9 Contract Drafting Mistakes That Lead to Costly Litigation

Vikrant D. Shetty

Jun 6

9 min read

Updated: Aug 26

9 Contract Drafting Mistakes That Lead to Costly Litigation

Vague payment terms, defective dispute resolution clauses, and unenforceable liquidated damages provisions under Section 74 of the Indian Contract Act, 1872 are among the most common drafting errors that turn ordinary commercial disagreements in India into prolonged litigation. Templates copied without adaptation to Indian law, undefined key terms, and missing termination clauses compound the risk further. This article sets out nine recurring drafting mistakes seen in Indian commercial contracts and explains why each one invites dispute rather than resolution.

Here are nine drafting mistakes that consistently turn business disagreements into full-blown, expensive litigation.

Contract Drafting Mistakes That Cost Indian Businesses Dearly

1. Vague Payment Terms and Milestones

Far too many commercial contracts in India use phrases like “payment shall be made within a reasonable time” or “upon satisfactory completion.” These phrases sound harmless until one party disputes what “reasonable” means, or who gets to decide whether completion is “satisfactory.” Courts have interpreted this kind of language many times, and the outcomes are rarely predictable. For contracts involving staged payments or milestone-based deliveries, every milestone must be defined using objective, measurable criteria, not impressionistic language that leaves room for argument.

2. Is Your Dispute Resolution Clause Missing or Defective?

A dispute resolution clause is not boilerplate. It is one of the most consequential provisions in any commercial contract, and yet it is frequently copied without thought or left out entirely. The most common problems: arbitration clauses that name a non-existent institution, clauses requiring both parties to mutually agree on an arbitrator (unworkable when parties are already in dispute) and hybrid clauses combining arbitration and litigation in ways courts have repeatedly struck down. A defective arbitration clause can land you in civil court ironically, to fight about whether you have to go to court at all.

3. Missing or Poorly Drafted Termination Clauses

Termination is the most common event that precedes litigation. Yet many contracts either have no termination clause at all, or have one that leaves critical questions unanswered: which party retains what, what the post-termination payment obligations are, and whether the aggrieved party is entitled to damages or only to the value of work done until the termination date. Without clear answers, termination becomes a trigger for litigation rather than a clean commercial exit.

4. Why Do Jurisdiction and Governing Law Clauses Matter?

In contracts between parties from different states, or with any cross-border dimension, failing to specify which court has jurisdiction and which law governs is an open invitation to a preliminary round of litigation about where the dispute will even be heard. Indian courts have seen extensive and expensive battles solely on the question of jurisdiction. A well-drafted governing law clause specifying both the substantive law and the courts or seat of arbitration with exclusive jurisdiction eliminates this uncertainty at the outset.

5. Liquidated Damages Clauses That Are Unenforceable

Section 74 of the Indian Contract Act, 1872 does not enforce penalty clauses, it enforces only genuine pre-estimates of the loss likely to flow from a breach. Many contracts include liquidated damages provisions that are clearly penal in character, with amounts bearing no rational relationship to the likely loss. Courts routinely refuse to enforce such clauses, leaving the aggrieved party with the much harder task of proving actual damages. A clause stating “10% of contract value per day of delay” will almost certainly be treated as a penalty and set aside.

6. Absence of Representations and Warranties

In transactions involving assets, businesses, or intellectual property, representations and warranties define the factual baseline each party is relying on. Without them, establishing misrepresentation becomes far harder and available remedies are narrower. A seller who makes no representations and warranties in a share purchase agreement places substantially all the transaction risk on the buyer, a fact the buyer often discovers only when the business underperforms and a claim becomes necessary.

7. Using Templates Without Proper Adaptation

Templates sourced online, borrowed from other agreements, or adapted from a different industry are not inherently bad, but they must be reviewed and adapted for the specific transaction and the applicable law. Clauses referencing English law, American courts, or statutory provisions inapplicable in India don’t just look unprofessional, they create genuine uncertainty about enforceability. A commonly misused example is the force majeure clause, which in many Indian contracts is copied from an English precedent that does not align with how Indian courts actually interpret force majeure.

8. Why Does Failing to Define Key Terms Cause Disputes?

Contracts using terms like “material breach,” “confidential information,” “business day,” or “affiliate” without defining them leave courts to supply the meaning, and courts are not always generous interpreters. The definition of “confidential information,” for instance, can determine the entire outcome of a non-disclosure dispute. The definitions section is unglamorous drafting, but it is precisely where many disputes are either quietly avoided or silently created.

9. Overlooking Compliance with Applicable Statutes

Many contracts, particularly in employment, real estate, and financial services, must comply with specific statutory requirements. Employment contracts that violate applicable labour law provisions, or property development agreements that ignore RERA requirements, may not just be unenforceable; they may expose one or both parties to direct regulatory liability. Statutory compliance is not a separate exercise conducted after the contract is drafted. The contract must be conceived with awareness of the legal framework within which it will operate.

The Cost of Getting a Contract Right

A poorly drafted contract does not just create litigation risk; it creates uncertainty, erodes commercial relationships, and shifts negotiating leverage to whichever party is more willing to fight. The cost of getting a contract properly drafted is a fraction of what even a pre-litigation dispute costs in management time, legal fees, and commercial disruption.

If your business regularly enters into commercial agreements, a periodic legal audit of your standard contract templates is basic risk management.

Frequently Asked Questions

What is the difference between a penalty and a genuine pre-estimate of loss under Section 74?

