Drafting, Pleadings and Appearances · Drafting of Commercial Contracts

Key Clauses in Commercial Contracts: Drafting Guide

Updated 11 October 2026 · Fact-checked

Key clauses in commercial contracts are the standard provisions that fix who does what, for how long, at what price, and what happens if things go wrong. These include definitions, consideration, term, termination, force majeure, indemnity, arbitration, governing law and boilerplate. In an exam, identify the facts, draft each clause precisely, and test it against the Contract Act.

Understand Key Clauses in Commercial Contracts

A commercial contract is an agreement between businesses. Under Section 10 of the Indian Contract Act, 1872, an agreement is a contract if it is made by free consent of competent parties, for a lawful consideration and with a lawful object, and is not expressly declared void. Clauses are how you put these requirements, and the commercial deal, into words.

Start with the definitions clause. It fixes the meaning of terms such as "Goods", "Effective Date" and "Confidential Information", so the rest of the draft stays short and consistent. Then comes the consideration clause. Section 2(d) treats an act, abstinence or promise done at the desire of the promisor as consideration. Your clause should state the price, the payment dates and the mode of payment. Under Section 25, an agreement without consideration is void, with limited exceptions. Inadequate consideration does not by itself make the agreement void if consent was freely given.

The term and termination clauses say when the contract starts, how long it runs, and how either party can end it. Draft the notice period, the events of default, the cure period and the consequences of termination, such as payment of dues and return of property. The force majeure clause deals with events beyond a party's control, such as floods, war or government orders. It has no fixed statutory form, so you must list the events, require prompt notice, suspend the obligations and give a right to terminate if the event continues too long.

The indemnity clause follows Section 124: one party promises to save the other from loss caused by the promisor's own conduct or by the conduct of any other person. A guarantee is different. Under Section 126, it is a contract to perform the promise or discharge the liability of a third person in case of his default. It involves three parties: surety, principal debtor and creditor. A guarantee may be oral or written. Indemnity usually involves two parties.

The dispute resolution clause covers arbitration, governing law and jurisdiction. Section 28 makes void any agreement that absolutely restricts a party from enforcing rights through the usual legal proceedings, or that limits the time to do so. Exception 1 saves an agreement to refer future disputes to arbitration. Boilerplate clauses, such as entire agreement, amendment, assignment, notices, severability, waiver and counterparts, close the draft.

Key rules to remember

Validity of a contract (Section 10): Free consent + competent parties + lawful consideration + lawful object + not expressly declared void; Your drafting must not break any of these. Law requiring writing, witnesses or registration still applies.
Consideration (Section 2(d)): Act, abstinence or promise at the desire of the promisor = consideration; It can move from the promisee or any other person. State price and payment terms clearly.
No consideration (Section 25): Agreement without consideration is void, except: registered written deed for natural love and affection between near relations; promise to compensate for past voluntary act; written signed promise to pay a time-barred debt; Inadequate consideration does not make an agreement void if consent was free.
Indemnity (Section 124): Promise to save the other from loss caused by the promisor's conduct or another person's conduct; Two parties: indemnifier and indemnified.
Guarantee (Section 126): Contract to perform the promise or discharge the liability of a third person in case of his default; Three parties: surety, principal debtor, creditor. May be oral or written.
Guarantee consideration (Section 127): Anything done or promised for the benefit of the principal debtor can be sufficient consideration for the surety; Past benefit without a fresh promise at the surety's request does not support a guarantee.
Surety discharged (Section 134): Release or discharge of principal debtor by contract or by creditor's act or omission discharges the surety; Draft a clause preserving surety liability on specified events.
Restraint of legal proceedings (Section 28): Absolute restriction on legal remedy, or limit on time to enforce rights, is void to that extent; Exception 1 saves arbitration agreements; Exception 3 saves a bank or financial institution guarantee clause extinguishing liability after a period of not less than one year.

How to solve Key Clauses in Commercial Contracts questions

Use this method for any question that asks you to draft or review a clause, or to advise on a contract.

1Read the facts and note the parties, the deal, the money and any special risk, such as import delay or data sharing.
2Name the clause or clauses the facts call for, such as termination, force majeure or indemnity.
3State the legal rule in one or two lines, citing the section only if you are sure of it, for example Section 124 for indemnity.
4Analyse the facts against the rule. Ask what could go wrong and who should bear the risk.
5Draft the clause in numbered sub-clauses using precise words: events, notice period, cure period, consequences, limits.
6Check the draft for voidness risks, such as a clause that absolutely bars court access under Section 28.
7Add the relevant boilerplate, such as notices, amendment and governing law, if the question asks for a full agreement.
8Conclude with a one-line summary of how the draft protects your client.

Quickest way: Rule, risk, clause

When to use it: Use it when time is short and the question asks for one or two clauses.

Write the rule in one line.
Write the risk the client faces in one line.
Draft the clause with these parts: trigger, notice, consequence, limit.
Add one line on any statutory limit, such as Section 28.

