Business Contract Drafting in India: The Clauses That Decide

Consider a Rs 60 lakh supply contract with a two line notices clause: notices go to the address ‘mentioned above’. The buyer shifts premises, tells the seller by email, and nobody updates the contract. The termination notice goes to the old address by courier and comes back undelivered. The seller treats the contract as terminated. What follows is a year of argument about whether termination ever took effect, while the quality dispute that started it is barely reached.

Business contract drafting in India rewards attention to a small number of clauses that do nothing at all while things go well and decide everything once they do not. What follows is not a template. It is the list of provisions where the law in India differs from the intuition most business owners bring to a contract, and where a poorly drafted line converts a strong claim into a long one.

Dispute resolution: the clause that costs the most to get wrong

Decide first whether you want a court or an arbitrator, then draft only one of them. Contracts that contain both a court jurisdiction clause and an arbitration clause, written by two different people at two different times, generate a preliminary fight before anyone reaches the dispute.

If you choose arbitration

Under Section 7 of the Arbitration and Conciliation Act 1996 the agreement must be in writing. Beyond that, four things need to be in the clause:

• The number of arbitrators. Section 10 says it shall not be an even number. Two arbitrator clauses are still written and still cause avoidable applications. For most commercial contracts a sole arbitrator is faster and much cheaper than three.
• The method of appointment. A clause letting one party unilaterally nominate the sole arbitrator is unenforceable. A person who is himself ineligible under the Seventh Schedule read with Section 12(5), such as an employee or a consultant of a party, cannot act and generally cannot appoint either. Draft for a neutral appointing mechanism, or accept that you will end up in a Section 11 application.
• The seat. The seat determines which court exercises supervisory jurisdiction over the arbitration, including applications under Sections 9, 11, 34 and 37. A “venue” is only the place hearings are held. Write “the seat of arbitration shall be Jabalpur” and not “arbitration shall be held at Jabalpur”, because the second sentence has generated years of litigation across the country.
• Language and governing law, which matter more than they seem in cross border contracts.

Three timing rules under the 1996 Act should shape expectations before anyone signs.

Provision	Rule	Extension
Section 29A	Award within 12 months from completion of pleadings	6 months by consent, then only by the court
Section 34	Challenge to the award within 3 months of receipt	30 days on sufficient cause, and no further
Section 36	No automatic stay on enforcement when a challenge is filed	Separate stay application, often on a deposit

If you choose the court

Parties can agree that of two or more courts that would otherwise have jurisdiction, only one will hear disputes. They cannot confer jurisdiction on a court that has none under Section 20 of the Civil Procedure Code. An exclusive jurisdiction clause naming Jabalpur works if the contract was made there, performed there, or the defendant carries on business there. It does nothing if the contract has no connection to Jabalpur. Use the words “only”, “alone” or “exclusively”, because their absence invites an argument about whether other forums were meant to be excluded.

Money clauses

Payment, interest and the MSME question

State the interest rate for late payment. Without it, interest becomes a matter for the court’s discretion under Section 34 of the Civil Procedure Code and the Interest Act 1978, and the recovery of the time value of the money becomes a negotiation.

More importantly, check the counterparty’s status. If your supplier is a registered micro or small enterprise, no payment term you negotiate can exceed 45 days from acceptance, whatever the purchase order says. The consequences of ignoring that are set out in our guide to MSME Samadhaan and delayed payments, and they include compound interest at three times the RBI bank rate and the loss of a tax deduction.

Liquidated damages are a ceiling, not an entitlement

This is the point most often misunderstood. Under Section 74 of the Indian Contract Act 1872, where a sum is named in the contract as payable on breach, the party complaining is entitled to reasonable compensation not exceeding that sum, whether or not actual damage is proved. Indian law does not preserve the English distinction between a penalty and liquidated damages in the same way, but it does not hand over the named figure automatically either.

Practical consequences for drafting:

• Name a figure that is a genuine pre estimate and record in the clause how it was arrived at. That recital is evidence later.
• Keep proof of the loss anyway. Where loss is capable of being proved, courts expect some proof.
• If the figure is meant as a cap on liability rather than a measure of damages, say so separately. Section 73 governs damages that flow naturally or were in the contemplation of both parties, and a clause excluding indirect and consequential loss is generally given effect between commercial parties. Draft carve outs for fraud, wilful misconduct and breach of confidentiality where you mean them.

