THE MOST DANGEROUS WORDS IN A BUSINESS CONTRACT

Why Vague Agreements Are the Single Biggest Legal Risk Facing Indian Businesses

By Dhanaram Ramachandran, Attorney at Law  |  Founder, D.R. Law Chambers  |  2026

EXECUTIVE SUMMARY

In over a decade of commercial law practice, six words have generated more disputes than almost any other cause: "We will sort out the details later." This article examines, through the lens of Indian statute, landmark judgments, and real-world case studies, why contractual vagueness is the most preventable and yet most common cause of business disputes in India. It provides a practitioner-level analysis of the legal provisions governing uncertain contracts, the consequences of contractual ambiguity, and a practical framework for businesses to protect themselves.

I. INTRODUCTION: THE COST OF AMBIGUITY

In India's fast-moving business environment, deals are often struck over cups of chai, sealed with handshakes, and followed up with hurriedly drafted agreements that leave critical details to be "sorted out later." This approach, born of optimism and the desire to preserve relationships, is one of the most expensive mistakes a business can make.

Consider the scale of the problem. India's commercial courts and arbitration tribunals are dealing with a surge in commercial disputes — many of which trace their origin not to bad faith, but to bad drafting. A 2020 Law Commission of India report noted that contract-related disputes account for a significant share of the commercial litigation burden, with vague payment terms, undefined scope of work, and absent dispute resolution clauses cited among the leading causes.

The Indian Contract Act, 1872 — a statute that has governed commercial relationships in this country for over 150 years — is clear on this: agreements whose meaning is not certain or capable of being made certain are void. Yet businesses, particularly SMEs and startups, continue to operate on verbal understandings and loosely worded documents, often discovering the consequences only when they find themselves in litigation or arbitration.

This article examines the legal framework governing contractual certainty in India, analyses key judgments from the Supreme Court and High Courts, draws on real-world case studies, and offers a practical framework for businesses to protect themselves before the next agreement is signed.

II. THE LEGAL FRAMEWORK: WHAT THE LAW SAYS

A. Section 29 of the Indian Contract Act, 1872 — The Foundation

The cornerstone of the law on contractual certainty in India is Section 29 of the Indian Contract Act, 1872, which provides:

Section 29, Indian Contract Act, 1872

"Agreements, the meaning of which is not certain, or capable of being made certain, are void."

This provision is deceptively simple. Its application, however, has generated decades of litigation and a rich body of judicial interpretation. The section operates on a two-part test: (i) is the agreement uncertain? (ii) if uncertain, can that uncertainty be resolved? Only if both limbs are answered adversely does the contract become void.

The illustrations to Section 29 are instructive. An agreement to sell "a hundred tons of oil" with nothing to indicate the type of oil is void for uncertainty. But an agreement by a coconut oil dealer to sell "one hundred tons of oil" is not uncertain — the nature of the trade affords the necessary indication. The law, therefore, does not demand absolute precision; it demands sufficient certainty.

B. Section 73 — Compensation for Breach

When a contract is broken, Section 73 of the Indian Contract Act entitles the aggrieved party to compensation for any loss or damage caused by the breach which the parties knew, when they made the contract, to be likely to result from the breach. The operative phrase — "which the parties knew... to be likely" — requires that the scope and consequences of contractual obligations be clearly understood at the time of contracting. Vague contracts undermine this foundation: if the obligations are unclear, the consequences of breach become equally contested.

C. Section 74 — Liquidated Damages and Penalties

Section 74 allows parties to pre-agree the compensation payable in the event of breach. This is the liquidated damages clause — one of the most practically significant and frequently litigated provisions in commercial contracts. The law is clear: where parties have named a sum as compensation for breach, the court may award reasonable compensation not exceeding that sum, regardless of whether actual loss is proved.

The significance of this provision lies in what it demands: a clear, written, pre-agreed sum. Without a properly drafted liquidated damages clause, the party in breach of a vague contract may face no meaningful financial consequences — or worse, prolonged litigation to establish even the existence of a breach.

D. The Specific Relief Act, 1963

Section 10 of the Specific Relief Act allows a court to compel specific performance of a contract. But specific performance is only available where the contract terms are sufficiently certain to admit of enforcement by decree. A vague contract — particularly one with an unclear description of property, undefined scope of services, or uncertain price — cannot be specifically enforced. The court, as the Supreme Court has observed, cannot be expected to pass a decree it cannot enforce.

III. THE JUDICIARY SPEAKS: KEY JUDGMENTS

A. Contracts That Fell Apart for Vagueness

CASE LAW: Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd.

