This clause sets a maximum percentage of defective items the vendor can deliver—for example, "no more than 2% of parts can be faulty." If defects exceed this target, there are usually financial penalties or the buyer can reject the shipment. This is high-risk because it creates a legal obligation with real money consequences if you miss the target. Under UK and US contract law, failing to meet a performance target can be treated as breach of contract, allowing the other side to claim damages.
Only agree to a defect rate you can actually achieve based on your current processes—ask your production team first. Build in a 3-6 month "ramp-up period" where the target is higher while you improve systems. Include a clause saying that if the target becomes impossible due to factors outside your control (like a supplier's failure), you can renegotiate rather than face automatic penalties. ---
Frequently Asked Questions
What does this clause mean in simple terms?
This clause sets a maximum percentage of defective items the vendor can deliver—for example, "no more than 2% of parts can be faulty." If defects exceed this target, there are usually financial penalties or the buyer can reject the shipment.
Why should I care about this clause?
This is high-risk because it creates a legal obligation with real money consequences if you miss the target.
What are my options?
Under UK and US contract law, failing to meet a performance target can be treated as breach of contract, allowing the other side to claim damages.