One of my clients recently had a case which I am explaining below and if you are stuck in such similar situation, here is what to do.
Note: Due to attorney-client privilege, I cannot disclose complete case details or identify the actual parties involved. However, I am sharing the essential facts and legal approach so that if you find yourself in a similar situation, you can understand the available solutions and legal remedies.
Rohan Gupta and his colleague Sneha Iyer had been doing freelance software development work together for nearly two years, mostly short-term projects out of Pune. In early March 2024, they were approached by a mid-sized logistics company based in Nagpur — a firm with a reasonable online presence and a professional-sounding contract. The project sounded promising. The pay was decent. But the contract was not.
Three clauses stood out as particularly alarming. First, the agreement held Rohan and Sneha jointly liable for three times the project fee in the event of losses caused by software bugs. Second, the client reserved the right to exit the arrangement with just 15 days' notice, while Rohan and Sneha had no matching right to terminate for convenience. Third, the SLA required a full fix — not just a response — within four hours for critical issues and within eight hours for issues of moderate severity. No two-person freelance team can realistically guarantee that. Full stop.
Rohan tried negotiating directly with the client's internal team first. The pushback was dismissive. He then consulted a general practice advocate in Pune who reviewed the contract briefly and suggested they "try to negotiate." That didn't move things forward at all. A colleague eventually referred him to Advocate Sudhir Rao. With a structured legal review and a formal counter-proposal backed by specific provisions of the Indian Contract Act, 1872, the clauses were renegotiated to a mutual liability cap, a symmetric exit clause, and an SLA revised to properly distinguish response time from resolution time. The engagement proceeded on far more balanced terms.
Advice in Such Cases
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation to come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.
Don't sign under pressure. Clients sometimes push hard for quick signatures. Ask for at least five working days to review any contract. And here's the thing — any party that refuses a reasonable review window is already telling you how disputes will be handled down the line.
Propose specific counter-clauses in writing: Verbal negotiations go nowhere. Draft your counter-positions formally, citing the exact clauses you seek to amend and the specific language you want in their place. This also creates a paper trail if things go wrong later, which they sometimes do.
Seek domain-specific counsel: Freelance technology contracts sit at the intersection of commercial contract law, intellectual property, and service-level practice. A general practitioner may not flag risks that a commercial contracts specialist picks up immediately. Engaging an advocate who regularly handles such matters typically leads to faster, better-calibrated outcomes — and that difference matters when you're trying to start a project, not fight one.
Applicable Sections of Law
This is a civil matter governed primarily by Indian contract law. The following provisions are directly relevant:
- Section 23, Indian Contract Act, 1872: A contract term is void if its object or consideration is opposed to public policy or causes injury. Grossly one-sided penalty clauses attract scrutiny under this section.
- Section 74, Indian Contract Act, 1872: Courts may grant only reasonable compensation for breach of contract, even where a specific penalty is stipulated. A liquidated damages clause that is a penalty — rather than a genuine pre-estimate of loss — can be reduced by a court. See Fateh Chand v. Balkishan Das, AIR 1963 SC 1405 for the foundational position on this.
- Section 28, Indian Contract Act, 1872: Any clause that restricts a party's right to enforce legal remedies or imposes unilateral restrictions on exit rights may be void to that extent.
- Order 39, Rules 1 and 2, Code of Civil Procedure, 1908: Interim injunctions are available in civil courts to restrain enforcement of oppressive contractual obligations while the dispute is pending.
Jurisdiction — Where to File the Case
Frankly, getting this right from the start saves a lot of grief later. For contract disputes of this nature, jurisdiction lies with the civil court in the city where the contract was signed, where the services are performed, or where the defendant resides or carries on business, as per Section 20 of the Code of Civil Procedure, 1908. Pecuniary jurisdiction depends on the suit's valuation: suits below Rs. 3 lakhs typically go before a Civil Judge (Junior Division), while higher-value suits go before the Civil Judge (Senior Division) or District Court. If the contract includes an arbitration clause, the matter may instead be referred to arbitration under the Arbitration and Conciliation Act, 1996. A filing in the wrong court wastes both time and money — don't let that be the reason your case stalls.
Limitation Period
Three years. That's what you get. Under Article 55 of the Limitation Act, 1963, a suit for compensation for breach of contract must be filed within three years from the date the breach occurs, or from the date the consequences of the breach become apparent. If a client enforces an unfair penalty clause, the limitation clock starts running from that enforcement date. Missing this window can be fatal to your case. Condonation of delay under Section 5 of the Limitation Act is available in limited circumstances, but courts are strict about it in contractual matters. Now, before you act on anything else — check your dates first.
Interim Reliefs Available
If a client attempts to enforce an unreasonable penalty clause — such as a three-times-fee liability — before the dispute is adjudicated, interim reliefs under Order 39, Rules 1 and 2, CPC can be sought to stay enforcement. A temporary injunction prevents the opposite party from acting on the disputed clause while the case is pending. Where there's a risk that the client may attempt to recover amounts from bank accounts or receivables, an attachment before judgment under Order 38, Rule 5, CPC is also available. Courts in India have consistently held, including in Dalpat Kumar v. Prahlad Singh, AIR 1993 SC 276, that interim reliefs require establishing a prima facie case, balance of convenience, and irreparable harm. These are real tools. Early application matters enormously here.
If You Are the Victim
- Do not make any payments under a disputed penalty clause without first obtaining a legal opinion on whether the clause is enforceable under Section 74 of the Indian Contract Act, 1872.
