system restricts certain suppliers and distributors, the parties should consider whether their arrangements have competition law implications.

The usual contractual terms in distribution and agency structures for fashion goods include, but are not limited to, exclusivity, intellectual property ownership, product classification, trademark usage, duration, terms of sale, payment terms, delivery terms, obligations of the distributor or agent, subcontracting of contractual obligations, termination, assignability and dispute resolution mechanisms.

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

No specific import and export rules and restrictions apply to fashion goods. In some cases (eg, jewellery or watches containing radioactive substances), an import licence will be required. Other than that, Hong Kong Customs are active in inspecting and seizing suspected counterfeit fashion goods at the border.

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?

There are no such requirements specifically for fashion and luxury brands in Hong Kong. The Companies Ordinance (Cap 622) requires companies registered in Hong Kong (generally public companies and larger private companies) to provide business reviews in their annual director's reports. Such business reviews should include, among other things, a discussion on the company's environmental policies and performance and an account of the company's key relationships with employees, customers, suppliers, and others that have a significant impact on the company and on which the company's success depends. For companies that are listed on the Stock Exchange of Hong Kong, they are required to produce annual environmental and social governance (ESG) reports to make certain 'comply or explain' disclosures.

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

The Occupational Safety and Health Ordinance (Cap 509) and the Occupational Safety and Health Regulation (Cap 509A) apply to almost all Hong Kong workplaces.

The Occupational Safety and Health Ordinance imposes on employers a duty to provide and maintain a safe and healthy workplace, plant, and work systems, and safe access to and egress from the workplace. Employers are also required to make arrangements to ensure safety and health regarding the use, handling, storage, or transport of plant or substances, and to provide all necessary information, instruction, training and supervision for ensuring safety and health.

The Occupational Safety and Health Regulation stipulates further requirements in relation to the prevention of fire and other accidents, maintenance of workplace hygiene and environment control, first aid, and the expectation of employers in manual handling operations.

The Commissioner for Labour may issue improvement notices for specific measures or arrangements to be put in place, or issue suspension notices against workplace activities that may cause imminent danger to employees, or both. Failure to comply with these notices constitutes an offence that is punishable by fines up to HK$500,000 and imprisonment up to 12 months.