Introduction
Commercial contracts play a very crucial role; they help in keeping the business running in India. They also play an important role in how companies, suppliers, service providers, investors, and customers work with each other. As we can see, the economy is rapidly growing due to this more trade deals are seen, especially after globalization, new infrastructure, and more private players as a result, contracts have become more important than ever; they actually have moved way beyond just recording what people agree on. They set out who takes on which risks, even plan for what can go wrong, and make it explicitly clear as to how people will settle fights in case of disputes
Indian law, especially the Indian Contract Act, 1872, states that people are mostly free to make whatever deals they want. But Indian courts are not particularly concerned about mere freedom. Rather, they dig into the details, looking hard at the key clauses especially, the parts that say who pays if something goes wrong, if one gets these clauses right, then one is already ahead before any court or arbitrator gets involved. Sometimes, just one well-written clause can decide who wins or loses, even before a judge hears the case.
In this article, clauses that really matter in Indian commercial contracts will be broken down. For Legal practitioners, drafting isn’t just paperwork; it’s a counsel’s first real shot at protecting your client. The Indian Contract Act, 1872, lays out the basics, but those custom clauses which a lawyer adds, that’s where all the real strength comes in. When things go wrong like, maybe there’s an arbitration in Mumbai or a court fight in Delhi, it’s not just the facts of the breach that matter. What really matters is how the contract split up the risks from the start
2. Indemnity Clause
Verbatim Clause of Indian Contract Act, 1872:
124.“Contract of indemnity” defined.—A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.
Interpretation:
Indemnity clauses play a very crucial role in determining or shifting the liability in commercial contracts. Basically, when one party agrees to indemnify the other, they’re it means that certain loses have been taken into consideration, liabilities, penalties, or even third-party claims that would actually show up during an ordinary course while carrying out the contract. It is also important to know scope and ambit of these clauses, these clauses do not have a narrow interpretation that is to say that they do not have narrow legal definition, instead they have a very wide ambit and actually cover all sorts of losses, whether it’s because of a breach, negligence, fines that are regulatory in. nature, or even disputes related to intellectual property.
An indemnity clause which is very strong in nature explicitly states that on whom liability shall fall if things go wrong and disputes rises . Also In India, courts and arbitral tribunals usually stick closely to the language that has been used in making of these clauses, especially when both sides are indulged in businesses that is experienced in nature. That means indemnity terms can really shape the outcome of a dispute. If the clause is broad and doesn’t have a bunch of exceptions, tribunals often award full compensation even if the party seeking indemnity can’t show an actual loss at the time they enforce it. As indemnity clause makes it clear explicitly that there are two kinds of parties which are “indemnifying party”, which agrees to indemnify and then there is “indemnified party”, to which indemnity is to be provided.
In Indemnity clause the words “defend and hold harmless” really matter here. They force the Indemnifier to cover legal costs upfront or handle the defense themselves, not just pay the Client back after a judgment. In India, when someone makes an indemnity claim, they’re usually not required to try and limit their losses like they would with general damages. That makes indemnity a strong option for the Indemnified Party, since they can recover all their losses without having to show how distant or connected the damages are.
3. Limitation Of Liability Clause
Verbatim way in which it is generally written:
“In no event shall either Party be liable to the other for any indirect, incidental, consequential, special or punitive damages, including loss of profits or business opportunity, arising out of or in connection with this Agreement.”
Interpretation:
Limitation of liability clauses basically set a cap on how much money someone can lose if a contract goes sideways. In India, this clause is very widely used this clause plays a crucial role as it block claims for consequential damages and also sets a maximum payout, which is usually tied to what the contract’s is actually worth or how much was actually paid.
When it comes to settling disputes, these clauses play a very crucial role. Indian usually have adopted an approach they see that if both sides have agreed in order to to limit the liability, then parties actually have to stick to that transaction only and not beyond, otherwise it would violate rhe very basic essence of it, unless it goes against the public policy or it may even break a law. So, even if there is a situation and one party proves that the other side vitiated or violated the contract, the damages they can actually collect may be much lower than expected. In the end, these clauses play a crucial role in deciding how much relief anyone gets.
4. Termination Clause
Verbatim way in which it is generally written:
“Either Party may terminate this Agreement with immediate effect by written notice in the event of a material breach by the other Party which remains uncured for a period of thirty (30) days from receipt of notice.”