Common mistakes in Key Clauses in Commercial Contracts

Treating indemnity and guarantee as the same
Both protect against loss, so they look alike.
Fix: Remember the parties. Indemnity is between two parties under Section 124. Guarantee has three parties under Section 126 and covers a third person's default.
Drafting force majeure as a vague list with no notice or end point
Students copy a heading without drafting its working parts.
Fix: Include events, notice within a stated time, suspension of obligations, mitigation duty and a right to terminate if the event lasts beyond a stated period.
Drafting an arbitration clause that bars all court remedy absolutely
Students want the clause to sound final.
Fix: Refer disputes to arbitration and name the seat, number of arbitrators and language. Section 28 voids an absolute bar on legal proceedings, but Exception 1 saves arbitration references.
Leaving out or vaguely stating consideration
Students focus on obligations and forget the price clause.
Fix: State the amount, payment schedule and mode. Under Section 25 an agreement without consideration is void unless an exception applies.
Termination clause with no notice period or cure period
Students write only "either party may terminate".
Fix: Separate termination for convenience from termination for breach. State notice days, cure period and what survives termination.
Putting limitation periods in a clause without checking Section 28
Students try to shorten the time for claims to protect the client.
Fix: A clause that limits the time to enforce rights, or extinguishes rights on expiry of a period, is void to that extent, subject to the saved cases such as bank guarantees under Exception 3.

Worked examples

Example 1

Sharma Traders will supply 500 tonnes of steel to Bharat Fabricators Pvt Ltd. Draft a force majeure clause suitable for the supplier.

Show the solution

Rule: no statute fixes the wording, so the contract itself must define the events and effects.
Risk: the supplier may be unable to deliver because of events beyond its control and should not be in breach.
Draft the trigger: "Force Majeure Event means an event beyond the reasonable control of the affected party, including flood, fire, earthquake, war, riot, epidemic and any order of a government authority, but excluding lack of funds."
Draft notice: "The affected party shall notify the other in writing within 7 days of the event, with details and expected duration."
Draft effect: "Obligations affected are suspended for the period of the event. The affected party shall use reasonable efforts to resume performance."
Draft exit: "If the event continues for more than 60 days, either party may terminate by written notice without liability, except for payments already due."

Answer: The clause defines the events, requires notice in 7 days, suspends obligations, imposes a duty to mitigate and allows termination after 60 days, so Sharma Traders is protected while Bharat Fabricators has a clear exit.

Example 2

Meera Exports Ltd appoints Kiran Logistics as its carrier. The parties want Kiran to cover Meera's losses if Kiran's negligence damages goods. A bank will also give a separate promise to pay Meera if Kiran fails to pay its dues. Explain which promise is indemnity and which is guarantee, and draft the indemnity clause.

Show the solution

Rule: under Section 124, a contract to save the other from loss caused by the promisor's own conduct or another's conduct is indemnity.
Kiran promises to make good Meera's loss caused by Kiran's own negligence. This is indemnity between two parties.
Rule: under Section 126, a contract to discharge the liability of a third person in case of his default is guarantee.
The bank promises to pay if Kiran defaults. There are three parties: bank as surety, Kiran as principal debtor, Meera as creditor. This is guarantee.
Draft: "Kiran Logistics shall indemnify and keep indemnified Meera Exports Ltd against all losses, damages, costs and reasonable legal expenses arising from loss of or damage to the goods caused by the negligence or wilful default of Kiran, its employees or agents."
Add a procedure: Meera shall give prompt written notice of any claim and allow Kiran to assist in the defence.
Add a limit if agreed: "Liability under this clause shall not exceed the value of the goods affected."

Answer: Kiran's promise is indemnity under Section 124. The bank's promise is a guarantee under Section 126. The indemnity clause covers losses from Kiran's negligence, sets a claim procedure and may include a liability cap.

Exam tips

When a question lists several clauses, give each its own numbered heading and draft sub-clauses so the examiner sees structure.
Always show provision, analysis and conclusion, then the draft. Pure drafting without the legal basis loses marks.
Compare indemnity and guarantee by parties, nature of liability and section number. This is a frequent contrast.
Use specific numbers in your drafts, such as notice days and cure periods. Vague words like "reasonable time" alone look weak.
Give a section number only when sure. Sections 2, 10, 25, 28, 124, 126, 127 and 134 of the Contract Act are safe anchors.

Practice questions from Drafting of Commercial Contracts

Key Clauses in Commercial Contracts: frequently asked questions

What are the key clauses in a commercial contract?

The common ones are definitions, consideration, term, termination, force majeure, indemnity, dispute resolution with arbitration, governing law and boilerplate. Each one allocates a specific risk or fixes a specific right. Exam answers should draft them in numbered sub-clauses.

What is the difference between indemnity and guarantee clause drafting?

An indemnity clause is a promise by one party to save the other from loss, as in Section 124. A guarantee clause involves a surety promising to discharge a third person's liability on his default, as in Section 126. Draft indemnity with losses covered, claim procedure and caps. Draft guarantee with the principal debt, the surety's liability and events that do not discharge the surety.

How do I draft a termination clause?

Separate termination for convenience from termination for breach. State the notice period, the events of default, the cure period, and the consequences such as payment of dues and return of property. List clauses that survive termination, such as confidentiality and indemnity.

Can an arbitration clause take away the right to go to court?

Section 28 voids an agreement that absolutely restricts a party from enforcing rights by usual legal proceedings. Exception 1 saves an agreement to refer disputes to arbitration, so a valid arbitration clause is allowed. Draft it with seat, number of arbitrators and language.