MoU

Here is what you should know about commercial contracts: drafting, review and disputes before you act or reply to anyone. Legals365 is the legal platform of Advocate B.K. Singh and associates, based in Delhi NCR.

In short. A commercial contract in India is governed mainly by the Indian Contract Act 1872. It should clearly fix the parties, scope, price, term, termination, liability limits, indemnity and dispute resolution, be properly stamped and, where needed, registered. Claims for breach must usually be filed within 3 years, through arbitration if the contract has a clause, or otherwise in a commercial court after pre-institution mediation.

Most business disputes trace back to the contract: a scope that was never defined, a payment clause with no due date, an indemnity that covers everything or nothing, or an arbitration clause that names an institution that does not exist. Good drafting does not stop disputes, but it decides who wins them and how quickly.

This page covers commercial contracts generally, from master service agreements and agency agreements to asset purchase agreements, leases and memoranda of understanding. It explains what makes a contract enforceable in India, the clauses that carry the risk, stamp duty and registration, non-compete restrictions, the remedies for breach and the route a contract dispute takes. Where the answer depends on the type of contract or party, the sections below say so.

Law

Indian Contract Act 1872, Specific Relief Act 1963 (as amended in 2018), Sale of Goods Act 1930, Indian Stamp Act 1899 and state stamp laws, Registration Act 1908, Information Technology Act 2000.

Disputes

Arbitration under the Arbitration and Conciliation Act 1996 if the contract has a clause; otherwise a commercial court under the Commercial Courts Act 2015 for claims of Rs 3 lakh and above.

Time limit

3 years from breach for most contract claims (Limitation Act, Article 55); 3 years for specific performance (Article 54).

Pre-suit step

Pre-institution mediation under section 12A of the Commercial Courts Act unless urgent interim relief is sought.

Stamp duty

Payable under the state's stamp law where the contract is executed or received; unstamped documents are inadmissible until duty and penalty are paid.

Registration

Compulsory for leases of immovable property for more than one year and other documents under section 17 of the Registration Act.

Documents

Signed contract and annexures, purchase orders, statements of work, invoices, emails and messages, delivery records, notices and replies.

What makes a commercial contract enforceable

Under section 10 of the Indian Contract Act 1872, an agreement is a contract if it is made by free consent of parties competent to contract, for a lawful consideration and a lawful object, and is not declared void. In business terms that means the right legal entity must sign, through a person with authority, for a purpose that is not illegal or against public policy, with terms certain enough to be performed.

Authority is a frequent weak point. A company acts through its board, so the signatory should hold a board resolution or a power of attorney. A partnership firm binds partners through a partner acting in the ordinary course. A proprietorship has no separate legal identity, so the proprietor is personally liable. A government body may need specific approvals and the form required by Article 299 of the Constitution for contracts made in the name of the President or Governor.

Writing is not always legally required, but it is required in practice. Oral contracts and contracts formed by emails or purchase orders are enforceable, yet proving their terms is difficult. Section 29 voids agreements whose meaning is uncertain, which is the risk with a one-page letter that says the price will be agreed later.

Common commercial contracts and what to watch

Drafting: the clauses that do the work

A useful contract starts with the parties described correctly (full legal name, registered office, CIN or registration number), recitals that explain the commercial purpose in two or three sentences, and definitions used consistently. The operative core is the scope or deliverables, the price and payment mechanism, the term and the conditions for termination. If any of these is vague, everything else in the contract becomes an argument.

Payment clauses should state the amount or formula, invoicing, due date, currency, taxes, interest on late payment and the consequence of non-payment (suspension, termination, or both). Delivery or acceptance clauses should say how and when the work is accepted, and what happens if the buyer neither accepts nor rejects. A deemed acceptance clause, for instance acceptance after 15 days without written objection, removes a common source of dispute.

