A good commercial contract does two jobs at once: it makes a deal easy to perform, and it protects you when the deal does not go to plan. Most disputes I see do not come from bad faith. They come from a contract that was vague about scope, silent about delay, or signed without the formalities that make it enforceable.
This note walks through the clauses that matter most in Indian commercial contracts, the mistakes that cost businesses money, and a short checklist to use before you sign. It applies whether you are hiring a vendor, appointing a distributor or signing a services agreement with a client.
Start with the commercial deal, not the template
Templates are useful, but a contract should describe the deal you actually agreed. Before anyone drafts, write down in plain words what is being delivered, by when, for how much, and what happens if either side falls short. A contract built on that summary is easier to negotiate and much easier to enforce.
The clauses that carry the most weight
Scope and deliverables
Vague scope is the single biggest source of disputes. Describe the deliverables, standards, timelines and acceptance process precisely, and say how changes will be requested, priced and approved. “Services as agreed from time to time” invites argument later.
Payment and milestones
Link payments to milestones that can be checked, set the invoicing and payment period, and say what happens on late payment, such as interest or the right to suspend work. Address taxes and deductions at source clearly so that nobody argues later about who bears them.
Where payment is secured by post-dated cheques, a dishonoured cheque opens a separate remedy: a cheque bounce case under Section 138 of the Negotiable Instruments Act, which starts with a written demand within 30 days of the bank’s return memo.
Limitation of liability
Under Sections 73 and 74 of the Indian Contract Act, 1872, a party in breach compensates the other for losses arising naturally from the breach, and agreed sums are tested for reasonableness. A limitation clause caps that exposure, often at the contract value or fees paid in a period, and usually excludes indirect losses. Make sure the cap and its exceptions, such as fraud or confidentiality breaches, are consistent with the indemnity clause.
Indemnity
An indemnity shifts specific risks to the party that is in a better position to control them, such as third-party claims for intellectual property infringement, data breaches or a contractor’s own legal violations. Define what is covered, how claims are notified and who controls the defence. An open-ended indemnity with no cap can quietly undo a carefully negotiated limitation of liability.
Termination
Set out when each side may end the contract: for convenience with notice, for breach after a cure period, or on insolvency. Then say what happens next: payment for work done, return of data and materials, transition support and which clauses survive.
Dispute resolution, seat and governing law
If you choose arbitration, name the seat clearly, because the seat decides which courts supervise the arbitration under the Arbitration and Conciliation Act, 1996. State the number of arbitrators, the rules, if any, and the language. Choose Indian law as governing law for domestic contracts, and think carefully before choosing a foreign law or seat in a contract that will mainly be performed in India.
Formalities: stamp duty and execution
Many businesses treat stamp duty as an afterthought. It should not be. Stamp duty on most agreements is governed by state law, such as the Maharashtra Stamp Act in Maharashtra, and an instrument that is not duly stamped cannot be relied on as evidence until the duty and any penalty are paid. In December 2023 a seven-judge bench of the Supreme Court held that an unstamped arbitration agreement is not void, and that the stamping defect can be cured. That reduces the risk, but it does not remove the cost and delay of paying duty and penalty at the worst possible moment.
- Pay the correct stamp duty in the right state, at or before signing.
- Check that the signatory has authority, such as a board resolution or a power of attorney.
- Initial every page, date the document and keep a fully signed copy for each side.
Electronic signatures and online contracts
The Information Technology Act, 2000 recognises contracts formed electronically and electronic signatures that meet its requirements. Its First Schedule, however, excludes certain documents, including wills, trusts, powers of attorney, negotiable instruments other than cheques, and contracts for the sale or conveyance of immovable property. For those, a physical signature and, where required, registration are still needed. The Act and its schedules are available on India Code.
Stamp duty still applies to an electronically signed agreement. Several states allow e-stamping, so plan how duty will be paid before the document goes out for signature.
Common mistakes I see
- Signing the other side’s template without reading the liability and termination clauses.
- Indemnity and limitation clauses that contradict each other.
- No clear process for changes to scope, leading to unpaid extra work.
- Missing data protection and confidentiality terms, now more important under the DPDP Act, which I cover in India’s evolving regulatory landscape.
