What Are the Key Contractual Requirements When Drafting an Agreement with an Indian Business?

Drafting a robust agreement with an Indian business requires careful attention to specific contractual clauses that address the unique legal, economic, and cultural context of India. This article will explore the essential requirements, including scope of work, payment terms, intellectual property (IP), confidentiality, dispute resolution, termination, and ensuring compliance with Indian laws.

Whether you’re a foreign investor or a domestic entity, understanding these aspects will help ensure a clear, enforceable, and mutually beneficial contract.


1. Defining the Scope of Work (SOW)

The Scope of Work (SOW) is the foundation of any agreement. It establishes the exact duties, responsibilities, and deliverables expected from each party. When drafting with an Indian business, ensure that the SOW is:

  • Detailed and Specific: Clearly outline the products or services to be provided.
  • Time-Bound: Include timelines, milestones, or deadlines to track progress.
  • Measurable: Set performance standards or metrics for evaluation.

Example:

For instance, if the agreement involves IT services, the SOW should specify the technology stack, service levels (e.g., uptime guarantees), and the deliverables (e.g., apps or software).


2. Payment Terms

Payment clauses are particularly sensitive in cross-border agreements involving Indian businesses due to variations in currency, taxation, and regulatory controls.

Key Elements:

  • Currency and Mode of Payment: Specify the currency (e.g., INR, USD) and whether payments will be wire transfers, digital payments, or bank drafts.
  • Payment Schedule: Break down payments into installments or milestone-based releases to reduce risk.
  • Tax Compliance: Consider India’s Goods and Services Tax (GST) and withholding tax requirements. For foreign parties, consult tax treaties to avoid double taxation.

Example Clause:

“Payments shall be made in USD to the bank account designated by the Service Provider within 15 days of invoice receipt, subject to a deduction of 10% withholding tax in compliance with Indian Income Tax Act, 1961.”


3. Intellectual Property Rights (IPR)

India has comprehensive IP laws, and ensuring proper IP protection in contracts is critical, particularly in industries like technology, media, or pharmaceuticals.

Key Considerations:

  • Ownership of IP: Clearly state whether IP created under the agreement is transferred to the client or retained by the creator.
  • Usage Rights: Define the scope of usage for any licensed IP.
  • Registration Requirements: Include a clause for registration in India under relevant statutes like the Copyright Act, 1957 or the Patent Act, 1970, if necessary.

Common Pitfalls:

Failing to address the status of jointly created IP can lead to disputes. Explicitly define the ownership structure and terms of future usage.


4. Confidentiality and Non-Disclosure Agreements (NDAs)

Confidentiality is a cornerstone of business agreements, particularly when sensitive information like trade secrets, pricing data, or client lists is exchanged.

Drafting Essentials:

  • Definition of Confidential Information: Be precise about what constitutes confidential information.
  • Duration: Specify the period during which confidentiality must be maintained, often ranging from 1 to 5 years post-termination.
  • Permitted Disclosures: State exceptions, such as disclosures mandated by law or regulatory authorities.

Indian Context:

Ensure the NDA aligns with the Indian Contract Act, 1872, which governs enforceability, and consider judicial precedents on reasonable restrictions.


5. Dispute Resolution Mechanism

India’s legal system can be time-consuming for resolving disputes, making it essential to include efficient mechanisms in the agreement.

Options:

  • Arbitration: India has adopted the Arbitration and Conciliation Act, 1996, based on UNCITRAL standards. Specify:
    • The seat of arbitration (e.g., Mumbai, Singapore).
    • The governing rules (e.g., Indian Arbitration Rules).
  • Mediation or Conciliation: Particularly useful for preserving long-term relationships.
  • Jurisdiction: If litigation is chosen, clearly state which court (e.g., Indian courts or a foreign court) has jurisdiction.

Example Clause:

“Any dispute arising under this Agreement shall be referred to arbitration under the Arbitration and Conciliation Act, 1996, with the seat of arbitration in New Delhi, and the proceedings conducted in English.”


6. Termination Clauses

Well-drafted termination clauses protect both parties in case of unforeseen events or breaches.