Termination clauses deserve more care than they usually get. Distinguish termination for convenience (with notice), for cause (material breach not cured within a set period), and for insolvency or change of control. State what survives termination: payment for work done, confidentiality, indemnities, IP licences and dispute resolution. When Advocate B.K. Singh reviews a contract for a client, he reads the termination and exit clauses before the price, because that is where the client's real exposure usually sits.

Indemnity, limitation of liability and liquidated damages

An indemnity under section 124 is a promise to save the other party from loss. In commercial contracts it is usually wider than the statutory definition, covering third party claims, IP infringement, breach of law and data incidents. Read it with the limitation of liability clause: a cap on liability that excludes indemnities from the cap can leave a small vendor exposed to unlimited claims.

Limitation of liability clauses typically cap total liability at the fees paid in a period and exclude indirect or consequential loss. Indian courts generally enforce negotiated caps between commercial parties, but a cap does not protect fraud or wilful misconduct, and it must be drafted clearly. Define what counts as direct loss for your business; lost profits may be the main loss for one party and an excluded consequential loss for the other.

Liquidated damages are a sum fixed in advance for a specific breach, such as delay. Under section 74 the court awards reasonable compensation not exceeding the stated sum. The Supreme Court has held that where actual loss can be proved, it must be proved, and the stated sum is a ceiling, not an automatic award, though where loss is hard to prove a genuine pre-estimate is generally upheld. Force majeure clauses should list the events, require notice, suspend obligations for a period and allow termination if the event lasts too long; without one, the party must rely on frustration under section 56, which courts apply narrowly.

Dispute resolution clauses that actually work

An arbitration clause should name the seat (the legal home of the arbitration, which decides which courts supervise it), the number of arbitrators, the appointment method, the rules or institution, and the language. A clause that only names a venue, or that lets one party appoint a sole arbitrator alone, invites a court fight before the arbitration begins; the Supreme Court has held that unilateral appointment of a sole arbitrator by one party is not permitted. Institutional arbitration, for example at the Delhi International Arbitration Centre, saves time on procedure.

If there is no arbitration clause, commercial disputes of Rs 3 lakh and above go to the commercial courts, and in Delhi to the Commercial Division of the High Court where the value is above Rs 2 crore. An exclusive jurisdiction clause can choose one of the courts that would otherwise have jurisdiction, but cannot confer jurisdiction on a court that has none. Section 28 of the Contract Act voids clauses that restrict a party's right to sue or shorten the limitation period, with arbitration as the main exception.

Governing law matters when one party is foreign. Two Indian parties should choose Indian law. A foreign-seated arbitration between Indian parties raises enforceability questions that are not worth the risk for ordinary contracts. Many contracts now include a tiered clause: negotiation between senior managers, then mediation, then arbitration. Keep each tier short and time-bound so it does not become a reason for delay.

Stamp duty, registration and signing electronically

Stamp duty is a state subject, and each state's schedule fixes the duty for agreements, leases, conveyances, bonds, indemnities and powers of attorney. Delhi applies the Indian Stamp Act 1899 as it applies to Delhi; Uttar Pradesh and Haryana have their own amendments and rates. E-stamp paper is available through authorised centres, and paying duty before or at the time of execution is the safe course. See e-stamp assistance and stamp duty advice.

An unstamped or under-stamped document cannot be admitted in evidence under section 35 of the Stamp Act until duty and penalty are paid. In December 2023 a seven-judge bench of the Supreme Court held that an unstamped arbitration agreement is not void; the defect is curable and the arbitral tribunal can deal with it. This removed a major delay at the appointment stage, but it does not remove the duty or the penalty.

Leases of immovable property for more than one year must be registered under section 17 of the Registration Act and section 107 of the Transfer of Property Act; an unregistered lease can be used only for collateral purposes under section 49. Most commercial contracts can be signed electronically under the Information Technology Act using an electronic signature such as Aadhaar eSign or a DSC, but the Act excludes negotiable instruments other than cheques, powers of attorney, trusts, wills and contracts for sale or conveyance of immovable property. Electronic records relied on in court need a certificate under section 63 of the Bharatiya Sakshya Adhiniyam.

