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Contractual Negotiations In The Fashion Industry; Types Of Agreements And Licensing Agreement

Contracts/Agreements (hereinafter mentioned as "Agreements") make it to the top of the list when it comes to the effective functioning of a business, no matter what the industry is. The fashion industry has evolved tremendously in such a short span of time. The industry is home to numerous employees and contributes significantly to a nation's economy.

This article shall focus upon the various Agreements which ensure smooth functioning of the industry with minimum liability. Divided into three stages, we will look at the most important facets of contracts which play a vital role in administering the fashion business.

Licensing is the activity of negotiating with another party to gain and use rights, in this case, intellectual property rights, in exchange for a price (a fee or royalty). A trademark owner (the licensor) and another party (the licensee) often enter into a licensing agreement in which the licensor allows the licensee to use its trademark in commerce.

Simply expressed, a license gives the licensee access to the property without transferring ownership. Licensing allows fashion brands to grow, complement and reinforce their brands, expand into new areas, and improve their image.

Stage I: Making of the Product

This is the initial stage. Here we will take a look at the Agreements that are necessary for the manufacturing of the products i.e. Manufacturing Agreements and Private Label/ White Label Agreements.
  1. Manufacturing Agreements:
    A manufacturing agreement is contracted between two parties, the designer and the manufacturer. Here, the product designer demands the creation of the goods (clothing items, accessories, footwear, bags, etc.) on his/her behalf from the manufacturer.

    The Manufacturing Agreement must include the following clauses:
    1. Quantity of the Product.
    2. Shipment: How will the products be shipped to the designer by the manufacturer.
    3. Modes of Payment: What shall be the outstanding amount and how will the payment be made.
    4. Dates of Delivery: When will the product be delivered?
    5. Product Specifications: Maintaining the quality of the product.
    6. Details about the manufacturer.
    7. Intellectual Property (IP) Rights: Designers ownership of the intellectual property.
    8. Liability of both the Parties.
  2. Private Label/ White Label Agreements
    Under Private Label/White Label (A.G. Paphitis & Co.) Agreements the designer sells products manufactured under their brand. The manufacturing companies provide the designers with their product, the company on the other hand markets the product as their own. This method minimizes the designing cost, manages time, and lifts off the burden from the designer's head. A very popular example of a Private Label (Lamb) is AmazonBasics. It is an in-house brand of Amazon which includes a variety of products ranging from electronics to house goods at a much cheaper cost than other competitive brands.

    The Private Label/White Label Agreements must include the following clauses:
    1. Price of the Product.
    2. Quantity of the Product.
    3. An assurance of the quality of the product.
    4. Right of selling the product under a specified trademark.
    5. Liability of both the parties.

Stage II: Breaking the Product Out

Under the second stage, we will look at the Agreements necessary for the product to reach the market i.e Consignment Agreement, Showroom Agreement, and Independent Sales Representation Agreement.
  1. Consignment Agreement
    A Consignment Agreement (Practical Law Commercial) is a contract between the designer and the retailer where the former consents to the latter to sell the design at his/her marketplace for a particular period of time. If the goods are not sold by the retailer they are returned to the designer company.

    The Consignment Agreement must include the following clauses:
    1. Term and Termination of the Agreement.
    2. Terms of Sale for the Designer Goods.
    3. Percentage/Profit Percentage each party tends to receive.
    4. Effect of non-sale on the Designer Goods.
  2. Showroom/Dealership Agreement
    A Showroom/Dealership Agreement is a contract between the owner of the showroom and the designer. The dealer grants the designer permission to showcase his/her products at their showroom. The dealer owes the designer the responsibility to not only showcase his/her items but also to introduce the products to its buyers and sell them.

    A Showroom/Dealership Agreement must include the following clauses:
    1. Term and Termination of the Agreement.
    2. Quantity and Quality Assurance of the Products.
    3. Modes of Payment.
    4. Shipping Policy.
    5. Dates and Methods of Delivery.
    6. Specifications of the Product(s).
    7. Details of the Designer.
    8. Intellectual Property Rights
    9. Liability of both the Parties.
  3. Independent Sales Representation Agreement
    An Independent Sales Representative (also known as Sales Rep Agreement) Agreement (Guillermo and Kolson, 178) is a contract between the designer company and a sales representative where the company assigns the representative to display their collection to the list of his/her customers. The representative is obligated to take orders and pass the details to the designer company. Representatives are offered a commission on the sales by the designer company. This Agreement is quite similar to the Showroom Agreement.

    The Sales Rep Agreement must include the following clauses:
    1. Term and Termination of the Agreement.
    2. Representative's Obligations.
    3. Exclusivity of the Products.
    4. Products and Territories covered by the Representative.
    5. Commission of the Representative.
    6. Guaranteed Percentage of Orders by the Representative.
    7. Showroom Tariff.

Stage III: Expanding the Brand

The third stage is where we expand our fashion brand with the following agreements i.e Licensing Agreement, Joint Venture (JV) Agreement and Distribution Agreements. These agreements will safeguard and widen the business of the designer company.
  1. Licensing Agreement
    A Licensing Agreement is a contract between the designer company and a second party where the company permits the use of the trademark within a specified territory for a limited period. This process is generally used to increase territorial reach and ensure a constant supply of products without investing a huge amount of funds. The designer companies can avoid the struggle of building new manufacturing units and gathering the sales segment.

