Lessons · Lesson 6 of 6
The cap, the carve-out and the multiple nobody checked
Price an indemnity that sits outside the liability cap, and rank every clause in the terms by the money it can take rather than by the attention it gets.
Lesson 6 of 6 · 17 min
A cap that reads like protection
One sentence in Halstrow's terms of purchase looks, to a factory reading it, like the best news in the document:
The supplier's total liability under this contract shall not exceed the value of the goods supplied under it.
On HS-90412 that is USD 419,040.00. A ceiling, in writing, and a large one next to anything the factory expects to go wrong.
The next clause is one line long:
This limit does not apply to the indemnities given by the supplier, nor to liability for death or personal injury.
An indemnity is a promise to pay somebody else's costs when a stated thing goes wrong. The second half of that clause is universal and no factory should try to move it. The first half is the whole of this lesson, because the indemnities are where the large numbers live, and they have just been placed outside the only ceiling in the contract.
What the indemnity actually covers
Halstrow's indemnity, in substance: the supplier pays the buyer's costs, claims, damages and losses arising from any defect in the goods, any failure to comply with product safety or labelling law, and any infringement of somebody else's intellectual property — including the cost of any withdrawal or recall, refunds to customers, disposal, and lost profit.
Every phrase in that sentence is ordinary. Read it as a merchandiser, though, and one thing should stop you:
The cap is a multiple of the price you sold at. The indemnity is a multiple of the price the buyer sells at, plus the buyer's own costs of putting the problem right.
Those are not the same currency. On this style, retail is 2.68 times FOB before a single cost of the buyer's is added. So the exposure is structurally a multiple of the cap, rather than a fraction of it. That is exactly the wrong way round for a clause everybody reads as protection.
Putting the number on it
This did not happen on HS-90412, and it is important to say so plainly. There was no recall, the garments are in wardrobes, and the arithmetic below is a projection. It is here because the only useful time to do this calculation is before you sign, and the only time anybody actually does it is afterwards.
Suppose the goods have to come off sale. Halstrow's recall procedure — which is in the manual, and which the factory is contractually bound by — produces this.
| Line | Working | Amount |
|---|---|---|
| Refunds to customers, at retail | 61,200 sold at USD 12.99 | USD 794,988.00 |
| Stock in stores and the distribution centre, credited | 25,200 at the FOB price of USD 4.85 | USD 122,220.00 |
| Withdrawal, handling and store labour | 86,400 at USD 0.85 | USD 73,440.00 |
| Customer notices and communication | as quoted | USD 46,000.00 |
| Disposal | 86,400 at USD 0.24 | USD 20,736.00 |
| Total recoverable under the indemnity | USD 1,057,384.00 |
Now measure that against the things a factory actually has.
- 2.52 times the value of the whole order
- 29.14 times the order's margin of USD 36,288.00 — the margin covers 3.43% of it
- Mushatta's product liability insurance limit is USD 250,000.00, which covers 23.6%
And the cap in the contract, which reads so reassuringly, covers none of it. This is the clause the cap was carved away from.
The mistake nobody made
Here is how the exposure would arise, and there is no careless person anywhere in it.
The specification for KF-2145 called for a working drawcord in the hood, finished with a Halstrow-branded metal tip. Mushatta's technical team queried it once, in writing, and the query was a good one. The European standard on cords and drawstrings in children's clothing does not permit working cords in the hood and neck area of garments for the younger age group it defines.
Claire Denton answered, correctly, that the styling was meant for the upper age band, outside that restriction, and confirmed the specification. Mushatta built exactly what was confirmed.
In June, the buying office extended the range downwards by one size band to widen the offer, and applied the same specification to the smaller garment. That decision was taken in Leeds, by people who were not on the cord conversation in April, using a specification that had been correctly approved for a different age band.
The three asks, ranked by money
Every ask costs you something in goodwill, and you get a small number of them. Spend them in this order.
One: a carve-out for the buyer's own specification. In substance: the supplier is not liable to the extent that a claim arises from a design, specification, or material nominated by the buyer, where the supplier has manufactured in accordance with it and has notified any concern in writing.
This is a normal ask and it is frequently accepted. It is not a request to escape responsibility. It says the party that decides bears the consequence of the decision. On the scenario above it is worth the whole USD 1,057,384.00. Note the second half: it requires you to have raised your concern in writing. That is a good discipline to be held to, and it is why Mushatta's April email matters more than anybody realised at the time.
Two: a ceiling tied to insurance. Buyers resist an absolute cap on safety, and they are not being unreasonable. A cap that leaves them exposed on a product they must stand behind is not something a retailer can sign. The version that gets agreed is different: liability under the indemnities is limited to the proceeds of the insurance the supplier is required to maintain under this contract, plus a stated excess borne by the supplier.
That turns an unbounded number into a known one, and it lines the cap up with the cover the buyer has already specified. It also moves the conversation to where it belongs: the limit of the policy, which you can buy more of, rather than a clause neither side can price.