Non-compete, non-solicit and confidentiality

Section 27 of the Contract Act voids agreements that restrain anyone from carrying on a lawful profession, trade or business, with an exception for the seller of goodwill who agrees not to compete within reasonable local limits. Courts have consistently held that restraints operating after an employment or service relationship ends are void, while restrictions during the term of the contract are generally enforceable. So a distributor can be required not to sell competing products during the distribution agreement, but usually cannot be barred from the trade for years after it ends.

Non-solicitation of employees and customers after termination is tested more leniently but is not automatic, and courts look at whether it is really a disguised non-compete. Confidentiality obligations are enforceable after termination, and misuse of trade secrets or confidential customer data can be restrained by injunction. Protection is strongest when the contract defines confidential information precisely and the business actually treats it as confidential.

A notice of non-compete violation should therefore be built on what the law enforces: breach of an in-term restriction, misuse of confidential information, solicitation contrary to a valid clause, or sale of goodwill. A notice that relies only on a post-termination non-compete is likely to be answered with section 27. In non-compete disputes that reach Advocate B.K. Singh's office, the case usually turns on proof of misuse of confidential data, so evidence such as downloaded files, emails forwarded to personal accounts and customer communications should be preserved at once.

Specific contracts: MSA, agency, asset purchase, lease and MOU

A master service agreement sets common terms, and each statement of work sets the project scope, timelines and price. Make the order of precedence clear when an SOW conflicts with the MSA. IP clauses should say who owns deliverables and pre-existing materials; under the Copyright Act, work made by an independent contractor belongs to the contractor unless assigned in writing. Where personal data is processed, add obligations under the Digital Personal Data Protection Act 2023; see data protection and DPDP compliance.

An agent acts on the principal's behalf and binds it (section 182), while a distributor buys and resells on its own account. The difference affects liability, tax and termination. An agency for a fixed period terminated without cause can attract compensation under section 205, and reasonable notice is expected under section 206. Exclusivity and resale price terms should be checked against the Competition Act; see competition law and antitrust.

An asset purchase agreement transfers chosen assets and, usually, chosen liabilities, unlike a share purchase where the company and all its history pass with the shares. It must deal with employees, licences that are not transferable, consents from counterparties, and the tax treatment of an itemised sale versus a slump sale under the Income-tax Act 2025. A commercial lease should cover lock-in, rent escalation, security deposit, fit-out, maintenance and exit; see lease deed drafting. An MOU is binding if the parties intended to be bound and the terms are certain; write subject to contract on non-binding MOUs and list the clauses that bind regardless, such as confidentiality and exclusivity.

Key provisions for contract work

How to review a contract before signing

A review is most useful when it starts from the deal, not from the draft.

1. Write down the commercial deal

   List in plain words what each side gives and gets, by when, and what happens if it goes wrong. Compare the draft against this list before reading clause by clause.

2. Check the parties and authority

   Confirm legal names, registration numbers and who is signing. Ask for a board resolution or authority letter for a company counterparty.

3. Read the money and exit clauses

   Check price, payment dates, interest, set-off, termination rights, notice periods and what is payable on termination. These decide most disputes.

4. Test the risk clauses

   Read indemnity, liability cap, exclusions, liquidated damages, warranties and insurance together. Work out the worst realistic claim against you under the draft.

5. Check dispute resolution and law

   Confirm the seat, arbitrator appointment method, governing law and jurisdiction. Fix any clause that allows unilateral appointment or names the wrong forum.

6. Settle stamping and signing

   Decide the stamp duty and which state's law applies, whether registration is needed, and whether electronic signature is permitted for this document.

Keep a marked-up copy showing what changed in negotiation. If a dispute arises years later, the negotiation history can explain what an ambiguous clause was meant to do.