    A Licensing Agreement must include the following clauses:
    1. Term and Termination of the Agreement.
    2. Assignment of Products.
    3. Clause of Exclusivity.
    4. Channel of Sale.
    5. Royalty Payments.
    6. Use of Manufacturers
    7. Use of Retailers
    8. Use of Wholesalers
    9. Licensed Trademarks
    10. Intellectual Property Rights (IP) Rights
    11. Liability of both the Parties.
  2. Joint Venture (JV) Agreements
    A Joint Venture (JV) Agreement is a contract between two companies where both come together to create a fresh establishment with their competence. Bally-Reliance Brand Limited (RBL), Karl Lagerfeld-Cover Story, Raghvendra Rathore-Reliance Brand Limited (RBL), Shantanu & Nikhil-Aditya Birla Fashion & Retail Limited (ABFRL) are a few of numerous JV's (Vogue Business) running in India. In a JV, both the brands invest and share the revenue plus profits.

    A Joint Venture (JV) Agreement must include the following clauses:
    1. Term and Termination of the Agreement
    2. Initial Investments by both the Parties.
    3. Classification of Products.
    4. Registered Trademarks and Licenses.
    5. Intellectual Property (IP) Rights.
    6. Renewal of the Agreements.
    7. Profit Division.
    8. Advertisement & Marketing.
    9. Rights of Audit

  3. Distribution Agreements
    A Distribution Agreement is a contract that is used to build trading relations between the distributor and retail outlets. The distributor collects the products from the designer company and trades them with the retail houses. The Distribution Agreements can be Exclusive, Non-Exclusive, Selective and Sole.
    1. Exclusive Distribution Agreement
      Under the Exclusive Distribution Agreement, the manufacturer allows only one distributor to trade the products with the retail outlets.
    2. Non-Exclusive Distribution Agreement
      Under the Non-Exclusive Distribution Agreement, the designer company authorises multiple distributors to resell the products to the retail houses.
    3. Selective Distribution Agreement
      Under the Selective Distribution Agreement, the company permits the distributors to resell to selected retail houses. This agreement is often used by luxury brands.
    4. Sole Distribution Agreement
      Under the Sole Distribution Agreement, the supplier appoints one distributor as their sole distributor within a geographical area.

Consignment Contract:

This is a contract between a retailer and his agent wherein the retailer grants the right to sell, merchandise, conduct an exhibition for sale of the fashion apparel or inventory. Here, the retailer is called as consignor and his agent as consignee in the whole contract.

Clauses In Consignment Contract:

  1. Preamble: It depicts the details and facts of whole contract in short
  2. Duration clause
  3. Terms of sale of products clause
  4. Percentage that each party would receive clause or Consignment fee clause
  5. Payment options clause
  6. Liability for lost or damaged stock clause or Insurance Clause
  7. Effect on non-sale clause
  8. Minimum Price clause: the price below which the fashion products should not be sold
  9. Location and storage of stock during consignment clause
  10. Expenses clause
  11. Modification/Amendment clause
  12. Applicable law clause

Showroom Rent Contract:

It is a contract between the shop owner or showroom owner and the designer of fashion products for renting out the shop space to sell his stock. It is a type of a rent contract between these parties wherein the shop owner grants his shop to the designer against periodical payments of rent for the letting.

Clauses In Showroom Rent Contract:

  1. Preamble
  2. Duration clause
  3. Expenses clause
  4. Terms of the rent payment clause
  5. Applicable law clause
  6. Dispute Resolution clause: In which court to refer the dispute in is included in it.
  7. Terms of letting clause: for example, whether the showroom will be furnished or not
  8. Payment of taxation clause
  9. Breach of contract clause
  10. Liability for damage to the showroom clause
  11. Security deposit clause: the amount of deposit to be given by the designer to the owner for rent
  12. Modification/Variation clause
  13. Termination clause: it also includes notice period to be given to each other

Franchise Contract In Fashion Industry:

This is a contract wherein one party grants the authority to other to open and operate the business in the name of the selling party. The party granting such a right is called as a franchisor and other party is termed as a franchisee. We find many franchises in fashion industry such as Being Human,Fittin, Choupette, Duke,, Bombay dyeing, etc.

Clauses Under Franchise Contract In Fashion Industry:

  1. Preamble
  2. Franchise fee clause
  3. Security Deposit clause
  4. Royalties clause
  5. Mode of Payment clause
  6. Confidentiality clause: wherein the franchisee agrees not to disclose franchisor's trade secrets
  7. Standards of Operations clause: wherein fixed set of standards have been set and the franchisee needs to follow them accurately
  8. Inspection clause: Right of franchisor to inspect the premises at regular intervals
  9. Applicable laws clause
  10. Proper registrations by franchisor relating to licenses clause
  11. Advertising and Brand Promotion clause
  12. Training, supervision and support clause
  13. Use of trademark and intellectual property clause: This is one of the most important clauses wherein the franchisor needs to have registered the trademark and should have exclusive rights for use of such a trademark
  14. Duration of contract clause
  15. Renewal clause
  16. Termination of contract clause
  17. Dispute Resolution clause: for example, arbitration, mediation, conciliation
  18. Force Majeure clause: Wherein any of the parties fails to perform their functions due to unforeseen circumstances, then what should be done.

Fashion Related Advertising And Promotional Contract:

It includes a contract between a designer/retailer/manufacturer of fashion products and an advertising and marketing agency for promoting these products through various channels in exchange of an advertising fee.

Thus, as we saw above these were some of the different types of contracts under the fashion Industry and some of which though contains similar clauses but are also specialised as per their work. Some clauses such as severability, survivability, dispute resolution, applicable governing laws, confidentiality clause, force majeure clause are amongst the most important clauses which safeguards the contract against uncertain or unforeseen events that can make the contract disputable or void.

Inserting these clauses ensures that the contract remains in force and is termed to be valid. The non-disclosure clause also ensures that the valuable trade secrets are not revealed by the parties to the contract and the survivability clause exists even after the parties have finished dealing or performing as per the contract and if such a term is breached, the consequences need to be faced by the defaulting party as per the provisions in that effect in the respective contract.

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