The commercial contract clauses that decide whether you get paid
Most founders treat a contract as the step before the work starts. It is actually where three things get settled: when you get paid, what a bad outcome costs you, and how much of your company you still own when someone looks closely.
Summary
- A master agreement for what rarely changes, a short statement of work for each engagement. Payment terms that are testable rather than subjective. A liability cap whose carve-outs do not swallow it.
- Two clauses cost Indian companies the most: a missing written IP assignment from a contractor, and a post-employment non-compete copied from a US template that section 27 of the Contract Act makes void.
- Electronic signing is valid, but the recognised methods are narrow. A digital signature certificate or Aadhaar eSign carries a presumption; a click-to-sign platform leaves you proving who signed, and stamping still applies either way.
Most founders treat a contract as a step before the work starts. Sign it, file it, get on with delivery.
The contract is where three things actually get decided: when you get paid, what a bad outcome costs you, and how much of your company you still own when someone looks closely. All three are settled in clauses that take about ten minutes to read and rarely get read at all.
Split what changes from what does not
A single long agreement renegotiated for every project is slow, and it is the main reason sales cycles stall at the legal stage.
The better structure is a master agreement covering the terms that rarely change, liability, intellectual property, confidentiality, termination and dispute resolution, signed once with each customer. Then a short statement of work for each engagement, covering scope, timeline, deliverables and price.
The second engagement with that customer then needs a one-page statement of work rather than a three-week negotiation. For anyone selling services or software repeatedly, this is the single biggest structural improvement available.
Getting paid
Payment terms have to be enforceable, not merely stated. "Net 30 from invoice" is enforceable. "Payment on satisfactory completion" is an invitation to argue, because nobody defined satisfactory.
Three things to nail down:
- When the invoice can be raised. On delivery, on acceptance, monthly in arrears, or on a fixed date.
- What triggers a milestone. Something objectively verifiable, not a subjective judgment.
- What happens when payment is late. Interest, suspension of service, or both.
Acceptance criteria are where deals rot. If the customer can withhold payment because they are unhappy, and happiness is nowhere defined, you have a receivable that depends on goodwill. Define acceptance as a testable condition with a deemed-acceptance period: if they do not object within, say, ten business days, it is accepted.
Suspension rights matter more than interest. Interest on late payment is standard and rarely collected. The right to pause work or service until you are paid is what gets invoices settled.
One connection your finance team will notice: the way these clauses are drafted determines when revenue can be recognised and how hard collections will be. A loosely written contract creates a receivables problem that no amount of chasing fixes, which is why the controllership function should see the payment clauses before signature, not after the first dispute. If you sell to larger buyers, the MSME payment rules also set an outer limit that your own terms cannot override.
What a bad day costs you
Limitation of liability is the number that caps your exposure when something goes wrong. Common positions are a multiple of fees paid, or fees paid in the preceding twelve months.
Indian law sets no statutory ceiling or formula here. Parties are free to agree a cap, and courts have generally treated an agreed cap as the outer limit of recoverable damages, with section 74 of the Contract Act still requiring that what is claimed is reasonable compensation rather than a penalty. So the cap is yours to negotiate, and what you agree is broadly what you will live with.
What to check:
- Is there a cap at all? Uncapped liability in a services contract is a real risk, not a theoretical one.
- Are consequential and indirect losses excluded? Loss of profit, loss of business and loss of data can dwarf the contract value.
- What is carved out of the cap? Some carve-outs are reasonable: confidentiality breach, IP infringement, fraud. A carve-out for "breach of the agreement" makes the cap meaningless.
Indemnity is a different thing from liability, and the two get confused. An indemnity is a promise to cover the other side's losses for defined events. Giving one is a real commitment. Check what triggers it, whether it sits inside or outside the cap, and whether it survives termination.
A useful test on any indemnity: does your insurance cover what you have just agreed to? If not, you have taken on an exposure you cannot fund.
The clause investors check first
If you build anything, this is the most important section on this page.