Key Points:

  • Grounds for Termination: List events like non-payment, breach of confidentiality, or insolvency as valid grounds.
  • Notice Period: Specify the time required for termination notice (e.g., 30 days).
  • Post-Termination Obligations: Address the return of materials, payment of outstanding dues, and preservation of confidentiality.

Indian Context:

Under Indian laws, certain types of employment or service contracts may require a minimum notice period to comply with labor regulations.


7. Compliance with Indian Laws

Indian contracts must adhere to local statutes to ensure enforceability. Some critical legislations include:

  • Indian Contract Act, 1872: Governs the legality, formation, and execution of contracts.
  • Foreign Exchange Management Act (FEMA), 1999: Regulates cross-border transactions.
  • Companies Act, 2013: Relevant for agreements with Indian corporations.

Additional Considerations:

If the contract involves a foreign entity, consult legal experts to ensure compliance with India’s FDI (Foreign Direct Investment) Policy and RBI (Reserve Bank of India) guidelines.


8. Force Majeure Clause

Given India’s susceptibility to events like natural disasters or political changes, including a force majeure clause is essential. This clause protects parties from liability when performance becomes impossible due to unforeseen circumstances.

Elements:

  • Events Covered: Include pandemics, natural calamities, government actions, and strikes.
  • Obligations During Force Majeure: Specify obligations like notification timelines or alternative arrangements.

9. Governing Law and Choice of Forum

For cross-border agreements, explicitly stating the governing law and jurisdiction prevents ambiguity.

Recommendations:

  • For agreements with Indian businesses, Indian law is often the default governing law.
  • Include a clause for exclusive or non-exclusive jurisdiction to resolve disputes.

10. Representations and Warranties

Representations and warranties ensure that both parties enter the agreement with accurate knowledge and intent.

Examples:

  • Business Warranties: The Indian business warrants that it is legally registered under the Companies Act.
  • Performance Warranties: Guarantees related to the quality or timeliness of deliverables.

11. Indemnification Clauses

Indemnification clauses allocate risks and protect one party from losses caused by the other’s actions.

Typical Scenarios:

  • Breaches of confidentiality.
  • Infringement of third-party IP.
  • Violations of laws or regulations.

12. Data Protection and Privacy

With the rise of digital business, compliance with India’s evolving data protection framework, including the Personal Data Protection Act, 2019 (if enacted), is vital.

Clauses to Include:

  • Data storage and processing obligations.
  • Consent requirements for using sensitive data.

13. Non-Compete and Non-Solicitation Clauses

Restrictive covenants prevent the Indian business from competing unfairly or poaching employees during and after the contract.

Indian Law Note:

Indian courts generally uphold non-compete clauses only if they are reasonable in scope and duration.


14. Boilerplate Clauses

Common clauses often overlooked but essential include:

  • Entire Agreement Clause: Prevents reliance on prior discussions.
  • Amendment Clause: Specifies procedures for modifying the agreement.
  • Severability Clause: Ensures invalid provisions don’t void the entire contract.

15. Conclusion and Signature Requirements

A contract with an Indian business is incomplete without proper execution. Ensure:

  • It is signed by authorized representatives.
  • Witnesses or notarial formalities are adhered to, if required.
  • Digital signatures comply with India’s Information Technology Act, 2000.

FAQs

1. What is the Indian Contract Act, 1872?
It is the primary law governing all contracts in India, ensuring agreements are lawful, voluntary, and enforceable.

2. How can foreign businesses protect IP in India?
By explicitly including IP ownership and registration clauses in contracts and registering IP with Indian authorities.

3. Is arbitration mandatory for Indian contracts?
No, but it is a preferred dispute resolution method due to its efficiency.

4. Are non-compete clauses enforceable in India?
Yes, if reasonable in time and scope, but courts scrutinize them for fairness.

5. Can foreign currency be used for payments?
Yes, subject to FEMA guidelines and RBI approvals.

6. How do I handle tax deductions in cross-border contracts?
Consult tax treaties to reduce withholding tax obligations and ensure compliance with Indian tax laws.