Q&A: manufacture and distribution of fashion goods in Canada - Lexology

Manufacture and distribution

Manufacture and supply chain

What legal framework governs the development, manufacture and supply chain for fashion goods? What are the usual contractual arrangements for these relationships?

There are a number of legal frameworks that apply, including intellectual property, manufacturing process safety standards, product regulatory standards, and international trade law. Generally speaking, product development contracts contemplate intellectual property ownership and the application of royalties, design and fabrication methodologies, and sourcing strategies or restrictions. From the manufacturing and supply chain perspective, effective contractual agreements will contemplate risks and liabilities from the point of manufacture all the way through to retail sale.

Manufacturing contracts are often executed between a producer and a brand owner, a distributor, or directly with a retailer. Terms that are particularly important to include are those governing manufacturing processes, finished product standards, supply chain integrity (including forced labour considerations), design execution expectations and liability for sub-standard or non-compliant product. Potential corrective measures such as recall protocols are also important to include. On the supply chain side, key issues to consider are production and distribution rights, transportation and shipping, title transfer, import/export compliance and supply chain safety. Currently, emphasis on corporate social responsibility and its interplay in supply chain management has become more important with respect to brand protection and consumer interest. In fact, Canada has recently enacted additional measures relating to human rights violations within the supply chain, especially as they relate to imported goods that have been produced in whole or in part by forced labour. We anticipate that additional legislation will be proposed in the months ahead, addressing forced labour and related reporting requirements.

Distribution and agency agreements

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

In Canada, commercial distribution and agency relationships are primarily governed by contract law. There is no federal or provincial legislation that specifically targets distributorships or agency agreements in Canada, nor legislation that specifically targets these arrangements for fashion goods.

While there have been Canadian cases in which courts found certain automotive dealers were ‘franchisees’ under the relevant Canadian franchise legislation, it is unlikely that typical distribution relationships between suppliers of fashion goods and retailers that carry multiple fashion brands would be treated as franchises. Nonetheless, parties should take care to consider if the terms of a particular relationship could constitute an unintended franchise.

A number of courts in Canada have ruled that because distribution relationships require mutual trust between the parties, either party may terminate a distribution agreement by giving reasonable notice to the other party in the event of a breakdown in that trust. To enforce this common law right in court, the terminating party would normally need to put forward evidence to demonstrate that the relationship of trust between the parties is broken.

There is also a line of case law dealing with claims brought by customers and other third parties that claim that a franchisor or manufacturer is legally responsible for the acts of its dealers, distributors or franchisees. While it is rare for a distributor to be treated as an ‘agent’ of its supplier (and distribution agreements will normally disclaim an agency relationship), the case law has developed a principle known as ‘apparent authority’ (also referred to as ‘agency by estoppel’). Under this principle, where a supplier causes third parties who transact with distributors to reasonably believe they are transacting with the supplier, the supplier may be directly liable to the third party. To mitigate the risk of this outcome, distribution agreements in Canada would normally require distributors to identify themselves as being owned and operated independently from the supplier.

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

Retailers often deal with a fashion brand supplier directly, a distributor representing a particular brand or distributors that represent multiple brands. Typically, the distribution agreements will include provisions that specify whether or not the rights are exclusive, if the rights are limited to a particular territory and any specific rights and obligations associated with the marketing and sale of the products, including (but not limited to) the use of associated trademarks. These agreements also usually specify the relevant ordering procedure, shipping and delivery terms (including title, risk of loss, inspection and acceptance) and payment terms, as well as termination rights and the allocation of risk and liability between the parties.

Import and export

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

Canadian import and export laws do not impose restrictions specific to fashion goods as such. However, Canada is a party to a number of bilateral and plurilateral free trade agreements (FTAs) that establish preferential tariff provisions for certain textile and apparel goods that are imported or exported within recognised free trade zones (including, for example, the United States, Mexico, Chile, Costa Rica, Honduras, Vietnam and Singapore). These FTAs present an opportunity for textile and apparel products that satisfy prescribed rules of origin to be imported into Canada under preferential trading conditions, often including lower rates of duty. In some instances, textile and apparel goods imported into Canada pursuant to Tariff Preference Level arrangements in FTAs may require an import permit issued by Global Affairs Canada under the authority of the Export and Import Permits Act.