- An arbitration clause with no seat, or with two conflicting dispute resolution clauses.
- Unstamped or under-stamped agreements discovered only when a dispute begins.
- Paying a new counterparty without basic checks, a risk I discuss in my note on risk management in a hyperconnected world.
Negotiating with a larger counterparty
Smaller businesses often feel they cannot negotiate when the other side is a large company with a standard form. Usually some terms can still move, and it helps to know which ones to ask about.
- Payment period. Long payment cycles hurt cash flow. Ask for a shorter period or milestone payments for long projects.
- Liability cap. If the cap only protects the larger party, ask for it to apply both ways.
- Termination for convenience. If they can exit at short notice, ask for payment for work done and committed costs.
- Intellectual property. Make sure you keep ownership of your existing tools and know-how, and license only what the client needs.
- Dispute forum. A forum in a distant city or abroad raises the cost of enforcing your rights. Ask for a neutral or nearer seat.
Prioritise two or three points that genuinely matter to your business rather than marking up every clause. A short, reasoned request is more likely to be accepted, and it keeps the relationship on a good footing from the start.
Pre-signing checklist
| Check | Question to ask |
|---|---|
| Parties | Are the legal names, addresses and registration details correct? |
| Scope | Could a stranger read the scope and know exactly what is to be delivered? |
| Payment | Are milestones, invoicing, tax treatment and late payment terms clear? |
| Liability | Is there a cap, and do its exceptions match the indemnity clause? |
| Termination | Can each side exit, and what happens to payments, data and materials? |
| Confidentiality and data | Are confidential information and personal data protected, with breach notification? |
| Disputes | Is the arbitration seat or court named, and is governing law stated? |
| Stamp duty | Has the correct duty been paid in the right state? |
| Authority | Does each signatory have authority to sign for their organisation? |
| Execution | Is electronic signature allowed for this document, or is a wet signature required? |
Contracts as a growth tool
Well-drafted contracts do more than avoid disputes. Clear terms shorten negotiations, help you get paid on time and make it easier for investors, lenders and acquirers to understand your business. In my experience, the businesses that grow most smoothly treat their key contracts as assets to be reviewed, not paperwork to be filed and forgotten.
Closing thought
A contract is cheapest to fix before it is signed. A careful review of scope, liability, termination, dispute resolution and formalities takes a little time and saves a great deal of it later. If you would like to talk through a contract or a contracting process, you can reach me through the contact page, or read more about my background.
Frequently asked questions
Which clauses in a commercial contract cause the most disputes?
Unclear scope causes the most disputes, followed by payment terms, limitation of liability and termination. When deliverables, acceptance and change requests are not written precisely, each side remembers the deal differently. Spending time on these clauses before signing prevents most of the arguments that later turn into notices and claims.
Is an unstamped agreement valid in India?
An unstamped or under-stamped agreement is not automatically void, but it cannot be relied on as evidence until the duty and penalty are paid. In December 2023 the Supreme Court held that an unstamped arbitration agreement is not void and the defect can be cured. Paying the correct duty at signing avoids cost and delay later.
Can every contract be signed electronically in India?
Most commercial contracts can be signed electronically under the Information Technology Act, 2000. Its First Schedule excludes some documents, including wills, trusts, powers of attorney, negotiable instruments other than cheques, and contracts for the sale or conveyance of immovable property. Stamp duty still applies to electronically signed agreements.
Why does the seat of arbitration matter?
The seat decides which courts supervise the arbitration under the Arbitration and Conciliation Act, 1996, including challenges to the award. An arbitration clause without a clear seat, or with conflicting dispute clauses, often leads to preliminary litigation before the dispute itself is heard. Naming the seat removes that uncertainty.
How should limitation of liability and indemnity clauses work together?
The limitation clause caps how much a party can be asked to pay, while the indemnity shifts specific risks such as third-party claims. They must be drafted together. An uncapped indemnity can override a carefully negotiated cap, so the exceptions to the cap and the scope of the indemnity should match.
What should I check before signing a vendor or client contract?
Check the parties’ details, a precise scope, payment and late payment terms, a liability cap that matches the indemnity, termination rights, confidentiality and data protection, the dispute forum and governing law, stamp duty, signatory authority, and whether electronic signature is permitted for that document.
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