AIR 1958 SC 512 — Supreme Court of India

Facts: During the Quit India Movement of 1942, a mill was forced to close due to a workers' strike. The respondent wrote to the appellant requesting an extension of delivery time, stating that delivery "shall be automatically understood as extended for the period the working is stopped and till the normal state of affairs recurs."

Held: The Supreme Court held that the extension clause was so vague and uncertain as to make it impossible to ascertain the period for which time was extended. The agreement for extension was declared void under Section 29 of the Indian Contract Act. The critical lesson: even well-intentioned agreements to modify contractual obligations can be rendered unenforceable by imprecise language.

CASE LAW: Dhanrajamal Gobindram v. Shamji Kalidas & Co.

Bombay High Court

Facts: An agreement for the sale of raw African cotton contained an amendment clause stating that "if necessary, we shall carry over the goods for two months." The sellers argued this clause was void for vagueness and uncertainty.

Held: The court examined whether the clause could be made certain. The phrase "if necessary" was found to be capable of determination — the sellers had absolute discretion in specified circumstances. This case establishes the principle that courts will attempt to uphold a contract if certainty can be found, but will not construct a contract for parties when the terms are genuinely indeterminate.

CASE LAW: Sohbatdei v. Deviplal and Others

(1971) Supreme Court of India

Facts: The plaintiff sought specific performance of an oral agreement for the sale of property. The lower courts held the agreement was void for vagueness under Section 29, finding the sale price and contingencies were uncertain.

Held: The Supreme Court reversed this finding. It held that where the sale price was unequivocally fixed and the terms were clear and ascertainable, the agreement could not be invalidated on the basis of peripheral uncertainties. This landmark ruling reinforced that courts should uphold clear agreements and not invalidate contracts on the basis of perceived uncertainties that do not go to the root of the agreement.

B. The Liquidated Damages Trilogy — When Contract Terms Save the Day

CASE LAW: Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd.

(2003) 5 SCC 705 — Supreme Court of India

Facts: ONGC contracted Saw Pipes for the supply of casing pipes, with a clause providing for liquidated damages of 1% of the contract price per week of delay, subject to a ceiling of 10%. Delivery was delayed due to a European workers' strike. ONGC deducted liquidated damages from payment. Saw Pipes disputed the deduction before an arbitral tribunal, which held that ONGC must prove actual loss. The High Court upheld the tribunal. ONGC appealed to the Supreme Court.

Held: The Supreme Court set aside the arbitral award. It held that where parties have agreed to genuine pre-estimated liquidated damages, there is no requirement to prove actual loss — the clause is binding on its own terms. The court emphasised that the contract's language, when unambiguous, binds the parties and the tribunal. This case remains a seminal authority on the enforceability of clear contractual terms in India.

The ONGC v. Saw Pipes judgment teaches a fundamental lesson for businesses: a well-drafted liquidated damages clause is not merely a legal formality — it is a financial shield. Had the contract been vague about consequences of delay, ONGC would have had to prove actual loss, a notoriously difficult exercise. Because the clause was clear and pre-agreed, the Supreme Court enforced it precisely.

C. The Arbitration Clause Cases — When Vagueness Defeats Access to Justice

A particularly costly form of contractual vagueness concerns arbitration clauses. Indian courts have repeatedly held that a poorly drafted arbitration clause can render the entire dispute resolution process ineffective.

As legal practitioners advising on cross-border and domestic commercial contracts have noted, the seat of arbitration, governing law, number of arbitrators, and institutional rules must all be specified with precision. An arbitration clause that states merely "disputes shall be settled by arbitration" without specifying the seat creates immediate jurisdictional uncertainty — multiple courts may claim jurisdiction, and preliminary disputes about the forum can drag on for years before the substantive matter is even heard.

PRACTICAL NOTE ON ARBITRATION CLAUSES

A vague arbitration clause can cost a business more than the underlying dispute itself. If the seat of arbitration is not specified, parties have litigated for years merely to determine which court has supervisory jurisdiction over the arbitration — before a single day of hearing on the merits. Always specify: (i) the seat of arbitration; (ii) the governing law; (iii) the number of arbitrators; and (iv) the institutional rules, if any.

IV. REAL-WORLD CASE STUDIES: HOW VAGUE CONTRACTS DESTROY BUSINESSES

Case Study 1: The Technology Services Agreement

A mid-sized IT services company in Chennai entered into a service agreement with a corporate client for "software development and related services" at a monthly retainer. The agreement did not define the scope of services, the deliverables, the turnaround times, or the quality standards. It also did not specify what happened if the relationship ended.

