Contracts are one of the most significant parts of any corporate's lifecycle. From purchasing the smallest item to procuring Aircrafts or rockets worth millions and billions, corporate honchos' lives are surrounded by contracts.

In legal terms, a contract is an agreement entered into between two or more parties for exchange of reciprocal promises between the parties for the fulfillment of certain purposes. It is legally binding on parties by imposing certain rights and obligations upon them.

As far as negotiating commercial contracts is concerned, there could be situations wherein one party is in a better position to dominate the will of the other party (undue influence or other factors). However, the very foundation of a good, effective contract is to seek equity and fairness for all parties concerned. A good contract is the one not favouring one party at the cost of the other.

To achieve this purpose, some basic points may be taken into consideration while drafting any contract. Let us discuss some major components that should be incorporated in any commercial contract to fulfill the purpose of all parties.


The Heading Clause of a contract identifies the nature of the transaction / agreement the parties are entering into. This acts as a key factor to determine purpose of reference but it doesn't have a fundamental interpretative value for the contract.

Background / Recitals

The background clause is optional in a contract, and it is not compulsorily required to be in the contract. It lays down the circumstances as well as the reasons for which the parties are entering into the contract per se. Additionally, it may also lay down the background / conditions (financial and otherwise) prevailing at the execution time, due to which the parties entered into the contract.

It is generally in the form of short drafting notes along with brief explanations that are vital for supporting the main agreement. It is also known as the preamble of the contract which gives the idea about the identities of the contracting parties and the very purpose of the contract.

Limitation Clause

Limitation or the Limitation of Liability Clause is a vital part of any contract and acts as a watchdog towards the parties being serious about their obligations. It lays down the liability of the parties to the contract in the form of payment of damages in case there is a breach of contractual obligations. This clause essentially puts a cap on the amount of damages a party shall be able to recover from the other in case of a breach as per the contractual terms.

This clause is invariably prevalent in the Service Level Agreements. The basic objective of this clause is to prevent the service provider from undertaking any risk which would be disproportionate to the fee they are charging for providing these services. It should be fair for all parties and reasonable with respect to the monetary value of the contract.

Indemnity / Guarantee Clause

An indemnity or guarantee clause aims to shift the burden of risk from one party to another either wholly or in part. Indemnity is an undertaking which the indemnifier promises to compensate the indemnified party for any losses suffered by the latter due to the indemnifier's or any third party's negligent act or conduct.


A Guarantee is also provided for the benefit of the principal debtor or a party to the contract by the surety. This clause can be provided when there's a third party that is willing to take the guarantee on behalf of the debtor party in a contract.

Confidentiality Clause

The Confidentiality Clause or a Non-Disclosure Agreement is perhaps the most important clause in any contract, particularly for all Tech Startups. Data Privacy has become all the more important and a confidentiality provision is necessary to prevent any leak of confidential data being exchanged between parties in a transaction. This is essentially the crux of the confidentiality clause which prevents the disclosure of sensitive information to the general public or third party who could possibly misuse it.

For International Commercial Contracts, the NDA should be in accordance with the GDPR (Global Data Protection Regulations). Though it's applicable only in the European Union and for their citizens, it provides extensive guidelines and rights relating to privacy, data protection, etc. However, in India, there is no statutory enforcement or enactment for the confidentiality clauses and it could have any terms and conditions that the contracting parties require.

Terms of Delivery

The Terms of Delivery in case of products are required to be provided including the timeline for the delivery. Additionally, if the goods are to be delivered on a rolling basis, the specifications of the date and time of delivery of each and every consignment should be necessarily provided. Further, the responsibilities of the buyers and sellers have been laid down in the Incoterms which are the widely used terms of sale and lay down a set of internationally recognized rules for trade and commerce.

Penalties for Delay

There is also a need to lay down the fines and penalties that are required to be met by the vendor in case there are delays in the delivery of the consignment. These penalties can be in the form of compensation or even specific performance. In the case of services (SAAS Platforms), the penalties can be in respect of the downtime or glitches that might take place in the ordinary course of business.


This would generally include the duration within which the purchase order or any other offer must be accepted by the buyer for a valid contract. At the same time, it also consists of the criteria or the terms of acceptance. These are certain conditions that any product or service should compulsorily meet for it to be accepted by the buyer company, users, or even the customers. Hence, this clause or phase is also very important in any Contract.

Intellectual Property Rights

Intellectual Property refers to all the intangible property based on the intellect of human beings. It takes into consideration all the literary and artistic works of the people along with any inventions or discoveries made by the people. Intellectual Property can be divided into several types which include Copyright (Literary and Artistic Works), Trademark (Logo, brand mark), Patent (inventions), Industrial Designs, and even Geographical Indication (GI).

A company while entering into any transaction must indicate the scope of its IP Rights i.e., to what extent they shall be entitled to claim IPR protection. At the same time, they need to look into what all works are to be protected under the IPR Regime. In case there is a transfer of business or outright sale through an agreement, this IPR clause can determine which Intellectual Property rights can or cannot be claimed by the other party. Further, there can also be a question regarding Intellectual Property protection for the Company's work product.

Complementary portions

There are certain parts which may not constitute a part of the main body of the contract but provide strong support to it. These are known as complementary portions. Some complementary portions that are there can be classified as follows:

a) Statement of Work

The Statement of Work refers to a supporting document to a contract that lays down the scope and objective of entering into the contract which the parties need to keep in mind. It further provides the specific requirements and the deadlines of the work to be completed so that, the terms and conditions along with the payment methods and other related aspects are meticulously adhered to. It helps ensure explicit consensus regarding the requirements of a particular transaction under the contract.

b) Purchase order

A Purchase Order is a document sent by the buyer to the vendor to request for purchasing of particular products / services. It consists of all the specifications along with the quantity of the product or service. As soon as the seller accepts this purchase order it becomes legally binding between the parties. It may also be a precursor to a contract.

c) Service Level Agreement

While the purchase order is for the purpose of goods, a service-level agreement is required for availing any services from the vendor or the seller. An example of the same can be SAAS (Software as a Service) Agreement or a technical support agreement. It essentially includes the description of the services along with the requirements and the exclusions. This agreement can further be of three types based on the other party to the contract.

Customer agreements are between the company which is the service provider and the final customers. It is also known as an external service agreement. An internal agreement is entered into between the members of the organization in itself. A multi-level service agreement is entered into between multiple parties such as the organization and other multiple vendors or more than two departments in the organization.


An effective Contract can pave the way for immense growth and gains for all parties that were involved. To achieve this goal and to ensure fairness, all these clauses should always be kept in mind while drafting a Contract.

By using all these clauses and drafting them effectively, the interests of all parties can be taken care of effectively. In this way, these clauses by themselves can become the 'veil of ignorance' thereby making parties forget about their differences in power and achieving a status of equality.


Parth Verma is a 3rd year student of BBA LLB from Christ, Bengaluru


Originally published July 3, 2023.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.