Remedies when a contract is breached

The usual remedy is damages under section 73: compensation for loss that arose naturally from the breach or that the parties knew, when contracting, was likely to result. Remote or indirect loss is not recoverable, and the injured party must take reasonable steps to reduce its loss. Interest on unpaid sums can be claimed under the contract or at the court's discretion.

Since the 2018 amendment to the Specific Relief Act, specific performance is no longer discretionary; the court must grant it unless the contract falls within section 14, for example a contract that needs continuous supervision, depends on personal qualifications or is by nature determinable. Section 20 allows the injured party to get the work done by someone else at the defaulting party's cost, after 30 days notice. Injunctions can enforce negative covenants such as confidentiality.

A party facing a material breach may also accept it as repudiation and terminate, but should follow the contract's notice and cure procedure first. Terminating too quickly, or on a breach that is not material, can turn the innocent party into the party in breach. Many contracts are lost this way.

The route a contract dispute takes

Most disputes begin with a legal notice that sets out the contract, the breach, the amount and a deadline. A good notice is accurate and complete, because its contents will be compared with the later claim. If the contract has an arbitration clause, the notice invoking arbitration under section 21 of the Arbitration Act starts the arbitration and stops limitation running for that claim; see arbitration: appointment, interim relief and challenges.

Without an arbitration clause, a commercial dispute of Rs 3 lakh or more needs pre-institution mediation under section 12A before a suit, unless urgent interim relief is sought. A suit for a fixed sum on a written contract or invoice can be filed as a summary suit under Order 37 CPC, where the defendant must obtain leave to defend. See commercial court suits and commercial litigation and mediation and conciliation.

Other routes exist depending on the parties. A micro or small supplier can file a reference before the MSME Facilitation Council; see MSME delayed payment claims. A dishonoured cheque given for the contract dues can found a complaint under section 138 of the Negotiable Instruments Act; see cheque bounce complaints. An operational creditor owed Rs 1 crore or more by a company can consider insolvency, but this fails where a genuine pre-existing dispute is shown.

Documents for a contract dispute

Mistakes that cost money later

• Signing the other side's template unread. Standard terms usually favour the drafter, especially on liability, termination and dispute resolution.
• Vague scope. If the deliverables are not defined, neither side can prove breach. Attach specifications and acceptance criteria.
• Relying on post-termination non-competes. Section 27 makes most of them void. Protect confidential information and goodwill instead.
• Ignoring stamp duty. An unstamped contract has to be stamped with penalty before it can be relied on in court.
• Broken arbitration clauses. Clauses naming only a venue, a non-existent institution or a unilateral appointment lead to a court case before the arbitration starts.
• Missing the limitation period. Three years runs from breach for most claims. Part payment or written acknowledgement can extend it, but do not rely on that.

How the answer changes by party

For an MSME supplier, the most useful protections are clear payment terms, a deemed acceptance clause and the right to suspend work. The MSMED Act adds statutory interest on late payment by buyers and access to the Facilitation Council, and income tax rules now restrict a buyer's deduction for late payments to micro and small enterprises, which strengthens the supplier's hand in negotiation. Large buyers often insist on their own terms; even then, negotiate payment timelines and liability caps.

For a startup, the key contracts are founder and shareholder agreements, customer MSAs, vendor agreements and IP assignments from employees and contractors. Missing IP assignments are a common problem in investor due diligence. For a large company, contract management, approval matrices and consistent templates reduce risk more than individual negotiation.

Government contracts follow tender conditions that are rarely negotiable, and disputes often involve arbitration clauses with special procedures. With a foreign counterparty, governing law, seat, currency, FEMA rules on payments and enforcement abroad need early attention. An individual or freelancer contracting with a business should watch for broad IP assignments, uncapped indemnities and unilateral termination rights.

What to do this week

• Find the signed copy of the contract with all annexures and amendments.
• Note the termination, notice and dispute resolution clauses and any deadlines in them.
• Calculate the limitation date for any claim: three years from the breach.
• Collect invoices, ledgers, emails and messages that show performance and breach.
• Check whether the contract was stamped and, if required, registered.
• Preserve electronic evidence and avoid deleting chats or emails.
• Before terminating, check that the breach is material and the cure period has run.

