पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 06 · Start

Contracts: the ten clauses that decide who wins a dispute

Most of a contract describes a relationship that will go well. Three or four clauses describe what happens when it does not, and those are the ones a founder signs without reading.

Pathshala, The Founder Library · 11 October 2026 · 9 min read

A twenty-page master services agreement arrives from the first enterprise customer. Eighteen pages describe a relationship in which everyone performs, pays and renews. Two pages describe what happens when they do not. The founder reads the eighteen, skims the two, signs, and eleven months later learns that the company agreed to indemnify a bank, uncapped, for any claim arising from the services, while its own recovery was capped at three months of fees.

This lesson does three things. It explains what makes an agreement a contract in India and what the Contract Act already supplies before any clause is written. It takes the ten clauses that decide disputes in the order a dispute will reach them, and says what to look for in each under Indian law. And it gives a forty-minute reading routine, because the point is not to become a lawyer but to know which two pages to send one.

What the Contract Act gives you before you write a word

Section 10 of the Indian Contract Act 1872 says an agreement is a contract if it is made by free consent of competent parties, for a lawful consideration and object, and is not expressly declared void. Writing is not required unless another law demands it. That cuts both ways. An exchange of emails agreeing a price and a scope is a contract. So is the WhatsApp message in which a founder promised a customer a feature by March. The written agreement is not what creates the obligation; it is what fixes the evidence of it, and that is reason enough to make sure the written version says what was meant.

The Act also supplies default rules that most clauses are written to displace. Section 73 says compensation for breach covers loss that arose naturally from it or that the parties knew was likely, and not remote or indirect loss. Section 74 says a sum named in the contract as payable on breach is recoverable only as reasonable compensation not exceeding that sum, whether or not actual loss is proved, so a liquidated damages clause is a ceiling and not a guarantee. Section 56 says a contract to do something that becomes impossible or unlawful becomes void when it does. Section 27 says a restraint on carrying on a lawful business is void. Every indemnity, limitation, force majeure and non-compete clause you will ever read is an attempt to move one of these defaults, and the question to ask of each is simply: in which direction, and how far.

Clauses one to three: the money

Scope and acceptance decide what was promised and when it counts as delivered. Look for the acceptance mechanism: who tests, within how many days, and what silence means. A deemed-acceptance clause, under which deliverables are accepted if not rejected within ten days, protects a supplier; an open-ended acceptance at the customer’s satisfaction protects nobody and is where invoices go to wait. Tie milestones to dated, objective criteria, and tie payment to the milestones.

Payment terms are where the law intervenes on a founder’s side. If the company is registered on Udyam as a micro or small enterprise, section 15 of the MSMED Act 2006 requires the buyer to pay by the agreed date, which cannot exceed 45 days from acceptance or deemed acceptance, and section 16 charges the buyer compound interest with monthly rests at three times the Reserve Bank’s bank rate on anything paid later. A contract that says 90 days does not override it. The buyer’s finance team knows this, which is why registering on Udyam changes the tone of the conversation about terms. Beyond that, the clause should say what the invoice date is, who bears GST and withholding tax, and whether a disputed line item lets the buyer withhold the whole invoice or only that line.

Term and termination is the exit, and it is read on the worst day of the relationship. For cause: a material breach, a written notice, a cure period of fifteen to thirty days. For convenience: notice of thirty to ninety days, available to both sides or to one. On termination: what is paid for work done, what is refunded, how data is returned, what transition assistance is owed and for how long. A customer’s right to terminate for convenience on thirty days with no exit fee means the three-year contract is a thirty-day contract with a long name, and the discount you gave for three years was a gift.

Clauses four and five: indemnity against limitation

These two are read together because one is written to defeat the other. Section 124 of the Contract Act defines an indemnity as a promise to save another from loss caused by the conduct of the promisor or of any other person, and section 125 lets the indemnified party recover the damages, costs and compromise sums it is compelled to pay in a suit covered by the promise. In a commercial contract the indemnity clause names the triggers: third-party claims that the services infringe someone’s IP, breach of confidentiality, breach of law, death or damage caused by negligence, sometimes any breach at all. Read the trigger list as a list of things you will pay for, in full, outside any cap.

The limitation clause then says how much of the loss is recoverable. The usual shape is a cap at the fees paid in the preceding twelve months and an exclusion of indirect, consequential, special and punitive damages and lost profits, which largely restates section 73. Then come the carve-outs: the cap does not apply to indemnity obligations, to breach of confidentiality, to IP infringement, to gross negligence or wilful misconduct. Read the carve-outs twice. A clause that caps liability at twelve months of fees and carves out the indemnity has capped nothing that matters, because the indemnity is where the large claims live.