Indemnity

Sections 124 and 125 of the Contract Act deal with indemnity, and Indian courts have read the remedy more widely than the bare text, including for third party claims and without insisting that the indemnity holder pay out first. That flexibility makes the drafting more important, not less. A workable indemnity clause states the trigger events, requires prompt written notice of a claim, allocates control of the defence and settlement, and says whether the liability cap applies to it. An uncapped indemnity on a Rs 5 lakh contract is a risk nobody priced.

Force majeure, termination and what survives

A force majeure clause is a contractual allocation of risk under Section 32 of the Contract Act. Where such a clause exists and covers the event, the doctrine of frustration in Section 56 does not come into play. Where no clause exists, Section 56 is the only route, and it is narrow: performance must become impossible or unlawful, not merely expensive or unprofitable. A commodity price rise, a labour shortage or a currency movement is not force majeure.

A usable clause needs four elements: a list of events with a general sweep up, a notice requirement with a deadline, the consequence during the event, usually suspension rather than excuse, and a right to terminate if the event runs past a stated period.

Termination clauses need the same discipline. Distinguish termination for material breach with a cure period from termination for convenience on notice. Spell out what happens to work in progress, materials, advances, licences and data. And list which clauses survive termination: confidentiality, indemnity, limitation of liability, dispute resolution and governing law.

One consequence deserves a flag. Under Section 14 of the Specific Relief Act 1963, a contract that is determinable in nature cannot be specifically enforced. A wide termination for convenience clause can therefore weaken your own ability to obtain an injunction compelling the other side to continue. That is a genuine trade off between flexibility and enforceability, and it should be a decision rather than an accident.

Restraint of trade and confidentiality

Section 27 of the Contract Act makes every agreement in restraint of a lawful profession, trade or business void, subject to a narrow exception for the sale of goodwill. Indian courts enforce restrictions that operate during the term of an employment or a contract, and consistently refuse to enforce a non compete that operates after it ends, however reasonable it looks.

What survives is worth drafting properly, because it is what you will rely on:

• Confidentiality obligations, with a defined scope and a stated duration.
• Non solicitation of employees and of customers, drafted narrowly.
• Assignment of intellectual property created during the engagement, in writing, with the moral rights position addressed.

The two clauses that quietly void themselves

Section 28 of the Contract Act. An agreement that restricts a party from enforcing rights through the ordinary tribunals, or that limits the time within which he may do so, is void. Since the 1997 amendment this extends to a clause that extinguishes the right or discharges the liability on the expiry of a specified period. So a line saying “no claim shall be entertained after six months from delivery” is not enforceable as a bar. There is a carve out for bank guarantees within a stated minimum period. Notification and claim procedures are fine; time bars that kill the right are not.

Section 28 read with the Limitation Act 1963. You cannot shorten limitation by contract, but you can and should preserve it in practice. A claim for compensation for breach of contract runs for three years from the breach. A claim for the price of goods sold and delivered runs for three years from delivery, or from the expiry of the agreed credit period where credit was fixed. Under Sections 18 and 19 of the Limitation Act, a written acknowledgement of liability signed before the period expires, or a part payment, starts a fresh three years. Building an annual signed balance confirmation into the contract administration is the single cheapest protection in commercial practice.

Execution and stamping

• Authority. Check the signatory’s authority: a board resolution or a power of attorney for a company, the partnership deed for a firm, and the LLP agreement for an LLP. A common seal is no longer mandatory for a company.
• Stamp duty. An instrument that is unstamped or insufficiently stamped is inadmissible in evidence under the Indian Stamp Act 1899 until the duty and penalty are paid, and the penalty can be a multiple of the duty. A seven judge bench of the Supreme Court has clarified that an unstamped agreement is not void and does not prevent the appointment of an arbitrator, with the stamping objection left to the tribunal. That reduces the delay; it does not remove the cost.
• Electronic signature. Section 5 of the Information Technology Act 2000 recognises electronic signatures, but the First Schedule excludes certain documents, including negotiable instruments other than cheques, powers of attorney, trust deeds, wills and contracts for the sale or conveyance of immovable property. Those still need wet ink.
• Notices. Give a full postal address, an email address, a mode of service, and a deemed delivery rule. Then add an obligation to notify a change of address in writing. The scenario at the top of this article turned on exactly that omission.

Reviewing and papering commercial agreements is part of our corporate and commercial practice, and the same clauses come back in the disputes we later argue. Where a contract touches immovable property, a separate layer of title, possession and registration questions applies, and that work sits with our real estate and property practice.

This article is general information about Indian contract law, not legal advice on any specific agreement. Every clause here behaves differently depending on the rest of the document, and a provision that protects a buyer often exposes a seller. To have a contract read before you sign it, or after a dispute has started, reach us through the contact page.