Eighteen months into the engagement, the corporate client claimed that certain modules had not been delivered and withheld three months' payment. The IT company countered that the modules were never part of the agreed scope. With no written scope of work, no milestone schedule, and no acceptance criteria, neither party could definitively establish what had been agreed.

The arbitration that followed lasted two years. The IT company recovered only a fraction of the disputed amount — not because its claim was wrong, but because it could not prove the existence and extent of its obligations with sufficient certainty. The cost of the arbitration itself exceeded the disputed amount.

LESSON

A services agreement without a defined scope of work, deliverable milestones, and acceptance criteria is not a contract — it is an invitation to dispute. Every services engagement must be supported by a Statement of Work that forms part of the contractual framework.

Case Study 2: The Real Estate Development Deal

A property developer in Coimbatore entered into a joint development agreement with a landowner. The agreement provided that the developer would "share profits equitably" upon completion of the project. No formula for profit calculation was defined. The treatment of development costs, unsold inventory, and financing charges was left entirely unaddressed.

Upon project completion, the parties' calculations of "equitable profit" differed by over forty percent. The litigation that followed was expensive, protracted, and ultimately resolved by a court that had to impose its own interpretation of what the parties might have meant — not what they actually agreed.

This case illustrates a particularly common problem in Indian real estate: the eagerness to execute a broad framework agreement and defer the details to a later date. In practice, those details are never agreed upon before the relationship deteriorates.

LESSON

"Equitable" and "reasonable" are not contractual terms — they are arguments waiting to happen. Every financial arrangement in a commercial contract must be reduced to a formula, a schedule, or an objective criterion that both parties can independently calculate and verify.

Case Study 3: The Manufacturing Supply Arrangement

A manufacturer in Mumbai supplied components to an assembler under a long-standing commercial relationship. Over years of dealing, the parties had developed a practice of adjusting prices informally based on raw material costs. No written agreement captured this pricing mechanism. When global commodity prices spiked, the manufacturer sought to revise prices; the assembler refused, claiming the original price was fixed.

With no written pricing formula, no price revision mechanism, and no force majeure clause, the manufacturer was left with a choice between supplying at a loss or breaching the contract. Either outcome was damaging. The relationship, and ultimately both businesses, suffered significantly.

LESSON

Long-standing business relationships create comfort — and complacency. The longer a relationship has operated on informal understandings, the more urgent it is to reduce those understandings to writing before they are tested by commercial pressure.

V. THE THREE MOST DANGEROUS CONTRACT OMISSIONS

Based on a decade of practice advising corporates, SMEs, and HNIs across commercial disputes, the following three omissions account for the overwhelming majority of contract-related disputes that reach litigation or arbitration in India.

1. Undefined Scope and Deliverables

The scope of work is the heart of any services or supply contract. Yet it is routinely left vague — often deliberately, in the mistaken belief that flexibility serves both parties. In reality, undefined scope serves neither party: it creates the conditions for disagreement about whether obligations have been fulfilled.

A well-defined scope clause must specify:

•       Precisely what is to be delivered — not categories of work, but specific outputs

•       The standard to which deliverables must conform — technical specifications, quality criteria, or industry benchmarks

•       The timeline for delivery — milestones, intermediate checkpoints, and final delivery dates

•       The process for requesting and approving variations — changes of scope must be documented in writing and priced before execution

2. Absent or Defective Payment Terms

Payment disputes are the most common category of commercial litigation in India. They arise overwhelmingly not from dishonesty, but from ambiguity. The parties had different understandings of when payment was due, what triggered the obligation to pay, and what the consequences of non-payment were.

Payment terms must specify:

•       The amount payable — as a fixed sum, a formula, or a schedule

•       When payment is due — on invoice, on delivery, on acceptance, or on a fixed date

•       What must accompany a payment claim — documents, certificates, or approvals required

•       Interest on late payment — the rate, the trigger date, and whether it compounds

•       The consequences of non-payment — rights to suspend, terminate, or set off

3. No Consequence for Breach

Perhaps the most revealing omission in poorly drafted contracts is the absence of meaningful consequences for breach. Without a liquidated damages clause, a penalty provision, or a clearly defined right of termination, a party who has been wronged faces the difficult and expensive task of proving actual loss in court or arbitration.

The lessons of ONGC v. Saw Pipes are directly applicable here. A party with a well-drafted liquidated damages clause does not need to prove loss — the clause speaks for itself. A party without one must litigate quantum, which is often more expensive than the loss itself.

