The new "normal" - transparency and flexibility in luxury commercial contracts
Current events have forced luxury brands' commercial arrangements into the spotlight like never before. Brands have had to flex, and quick – whether through changing their production to essential garments or hand sanitiser, cancelling a new product launch or season's collection or finding new ways to market such as livestream shopping (on Chinese commerce platforms like Tmall or Taobao Live). Luxury brands have also been forced to have honest and transparent conversations with their consumers and other stakeholders about their current challenges – whether announcing pay cuts for executives, profit warnings or closures of their sales outlets (such as stores, restaurants, bars) and of manufacturing/distribution centres.
Being flexible and transparent are of course not new ideas for luxury brands. As new consumer demographics have emerged over the past few years (like millennials through to Gen-Z) brands have had to flex to meet their demands and also be more transparent as the new conscious generation of luxury shoppers expect brands to be much more open (eg, about their supply arrangements) - demanding traceability, authenticity and sustainability in order to maintain trust in the brand.
A brand's' commercial contracts can be a key way of achieving flexibility and transparency through its commercial arrangements. As the luxury sector moves forward in 2020 and brands redefine their approach to bringing value to consumers, what lessons have been learned and can be taken forward in the commercial contracts of the future? Building more flexibility and transparency into commercial contracts now could help brands to create a contract base redefined for the new "normal".
The approach to a commercial contract will inevitably depend on the commercial priorities in play and the relative strength of the parties' bargaining positions. The following should, however, give some practical guidance for achieving flexibility and transparency within commercial contracts.
- There are a number of ways in which brands can achieve flexibility in commercial contracts, including:
- Ensuring that there are no (or at least limited) exclusivity restrictions imposed on the brand and, if there are restrictions, being clear on what "exclusivity" means. For example, even if the contract prevents signing a deal with a new partner for X number of years, a brand could build in an express right to conduct tender processes with other potential partners during the term of the contract;
- Ensuring that some flexibility is built into any minimum purchase obligations such as clear rights to modify volumes or SKUs upon the occurrence of specified trigger events;
- Having simple and clear rights to cancel an order or defer delivery dates (remember, if a supplier is holding goods to the brand's order, title should usually remain with the brand but risk with the supplier);
- A short, rolling term (rather than a fixed longer term) will make a contract more agile and a right to terminate for convenience with a reasonable specified notice period is critical in an uncertain economic climate;
- Finally, as this year has proven, force majeure clauses should not be overlooked as a means of responding to change. Ideally, a force majeure clause should be tailored to the particular circumstances/transaction. To help create a tailored clause consider: what matters will trigger the provisions (and when); what matters are not outside of a party's reasonable control (eg, appropriate business continuity/disaster recovery provisions); what are the consequences; and, what steps should be taken and when? Force majeure clauses often focus on the obligations that are delayed or impossible to perform but it is also crucial to consider payment obligations (if not impossible, do they continue even if no services are being provided?). If a force majeure event arises, make sure to also keep records as to why contractual performance was delayed or prevented and what steps were taken to mitigate its effects.
There are a number of ways in which brands can achieve transparency through commercial contract arrangements, including:
- Robust compliance frameworks can set clear risk-based standards for brand partners (eg, suppliers) to adhere to, enable brands to demonstrate that standards are in place, mitigate the risk of non-compliance and help to ensure adherence to relevant legislation;
- For example, a requirement upon a partner to conduct and document ongoing monitoring into modern slavery and human trafficking practices will enable the brand to understand the partner's compliance commitment and help to demonstrate to relevant stakeholders (including consumers, investors and regulators) its own commitment to protecting workers. Events this year have shone a spotlight on the vulnerability of garment workers in low cost manufacturing centres so we expect this area of contracting to be subject to increasing focus;
- Placing stringent record-keeping and reporting obligations upon partners is important to help ensure that if required, the brand can readily identify and be transparent about key aspects of its products or garments such as costs and sourcing of materials or ingredients (within food and drink), labour, transport, duties and mark-up. A number of luxury brands are introducing blockchain technology to capture this information (including for example producers of champagne, luxury leather goods, fine jewellery and a beauty e-commerce platform);
- Similarly, clear and well-thought through audit rights will help to enable the brand to promptly investigate and respond to compliance issues it suspects or discovers during the commercial relationship;
- Finally, aside from supply and manufacture, achieving transparency is important in respect of the data protection practices of partners with whom the brand shares personal data (eg, a CRM cloud hosting provider). Understanding how the partner will handle personal data and documenting a clear compliance framework in commercial contracts (such as a standard DPA listing the agreed data processors) will help the brand to demonstrate that it conducted appropriate due diligence and that robust security measures are in place (including appropriate response times and processes to any cyber incidents). It is also a critical aspect of building and maintaining consumer trust.
Luxury brands are undoubtedly using this time to remind and reinforce their target market of their brand values. It is arguably more important than ever for brands to be flexible, live to change and transparent in how they operate. Reflecting these approaches within commercial contract arrangements is key to ensuring brand values are maintained.(This article was first published in Luxury Law Alliance)