Liability Follows the Name

A batch of cream goes out in March. By the second week of April there are eleven posts, then forty, then a thread with photographs that travels further than any advertisement the founder has ever paid for. Some of the reactions are mild. Two are not.

What arrives next arrives in a particular order. First the customers, who want refunds and explanations. Then the distributors, who want to know whether to pull the stock and who is paying for it. Then a letter from a lawyer acting for one of the two. Then, some weeks later, a regulator, asking for batch records and a copy of the product registration.

Every one of these arrives addressed to the name on the jar.

Nobody wrote to the factory.

The factory, in fact, was cooperative throughout, and sincerely sorry, and produced a plausible account involving a raw-material supplier and a substituted ingredient. It was also, by the time the second letter arrived, quoting for the next production run, because from the factory’s side nothing much had happened.

This essay is about why the letters go where they go, and what a seller can actually do about it.

The consumer’s position is simple and it drives everything. She bought a product. She has one name and one telephone number, both printed on the pack. She does not know that the goods were manufactured by a third party, and she is under no obligation to find out. Her sense of who is responsible was formed by the packaging, which was designed to form exactly that impression.

The law does not correct her impression. It largely ratifies it. Consumer protection exists precisely because the person harmed is the person with the least information about how the goods came to exist, and rules that required her to trace a supply chain before she could recover would defeat their own purpose.

So the practical effect of private labelling is an exchange the seller rarely prices. She has acquired the visible benefit of being seen as the producer — the margin, the loyalty, the pricing power — and with it the visible burden of being treated as one, while holding no direct control over the process that creates the risk.

Liability is not one thing arriving once. It is four separate exposures, arriving on different timescales, answerable by different means.

The consumer never signed anything. That is precisely why she is protected.

Almost every private-label agreement contains an indemnity from the factory. Founders negotiate it hard and then rest on it, and the rest is misplaced, because an indemnity does not do what it is imagined to do.

It does not prevent a claim being made against the seller. The claimant is not a party to the agreement and is unaffected by it; she sues whom she chooses. The indemnity operates afterwards, between the two signatories, as a promise to make good.

It does not prevent the regulator acting, because a regulator’s powers are statutory and are not allocated by private contract.

It does not prevent the commercial damage, which is the largest cost in almost every such episode and the one no indemnity addresses: the recall, the withdrawn listings, the distributors who take a competitor’s line, and the customers who do not come back.

And its value in the one thing it does do — reimbursement — is bounded by four practical limits. The wording, which is usually narrower than remembered and may exclude the consequential losses that constitute most of the harm. Any cap, which is often set by reference to the contract value rather than the exposure. The factory’s solvency at the moment of enforcement, which is a real question in this trade. And the time and cost of enforcing it, potentially against a party the seller must also persuade to keep supplying.

None of this makes the indemnity worthless. A seller should have one, drafted properly, and the essay on the agreement in this sub-cluster deals with how. What it is not is a substitute for the seller’s own controls, and treating it as one is the most common error in this area.

Exposure is reduced by things that happen before the batch, not by clauses invoked after it. Six of them, in rough order of how much they matter relative to what they cost.

Traceability to batch. Every unit should be traceable to a production batch, and the seller should hold the records tying batch to date, to raw-material lot and to the customers who received it. Without this, a problem in one batch becomes a problem with the product, and a targeted recall becomes a total one. This single discipline separates episodes that cost a fortnight from episodes that end a business.

Retained samples. A sealed sample of every batch, held by the seller and not only by the factory, dated and stored. When a claim arrives eight months later, the question is what was actually in that batch, and the party holding the sample is the party able to answer.

Incoming inspection. Something more than counting cartons. Documented checks on arrival, against a written specification, with the results kept. This is the primary evidence of care taken, and it is the difference between the negligence question being awkward and being unanswerable.

A specification that exists. A great many arrangements have none in writing, which means there is no standard against which goods can be rejected, no basis for a quality claim against the factory, and nothing to show a regulator asking what the product was supposed to be.

Insurance. Product liability cover is available, and is priced against exactly the exposures above. A seller who has done the other five things is also an insurable one, on better terms.

A recall plan. Two pages: who decides, how customers and distributors are reached, how stock is retrieved, what is said publicly, and who pays for it pending the argument with the factory. Written in a calm week. The difference between a controlled withdrawal and a public collapse is almost entirely a difference in preparation, because the events themselves are similar.

The decision to put one’s own name on goods made by another is taken, almost always, as a commercial and creative decision. It is described in the language of positioning and margin. Nobody convenes to discuss it as an assumption of risk, and the paperwork that follows is drafted by people optimising for price and delivery.

But it is an assumption of risk, and a substantial one, and it is assumed on the day the label is printed rather than on the day the batch fails. What the seller has done is to stand in front of the manufacturer, in public, permanently, in exchange for the margin that position earns.

That exchange can be a very good one. It is the basis of most consumer businesses in the world, and it is not made unwise by the existence of risk. It is made unwise by being made unknowingly, and priced as though only the upside were real.

A seller who understands the exchange does three things differently. She builds the controls in the previous act into her cost of goods rather than treating them as overhead to be cut. She negotiates the agreement as a risk document and not only as a price document. And she stops thinking of the factory as a supplier of goods and starts thinking of it as a supplier of her own liability, which is a more accurate description of what she is actually buying.

The factory made the product. The name made the promise. Only one of them is in the room when the promise fails.

This publication is educational and analytical. It describes how legal and commercial structures work; it does not advise on any particular matter, and nothing here should be relied upon as advice on a reader’s own affairs. The author holds commercial interests in the brand-building and private-label sector examined by this series.