This article is authored by Devansh Awasthi, a third-year B.A. LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow.

INTRODUCTION

The most expensive garment in fashion could be the one that is never worn at all. From 19 July 2026, the Ecodesign for Sustainable Products Regulation (ESPR) prohibits covered large economic operators from destroying unsold garments and footwear. The prohibition applies to economic operators within the scope of the European Union regulation, but its financial repercussions can travel down the supply chain to Indian exporters through cancelled orders, product returns, stock buybacks, traceability requirements and disposal costs. The key question is who should bear the cost when goods cannot be sold because of forecasting failures, changing consumer tastes or a brand’s marketing decisions. If contractual terms do not distinguish manufacturing defects from commercial unsaleability, the obligation could simply pass the cost of unsold stock to Indian suppliers. This article explains how European obligations may be transmitted through private contracts and proposes a causation-based allocation of liability.

THE ESPR DESTRUCTION BAN

Article 25 of the ESPR prohibits the destruction of unsold textiles and footwear from 19 July 2026. It does not presently apply to micro and small enterprises but will apply to medium-sized enterprises from 19 July 2030. Article 24 imposes additional disclosure duties upon covered operators, who must report the number and weight of discarded items, the reasons for discarding them, their treatment route and the measures taken to prevent destruction. Repair, reuse, remanufacturing and donation are alternatives to destruction.

Conditions for Destruction under Regulation (EU) 2026/296

Under Commission Delegated Regulation (EU) 2026/296, destruction is permissible only in specified circumstances, including safety or legal non-compliance, certain intellectual-property restrictions, irreparable damage, manufacturing defects where repair is not technically feasible, and unsuccessful donation. Destruction must be supported by proper documentation, and records supporting a derogation must generally be retained for five years.

INDIA’S EXPORT EXPOSURE

The EU is the second-largest destination for Indian textile and apparel exports. Indian textile exports to the EU are worth approximately ₹62,700 crore (Ministry of Textiles, January 2026), with ready-made garments representing nearly 60 per cent of that amount. Given the scale of exports, legislation adopted in Brussels can affect textile mills in Tiruppur, garment factories in Gurugram-Faridabad and export centres in Bengaluru. Since the textile sector has an MSME-driven character, suppliers are particularly vulnerable to changes in purchasing policies.

THE CONTRACTUAL TRANSFER OF LIABILITY

The ESPR does not directly bind Indian manufacturers that merely produce goods for a European company without themselves placing those goods on the EU market. However, liability may be transferred through private contracts. European brands may impose broader cancellation rights, buyback obligations, longer return periods, mandatory repair or repurposing duties, and indemnity clauses. These obligations can expose suppliers that neither control retail demand nor determine the brand’s sales strategy.

If a brand cancels after cutting and stitching because demand has fallen, the Indian vendor may already have purchased fabric and trims, paid dyeing and labour costs, financed production, and arranged packaging or freight forwarding. The finished jackets cannot readily be sold to another buyer because the design and trademark belong to the brand. The vendor is therefore left with stranded stock, interest on working-capital loans, and the additional cost of de-branding, repackaging, return shipment or repurposing. A broad cancellation clause can consequently transform the brand’s forecasting problem into an immediate cash-flow problem for the vendor.

DEFECTS VERSUS COMMERCIAL OBSOLESCENCE

Contracts must clearly distinguish goods rejected because of manufacturing defects from goods that have become commercially obsolete for reasons outside the vendor’s control. Vendors should remain responsible for deviations from agreed specifications, quality-control failures and delays attributable to them.

For example, a batch of shoes whose soles separate during ordinary use raises a manufacturing issue. A compliant batch returned because its colour did not sell raises a question of commercial viability. Treating both situations as generic quality issues would allow a brand to conceal market failure behind supplier responsibility and demand a refund or buyback.

RISK, OWNERSHIP AND REMEDIES UNDER INDIAN LAW

Under Section 19 of the Sale of Goods Act, 1930, property in specific or ascertained goods passes when the parties intend it to pass. Section 26 provides that risk ordinarily follows property unless the parties agree otherwise. Section 55 permits a suit for the price in specified circumstances, while Section 56 entitles the seller to claim damages where the buyer wrongfully refuses to accept and pay for the goods. These rules presuppose Indian governing law. A clause selecting foreign law, which NTPC v Singer treats as generally decisive, may displace them altogether.