Consequence provisions should include:

•       Liquidated damages for delay — a pre-agreed sum per day or week of delay, subject to a reasonable cap

•       Right to cure — a defined period within which a defaulting party may remedy the breach before termination rights arise

•       Termination triggers — specific, objective events that entitle a party to terminate, not vague references to "material breach"

•       Consequences of termination — what happens to work in progress, advance payments, confidential information, and ongoing obligations

VI. A PRACTICAL FRAMEWORK: THE CONTRACT HEALTH CHECK

Before signing any commercial contract, every business — regardless of size or sophistication — should apply the following five-question test. If the answer to any of these questions is "no" or "unclear," the contract is not ready to sign.

#	Question	What to Look For
1	Is the scope completely defined?	Specific deliverables, not categories of work. Quality standards. Timelines.
2	Are payment terms unambiguous?	Fixed amounts or clear formulas. Payment triggers. Consequences of non-payment.
3	What happens when things go wrong?	Liquidated damages. Right to cure. Clear termination triggers and consequences.
4	How will disputes be resolved?	Arbitration or court? Seat, governing law, number of arbitrators, institutional rules.
5	Can both parties independently verify compliance?	Objective criteria for deliverables, payment triggers, and breach — not subjective judgments.

VII. THE ROLE OF THE COMMERCIAL COURTS ACT, 2015

India's Commercial Courts Act, 2015, established a dedicated framework for the resolution of commercial disputes above a specified pecuniary threshold — currently INR 3 lakhs. These courts, staffed by judges with commercial law expertise, operate under a tighter procedural framework designed to reduce delays and improve the quality of commercial adjudication.

The significance of this legislation for the present discussion is twofold. First, it signals a legislative intent to treat commercial disputes with urgency and seriousness. Second, it places a premium on well-documented, precisely drafted contracts: commercial courts emphasise precise pleadings and documentary evidence, and discourage vague or overly broad claims. A party whose contract is poorly drafted will find even this more efficient forum difficult to navigate.

The Act has also encouraged the growth of institutional arbitration in India, with parties increasingly choosing institutions such as the Indian Council of Arbitration, the SIAC, and the ICC for the resolution of commercial disputes. Institutional arbitration, by its nature, requires well-drafted arbitration clauses — the institution's rules will only apply if the clause correctly identifies the institution and its rules.

VIII. CONCLUSION: THE BEST TIME TO NEGOTIATE IS BEFORE YOU NEED TO

The law is clear. The case law is consistent. The real-world consequences are well-documented. Yet businesses in India — from corner shops to listed companies — continue to operate on the faith that relationships will endure and disputes can be sorted out when they arise.

They cannot. By the time a dispute arises, the trust that held the relationship together has often evaporated. What remains is the contract — and if the contract does not speak clearly, it cannot protect either party.

The most important legal work in any commercial relationship happens before the relationship begins: in the drafting of the contract, the definition of obligations, and the pre-agreement of consequences. That investment — of time, attention, and legal counsel — is invariably a fraction of the cost of a single commercial dispute.

As the Supreme Court observed in ONGC v. Saw Pipes, when a contract's language is unambiguous, the court is bound by it. That is not a burden — it is a promise. A well-drafted contract is a promise that the law will keep.

THE TAKEAWAY FOR EVERY BUSINESS

A well-drafted contract does not signal distrust. It signals professionalism. It protects both sides equally. The best time to negotiate contract terms is before you need them — not after a dispute has arisen and the relationship has broken down. If you are unsure whether your current contracts are protecting you adequately, the time to find out is now.

IX. LEGAL PROVISIONS AND CASES CITED

Statutes

•       Indian Contract Act, 1872 — Sections 10, 20, 29, 73, 74

•       Specific Relief Act, 1963 — Sections 9, 10

•       Arbitration and Conciliation Act, 1996 — Sections 7, 28, 34

•       Commercial Courts Act, 2015

•       Code of Civil Procedure, 1908 — Section 89, Order XII Rule 6

Cases Cited

•       Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705

•       Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills Ltd., AIR 1958 SC 512

•       Sohbatdei v. Deviplal and Others (1971), Supreme Court of India

•       Dhanrajamal Gobindram v. Shamji Kalidas & Co., Bombay High Court

•       Kovuru Kalappa Devara v. Kumar Krishna Mitter

•       Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405

•       Panchanan Dhara & Ors v. Monmatha Nath Maity (Dead), (2006) Supreme Court

•       Welspun Specialty Solutions Ltd. v. ONGC Ltd., Supreme Court of India