- Send a formal legal notice to the client, clearly stating which clauses you dispute and the legal basis for your objection — this notice itself can shift the dynamic of negotiations significantly.
- Preserve all communications: emails, WhatsApp messages, project management tool records, and any version of the draft contract exchanged during negotiations.
- If the client has already invoked the penalty clause, apply for interim relief before the competent civil court at the earliest opportunity to prevent enforcement while the dispute is pending.
- Document every deliverable, every bug report, every response, and every fix attempt with timestamps. This evidence becomes decisive if the SLA dispute goes to arbitration or court.
Documents You Must Keep Ready
- Aadhaar card and PAN card of both freelancers (identity and address proof)
- The signed or unsigned contract — all drafts exchanged, not just the final version
- All email communications with the client, including pre-contract negotiation exchanges
- Project scope document, work orders, or statement of work
- Invoices raised and payment receipts received
- Bug reports, issue tickets, and system logs with timestamps showing response and resolution times
- Bank account statements reflecting amounts received from the client
- Any written communications in which the client threatened to invoke the penalty clause
What Evidence Is Required?
- The contract itself: Primary documentary evidence — every version, including WhatsApp or email attachments of earlier drafts
- SLA performance logs: Server logs, project management tool exports, or email threads showing actual response and resolution timelines
- Correspondence trail: Emails and messages showing how the disputed clauses were introduced and any objections already raised
- Payment records: To establish the fee actually paid and the proportionality (or lack thereof) of the penalty clause relative to contract value
- Expert opinion: In some cases, a technical expert's evidence may be relevant to establish that fixing a critical software bug within four hours is not a commercially reasonable standard
- Comparable industry contracts: Secondary evidence establishing market norms for freelance SLA obligations — relevant to the reasonableness argument under Section 74
How Courts Typically Approach Such Cases
Indian civil courts approach contractual disputes between freelancers and clients with careful attention to the bargaining position of the parties and the actual commercial intent behind disputed clauses. Make no mistake, where a penalty clause is disproportionate to the actual loss likely to be suffered, courts consistently apply Fateh Chand v. Balkishan Das, AIR 1963 SC 1405 and later decisions to reduce enforcement to reasonable compensation only. Courts also look closely at whether terms like SLA obligations were genuinely negotiated or were standard-form impositions. One-sided termination clauses tend to attract scrutiny under Section 23 of the Indian Contract Act. That said, courts expect both parties to come with clean hands and complete documentation — and a weak paper trail has sunk more than a few otherwise strong cases.
Timeline of Legal Process
- Legal notice (Week 1-2): Sending a formal legal notice to the client, specifying disputed clauses and demanding revision or withdrawal of the penalty claim
- Response or negotiation (Week 2-6): Client may respond, negotiate, or ignore — each outcome determines the next step
- Filing plaint (Month 2-3): If negotiation fails, filing a civil suit for declaration and injunction before the competent civil court
- Service of summons (Month 3-5): Court issues summons to the defendant
- Written statement by defendant (Month 5-7): Defendant files reply
- Framing of issues (Month 7-9): Court identifies the legal questions to be decided
- Evidence stage (Month 9-18): Both parties lead evidence — documents and, if needed, witnesses
- Arguments and judgment (Month 18-30): Final arguments followed by the court's order
- Appeal, if any (adds 1-2 years): Before the High Court under Section 96, CPC
Understanding the Costs
The total cost of a matter like this varies significantly from one case to the next — it depends on the complexity of the dispute, the forum involved, the number of hearings, and the specific facts of your situation. There is no single fixed figure that applies to everyone.
A professional advocate can give you an accurate estimate only after reviewing all your facts and documents in a consultation.
Can the Matter Be Settled Out of Court?
Yes. And in many cases, it's the smarter path. Contract disputes between freelancers and clients are well-suited for mediation or conciliation before formal litigation begins. Under Section 89 of the Code of Civil Procedure, 1908, courts may refer pending disputes to mediation, arbitration, or Lok Adalat. Pre-litigation mediation through an accredited mediation centre can produce a binding settlement agreement quickly and at a fraction of the cost of a full trial. If the contract contains an arbitration clause — which many technology service agreements do — the dispute must typically go to arbitration first. Settlement is particularly worth considering where the working relationship is salvageable, or where the disputed penalty amount simply doesn't justify extended litigation costs.
Common Mistakes People Make
- Signing without reading carefully: Many freelancers skim contracts, especially when eager to start a well-paying project. Every clause matters — particularly liability, termination, and SLA sections.
- Assuming verbal assurances override written terms: If a client says "don't worry, we'll never actually invoke that penalty clause," it means nothing legally. Only what is in the signed document counts.
- Negotiating without a written trail: Verbal negotiations produce no evidence. Every proposed amendment must be exchanged in writing, even if by email.
- Waiting too long before seeking legal help: By the time the client invokes a penalty clause, options narrow sharply. Review the contract before signing, not after the dispute begins.
- Engaging an advocate without relevant domain experience: Freelance technology contracts involve specific commercial practice norms, SLA industry standards, and IP ownership questions that a general practitioner may not be fully familiar with. The procedural strategy — which clauses to formally contest, when to negotiate versus litigate, and how to lead technical evidence — differs meaningfully depending on domain experience. Engaging someone who regularly handles commercial technology contracts makes a genuine difference to how the case unfolds.
Advocate Sudhir Rao, Supreme Court of India