Contracts should therefore state when ownership and risk pass, who owns cancelled or returned goods, who pays for storage and reverse logistics, how customs and re-importation costs are treated, which resale channels may be used, and how trademarks, designs and labels may be altered or used.

Where cancellation occurs after manufacturing has begun and raw materials have been procured, cancellation charges should cover committed raw materials, work in progress, completed production, wages already paid, and reasonable storage or repurposing costs.

For example, where a brand cancels after 80 per cent of the goods have been manufactured, the manufacturer may still absorb wages, processing expenses, financing costs and charges attributable to completed branded stock. Absent a contractual right to cancel, the manufacturer usually cannot sue for the price under Section 55, because property has not passed. It may instead claim damages under Section 56, read with Section 73 of the Indian Contract Act, 1872: its expenditure, including de-branding, and lost profit, less salvage value, but not the cost of completing the order. If the contract permits cancellation, the manufacturer recovers only what the clause provides, possibly nothing. Linking cancellation charges to the stage of production makes these consequences visible and prevents the purchaser from passing every sunk cost downstream. Incoterms allocate delivery duties, costs and risks of loss, but they do not determine when ownership passes.

INFORMATION DISCLOSURE OBLIGATIONS

Article 24 of the ESPR requires covered entities to disclose information about discarded unsold products. Commission Implementing Regulation (EU) 2026/2, applicable from 2 March 2027, standardises the reporting format and may consequently lead EU buyers to request production records and inventory reports from suppliers. Audit clauses should specify the required documents, audit frequency, confidentiality safeguards, allocation of compliance costs, retention periods and protection of commercially sensitive information. A demand for traceability should not become unlimited access to a supplier’s pricing or customer databases where that information is unrelated to ESPR compliance.

DOCUMENTATION OF DEFECT CLAIMS

Contracts should require documentation identifying the nature of the defect, the affected batch, the available remedy, the responsible party, and the reasons why resale, remanufacture or donation is not feasible. Such documentation can prevent commercially unsuccessful goods from being reclassified as defective merely to avoid the consequences of poor sales.

A CAUSATION-BASED ALLOCATION OF LIABILITY

Liability should follow causation. The manufacturer should repair, replace or reimburse defective products where its manufacturing practices caused the defect. The buyer should bear losses arising from its own commercial decisions, including cancellations after production caused by poor sales. Where both parties contributed to the loss, costs should be allocated proportionately. The contract should also require mitigation through repair, resale, donation or repurposing.

BARGAINING POWER AND SUPPLIER SAFEGUARDS

Formal allocation cannot guarantee fair negotiation. Large corporations may impose purchasing terms on smaller Indian suppliers, including broad return and indemnity obligations, as a condition of retaining access to export business. For instance, a supplier facing the loss of a steady relationship may assume liability for returns arising from decisions made by the brand about quantities, seasons, colours and retail prices. Such provisions may protect the brand’s financial interests, but they also deprive suppliers of cash needed to pay workers and lenders.

Causation-based allocation therefore needs support beyond one-to-one negotiation. Export promotion councils could publish model clauses on production-linked cancellation charges and fault-based indemnities, giving suppliers a benchmark against one-sided terms. MSMEs could also bargain collectively: Section 3(5)(ii) of the Competition Act, 2002 carves out export-only agreements, though joint pricing of goods sold into the EU could still attract EU competition law.

THE COMPLIANCE CASE FOR INDEMNITIES

European companies may argue that broad supplier duties are necessary because they remain accountable for EU compliance and may face financial penalties for unlawful destruction or inadequate record-keeping. That concern justifies reasonable traceability and cooperation duties, but it does not justify indemnification against losses unrelated to the manufacturer’s conduct. Compliance can be achieved through clearly defined reporting requirements without requiring manufacturers to insure buyers against inaccurate forecasts or styling choices.

CONCLUSION

The ESPR is a significant environmental measure, but it will not achieve its purpose if the financial costs of unsold goods are merely hidden within supply contracts and passed to less powerful manufacturers. Indian suppliers and European brands should allocate liability according to causation, distinguish defects from commercial obsolescence, and define cancellation, return and compliance costs expressly. The circular economy should change how unsold products are managed rather than simply transfer the financial burden from brands to less powerful manufacturers.

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