Lessons · Lesson 5 of 6

Whose law, whose forum, and who has to start

Price a governing-law and jurisdiction clause as the cost of starting a claim, and see why a right of set-off matters more than either of them.

Lesson 5 of 6 · 18 min

Did you know

An arbitration award travels in a way a court judgment usually does not. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, agreed at New York in 1958, requires the courts of its member states to recognise awards made in other member states as binding and to enforce them, subject only to a short list of grounds for refusing. It also requires a court handed a dispute covered by a valid arbitration agreement to send the parties to arbitration. It is among the most widely joined commercial treaties in existence, and there is nothing of comparable reach for the judgments of national courts. That is why the practical question behind a forum clause is not only where you would have to argue. It is whether the result would be worth anything where the other side keeps its money.

Source: Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)

The remittance

18 September. Halstrow pays the invoice for HS-90412, less deductions.

Deduction	From which lesson	Amount
Carton relabelling under the reissued manual	1	USD 3,312.00
Lateness charge and freight recovery and administration	2	USD 66,204.20
Allowance on the largest size	3	USD 9,028.80
Total deducted		USD 78,545.00

What was taken, and where each deduction came from

The order's margin was USD 36,288.00. So the result is a loss of USD 42,257.00, on an order that shipped complete, at the agreed price, to a buyer who is not complaining about the garments.

Samar has a good case on most of it. This lesson is about what a good case is worth.

Two clauses, and the second one is the one that matters

Near the back of Halstrow's terms of purchase, in the section nobody reads because it is written in a different voice from the rest, sit two provisions.

Governing law and forum. The contract is governed by English law, and the parties submit to the exclusive jurisdiction of the English courts. The forum is simply the place where a dispute has to be decided. This is entirely ordinary. A retailer buying from twenty countries cannot litigate under twenty legal systems, and choosing its own is what any competent legal department does.

Set-off. The buyer may deduct any sum owed to it by the supplier from any sum payable to the supplier, under this or any other contract between them.

The second clause is the one with the money in it, and it is worth being precise about why. It does not change what either party is owed. It changes who has to move.

Halstrow's remedy runs itself: it takes the money by not paying it. Mushatta's remedy requires it to start something, in a country it does not operate in, under a law it does not know, before a court that is not down the road. The imbalance is not in the amount. It is in the direction the effort runs.

That imbalance is why the enforceability question in lesson 2 barely matters in practice. Whether a deduction would survive a challenge is irrelevant on the day it is taken, because nothing has to survive anything. The money is already gone, and the factory is financing the gap.

Price the claim before you decide whether you have one

This is the arithmetic most factories never do, and it is the whole of the commercial decision.

Start with the defensible part. Mushatta's own reconstruction of the delay says this: with a normal shade approval, the only lateness left is the three days lost to the bar-tack machine. Three days is one week under the clause instead of two, and at three days late nobody airfreights anything to make a launch that is a month away.

Line	Working	Amount
Lateness charge taken	two weeks at 1.5%	USD 12,571.20
Lateness charge properly due	one week at 1.5%	USD 6,285.60
Over-deducted on lateness		USD 6,285.60
Freight recovery, wholly caused by the approval delay		USD 53,568.00
Defensible claim		USD 59,853.60

The defensible claim, on Mushatta's own reconstruction

Now price the two ways of pursuing it.

Route	What it costs to reach a decision	The claim as a multiple of that cost
Litigation in the contractual forum, as quoted to Mushatta	USD 71,000.00, fourteen to twenty months	0.84
Fast documents-only arbitration, as estimated	USD 9,400.00, a few months	6.37

The same claim, under two forum clauses

Read the first row again. Pursuing this claim in the agreed forum costs 1.19 times the claim itself. Mushatta could win completely, recover every dollar, and still be worse off than if it had said nothing.

That is not a claim with a difficulty in it. That is a claim that does not commercially exist. And it stopped existing on the day the vendor agreement was signed, fourteen months before the delay it concerns.

Under the second row, the identical claim on identical facts is worth 6.37 times what it costs to pursue. Same delay, same evidence, same buyer, even the same law — arbitration does not require a different governing law, only a different place and procedure for deciding. One sentence, agreed at a moment when nobody was in dispute and everybody was agreeable, is the difference between a claim and a grievance.

What an award is worth, and the honest limit of this argument

There is a genuine enforcement difference, and it is worth knowing. It is also smaller than the cost difference above, for most factories most of the time.

An arbitration award travels. Under the New York Convention, courts in a very large number of countries recognise and enforce awards made in other member states, with only limited grounds for refusal. A court judgment does not travel nearly so freely. Whether one country's judgment can be enforced in another depends on treaties, reciprocity and local rules that vary enormously.

For a factory suing a retailer that plainly has assets in the forum's own country, that difference does not bite. A judgment where the money is, is as good as anything. It bites when the party you must enforce against holds its assets somewhere else, which is the more common shape when the claim runs the other way. So do not choose arbitration for its portability. Choose it, when you choose it, for what the last table shows. Portability is the bonus.

Do not fight the forum. Fight the self-help.

Asking a retailer to arbitrate in your country, under your law, is an ask you will lose. And it will spend all the goodwill you need for the indemnity in lesson 6.

Four narrower asks are routinely agreed. Every one of them attacks the imbalance rather than the forum.

Notice before deduction. No sum is deducted until the buyer has sent a statement of what it is deducting and why, with the supporting documents.
A window to dispute, during which the deduction is held. Not a right to refuse. A right to be heard before the money moves.
A small-value threshold below which deductions are final. Give this away on purpose. It costs little, and it makes the other three easy to agree, because the buyer keeps its administrative simplicity for the hundreds of small charges that make up most of its volume.
A named escalation. Your commercial director and theirs, on a call, before anything above the threshold is taken.

The first is worth the most, and this order shows exactly why. Halstrow chose air freight on 29 July and told Mushatta when the deduction appeared. Had the terms required notice first, the conversation on 29 July would have been about a choice.

Option on 29 July	Working	Cost to Mushatta
Air freight, as chosen	as invoiced	USD 53,568.00
Markdown allowance on the same pieces instead	34,560 at USD 0.45	USD 15,552.00

The conversation that notice-before-deduction would have forced

A markdown allowance protects the buyer's economics on late stock in the way it actually cares about, and it is a number the factory can survive. Whether Halstrow would have taken it cannot be known. What can be known is that nobody was ever asked, because the clause let the buyer choose alone and bill afterwards. The difference between the two rows is USD 38,016.00.

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 yourselfSamar wants to withhold the disputed amount from what Mushatta owes Halstrow for buyer-nominated trims. Is that the symmetrical answer?Show the answer

It is the tempting one, and it is usually a mistake. Set-off rights in buyer-drafted terms are one-directional by design. The buyer reserves the right to deduct and, in the same section, requires the supplier to pay sums due without deduction or set-off. So the same act is a contractual right for one party and a breach by the other. Worse, it turns a dispute the factory is probably right about into one it is plainly wrong about, and it hands the buyer the moral high ground in the only forum that will ever actually be used: the telephone call. Pay what you owe, in full, on time, and keep the argument on the ground where you are strong.

What you should be able to do now

Find the set-off clause in your buyer's terms, and read it as the clause that really decides remedies, because it is.
Price a real claim you are carrying against a quotation for pursuing it in the contractual forum, before deciding whether you have a claim at all.
Ask for notice before deduction rather than for a change of forum, and understand why that single sentence is worth more than the jurisdiction it leaves untouched.
Keep paying what you owe, and never answer a deduction with a deduction.