Key Clauses Every Business Contract Must Include

Whether you are running a small shop, a startup, or just someone providing a service on an informal basis, if there is no written agreement, you are leaving yourself open to any kind of vulnerability or someone disagrees with you. People often think contracts are only for big corporations, but even small business engagements can easily escalate to large disputes without any regard for what was agreed to in writing. A business contract clarifies expectations, can eliminate confusion, and will provide you with more clarity in terms of enforcing your legal rights and ultimately even enforce the terms of the contract.

Contracts in India are legally enforceable under the Indian Contract Act, 1872. More specifically, Section 10 states that a contract is only valid if it is made between parties with free consent, the contract includes lawful consideration, and the contract has a lawful object. Verbal promises often do not hold up in a court of law. This article outlines the essential clauses that should be included in every business contract, explains them simply, and provide legal references to help everybody understand and utilize them.

The Must-Have Clauses in Every Business Contract

Every business contract should contain some of the key clauses that constitute the framework of the agreement. These clauses are not simply legal formalities, they support understanding, and they assist in avoiding disagreements. Let’s take a look at the key ones:

Offer and Acceptance Clause 

This is the fundamental step of any agreement. One party has to make a clear offer, while the other party has to accept it without any ambiguity. A contract is only valid when an offer has been communicated and accepted, and this can be found in the Section 2(a) and Section 2(b) of the Indian Contract Act, 1872. For example, you agree to do a logo design for ₹ 5,000 and the client agrees in writing, that has now formed a contract.

Consideration Clause

“Consideration” for a contract can simply mean what each party gives. This can be cash, goods, services or even ​a promise. A contract is void without consideration, refer Section 2 (d) of the Indian Contract Act. So, if someone agrees to work for free without a benefit then the contract cannot be enforced under the law. The consideration clause should state what the consideration is worth and what type of consideration it is.

Scope of Work/Deliverables Clause

A scope of work/deliverables clause is a provision that outlines what work is to be done, who is to do the work, when it is to be done, and what is expected at every step of the contract. A scope of work/deliverables clause is especially important to owners of businesses when engaging freelancers or external vendor services via contracts that define project work. Failing to have a well-defined scope can often lead to disagreements and a loss of trust.  

Payment Terms Clause

The contract should clearly state the total amount payable, how payment is to be made (i.e., bank transfer, cheque, UPI, etc.), and when the payment is to be made (i.e., advance, lump sum, etc.). It would be sensible to add a clause that states that a penalty for late payment will apply or that interest will be charged under the Interest Act, 1978.  

These necessary clauses protect both parties and create a valuable and enforceable contract.

When and How Can You End a Contract? 

Despite how detailed and carefully written a contract is, there can still arise some situations which were not planned. This is the point of having all business agreements clearly articulate the way under which any party can exit the contract, for reasons stated in the contract, in a legal and peaceful manner. The establishment of a Termination Clause and a Force Majeure Clause in this part of the contract becomes significant.

1. Termination Clause: This clause identifies the conditions in which the contract may be terminated by either party. 

Termination can occur:

• With cause, (breach of contract, extension missed deadlines, poor work quality) or
• Without cause, (recommended notice, mostly 15-30 days) 

This clause not only specifies how a party has a way out, it also protects both parties in case the relationship doesn’t work out. 

For example, if a company is dissatisfied with the services provided by a vendor, the company can terminate the contract after providing written notice, which is the agreed to manner thus far in the contract under the termination clause.

Under Section 56 of the Indian Contract Act, the Doctrine of Frustration is provided, which allows to terminate contracts that have become impossible to perform due to events that may be outside of the control of one party (changes in law, death of key person).

2. Force Majeure Clause: This clause covers unforeseen circumstances beyond anyone’s control, natural disasters, pandemics, government shutdowns and closures, wars, or riots. A Force Majeure clause excuses both parties from fulfilling their obligations under the contract. This clause was very important during the COVID-19 pandemic, where many businesses were required to close or delay altogether. There were instances of liability for breaches that were outside of the parties or businesses control, because there was no Force Majeure clause included in the contract.

Having a clear Force Majeure and Termination clauses should provide certainty as to the exit options for both parties, and lessen the risk of legal challenges should things go sideways. This is not about that one should always expect the worst outcome, but simply to be prepared and protected.

Protecting Your Information and Ideas 

In today’s competitive landscape, information is power. If you are a startup owner, designer, consultant or small business operator, you often share ideas, plans, client lists and strategies with partners, staff or vendors. You need your sensitive information to remain protected and in order to make that happen your contract must include a Confidentiality Clause and, if needed an Intellectual Property (IP) Rights Clause. 

Confidentiality / Non-Disclosure Clause 

This clause protects all private information shared between the parties during the term of the contract and after the date of contract expiry, from disclosure to anyone else. A confidentiality clause is particularly necessary for protecting: 

• Business plans
• Financial data
• Customer information 
• Software codes or prototypes 

If someone breaches confidentiality they will always be legally responsible. Additionally, under the Information Technology Act, 2000, unlawful or unauthorized disclosure, misuse or access of digital information can lead to legal consequences. 

For example, a freelance website developer could not use your company’s private login and password or codebase for other clients. A Confidentiality Clause that is robust will capture that.

Intellectual Property Rights Clause

This clause indicates who owns what in relation to the creative or technical output (e.g. designer creates logo; developer builds software module). The contract should state:

• Is the client going to own full rights?
• Can the creator reuse his work elsewhere?
• Will there be any royalties or credits? 

Legal references relevant to contracts:

• Copyright Act 1957: (photo, design, artwork, musical, or software)
• Trade Marks Act 1999: (brand names, visual identifiers, etc.)

Always include these clauses to protect your creativity, labour, and sensitive data from others, and maintain control over your work and how your information is used and shared.

Who Pays If Things Go Wrong? Understanding Liability and Indemnity

There is always risk involved in every business relationship. What if your client experiences a loss because of your service or a vendor wrecks your property while making a delivery? You do not have to stress about these scenarios being handled fairly because fairness is built into contracts in the form of Indemnity and Liability Clauses.

Indemnity Clause

The Indemnity Clause protects one party from another loss or damage that the other party caused in the event of their actions, errors, or negligence. In the simplest of terms:

“If you cause the issue, you pay for it.”

As an example, let’s say a software company provides a software product that does not work causing a loss for its client. The Indemnity Clause states that the software company must pay for the client loss. It is especially important in:

• Service agreements
• Vendor contracts
• Technology or creative projects

Although the Indian Contract Act of 1872 does not define the indemnity arrangement in detail under contract law, section 124 of the Act recognizes contracts of Indemnity and makes them a legally enforceable agreement.

Limitation of Liability Clause

A limitation of liability clause limits a party’s liability. Without one, a minor mistake could lead to multi millions of dollars in claims against a party. The clause may read as follows: 

• Liability is limited to contract value
• No liability for indirect or consequential losses
• No liability for third-party actions

This is common in software, event, or product supply agreements, where some things may be out of the control of a party. 

In conclusion, indemnity and limitation of liability clauses provide a level of safety for parties to a contract. They ensure that the parties are allocating responsibility appropriately to not discourage certain types of agreements, where one or more parties could limit their responsibilities for things they did not cause or could not control. Indemnity and limitation of liability clauses are the not just an important aspect for large corporations but are just as important in everyday business dealings.

FAQs on Business Contract Clauses