In addition, Canada’s Textile Labelling Act and Regulations prohibit the importation of consumer textile articles that are not labelled in accordance with that statute. Specific labelling requirements vary depending upon the article at issue, but generally consumer textile goods must display the fibre content and percentage by mass of the article (in both French and English), and the identity of the manufacturer, processor, finisher, retailer or importer of the product.

Fashion and luxury goods not subject to the Textile Labelling Act (ie, non-apparel and non-fabric goods) may instead be required to comply with Canada’s Consumer Packaging and Labelling Act and Regulations (CPLA). Like the Textile Labelling Act, the CPLA prohibits the importation of consumer prepackaged products that do not comply with the specific labelling requirements prescribed in the Regulations. Consumer prepackaged products are broadly defined as including any product (subject to limited exemptions) that is packaged in a container in such a manner that it is ordinarily sold to or used or purchased by a consumer, without being repackaged. Accordingly, a wide variety of luxury and fashion accessories, cosmetics and non-textile goods can be expected to be subject to the CPLA.

Finally, Canada is a signatory to the Convention on International Trade in Endangered Species of Wild Flora and Fauna and has implemented it domestically by way of the Wild Animal and Plant Trade Act and Regulations (WAPTA). Pursuant to the WAPTA, the Canadian government maintains a list of endangered and protected species, the bi-products of which (fur, pelts, skin, etc) can only be imported pursuant to a permit. This includes a number of reptile skins, ivory products and furs of various endangered or protected species.

Corporate social responsibility and sustainability

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?

Securities legislation in Canada requires reporting issuers to disclose the material risks affecting their business and the financial impacts of the risks. This includes material information about environmental and social issues. Issuers may have additional disclosure obligations under the timely disclosure policies of the relevant stock exchange, which require the immediate public disclosure of material information about a company that has a significant effect, or would reasonably be expected to have a significant effect, on the market price of the company’s securities.

In October 2010, the Canadian Securities Administrators published Staff Notice 51-333, Environmental Reporting Guidance (the Staff Notice) to assist issuers in understanding their reporting requirements in respect of environmental issues. The Staff Notice does not specifically address social information, but it can be interpreted to include material social information, as disclosure requirements in the Annual Information Form and Management’s Discussion and Analysis cover all material issues. Disclosures may be required in connection with climate change-related risks, environmental trends and uncertainties, environmental liabilities, asset retirement obligations, financial and operational effects of environmental protection requirements, and risk oversight and management. In 2020, certain amendments came into force under the Canada Business Corporations Act that require all federally incorporated companies to disclose information on the diversity of their board of directors and senior management to shareholders.

There are also several internationally recognised frameworks and guidelines that Canadian businesses use to voluntarily report on their sustainability initiatives, including the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines, the Equator Principles, the International Integrated Reporting Framework, and the Sustainability Accounting Standards Board (SASB) Standards. The GRI guidelines have been widely adopted by Canadian companies (both publicly traded and privately owned) across industries.

Due diligence of sustainability reporting should consider how companies are managing and informing stakeholders about the company’s social, environmental, governance and economic performance, as well as communicating the company’s values, priorities and action plans and demonstrating how sustainability is linked to the company’s strategy. In addition, the company’s key performance indicators, performance and impacts should be considered in assessing the effectiveness of the company’s sustainability reporting processes.

In October 2010, the Canadian Securities Administrators published Staff Notice 51-333, Environmental Reporting Guidance (the Staff Notice) to assist issuers in understanding their reporting requirements in respect of environmental issues. The Staff Notice does not specifically address social information, but it can be interpreted to include material social information, as disclosure requirements in the Annual Information Form and Management’s Discussion and Analysis cover all material issues. Disclosures may be required in connection with risks, environmental trends and uncertainties, environmental liabilities, asset retirement obligations, financial and operational effects of environmental protection requirements, and risk oversight and management.