Your team. Employment agreements should assign to the company all intellectual property created in the course of employment. Most do, and section 17 of the Copyright Act 1957 supports the position for an employee working under a contract of service.
Contractors and agencies. A contractor works under a contract for service, which sits outside that rule. Absent a written assignment, copyright in what they create stays with them. The early freelance developer, the design agency that built your first app, the intern who wrote the scraper: each is a gap in your IP chain until a signed assignment exists.
Two details make thin assignments fail. An assignment of copyright must be in writing and signed to be valid, and it has to identify the work, the rights assigned, the duration and the territory. Where the agreement is silent, the Copyright Act supplies defaults: five years for duration, and India for territory. A one-line clause in an invoice covering note is not the document you want an acquirer to find.
Founders. If you built the first version before the company existed, assign it to the company in writing. Founder-to-company IP assignment is among the most common missing documents we find.
Customer work. Decide deliberately whether the customer owns the deliverable or takes a licence. If every customer owns what you built for them, you cannot reuse it, and a product business quietly turns into a services business.
This is what a diligence team opens early, because a break in the IP chain is a problem no amount of revenue compensates for, and it is the one finding that cannot be fixed without the cooperation of someone who no longer works for you.
Getting out
Termination for convenience lets either side exit on notice. That is fine, provided the notice period is symmetrical and long enough to redeploy your team.
Auto-renewal is where money leaks. A contract that renews automatically unless cancelled ninety days in advance means you must act three months before a date nobody is tracking. It works in both directions: it costs you on vendor contracts and protects you on customer contracts.
The fix is not in the drafting, it is in the process. Every renewal date and notice window has to be tracked after signature.
Then check what survives termination: confidentiality, IP assignment, payment for work done and the liability provisions should all continue.
Non-competes and non-solicits
This is where imported templates cause the most trouble.
Section 27 of the Indian Contract Act 1872 makes every agreement that restrains a person from exercising a lawful profession, trade or business void to that extent. There is no reasonableness test that can rescue an otherwise void restraint, which is the part that surprises anyone used to English or US drafting. The Supreme Court applied this to a post-employment restraint in Superintendence Company of India v Krishan Murgai in 1980, and again in Percept D'Mark v Zaheer Khan in 2006, and the Delhi High Court has continued to strike such clauses down.
Two situations differ. A restraint during employment is generally fine. And the one statutory exception covers a seller who agrees not to compete when selling a business with its goodwill, within reasonable limits.
Non-solicit clauses are treated separately and more often upheld, and confidential information is protected on a different basis altogether.
A US template copied wholesale gives false comfort. If retention is the concern, the answer is usually notice periods, garden leave and confidentiality, not a non-compete that will not hold. This one is fact-specific and worth a lawyer's hour.
Disputes
A poorly drafted dispute clause turns a small disagreement into an expensive one.
Decide three things and state them consistently in the agreement and every annexure: governing law, the seat of arbitration (which fixes the supervising courts, and is not the hearing venue), and how an arbitrator is appointed.
The most common failure is not a bad clause, it is an inconsistent one. The master agreement says Bengaluru, the statement of work says Mumbai, and the annexure refers to courts rather than arbitration. That inconsistency becomes the first dispute.
The clauses nobody reads until they matter
- Exclusivity. Granted to win an early customer, then discovered by an acquirer who wanted that market.
- Most-favoured-nation pricing. You promise this customer your best price. Every discount you give anyone else now reprices them too, and nobody is tracking it.
- Change-of-control consent. The customer can terminate, or must consent, if your company is acquired or majority ownership changes. Scattered across a few key contracts, these become a negotiation lever for the buyer.
Signing it properly
Authority. Whoever signs should have authority to. That means a signing matrix, and a board resolution where one is needed.
Stamping. Stamp duty is a state subject, so the rate and method vary. Section 35 of the Indian Stamp Act 1899 makes an unstamped instrument inadmissible in evidence, and a seven-judge bench of the Supreme Court held in December 2023 that it is inadmissible, not void: the defect can be cured by paying duty and penalty. Curing it, though, happens under time pressure, in front of the counterparty you are arguing with.