Before you sign or sue

Spending time on a contract before signing is far cheaper than litigating over it. A focused review of the money, exit, risk and dispute clauses, with stamping and authority settled, covers most of what goes wrong. For a dispute, an early assessment of the contract, the evidence and the limitation date usually shows whether a notice and negotiation, mediation, arbitration or a suit is the sensible path, and sometimes that the claim is not worth pursuing.

Contracts often sit inside a wider picture: company approvals and filings, intellectual property, employment terms and tax. For trademark and brand licensing, see trademark registration and infringement; for employee contracts under the Labour Codes, see labour and employment law; for share deals and joint ventures, see mergers, acquisitions and investment deals.

If you want the contract checked before you act, the team of Advocate B.K. Singh at Legals365 can review it and tell you the next step.

Frequently asked questions

Is an unsigned or email contract valid in India?

Yes, if there is offer, acceptance, consideration and certainty of terms, a contract formed by emails, purchase orders or conduct can be enforced. Proving the terms is harder, so confirm important deals in a signed document. Some documents, such as property sale deeds, must be in prescribed form.

What is the time limit to sue for breach of contract?

Generally 3 years from the date of breach under Article 55 of the Limitation Act. Specific performance is also 3 years. A written acknowledgement of liability before the period expires starts a fresh period.

Is a non-compete clause enforceable in India?

Restrictions during the term of employment or a commercial contract are generally enforceable. Restrictions after the relationship ends are usually void under section 27 of the Contract Act, except for a seller of goodwill. Confidentiality and trade secret protection remain enforceable.

What happens if a contract is not stamped?

It cannot be admitted in evidence until stamp duty and penalty are paid. The contract is not void, and the Supreme Court has held that an unstamped arbitration clause can still be acted on, with the stamp defect cured. Paying duty at the time of signing avoids the penalty.

Is an MOU legally binding?

It is binding if the parties intended to be bound and the essential terms are certain. Many MOUs are partly binding, for example on confidentiality and exclusivity. Say clearly in the document which clauses bind.

Can liquidated damages be claimed without proving loss?

The court awards reasonable compensation up to the stated sum. Where actual loss can be proved, it must be proved; where it is hard to prove, a genuine pre-estimate is usually upheld. The stated sum is a ceiling, not an automatic award.

Do I need mediation before filing a commercial suit?

Yes, for commercial disputes of Rs 3 lakh and above, pre-institution mediation under section 12A of the Commercial Courts Act is mandatory unless you seek urgent interim relief. If the contract has an arbitration clause, the dispute goes to arbitration instead.

Should a lease agreement be registered?

A lease of immovable property for more than one year, or from year to year, must be registered. An unregistered lease can be used only for limited collateral purposes. Leases of 11 months are common to avoid registration, but they carry their own risks.

What is the difference between an agency and a distribution agreement?

An agent acts for the principal and binds it; a distributor buys goods and resells them on its own account. This affects liability to customers, tax and how the arrangement can be ended. Label the agreement according to what the parties actually do.

Can a contract be signed with an electronic signature?

Yes, for most commercial contracts, using Aadhaar eSign or a digital signature certificate under the IT Act. Powers of attorney, wills, trusts, negotiable instruments other than cheques and contracts for sale of immovable property are excluded. Stamp duty still applies.

What should a notice for breach of contract contain?

The contract details, the clause breached, the facts of the breach, the amount claimed with calculation, the time to comply and the action that will follow. It should match the claim you will make later. Send it by a method that gives proof of delivery.

What is the difference between an asset purchase and a share purchase?

In an asset purchase the buyer takes chosen assets and liabilities, and the seller company remains. In a share purchase the buyer acquires the company with all its history and liabilities. Tax, employee transfers, consents and stamp duty differ between the two.