Introduction

In the dynamic world of Indian start-ups, partnerships with vendors and suppliers are indispensable. Whether you are a tech start-up outsourcing development, a D2C brand relying on manufacturers and logistics providers, or a food delivery company working with restaurant partners — your business ecosystem thrives on contractual relationships.

However, many founders overlook the importance of properly drafted vendor and supplier agreements, leaving their start-up exposed to legal liability, quality issues, supply chain disruptions, and financial losses.

This article explores how Indian laws govern vendor and supplier contracts, the essential clauses to include, relevant case laws, and practical tips to protect your start-up from liability.

1. Legal Framework Governing Vendor and Supplier Agreements in India

Vendor and supplier agreements are primarily governed by the Indian Contract Act, 1872, which lays down the foundational principles for valid and enforceable contracts.

Key Provisions under the Indian Contract Act:

• Section 2(h): Defines a contract as an agreement enforceable by law.
• Section 10: Lists the essentials of a valid contract — free consent, lawful consideration, lawful object, and competence of parties.
• Sections 37–67: Deal with the performance of contracts and the consequences of breach.
• Sections 73–75: Govern compensation for breach of contract, including damages.

Additionally, depending on the nature of the transaction, other laws may apply:

• Sale of Goods Act, 1930 (for sale/purchase of tangible goods).
• Consumer Protection Act, 2019 (if end-consumers are affected).
• Information Technology Act, 2000 (for e-commerce and digital service vendors).
• Companies Act, 2013 (for related-party transactions and disclosures).
• Goods and Services Tax (GST) Act, 2017 (for taxation on supply of goods/services).

2. Why Vendor and Supplier Agreements Are Critical for Start-ups

Start-ups often operate with tight budgets and depend heavily on external vendors — be it raw materials, software, packaging, logistics, or marketing services. Without proper agreements:

• Ambiguities may arise about delivery schedules, pricing, and payment.
• Quality disputes can harm your brand reputation.
• Data leaks or IP misuse can lead to lawsuits.
• Regulatory breaches by a vendor can pull your company into legal trouble.

Thus, a well-drafted agreement helps allocate risk, responsibility, and liability clearly between the parties.

3. Essential Clauses in a Vendor or Supplier Agreement

A robust vendor/supplier agreement should balance commercial flexibility with legal safeguards. Let’s explore the most important clauses and their legal rationale.

(a) Scope of Work (SOW) and Deliverables

Clearly define what the vendor will supply — products, services, or both.

• Specify quantity, specifications, performance standards, timelines, and acceptance criteria.
• Attach annexures for technical details or service level agreements (SLAs).

Case Law:
In Kailash Nath Associates v. DDA (2015) 4 SCC 136, the Supreme Court held that a contract must clearly define obligations for breach to be actionable. Ambiguity leads to unenforceability

(b) Term and Termination

• State the start and end date of the agreement.
• Include termination rights — for cause (breach, insolvency) and convenience (with notice).
• Provide for consequences of termination — payment for work done, return of materials, or transfer of IP.

Legal Tip: Under Section 39 of the Contract Act, if one party refuses to perform, the other may rescind the contract.

(c) Payment Terms

• Define the pricing model (fixed, milestone-based, variable).
• Include timelines, currency, taxes (GST), and payment method.
• Add a clause for withholding or set-off in case of non-performance.

Case Law:
In ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705, the Supreme Court upheld the importance of adhering to contractual payment and performance terms, establishing principles for liquidated damages.

(d) Representations and Warranties

Vendors must warrant that:

• They have the legal right and capacity to provide goods/services.
• Their goods conform to specifications and are free from defects.
• Their work will not infringe third-party IP rights.

These warranties help startups claim compensation if goods are defective or services substandard.

(e) Indemnity Clause

The indemnity clause is the most critical protection mechanism. It ensures that if a vendor’s action causes a loss (e.g., defective product, data breach, or IP infringement), the vendor compensates the start-up.

Section 124 of the Contract Act defines indemnity:

“A contract by which one party promises to save the other from loss caused by the conduct of the promisor or any other person.”

Case Law:
In Gajanan Moreshwar v. Moreshwar Madan (1942) 44 BOMLR 703, the Bombay High Court clarified that indemnity becomes enforceable when the promisee’s liability becomes absolute — even before actual payment.

Practical Example:
If a packaging vendor supplies boxes with the wrong branding leading to consumer confusion, your start-up can invoke the indemnity clause for losses and reputation damage.

(f) Limitation of Liability

To balance risk, vendors often cap their liability to a certain amount (e.g., value of contract). Founders must ensure that the limitation does not apply to:

• Willful misconduct,
• Gross negligence, or
• Breach of confidentiality/IP infringement.

Tip: Include a “carve-out” for such scenarios.

(g) Confidentiality and Data Protection

Under Section 72 of the Information Technology Act, 2000, unauthorised disclosure of personal data obtained during service is punishable.

Include clauses that:

• Restrict vendors from disclosing confidential data, business strategies, or customer information.
• Require compliance with India’s Digital Personal Data Protection Act, 2023 (DPDP Act), if applicable.

Case Law:
In Zee Telefilms Ltd. v. Sundial Communications Pvt. Ltd. (2003) 27 PTC 457 (Bom), the court held that unauthorised use of confidential information constituted a breach of contract and trust.