Section 74 of the Indian Contract Act, 1872 permits a court to award only reasonable compensation not exceeding the amount named, whether or not actual loss is proved, but Indian courts distinguish a genuine pre-estimate, an amount calculated from a realistic forecast of likely loss, from a penalty, a sum fixed to frighten the defaulting party into performance. A clause naming an arbitrary flat percentage of contract value per day, without any calculation basis, is usually treated as a penalty and reduced to actual proven loss.

Can a defective arbitration clause still be enforced by a court?

An arbitration clause that names a non-existent institution, requires mutual agreement on an arbitrator after a dispute has already arisen, or mixes arbitration with ordinary litigation is frequently held void for uncertainty. Where this happens, the parties are left to litigate in the civil courts, since a court cannot rewrite a fundamentally defective clause to make it workable. The dispute over the clause's validity itself often becomes the first round of litigation.

What should a termination clause cover to avoid becoming a source of litigation?

A termination clause should specify the grounds for termination, whether breach, insolvency, or convenience, the notice period required, what happens to part-performed obligations, whether accrued payment obligations survive termination, and whether the terminating party is entitled to damages beyond the value of work already done. Contracts silent on these points routinely generate disputes about entitlement once one party seeks to exit.

Why does a governing law clause matter even when both parties are Indian companies?

Even between Indian parties, a contract can lack a governing law clause specifying which state's procedural rules and which court has exclusive jurisdiction, particularly when the parties operate from different states. Without this clause, a plaintiff may file in a forum convenient to it, prompting the defendant to contest jurisdiction before the merits of the dispute are even reached, adding months of preliminary litigation.

What must a share purchase agreement include to protect a buyer against misrepresentation?

A share purchase agreement should include specific representations and warranties from the seller about the target company's financial statements, litigation history, regulatory compliance, and material contracts, backed by indemnity provisions for breach. Without these clauses, a buyer who later discovers undisclosed liabilities has a materially weaker claim, since misrepresentation is harder to establish without a documented factual baseline the seller warranted to be true.

Why can a force majeure clause copied from an English-law contract fail in India?

A force majeure clause drafted for English law often lists events, or uses interpretive conventions, that do not track how Indian courts read such clauses, which are interpreted strictly against the party invoking them. A clause copied without adaptation may fail to list an event the Indian party actually needs covered, or may conflict with the Indian Contract Act, 1872 rules on frustration under Section 56, leaving both sides uncertain which regime governs.

Who should draft or review a commercial contract to reduce litigation risk?

A commercial contract intended to bind the parties on significant obligations should be drafted or reviewed by an advocate familiar with Indian contract law and the specific sector's regulatory requirements, rather than adapted internally from a generic template. Sector-specific issues, such as RERA compliance in real estate agreements or labour law compliance in employment contracts, are easy to miss without that review.

How often should a business review its standard contract templates?

A business that relies on standard templates for recurring transactions should review them at least once a year, or immediately after a change in relevant law, an adverse judgment affecting a similar clause, or a dispute that exposed a gap in the existing template. Templates drafted years earlier routinely reference repealed provisions or fail to reflect current judicial interpretation of clauses like liquidated damages or force majeure.

Can a contract be enforced if it does not define a key term like confidential information?

A contract can still be enforced without a definitions section, but an undefined term is left to judicial interpretation, and courts are not always generous to the party who benefits from the term. In a non-disclosure dispute, the scope of confidential information can determine the entire outcome, so leaving it undefined shifts real risk onto whichever party needs the broader reading.

What is the limitation period for filing a suit for breach of a commercial contract in India?

Article 55 of the Schedule to the Limitation Act, 1963 gives a party three years from the date the contract is broken, or where there is a continuing breach, from the date the breach ceases, to file a civil suit for compensation. For a series of distinct breaches, a fresh limitation period can run from each breach. Missing this period bars the claim entirely regardless of its merits, which makes early legal advice on a suspected breach important rather than a step to defer until a dispute has fully matured.

Is pre-institution mediation mandatory before filing a commercial contract suit in India?

Section 12A of the Commercial Courts Act, 2015 requires a plaintiff to attempt pre-institution mediation before filing a commercial suit, unless the plaint seeks urgent interim relief. The process is conducted through the mediation cell of the relevant district legal services authority and must ordinarily conclude within three months, extendable by two months with the parties' consent. A suit filed without first attempting this mediation, where urgent relief is not genuinely sought, risks being rejected at the threshold, so parties anticipating litigation should factor this step into their timeline.

Can a non-compete or restraint of trade clause be enforced in an Indian commercial contract?

Section 27 of the Indian Contract Act, 1872 renders void any agreement that restrains a person from exercising a lawful profession, trade, or business, subject to a narrow statutory exception for the sale of goodwill of a business. Indian courts have generally refused to enforce post-termination non-compete clauses against employees, though reasonable restraints operating during the subsistence of an employment or commercial relationship are usually upheld. Contracts that assume a broad non-compete will survive termination, as is common under other legal systems, frequently fail when tested in an Indian court.

Why does an entire agreement clause matter, and what happens if a contract omits one?

An entire agreement clause states that the written contract represents the complete understanding between the parties and supersedes prior negotiations, drafts, or oral assurances. Without it, a party can attempt to introduce earlier correspondence, draft terms, or verbal representations as evidence of the parties' actual intent, complicating interpretation and creating scope for a collateral warranty claim outside the four corners of the document. Omitting this clause does not void the contract, but it leaves the door open to extrinsic evidence that a well-drafted agreement is meant to exclude.