The executed copy. Keep a signed version, and know where it is. A surprising number of disputes start with neither side able to produce the final signed document.
Electronic signatures are valid, but the methods are not equal
Almost everyone signs electronically now, and most founders assume that settles it. It mostly does, with four things worth knowing.
Electronic contracts are valid. The Information Technology Act 2000 gives legal recognition to electronic records and electronic signatures, and a contract is not unenforceable simply because it was formed electronically. An agreement concluded over an exchange of emails can bind you, which cuts both ways: a negotiation conducted casually over email can create a contract before anyone intended one.
"Electronic signature" has a narrow legal meaning. Section 3A of the Act recognises only the techniques listed in its Second Schedule. In practice that means two: a digital signature using a certificate issued by a certifying authority licensed by the Controller of Certifying Authorities, which is the same kind of certificate your directors already use for filings at the Ministry of Corporate Affairs, and Aadhaar-based eSign through an authorised service provider, notified in January 2015. Documents signed by those methods carry a presumption of validity, so the burden sits with whoever disputes them.
Most click-to-sign platforms fall outside that category unless they route through one of those two methods. Such contracts are still generally enforceable, but you may have to prove who signed, when, and that nothing changed afterwards, from the platform's trail. That is a weaker position when the counterparty is disputing rather than cooperating.
Some documents are still excluded. The First Schedule to the Act, amended in October 2022, is narrower than most guidance claims. Trusts and wills remain outside. So do most negotiable instruments other than a cheque, and powers of attorney, with carve-outs where the counterparty is regulated by the RBI, NHB, , IRDAI or PFRDA. Contracts for the sale or conveyance of immovable property were taken off the list, though registration and stamping under other laws still apply. Re-check this at the time you rely on it.
Stamping still applies, and the audit trail is part of the document. Electronic execution does not remove stamp duty, and e-stamping support varies by state. A signed PDF alone is weaker evidence than the PDF with its completion certificate: signer identity, timestamps, IP addresses, integrity. Store them together; most companies keep the file and discard the trail.
A workable rule: use a digital signature certificate or Aadhaar eSign for anything high-value, long-term or likely to be scrutinised, which means investment documents, customer contracts above a threshold you set, and IP assignments. A standard e-sign platform is fine for routine, lower-value paperwork. Keep the audit trail for everything.
Where to start if this feels like a lot
Pick the three contracts that carry the most revenue. Read five things in each: the payment trigger, the liability cap, IP ownership, termination and renewal, and change of control.
That hour tells you more about your contractual risk than a full audit.
Frequently asked questions
Are non-compete clauses enforceable in India?
Generally not after employment ends. Section 27 of the Indian Contract Act 1872 makes restraints of trade void, with no reasonableness test to save them. Restraints during employment, and a seller's non-compete on the sale of a business with its goodwill, are treated differently. Non-solicit clauses are more often upheld.
Who owns IP created by a contractor in India?
Not automatically the company that paid. An employee's work generally vests in the employer under the Copyright Act 1957, but a contractor keeps copyright unless there is a written, signed assignment naming the work, the rights, the duration and the territory.
Are electronic signatures legally valid in India?
Yes, under the Information Technology Act 2000. A digital signature certificate from a licensed certifying authority, or Aadhaar eSign, carries a presumption of validity. Other click-to-sign methods are generally enforceable, but you may have to prove who signed from the platform's audit trail.
Which documents cannot be signed electronically in India?
Trusts, wills, most negotiable instruments other than cheques, and powers of attorney, with carve-outs for regulated counterparties, under the First Schedule to the IT Act as amended in October 2022. Contracts for the sale of immovable property were removed from the list. Stamp duty applies either way.
If you want the clause positions written down before your next negotiation, rather than argued each time, our compliance and governance work starts with the contract set you already have.
Current as at September 2026. This is general guidance, not legal advice: enforceability turns on drafting and facts, so take advice on your own contracts.
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About the author
Lead - Company Secretarial, Compliance & Fundraise Advisory
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