Signing on the dotted line: the importance of commercial contracts
28/11/2019 by The Red Tree
This article is written by James Fowler, a Commercial lawyer at leading international law firm Bird & Bird LLP. James advises beauty, luxury, wellness and other retail brands on the contracts which underpin their business and enable them to enter new channels, markets and territories – from manufacturing, warehousing and logistics arrangements through to distribution, retailer and franchising agreements.
Whether you’re in the early stages of building your beauty brand, or have an established business and are looking to expand, the process of entering into formal written contracts (be it with suppliers, logistics partners, distributors or retailers) may sometimes seem daunting, confusing or even unnecessary.
Having robust written contracts in place, however, will put your business on a firm footing, and help to head off future disputes at the pass.
Why are written contracts important?
Well drafted commercial contracts give both parties certainty from day one as to what rights and obligations they expect to have, how their relationship will be governed, and the extent of their respective risk and liability.
An ad-hoc arrangement with a third party may appear convenient, flexible and cost-effective – particularly at the outset, when everything is going well. If the relationship hits a bump in the road, or if there’s a mismatch of expectations, or if your partner starts to misbehave, it will be far more difficult to bring your partner into line and to obtain remedies for any loss or damage you have suffered if you cannot point to a legally binding contract.
This is particularly important when your partner is going to be using your intellectual property (e.g. if they will be manufacturing products using your product formulations and specifications, or promoting and selling products using your trade marks). In these instances it is vital to have sufficient contractual safeguards in place to police their use of your most valuable assets.
Robust contracts will also be of importance when you come to take on investment, and when you look to exit your business. One of the first items on a potential investor or purchaser’s due diligence checklist will be to ensure that your business has binding arrangements in place with your key suppliers and customers, and that those contracts do not contain any deal-breaking “red flag” risks. To seek to document or re-negotiate your key relationships at that point will put you firmly on the back foot.
What are some key points to look out for?
Scope and Exclusivity – your contracts should define very carefully what rights you are granting to your partner, particularly if you are seeking to grant exclusive rights.
In the days of bricks-and-mortar, exclusivity was often defined on a territorial basis. In an interconnected and multi-channel era, exclusivity can be carved up in a number of ways – such as by product, by channel, or by customer group.
Whatever rights you grant, you should ensure that all rights not expressly granted to your partner are expressly reserved to you.
Treatment of intellectual property – this will be a vital concern, since your intellectual property is your most vital asset.
If you are contracting with a product developer you will need to ensure your contract assigns to you the ownership of the intellectual property in anything they create for you – as a matter of law they will often be the first owners of such intellectual property.
If you are contracting with a distributor or retailer, who will be marketing and selling your products under your brand, you will want contractual protections over the way they use your brand, and to ensure that they notify you of, and allow you to control, any infringement claims that may arise.
Terms of supply – your contracts should set out clear processes for ordering, delivery and payment.
English law permits parties to limit their liability for certain breaches. If you are contracting with a manufacturer or a logistics partner, you will want your contract to contain broad remedies for defective products, non-delivery of products, late delivery of products and incorrect delivery of products. If you are contracting with a distributor or retailer, you will want to limit your liability for any failure by you to fulfil orders to them correctly.
Termination – if your relationship breaks down, you need to be able to up stumps and walk away. Your contracts should contain express rights for you to terminate, and you should think carefully about the types of breaches that will have the biggest impact on your business, and ensure they are captured within the clauses dealing with termination of the contract.
How can lawyers help?
Lawyers can help in a number of ways with your commercial contracts.
Parties with huge commercial bargaining power (such as major retailers) are likely to have their own standard contracts that they use with brands. It is also likely that there will be very limited scope to negotiate these contracts. However, lawyers can review these contracts and report to you on their key terms, so you can be sure of exactly what is expected of you, and what you can expect of your partner. They can also identify key risks arising from these contracts, and seek to negotiate them on your behalf.
Conversely, other commercial partners may not have their own standard contracts, and this presents an opportunity to get on the front foot. Here, lawyers can draft a template contract for you, tailored to your needs and putting you in the most favourable position. In situations where the same contract can be used with multiple partners (for example in international distribution) the initial outlay can prove very cost-effective, and contract management will be made easier by dealing on similar terms with a network of partners.
The Red Tree is the UK’s leading international beauty brand consultancy and a powerhouse of ideas, insight and inspiration. For an informal discussion on how we might help you, please contact us.
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Any company entering The Beauty Accelerator™ competition must be based and registered in the UK.
The scheme by which investment into the winning brand will be made is the Seed Enterprise Investment Scheme (SEIS). You must be eligible for SEIS to enter The Beauty Accelerator but you do not need to be registered for SEIS. You can be in the process of applying for SEIS and receiving Advanced Assurance from HMRC, which is free of charge to obtain and certifies to investors that the criteria necessary to qualify for SEIS have been met by the company at the time of the application. You do however need to be SEIS registered at the point of investment.Click here For further information about SEIS
As is the case with all equity investments, the winning brand must be willing to provide equity stakes for both SFC Capital and The Red Tree. In addition, the winning brand might be required to pay a monthly fee for the duration of the 12 month period of assistance from The Red Tree. The size of the equity stakes for both SFC Capital and The Red Tree are unknown at this stage and will be based on the valuation of the business at the time of investment. The value of the monthly fee to The Red Tree will be determined by the scope of work required by The Red Tree and will be agreed in consultation with the winning brand. The equity stake, monthly fee and scope of work will be discussed in further detail with short listed brands during the interview stage.
Brands that applied for The Beauty Accelerator™ 2022 can apply for The Beauty Accelerator™ 2024.
Applicant brands should ideally have proof of concept – the business should ideally be in operation with at least one product currently retailing on the market, an existing website in operation and a number of months of trading.
Under exceptional circumstances, brands that are at concept stage will be considered.
There should be a team in place or a willingness to take on a co-founder at an early stage.
A business plan must be in place and submitted as part of your application to demonstrate the revenue that can be delivered.
The business should not be valued at more than £1,000,000.
All R&D should be completed as funds invested will only be used for marketing and commercial activity.
If you are short listed, you must be available to attend the virtual shortlist interview. It is likely that short listed brands will be required to attend more than one virtual interview.
If you are a Finalist, you must be able to attend The Beauty Accelerator™ Final, either virtually or in-person.
You cannot apply for or already be in the process of applying for another accelerator or incubator during the period December 2023 to December 2024.
If you are selected as a finalist, and if you go on to win The Beauty Accelerator™, you must agree to exposure of you and your brand through The Red Tree’s, SFC Capital’s and Freeths online and social channels and a possible marketing campaign.
Confirmation of the winning brand is subject to SEIS eligibility confirmation, agreement on equity stake and The Red Tree fee, and completion of due diligence.
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