Interpretation:
Termination clauses explicitly states that how can a party actually walk away from a contract without even breaking the law. It is parties who actually decide who shall bear damages in case of termination and also the further course of action thereafter, like who still has to pay, and which parts of the contract would still be applicable, and also what kind of responsibilities would still be applicable.
In commercial disputes, when someone tries to end a contract without following the rules in the termination clause, it usually creates a severe issue of wrongful termination and demands for damages. On the other hand, if one party follows the contract’s and still terminates, in that case a party also gets a very solid defense.
5. Liquidated Damages Clauses
Verbatim Clause of Indian Contract Act, 1872:
S.74. Compensation for breach of contract where penalty stipulated for. 1 [When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Interpretation:
Liquidated damages clauses reduce uncertainty and litigation by allowing parties to estimate the losses even beforehand . By establishing a penalty beforehand that is monetary in nature, these provisions actually help in distribution of the risk of non-performance.
By limiting the investigation to reasonableness rather than actual loss, such clauses alos help in adjudication in dispute resolution. Provisions pertaining to liquidated damages are also an indicator of financial exposure because tribunals are likely to enforce amounts that are not penal.
6. Arbitration Clauses:
Sec 7 (2) – An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
Interpretation:
Arbitration clauses are not there merely in a contract, they actually decide where and how disputes will be sorted out in case they arise in future. Parties also have to play a very crucial role as they have to decide the venue and seat of arbitration and it is generally advised that venue and seat shall be same pick the forum, lay down the rules, choose the seat, and the law that’ll apply. In Indian commercial deals, people actually are more in preference of arbitration because it keeps things private, brings in experts, and it is cheap yet a faster and an efficient method.
Once parties have got an arbitration clause, courts can’t ignore it. They have to send disputes to arbitration, which means parties are no longer having disputes sought out in a public courtroom forum but in a private setting.
IMPORTANT CASE LAW
M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696
This extract is taken from M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696 : (2009) 3 SCC (Civ) 271 : 2009 SCC OnLine SC 1256 at page 703
- Section 7 of the Act defines “arbitration agreement”. Sub-sections (1) and (5) of Section 7, relevant for our purpose, are extracted below:
“7. Arbitration agreement.—(1) In this Part, ‘arbitration agreement’ means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
***
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”
(emphasis supplied)
Having regard to Section 7(5) of the Act, even though the contract between the parties does not contain an arbitration provision, an arbitration clause contained in an independent document will be imported and engrafted in the contract between the parties, by reference to such independent document in the contract, if the reference is such as to make the arbitration clause in such document, a part of the contract.
This extract is taken from M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696 : (2009) 3 SCC (Civ) 271: 2009 SCC Online SC 1256 at page 703
- The wording of Section 7(5) of the Act makes it clear that a mere reference to a document would not have the effect of making an arbitration clause from that document, a part of the contract. The reference to the document in the contract should be such that shows the intention to incorporate the arbitration clause contained in the document, into the contract. If the legislative intent was to import an arbitration clause from another document, merely on reference to such document in the contract, sub-section (5) would not contain the significant later part which reads: “and the reference is such as to make that arbitration clause part of the contract”, but would have stopped with the first part which reads:
“7. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing….”
This extract is taken from M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd., (2009) 7 SCC 696 : (2009) 3 SCC (Civ) 271 : 2009 SCC OnLine SC 1256 at page 704
- Section 7(5) therefore requires a consciousacceptance of the arbitration clause from another document, by the parties, as a part of their contract, before such arbitration clause could be read as a part of the contract between the parties. But the Act does not contain any indication or guidelines as to the conditions to be fulfilled before a reference to a document in a contract can be construed as a reference incorporating an arbitration clause contained in such document into the contract. In the absence of such statutory guidelines, the normal rules of construction of contracts will have to be followed.
Sweety Tuli is a legal content writer at Legallands.com, specializing in corporate advisory, legal research, and strategic business compliance. Her work focuses on simplifying complex legal concepts for entrepreneurs, investors, and professionals navigating multi-jurisdictional frameworks, particularly across India and the UAE.
With a keen understanding of corporate law, regulatory affairs, and policy reforms, Sweety contributes insightful analyses on topics such as company formation, CEPA-driven trade policies, taxation frameworks, intellectual property, and digital compliance.
She is passionate about bridging the gap between legal interpretation and business practicality—helping organizations align their operations with legal governance, ethical standards, and global best practices.
Through her articles at LEGALLANDS LLP, Sweety aims to make legal knowledge more accessible, strategic, and actionable for businesses operating in a rapidly evolving regulatory environment.