The indemnity is what you promise to pay. The limitation is what you can be made to pay. Read the second before you agree to the first.

The position to hold, for a young company selling to a large one: a mutual indemnity limited to third-party claims for IP infringement and breach of confidentiality and law; a cap on everything else at twelve months of fees, with the indemnity capped at a stated multiple of fees rather than uncapped; a procedure requiring prompt notice, control of the defence by the indemnifier, and no settlement without consent. Large customers accept this more often than founders expect, because their own suppliers have asked for it for years. What they do not accept is a founder who has not read the clause.

Clauses six to eight: what you own, what you keep secret, what you may not do

Intellectual property decides who owns the deliverables, who owns improvements to the supplier’s platform made during the engagement, and what licence survives termination. A customer’s template often assigns everything to the customer, including the supplier’s pre-existing tools, because somebody copied it from a works-contract. Separate the three: the customer owns bespoke deliverables on payment, the supplier owns its platform and anything generic, and each gets a licence to what it needs. The [IP lesson](/library/ip-assignment-company-owns-what-you-built) explains why “work for hire” does nothing in India and a written assignment does.

Confidentiality should define the information, exclude what is public or independently developed, state how long the duty survives termination, and say what happens on exit. Where personal data moves, add the data-protection obligations and who answers to the regulator. Exclusivity, non-compete and non-solicit are where section 27 does the work. A restraint during the term, say an exclusive supply arrangement, can hold because it is part of the trade rather than a restraint on it. A clause stopping you from serving a competitor after the contract ends is void to that extent, and so is the one stopping your customer from hiring your engineer after the project. Do not give up price for a clause the other side cannot enforce, and do not rely on one you cannot.

Clauses nine and ten: where the fight happens

Governing law and jurisdiction choose the rulebook and the room. For a contract between two Indian companies the answer is Indian law and the courts of a city where you have a lawyer. Foreign customers will propose Singapore or English law with their own courts; accept the law if you must, because a good Indian commercial lawyer can work with either, but resist a foreign court for a dispute you would have to fund in a currency you do not earn. Exclusive jurisdiction in the customer’s city means every claim you bring begins with a flight.

Dispute resolution is usually arbitration, and the Arbitration and Conciliation Act 1996 sets the frame. Section 7 requires the arbitration agreement to be in writing, which a signed clause satisfies. Section 20 lets the parties choose the place; name a seat, a city, because the seat decides which courts supervise the arbitration. Section 29A requires the tribunal to make its award within twelve months of the completion of pleadings, extendable by six months with the parties’ consent, which is the Act’s answer to arbitrations that used to run for years. Section 9 keeps the courts available for interim measures, an injunction or an order preserving money or goods, before and during the arbitration. Section 28 of the Contract Act, which otherwise voids clauses that stop a party from going to court, expressly saves the agreement to arbitrate.

The practical choices: one arbitrator rather than three for anything under a few crore, because three arbitrators cost three times as much and take longer; an institution, or at least institutional rules, so that the appointment does not itself become a court case; and a seat you can reach. For small, local contracts, plain courts can be cheaper than arbitration, and a well-drafted clause may say that claims below a stated amount go to court. What the clause must not do is split the difference with vague language, because the first year of a dispute is then spent arguing about where to have it.

When to send the two pages to a lawyer

A founder can read all ten clauses and should. A lawyer should see them when any one of four things is true: the contract is worth more than a quarter’s revenue; the indemnity is uncapped or the cap carves out the indemnity; the governing law or the courts are outside India; or the counterparty’s template was plainly written for a different kind of deal. Send the lawyer the two pages with the ten clauses marked and your proposed position on each. The bill for an afternoon’s review is a fraction of the bill for drafting from scratch, and a tiny fraction of a dispute.

The forty-minute routine

Before any agreement over a month’s revenue is signed, open the checklist above beside the document and work through it in order. Ten minutes on the parties, precedence and payment. Fifteen on indemnity and limitation, reading the carve-outs twice and writing down in one line what the company could be made to pay in the worst case. Five each on IP, confidentiality and restraints. Five on law and disputes, confirming there is a named seat and a named city. Then write three sentences to the other side with the changes you need, in order of importance, and let the smaller points go. Once a quarter, pull the five largest live contracts and re-read only clauses three, four, five and ten. A company that does this never signs the agreement in the opening paragraph, and when something does go wrong, it already knows which page the argument is on.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.