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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Distribution of Hair Care in the UK
Rebecca Attree
General Information
A year ago, the Requesting Party, Salon Care Master Class Inc. (“SC”), entered into an Exclusive Distribution Agreement with Home Hairdressing Products Limited (“HH”), the Responding Party. The agreement was for a fixed period of five years. SC is a company incorporated under the laws of Illinois, USA; HH is a small company registered in England and Wales and based in London.
The Distribution Agreement provided:
HH ordered and took delivery of the minimum number of Products, but has paid only £200,000 of the £400,000 due in respect of them. In fact it has sold 100,000 colorants but only 50,000 shampoos and 50,000 conditioners. Most sales have been made in London.
SC provided the marketing materials to HH at no cost. For the samples SC charged HH 10% of the product price. SC provided samples and materials requested by HH in December last year and HH paid £10,000 for the samples. However, since then SC has not sent any more samples and marketing materials despite requests by HH.
HH’s Managing Director attended only one trade fair since the agreement was entered into.
The website has never gone online. Two draft website designs were prepared by HH and submitted to SC, which rejected them with no detailed explanation. SC has its own website and its other distributors have their own websites linked to it.
Four weeks ago, SC served notice to terminate the Exclusive Distribution Agreement with HH with two-month notice for breach of contract due to failure to use reasonable endeavours to sell the Products. It has also issued a claim in the English courts for payment for the Products. HH disputes SC’s right to terminate, claiming it did use reasonable endeavours and that any failure to perform by HH was brought about by SC’s own conduct in relation to the samples, marketing materials and website.
SC has developed a new range of shampoos, conditioners and colorants aimed at people with straight hair and would like to launch this in the United Kingdom as soon as possible. HH would like to be the distributor for the straight hair products, and argues that it is entitled to be the
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exclusive distributor for them as there is an overlap between the “over fifties” market and the “straight hair” market. The drafting in the agreement is unclear on this issue.
A competitor to HH, Hair Up, sells competing hair products in a number of markets, including the over fifties and the straight hair markets. It has a growing market share in the UK.
Attending the mediation will be the CEO of SC and an external lawyer to SC; the Managing Director of HH and an external lawyer to HH. Both parties have full settlement authority.
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Confidential Information for Salon Care Master Class Inc.
Requesting Party
You are very disappointed with sales and the lack of profile in the UK for the Products. You believe that HH’s small size and failure to address markets outside London have prevented large sales for the UK market. Recent appointments of distributors in other countries in Europe of comparable population to the UK have yielded substantially greater sales.
Repeated demands and the claim for the balance of the monies due have not resulted in any offer of part payment or payment in full by HH. You have lost trust in HH and question its ability to pay. Notwithstanding this, you see HH as a prime player in the “straight hair” market and would be willing for HH to sell the new range in the UK, if the current dispute can be settled.
You wish HH had come up with a suitable website. HH sent two drafts, but neither met your expectations. Mainly this is because the artwork of both designs looked too traditional and were unlike your company’s modern, crisp image as shown on your website. It was too difficult to explain exactly why this was the case — you are not artistically or creatively skilled. You did not have time to send detailed comments, as you did not know what font, colours, layout etc. to suggest. On reflection you realize you should have delegated the approval of the website to your technical director.
You are seriously considering withdrawing the colorants that are the subject of the Exclusive Distribution Agreement from the market due to a suspicion that one of the ingredients may cause serious harm to users. Considerable internal discussions continue regarding whether to recall the product, and you are awaiting a scientific report from your laboratory. You will, if necessary, disclose to HH at the mediation the fact that a possible recall is being considered but you are concerned that HH’s trust in your products will be harmed by this disclosure. Although you are aware that communications made during mediation are usually confidential you are nevertheless concerned to ensure that the possible product recall remains entirely confidential and is not disclosed, either within the industry or to the public. You wonder whether you should discuss and clarify this at an early stage.
You have become frustrated by HH’s poor performance and twice emphasized this on the telephone to the Managing Director of HH in very forthright terms, in the hope that some frank discussion might result in action on the part of HH.
You have been approached by a competitor of HH, Hair Up, which is keen to be appointed as a distributor on terms to be agreed for the UK for the straight hair products. You believe Hair Up would achieve good sales and you would like to appoint them if suitable terms could be negotiated.
