Reading between the lines
Jill Pullen spoke to fashion industry lawyer James Cameron about how to negiotiate a fair supply chain contract.
Making a snap decision on a supply chain contract is a costly and often fatal mistake.
Whilst this might seem like common sense, the harsh reality is that many textile and apparel companies continue to jeopardise their supply chains everyday by ignoring and or skimming over the finer details of their contracts.
Failure to understand a contract, and in turn to slow down contract negoiations, can end up with all associated parties later becoming involved in lengthy and costly mediation and court proceedings.
Further ramifications could involve everything from disagreements over ownership of stock and complaints about stock service levels to accusations of breaches of state or federal fair trading laws or trade mark infringements.
James Cameron (All key issues addressed in a contract should also be raised at the earliest possible stage, not as the contract is being signed or partway through the term of the contract.
"Don't leave your review of written terms and conditions to the last minute - be proactive and communicate early," says Cameron.
"Many of the issues that cause problems in supply chain management could be avoided with a more structured approach to the negotiation of the contract."
Prior to signing a contract Cameron recommends companies ensure it outlines clear payment terms, appropriate termination clauses, clear timeframes for delivery and that all goods to be supplied and delivered are clearly identified.
"Making sure the terms agreed upon actually form part of the contract is also important," says Cameron.
"Handing a customer a copy of your terms and conditions after they have paid for the goods may mean that those terms and conditions don't properly form part of the contract. There is a right and wrong way to enter into supply agreements. Which one you choose can have a significant affect on each parties rights of things go wrong."
Evidently, here are the do's and don't's when it comes to negotiating a fair supply chain contact.
Be aware of fair trading laws
The Trade Practices Act places a number of restrictions on anti-competitative conduct, so it is imperative that apparel and textile companies get legal advice on the effect of these provisions prior to finalising a contract.
"Clauses that seem reasonable to the parties may infact breach Australian or international laws," says Cameron.
"The penalties for getting it wrong can be severe, so don't just ignore it."
Breaches of fair trading laws can include attempts by suppliers to set a 'price floor' below which a retailer cannot on-sell the goods supplied. To do this constitutes 're-sale price maintenance', so any companies involved may face penalties of up to $10 million. It is also important to remember that individual officers and managers aren't immune from such heavy penalties. They too can face fines of up to $500,000.
Service level agreements
Depending on the purpose of the contract, an effective Service Level Agreement can provide customers with additional protection.
Should a company decide to develop such an agreement, it must ensure that the service levels are accurately defined in the contract.
There should also be an accurate process for measuring the actual level of service provided.
"Consider how long the measurment period should be and whether service levels should be fixed throughout the life of the contract," explains Cameron.
Suppliers, on the other hand, should also consider negotiating for performance bonuses in the event that the minimum service levels outlined in the contract are exceeded.
In the event of non-payment
A well drafted retention of title clause or 'all-monies' clause can provide suppliers with invaluable protection in the event that a customer doesn't meet their financial obligations.
These type of clauses state that title to the goods supplied under the contract will not pass until the customer has paid all outstanding debts due to the supplier.
"This may allow the supplier to take possession of stock and or stake claim to any proceeds of sale of the goods to meet the outstanding debts owed to it by the customer," explains Cameron.
"Really, it is one of those contentious clauses that a supplier will always ask for and which a customer should try to have watered down or excluded from the agreement altogether."
Intellectual property
Intellectual property rights are without a doubt the most important and fragile assests that a company can possess.
Cameron recommends that apparel manufacturers and designers get advice on the finer details in a supply contract in relation to any intellectual property (i.e: copyright, designs and trade marks) that are owned by either party or that might be created over the course of the contract. Failure to understand the rules of intellectual property
could prove very costly.
PULL QUOTE - "There is a right and wrong way to enter into supply agreements. Which one you choose can have a significant affect on each party's rights if things go wrong."
Contract check list
Bruce Haines, managing director of Melbourne-based logistics provider Dean World Cargo, urges apparel and textile companies to "do their homework" before signing a supply chain contract.
Prior to signing on the dotted line, Haines recommends companies ensure their contracts specify:
* that only full size containers be used in order to maximise protection against pilgerage and ensure faster consignment delivery;
* minimum cubic metreage per container - this will help to control costs;
* a detailed load plan to ensure that goods are packed properly to avoid damage in transit.
Haines adds that it is also important for service users to specify requirements when obtaining a forwarding quote.
"They should specify a shipping line and transit time, otherwise they might find their goods are trans-shipped via another port, leading to delays in end-of-chain delivery," says Haines.
"In negotiating a specific value-added contract, it is essential that both the service provider and the customer understand the requirements and responsibilities of each party."