Commercial Contracts

Parties to a commercial contract involving an Indian and foreign company can choose the governing law by express clause. However, certain mandatory provisions of Indian law (such as labour law, FEMA, and consumer protection) apply regardless of the chosen governing law for activities conducted in India. Indian courts will apply the chosen foreign law to contractual disputes unless it is contrary to Indian public policy.

Under the Limitation Act 1963, a suit for breach of contract must be filed within 3 years from the date the breach occurs or the date the right to sue accrues. For suits on a contract under seal, 12 years. Missing the limitation period is a complete bar to the suit.

Foreign companies contracting with Indian counterparts should insist on: a clear dispute resolution clause specifying arbitration at a neutral seat, a governing law clause, an indemnification clause with a liability cap, IP ownership and assignment provisions, a force majeure clause, data protection and confidentiality clauses, and FEMA-compliant payment terms.

A foreign parent can license intellectual property to its Indian subsidiary through a technology licensing agreement. The royalty payment from the Indian subsidiary to the foreign parent is subject to income tax withholding in India at rates modified by applicable DTAA. The license agreement must be on arm's length transfer pricing terms. FEMA permits remittance of royalties subject to the authorised dealer bank's compliance process.

A post-termination non-compete clause is generally not enforceable in India. Section 27 of the Indian Contract Act 1872 renders agreements in restraint of trade void. Courts have consistently refused to enforce post-termination non-competes. However, non-solicitation of clients and employees clauses may be enforceable where they protect specific legitimate business interests.