Your US lawyers have advised you in relation to the exclusivity clause in the Agreement. They have said that the probability of the exclusivity clause relating to the products in the Agreement being construed as including the new straight hair products is 70%.
You have heard a rumour in the industry that HH is planning to sell the stock it holds of your “over fifties” shampoos and conditioners in non-EU countries. This is a market in which you would not wish your “grey market goods” (that is, genuine goods sold outside the European Union market for a much lower price than usual) to be sold for a cheap price. If they were to be sold in non-EU countries, you run the risk that they are then sold back into the UK at a highly discounted price. This might be a problem for SC as it could mean that the products are perceived to be of lower quality due to the significantly lower price. It may also cause confusion among consumers in the UK as to the correct price that should be paid, and why some products are available at greatly discounted prices. However the cheaper prices for this limited stock might increase consumer awareness and generate more customers in the UK at the usual price thereafter.
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You have incurred costs of £10,000 in the UK and $5,000 in the US in legal advice in relation to this matter. It is likely you would incur a further £30,000 to take the termination of the Agreement and the money claim to court.
You perceive the market for shampoos, conditioners and colorants for the “over fifties” Home Hair Care range still to be good and wish to continue sales in the UK through representation by a suitable party (subject to addressing the possible product recall).
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Confidential Information for Home Hairdressing Products Ltd.
Responding Party
You have had significant problems selling the shampoos and conditioners. Since you took on the distributorship, you have discovered a competing product has been launched by Hair Up, which is marginally cheaper and presented in more attractive packaging.
You have not been able to sell the products effectively because you have not received samples and marketing materials from SC, and there is no website. You spent £10,000 in total on two versions of a possible website but in each case SC rejected your proposal out of hand, without giving feedback as to how it would like the website to look.
You are suffering cash flow difficulties and need more time to pay the outstanding sum of £200,000. Your main activity is sales of the Products. You are also a distributor for two other hair care products and these sales typically generate net profits of £10,000 per month. Therefore if you do not generate any further profits from sales of the Products, nor obtain the distributorship for the straight hair products, you would need a minimum of 20 months to pay the outstanding sum.
There is a further possible way of generating revenue. You have been asked by a company in a non-EU country with sales outlets in non-EU countries to sell your remaining stock to them for a fifth of its value. Although you would be reluctant to do so, you may need to do this in order to generate the profits you need to pay your and your directors’ fees, if this mediation does not result in a settlement. The difficulty of doing so is you would be in breach of your Exclusive Distribution Agreement with SC to sell only within the UK.
Your lawyers have advised in relation to the exclusivity clause in the Agreement. They have said that the probability of the exclusivity clause relating to the products in the Agreement being construed as including the new straight hair products is 50%.
You are unsure whether to continue to do business with SC. You feel the CEO has twice been rude and aggressive on the telephone to you when demanding payment of the outstanding monies.
You have heard a rumour that one of the ingredients in the colorants is being investigated as a result of a consumer suffering harm following its use. You have not yet been able to verify this. You appreciate the sensitivity of this issue and would like it to be discussed and clarified at an early stage. However your confidence in SC’s products has been weakened as a result of this rumour. It is paramount to your reputation that you are not involved with the sale of an unsafe product in the UK. Equally, you are aware of your responsibility as a distributor to cooperate in any recall of any defective or unsafe product if you have been involved in placing it on the market.
You attended only one major trade fair last year because you were diagnosed with cancer and were having treatment. You have recovered and are in remission. You want to maintain your privacy and do not want SC to know of the detailed nature of the illness. However if appropriate, you may be willing to divulge the reason for not attending some of the trade fairs was due to an illness from which you have now recovered.
In addition to the £10,000 spent on the website, you have spent £5,000 in legal costs to date. You anticipate you may spend a further £25,000 in defending the claims to trial.
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Colin J Wall
Case Analysis
This is a role-play where it is essential that the mediator keeps the parties in plenary session for as long as possible. The parties need to talk to each other to explain why the relationship has gone sour. Each party has breached the contract but has reasons for doing so that are not unreasonable, so that the other party might find these explanations as a plausible or at least understandable excuse for non-performance of the strict contract requirements. For example, SC failed to make comments on the proposed HH website within two weeks, and SC failed to provide samples and marketing material to HH after the initial batch was provided, despite HH’s repeated requests. HH has failed to pay the outstanding £200,000 due to SC, even though HH has sold £300,000 worth of products, and HH’s Managing Director only attended one trade fair instead of the required three. Interestingly, the SC notice to terminate the contract with HH was for an alleged failure to use reasonable endeavours to sell the products, rather than for citing specific breaches of the Exclusive Distribution Agreement. Due to this fact, HH can reveal the difficulties that it has faced in selling the shampoos and conditioners because of the apparently superior products sold by Hair Up. This exchange by the parties should lead to a mutual understanding of the current situation and enable the parties to move forward with their negotiations within the confidentiality of the mediation.