Three: a duty to consult on scope. The buyer must make the recall decision, and nobody sensible argues otherwise. But the scope of a withdrawal is where the number is made, and a supplier who is paying for it has something to contribute.
| Scope | Working | Cost |
|---|---|---|
| Every unit of the order | from the table above | USD 1,057,384.00 |
| Only the affected size band | 19,008 pieces, of which 13,500 sold | USD 268,797.52 |
The narrower withdrawal is 25.4% of the wider one — a difference of USD 788,586.48 — and it turns on a decision taken in an afternoon, under pressure, by people who are not paying for it. A duty to consult does not give you a veto. It gives you the right to be in the room with the traceability records while the scope is being drawn.
The table this whole course was written for
| Clause | Time spent on it before signature | What it took, or could take, on this order |
|---|---|---|
| Unit price | three weeks | it set the margin at USD 36,288.00 |
| Lateness charge | one afternoon, and it was improved | USD 12,571.20 |
| Manual amended after the price was fixed | none | USD 3,312.00 |
| Inspection is not acceptance | none | USD 9,028.80 |
| Freight recovery at the buyer's option | none | USD 53,568.00 |
| Materials bought against a forecast | none | USD 136,656.00 |
| Forum, and the claim it made uneconomic | none | USD 59,853.60 |
| Indemnity, carved out of the cap | none | USD 1,057,384.00 |
Three weeks went to the top row. Nothing at all went to the other seven, and the other seven are the whole of the rest of the column.
That is not an argument that the price does not matter. The price is the margin, and every other number here is measured against it. It is an argument about proportion. A merchandiser who spends one hour of the next negotiation on the bottom four rows will have done more for the factory than the three weeks did, and will have spent an hour.
Prompt · Rank this buyer's terms by the money each clause can take
When a vendor agreement, terms of purchase or supplier manual has arrived and you have one hour, not one week, to decide what to argue about.
Act as a commercial contracts adviser to a garment factory. You are not writing a legal opinion, and you must say so once at the start. Your job is to turn clauses into money on one specific order, so a merchandiser can decide where to spend limited negotiating capital. Below are the buyer's contract documents. Read all of them together, including anything pulled in by reference. Here they are: [PASTE THE PURCHASE ORDER, THE VENDOR AGREEMENT, THE TERMS OF PURCHASE, ANY SUPPLIER MANUAL SECTIONS AND ANY SPECIFICATION CLAUSES]. My order: buyer [BUYER], order number [NUMBER], style [STYLE], quantity [QTY] pieces, price [PRICE] per piece [INCOTERM AND NAMED PLACE], order value [AMOUNT], ex-factory [DATE], my cost per piece [AMOUNT] of which margin [AMOUNT], the buyer's retail price if I know it [AMOUNT], my product liability insurance limit [AMOUNT]. Do the following. First, list EVERY clause that can move cash in either direction, grouped into five families: what the buyer can deduct, what the buyer can refuse, what the buyer can cancel, what I have promised to pay on somebody else's behalf, and what decides whether I can ever argue. Second, put a number on each one, on my order — the most it can take, using the buyer's own rates where they are stated. Third, mark each clause PRICEABLE or OPEN-ENDED. Priceable means the rate, the base and the ceiling are all in the document. Open-ended means at least one of them is set later, by somebody else. Never give an open-ended clause a single figure as though it were priceable. Say what sets it, and what the worst realistic case is. Fourth, find the order-of-precedence clause and tell me which document my QA team should be measuring against. Fifth, find every carve-out from the liability cap and price the largest one. Sixth, give me a ranked table: clause, money at risk, priceable or open-ended, and the single narrowest amendment that would cap it without removing the buyer's protection. Finally, tell me the three asks worth making and the order to make them in, and draft the exact sentence to send for each one.
AI can make mistakes — check anything you act on.
Check yourselfHalstrow refuses the specification carve-out outright. What is the next best thing, and is it worth anything?Show the answer
Yes, and it is nearly free. If you cannot move the clause, build the record instead. Every time you receive a specification, a nominated material or an approval you have a technical concern about, raise it in writing, name the concern precisely, and keep the answer. That file does not change the indemnity, and it will not stop a deduction. What it does is change the negotiation that happens if the day ever comes: from a conversation between two recollections into one where only one side has documents. On the cord, Mushatta's April email is the single most valuable piece of paper in this whole course, and it was written by a technician doing his job on an ordinary Tuesday.
What you should be able to do now
- Find the carve-outs from your liability cap, and understand that the cap is only worth what is left inside it.
- Price one recall on your largest current order — at the buyer's retail price, at the buyer's own recall rates, and against your own insurance limit.
- Ask for the specification carve-out first, before any other change to the terms, because that is where the largest number is.
- Rank every clause in your buyer's terms by money, and spend your negotiating capital in that order rather than in the order the clauses appear.