(h) Intellectual Property Rights (IPR)

Clarify who owns the intellectual property created during the engagement.

• If a vendor creates software, designs, or content, ensure “work for hire” language assigning ownership to your start-up.
• Restrict vendors from using your IP or trademarks without written consent.

Case Law:
In Eastern Book Company v. D.B. Modak (2008) 1 SCC 1, the Supreme Court reinforced that creative expression qualifies for copyright protection — emphasising the need for clear IP ownership in contracts.

(i) Dispute Resolution and Jurisdiction

• Include a governing law clause (preferably “laws of India”).
• Specify jurisdiction (e.g., Mumbai courts).
• Provide for arbitration as a faster alternative — under the Arbitration and Conciliation Act, 1996.

Case Law:
In BALCO v. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552, the Supreme Court upheld the sanctity of arbitration agreements and party autonomy.

(j) Force Majeure

Include a clause covering events beyond control (natural disasters, pandemics, government actions) that excuse performance temporarily.

This became especially relevant post-COVID-19, when supply chains were disrupted.

Case Law:
In Energy Watchdog v. CERC (2017) 14 SCC 80, the Supreme Court held that force majeure clauses must be strictly interpreted — only genuine impossibility excuses performance.

(k) Compliance with Laws

Vendors must comply with:

• Labour and employment laws (if they deploy staff).
• Environmental or safety norms (for manufacturing).
• Import/export and GST regulations.

Include a clause stating that any violation by the vendor will make them solely liable for penalties or damages.

4. Special Considerations for Start-ups

(a) Start-ups as MSMEs

If your start-up is registered as an MSME, you can claim protection under the Micro, Small and Medium Enterprises Development Act, 2006, which mandates payment to MSMEs within 45 days. Non-payment can attract compound interest under Section 16.

(b) Vendor Audits and Risk Management

Include the right to audit the vendor’s facilities, compliance practices, and data security standards — especially for sensitive sectors like fintech, healthtech, or edtech.

(c) E-contracts and Digital Execution

Vendor agreements executed via digital signatures are legally valid under Section 10A of the IT Act, 2000, which recognizes electronic contracts.

Case Law:
In Trimex International FZE Ltd. v. Vedanta Aluminium Ltd. (2010) 3 SCC 1, the Supreme Court held that contracts formed via emails are enforceable if parties show consensus ad idem.

5. Remedies for Breach of Vendor/Supplier Agreements

Under the Indian Contract Act and the Specific Relief Act, 1963, the remedies available to a start-up include:

1. Damages (Sections 73–75) — for loss caused by breach.
2. Specific Performance (Section 10 of the Specific Relief Act) — to compel performance if damages are inadequate.
3. Injunction (Section 38 of the Specific Relief Act) — to restrain vendors from breaching confidentiality or misusing IP.
4. Rescission (Section 39 of the Contract Act) — terminate contract for non-performance.

Case Law:

• Hadley v. Baxendale (1854) 9 Exch 341: Forms the basis for calculating damages — only foreseeable losses can be claimed.
• ONGC v. Saw Pipes Ltd. (2003): Validated liquidated damages if they are a genuine pre-estimate of loss.

6. Common Mistakes Made by Start-ups

1. Using informal purchase orders instead of detailed contracts.
2. Copy-pasting foreign templates that don’t align with Indian law.
3. Ignoring jurisdiction clauses — leading to litigation in inconvenient forums.
4. Failing to define IP ownership with freelancers or third-party developers.
5. Skipping legal review — small start-ups often rely on “mutual trust” which fails under dispute.

7. Practical Checklist for Founders

✅ Draft a written agreement before sharing business or technical data.
✅ Ensure all agreements are stamped and executed per the Indian Stamp Act and relevant state laws.
✅ Verify GST registration and corporate identity of vendors.
✅ Insert audit, indemnity, and confidentiality clauses.
✅ File and store all vendor agreements in a central repository.
✅ Consult a lawyer before signing or terminating any major vendor relationship.

8. Conclusion

Vendor and supplier agreements are not mere formalities — they are risk management tools essential for protecting your start-up’s finances, intellectual property, and reputation.

A single defective batch, missed delivery, or data breach by a vendor can derail a young company. By carefully negotiating terms under the Indian Contract Act, 1872, ensuring clear allocation of liability, and staying compliant with modern laws like the DPDP Act, 2023 and Arbitration Act, 1996, start-ups can safeguard themselves from unnecessary disputes and losses.

In essence, every founder must remember: “Trust is good, but a contract is better.”

Key Case Laws Cited

1. Kailash Nath Associates v. DDA (2015) 4 SCC 136
2. ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705
3. Gajanan Moreshwar v. Moreshwar Madan (1942) 44 BOMLR 703
4. Zee Telefilms Ltd. v. Sundial Communications Pvt. Ltd. (2003) 27 PTC 457 (Bom)
5. Eastern Book Company v. D.B. Modak (2008) 1 SCC 1
6. BALCO v. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552
7. Energy Watchdog v. CERC (2017) 14 SCC 80
8. Trimex International FZE Ltd. v. Vedanta Aluminium Ltd. (2010) 3 SCC 1
9. Hadley v. Baxendale (1854) 9 Exch 341