Each party has embarrassing facts to reveal. HH’s Managing Director has had cancer, which is the reason why s/he only attended one trade fair and s/he might reveal some form of illness to explain this situation, without being specific. SC has a potentially more damaging fact to reveal: that the hair colorant might cause consumer harm. SC may choose to reveal this to the mediator in caucus and to seek advice as to whether to reveal it to HH. Depending on how frank HH has been with the mediator and the order in which the caucuses have taken place, the mediator might well already have been made aware of the rumour surrounding the safety of the colorant and could, with HH’s permission reveal this fact to SC. That would then enable SC to have a direct discussion with HH. A similar situation pertains to the rumour that HH might sell the currently unsold shampoo and conditioner to a party outside of the European Union.
The parties have the potential to work together in the future to sell straight hair products, while the legal advice as to whether SC is bound to offer these products to HH under their exclusivity arrangement is not clear. There is a rival distributor (Hair Up) that SC could use to distribute the new products if the parties decide to end their relationship. This is a role-play where on reflection the parties might decide that it is better to go their separate ways, especially if HH feels that its best-selling product, the hair colorant, does cause consumer harm. If an announcement is necessary to recall the hair colorant, it will cause HH enormous reputation harm, especially since this product has almost certainly been used by consumers. It is not clear as to whether or not the colorant is potentially harmful as SC is waiting for a report from its laboratory. This might mean that the mediation will not settle on the day. Alternatively the mediator, with the help of the lawyers and parties, could come up with a settlement agreement that has two potential outcomes, depending on whether or not the colorant is safe.
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Greg Bond
Commentary for Training
Reality Check
The first reason why these two companies are now meeting in mediation is a claim filed in court by SC. SC is demanding outstanding payments for products delivered and has sought to terminate the distribution agreement with HH. HH has been unable to sell the predicted numbers of products, and contests SC’s right to terminate the agreement. The deeper reason why the two companies are in mediation probably has something to do with the unrealistic hopes vested in their first distribution agreement.
If the parties are able to put the legal dispute aside they might be able to do something that probably should have been done when they first entered into their distribution agreement. What seems to have been lacking is some kind of reality check, both individually and together, on the market viability of that agreement. In the meantime, circumstances have changed, and if the two parties are to walk out of this mediation with the court claim put aside, and a new agreement to do business together, then serious thought should be invested in the viability of this new agreement under new market conditions. For mediation training, this case could be used to give students of business an opportunity to work out in advance of the mediation what realistic offers of future collaboration might look like. In mediation, they can then work with the help of the mediator in assessing whether there is a joint business opportunity for the future.
The role-play contains a number of parameters and options for business students to consider. Based on market research, HH needs to realistically evaluate and be confident about which products in which quantities and at what prices exactly which market can buy. These are just four questions a good business person would have to answer here, given that first time around HH seems to have got the answers to these questions wrong, and SC was expecting much better sales. The representative of HH will need to know and be able to reassure SC about the resources available to HH to market products in the UK and also for which requirements assistance on resources from SC might be welcome. If SC enters into this dialogue, then further questions will be addressed. Are the marketing materials provided by SC appropriate for the UK market? What can be done about getting the website online? What are the best distribution channels for the products? Is attendance at trade fairs necessary and how can it be guaranteed? What about the chance of selling some of the products more cheaply to another European market? What are the risks and opportunities involved in that and can the idea be fine-tuned so as to be workable and beneficial to both parties? What about the colorants that most likely need to be withdrawn?
This case provides an excellent opportunity for students of business to think business and marketing, both in preparation and during the mediation process. If the two companies come up with realistic scenarios for future business together in the mediation, then they will have to ask whether any of these scenarios are better than turning to the competitor, Hair Up, and also better than any other alternative to an agreement. That decision must also be based on how the claims brought before the court by SC can be settled — the lawyers should be able to contribute here.
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