Most commercial relationships in India run on a purchase order and a habit. The agreement, where one exists, was adapted from a template and signed without much attention, because at the start the parties are getting along and nobody expects to need it.
The agreement is read for the first time at the end — when a distributor is being replaced, a vendor has stopped performing, or a territory is being taken back. At that point three clauses decide almost everything: how the relationship can be ended, what exclusivity was actually promised, and where a dispute goes.
First decide what the relationship is
Before drafting anything, establish whether the counterparty is a distributor or an agent. The two are frequently confused and the consequences are different.
A distributor buys from the supplier and resells on its own account. It takes title, it takes the credit risk on its customers, and it sets its own resale price subject to competition law. The supplier has no privity with the end customer.
An agent acts on behalf of the principal. It does not take title. Its acts bind the principal, the principal carries the customer relationship and, in many cases, the risk.
The Indian Contract Act contains a detailed code on agency — the authority of an agent, the principal’s liability for the agent’s acts, and the consequences of revoking authority, including compensation where the agency is terminated without sufficient cause. A relationship drafted as a distribution but operating as an agency can attract those consequences whatever the document says.
The test is what the parties actually do: who invoices the customer, who bears the credit risk, who owns the stock, and whose name is on the transaction. Getting that characterisation right at the outset is a corporate and commercial law question as much as a drafting one.
Termination: the clause that is actually used
Every termination clause has three limbs, and most agreements get only two of them right.
Termination for cause. For material breach, with a cure period. Two drafting points: define what is material rather than leaving it at large, and make the cure period run from written notice specifying the breach. A clause allowing termination for “any breach” is both over-broad and, in practice, harder to rely on.
Termination for convenience. Either party, on notice. This is the limb most often omitted from a distributor’s agreement and most often needed by the supplier. Without it, a supplier that wants to exit a relationship where there is no breach has no contractual route, and ends up either manufacturing a breach or paying to leave.
Automatic termination. On insolvency, change of control, loss of a required licence, or a specified event.
The notice period is the commercial negotiation. A distributor that has invested in a territory, built a team and carried stock will argue for a long one. A supplier wants a short one. What matters more than the number is that it is certain — an unspecified “reasonable notice” invites the argument that whatever was given was not reasonable.
Where a distributor has made relationship-specific investments, a short notice period may also be contested on wider grounds. Making the period proportionate, and stating that it was negotiated, is better protection than making it aggressive.
What happens to stock and orders on exit
This is where terminations become expensive, and it is the section most templates handle badly.
The questions that need answering in the agreement rather than in correspondence:
Unsold stock. Does the supplier buy it back, at what price, and in what condition? A buy-back at invoice price is a very different commitment from a buy-back at a depreciated value, and silence means a negotiation at the worst possible moment.
Orders in the pipeline. Orders placed but not shipped; orders shipped but not paid. Whether the agreement terminates them or requires them to be completed.
Receivables. Whether amounts owed accelerate on termination.
Customer transition. Who owns the customer list, who communicates the change, and whether the outgoing distributor is restrained from soliciting those customers after termination.
Marketing materials, samples and equipment. Return or destruction, and who bears the cost.
Trade marks. The licence ends on termination; the agreement should say so expressly and deal with existing stock bearing the mark.
A termination clause that ends the relationship but says nothing about the stock sitting in the distributor’s warehouse has not finished the job.
Exclusivity, and the competition law limit
Exclusivity is the most negotiated term and the least understood.
Section 3(4) of the Competition Act, 2002 addresses agreements between enterprises at different stages of the production chain — vertical agreements — and lists:
- tie-in arrangements;
- exclusive supply agreements;
- exclusive distribution agreements;
- refusal to deal; and
- resale price maintenance.
Such an agreement is prohibited if it causes or is likely to cause an appreciable adverse effect on competition in India.
Two points follow, and both are routinely got wrong in opposite directions.
Exclusivity is not per se unlawful. Unlike the horizontal agreements covered by section 3(3), vertical restraints are not presumed to be anti-competitive. They are assessed against the appreciable adverse effect test, taking into account market share, barriers to entry, foreclosure of competitors, and any accrual of benefits to consumers.