There are also several internationally recognised frameworks and guidelines that Canadian businesses use to voluntarily report on their sustainability initiatives, including the GRI Sustainability Reporting Guidelines, the Equator Principles, the International Integrated Reporting Framework, and the SASB Standards. The GRI guidelines have been widely adopted by Canadian companies (both publicly traded and privately owned) across industries.

In response to the increasing global regulatory focus on supply chain risks, Global Affairs Canada and the Canadian Trade Commission Service issued several measures in 2020 to Canadian businesses designed to address human rights violations in global sourcing and impose greater obligations on companies doing business abroad. These measures address ongoing reports of human rights violations in Xinjiang, and set out the Government of Canada’s compliance expectations with respect to Canadian entities doing business with that region in China. Other regulatory initiatives include the enactment of new authorities under the Special Economic Measures Act and the Justice for Victims of Corrupt Foreign Officials Act, which allow the government to impose economic sanctions against parties involved in or facilitating gross violations of human rights or acts of significant corruption. In addition, the Customs Tariff was amended effective 1 July 2020 to prohibit the importation of goods from any country that are produced wholly or in part by forced labour. Further, An Act to enact the Modern Slavery Act and amend Customs Tariff was re-introduced in the Canadian Senate in October 2020. This proposed legislation imposes an obligation to publicly report on an annual basis the measures taken to prevent and reduce the risk that forced labour or child labour is used in any step of the production (1) of goods in Canada or elsewhere, or (2) of goods imported into Canada. It also introduces a prohibition on importation of goods produced in whole or part by child or forced labour.

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

There is federal and provincial or territorial occupational health and safety (OH&S) legislation across Canada that outlines the general rights and responsibilities of employers, supervisors and workers. Provincial or territorial legislation usually applies to all workplaces, except for private homes where work is done by owners or occupants. At the federal level, legislation covers employees of the federal government. OH&S legislation in Canada emphasises the importance of internal responsibility. One of the key elements of an internal responsibility system is the mandatory establishment of joint health and safety committees, where both workers and management are able to provide input to effectively address workplace health and safety issues.

Stakeholders in Canadian workplaces, including employers, supervisors, officers, directors, suppliers and workers, have legal duties under OH&S legislation. Although Canadian jurisdictions have generally been consistent in establishing the legal duties of workplace stakeholders, specific responsibilities may vary from jurisdiction to jurisdiction. Generally, employers’ responsibilities for OH&S matters include providing a safe work environment, appropriate education and training, first aid facilities and written instructions in respect of procedures, reports and notices. Workers’ responsibilities for OH&S matters generally include following prescribed procedures with respect to the health and safety of employees, reporting workplace hazards to employers, complying with oral or written directions of a health and safety officer and wearing protective equipment where appropriate. OH&S legislation may also require employers and other stakeholders to report workplace accidents, injuries and occupational illnesses to the relevant regulators.

Employers and workers may also face statutory liability under OH&S legislation, which could result in the issuance of orders and quasi-criminal regulatory charges. Generally, offences under OH&S legislation are strict liability offences, where the prosecution need not prove intent. If charged, a defendant may be found not guilty if the defendant can prove, on a balance of probabilities, that due diligence was exercised. Certain OH&S legislation, such as the Ontario Occupational Health and Safety Act, also creates statutory due diligence defences.

Directors and officers of companies operating in Canada face personal liability under both federal and provincial OH&S legislation if they authorised, permitted or acquiesced in an offence (exact language varies by statute), and they may be subject to penalties including significant fines, imprisonment or both. Under certain legislation (such as provincial workplace safety legislation), directors and officers have an additional positive duty to take all reasonable care to ensure that the company complies with the legislation. In addition to statutory liability, directors and officers may also face common law liability for tort-based claims.

Law stated date

Correct on

Give the date on which the information above is accurate.

30 January 2022.

Portions of the responses relating to Canada have been developed or reproduced from McCarthy Tétrault LLP’s ‘Cross-Border: A Retailer’s Guide to Doing Business in Canada’ publications. All of McCarthy Tétrault LLP’s rights in these portions are reserved.

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