But it is not unconditionally safe either. Where the supplier has significant market power and the arrangement forecloses a meaningful part of the market, exclusivity is exposed.
The practical drafting response is to define exclusivity precisely rather than broadly: exclusive as to what product, in what territory, for what channel, and with what carve-outs — house accounts, online sales, exports, government tenders. A narrow, clearly defined exclusivity is both more defensible and less likely to produce a dispute about what was promised.
Minimum purchase obligations are the usual counterpart. If a distributor wants exclusivity, the supplier wants volume. Draft the consequence of a shortfall explicitly — does the exclusivity convert to non-exclusive, or does the agreement terminate? Leaving it unstated makes the obligation unenforceable in any practical sense.
Resale price maintenance
Worth its own mention because it is so commonly done without thought.
Fixing the price at which a distributor may resell is one of the listed vertical restraints. A recommended resale price, where the distributor remains free to sell below it, sits differently from a stipulated minimum enforced by withholding supply.
Commercial teams frequently manage pricing informally — a call to a distributor who is discounting. That conduct is not made safe by the absence of a clause, and the correspondence is discoverable.
Payment terms are now a legal question
Payment terms used to be purely commercial. For an Indian supplier that is a micro or small enterprise, they are not.
Where the counterparty is a micro or small enterprise registered under the MSMED framework, delayed payment carries consequences for the buyer under both that Act and the Income-tax Act, where a deduction for the expenditure can be deferred to the year of actual payment if it falls outside the statutory period. The period is shorter — 15 days — where there is no written agreement, and can be extended to a maximum of 45 days where there is one.
Two drafting consequences. A written agreement is worth having simply to access the longer period. And the agreement should require the counterparty to disclose and keep updated its MSME status and registration number, because the buyer cannot comply with a regime whose applicability it cannot establish.
Liability, indemnity and caps
Three clauses that are usually copied and rarely calibrated.
Limitation of liability. A cap expressed as a multiple of fees paid in the preceding twelve months is the common formulation. What matters is what sits outside the cap — typically breach of confidentiality, infringement of intellectual property, and liability that cannot be limited by law.
Exclusion of indirect loss. Standard, but the phrase “consequential loss” is interpreted narrowly. If loss of profit is meant to be excluded, say so expressly rather than relying on the general words.
Indemnity. An indemnity is a promise to make good a loss and operates differently from a claim in damages. It should be specific about what triggers it, who controls the defence of a third party claim, and whether it is capped. An uncapped, undefined indemnity is a common and avoidable exposure.
The dispute clause
Three decisions, and the third is the one that gets skipped.
Governing law. Straightforward in a domestic agreement, material in a cross-border one.
Forum. Arbitration or courts. Where arbitration is chosen, the clause needs a seat, a set of rules, a number of arbitrators and a language — a subject dealt with in our note on arbitration. A clause that says disputes “may” be referred to arbitration is not an agreement to arbitrate.
Escalation. A short pre-arbitration step — a meeting between senior representatives within a stated period — resolves more commercial disputes than any other clause, provided it is time-bound. An open-ended obligation to negotiate in good faith is an obstacle to relief rather than a route to settlement.
Check also that there is only one dispute clause. An arbitration clause in the main agreement and an exclusive jurisdiction clause in a schedule is a common and expensive drafting error.
Ten clauses worth checking
- Definition of territory and products — precise, with carve-outs stated.
- Exclusivity, and whether it is conditional on minimum volumes.
- Termination for convenience, with a certain notice period.
- Stock buy-back on termination, with the price stated.
- Post-termination restraints — framed as non-solicitation and confidentiality rather than a bare non-compete, given the restraint of trade provisions of the Contract Act.
- Trade mark licence, and its termination.
- MSME status disclosure and payment terms.
- Liability cap and its carve-outs.
- Assignment and change of control — whether the agreement survives a sale of the counterparty.
- A single, complete dispute clause.
Our notes on the types of commercial agreements and on reducing risk in contracts and transactions cover the surrounding documentation, and legal documentation the drafting exercise generally.
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