This checklist covers key contract terms and compliance requirements between Micro and Small Enterprises and their buyers, including payment terms, delivery conditions, documentation, dispute resolution, and MSMED Act compliance.

Micro and Small Enterprise Vendor / Buyer Contract Compliance Checklist

1. Verify Parties and MSME Status

• Verify legal name, constitution, Permanent Account Number and Goods and Services Tax Identification Number of both parties.
• Obtain and verify the supplier's Udyam Registration details where applicable.
• Confirm that the contract correctly identifies the Micro or Small Enterprise supplier.

2. Define Goods / Services and Commercial Terms

• Clearly define the goods or services, quantity, specifications, quality standards and deliverables.
• Clearly specify price, taxes, delivery terms and other commercial conditions.
• Ensure the purchase order and agreement contain consistent terms.

3. Document Payment Terms Properly

• Payment terms should be clearly agreed in writing.
• Specify the payment period and the event from which the period will be calculated.
• Ensure the contractual payment period does not exceed the statutory limit of 45 days under Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006. 
• Avoid payment clauses that make payment dependent on uncertain or indefinite events.

4. Protect Acceptance and Payment Rights

• Clearly define the procedure and timeline for inspection and acceptance.
• Specify valid grounds for rejection.
• Require rejection or objections to be communicated in writing.
• Avoid indefinite inspection, approval or rejection periods that can delay payment.
• Ensure acceptance provisions are consistent with Sections 15 and 16 of the Micro, Small and Medium Enterprises Development Act, 2006.

5. Review Delayed-Payment Interest

• Ensure the contract does not attempt to exclude statutory interest applicable under Section 16.
• Review any contractual interest clause against the statutory interest provisions.
• Recognise that statutory interest for delayed payment is based on three times the bank rate notified by the Reserve Bank of India, with compound interest and monthly rests.

6. Review Retention and Payment Withholding

• Identify any retention money or security deduction.
• Specify the amount and release date.
• Clearly define circumstances in which payment can be withheld.
• Review unilateral deduction, set-off and recovery clauses.
• Ensure such provisions do not unnecessarily delay undisputed amounts payable to the Micro or Small Enterprise.

7. Review Price and Change-in-Scope Clauses

• Specify the agreed price and basis for price revision.
• Require written approval for additional work or changes in specifications.
• Clearly provide for additional payment and extension of time for approved variations.
• Do not require additional work without appropriate commercial approval.

8. Review Liability, Indemnity and Warranty

• Check whether liability is capped.
• Identify exclusions from the liability cap.
• Review indemnity obligations.
• Avoid unlimited or disproportionate liability for the Micro or Small Enterprise.
• Define warranty period and defect-remediation obligations.
• Ensure warranty obligations are reasonable and clearly measurable.

9. Review Delivery, Risk and Force Majeure

• Clearly define delivery obligations and timelines.
• Specify responsibility for transportation, insurance and loss or damage.
• Clearly identify when risk and ownership transfer.
• Include appropriate force majeure protection.
• Specify the effect of force majeure on delivery and payment obligations.

10. Review Termination and Cancellation

• Clearly define termination rights and notice periods.
• Specify grounds for termination.
• Provide for payment for goods supplied and services completed before termination.
• Address treatment of work in progress, approved expenses and outstanding invoices.
• Review termination-for-convenience provisions carefully where the Micro or Small Enterprise has incurred committed costs.

11. Review Dispute Resolution

• Specify negotiation and escalation procedures.
• Review arbitration and jurisdiction clauses.
• Ensure contractual dispute-resolution provisions do not improperly restrict statutory remedies available under the Micro, Small and Medium Enterprises Development Act, 2006.
• Where applicable, consider the statutory mechanism for reference to the Micro and Small Enterprises Facilitation Council under Section 18. 

12. Review Assignment and Receivable Rights

• Check restrictions on assignment of contractual rights and receivables.
• Ensure the contract does not unnecessarily restrict legitimate financing or assignment arrangements.
• Clearly specify whether prior consent is required for assignment.

13. Review Confidentiality and Intellectual Property

• Define confidential information.
• Clearly specify ownership and permitted use of intellectual property.
• Identify ownership of designs, drawings, technical information, software and other deliverables.
• Ensure intellectual property obligations correspond to the actual scope of work.

14. Review Tax and Statutory Compliance

• Clearly allocate responsibility for applicable taxes, withholding and statutory compliances.
• Ensure invoice and tax documentation requirements are clearly stated.
• For buyers, separately review the tax consequences of delayed payments to Micro and Small Enterprises under Section 43B(h) of the Income-tax Act, 1961. I

15. Final Contract Approval

Before signing or issuing the contract:

• Confirm payment terms.
• Confirm acceptance provisions.
• Confirm delayed-payment interest provisions.
• Review retention and set-off clauses.
• Review liability and indemnity.
• Review warranty obligations.
• Review termination rights.
• Review dispute-resolution provisions.
• Review Micro, Small and Medium Enterprises Development Act, 2006 compliance.
• Obtain legal and commercial approval for high-risk clauses.

DOCUMENTS REQUIRED

NOTES

• Forty-five-day ceiling: A written agreement with a Micro or Small Enterprise cannot provide a payment period exceeding forty-five days under Section 15. 
• Acceptance is critical: The contract should clearly establish the acceptance or deemed-acceptance mechanism because it affects the statutory payment timeline.
• Statutory interest: Contractual terms should not be used to improperly waive or reduce statutory interest under Section 16. 
• Payment withholding: Clauses permitting unlimited withholding, deductions or set-off should be specifically reviewed.
• Liability: Unlimited liability, broad indemnities and excessive warranty obligations are key contractual risks for Micro and Small Enterprises.
• Termination: The agreement should protect payment for goods already supplied, services already performed and legitimate costs incurred before termination.
• Disputes: A contractual arbitration clause should be reviewed together with the statutory dispute-resolution mechanism under Section 18.
• Tax: Section 43B(h) is a buyer-side income-tax consideration for sums payable to Micro and Small Enterprises beyond the time specified in Section 15. 
• Financial reporting: Companies should also consider applicable trade-payable and Micro and Small Enterprise ageing disclosures under the Companies Act, 2013 and applicable accounting requirements. 
• Core Objective: Protect the Micro and Small Enterprise against payment delays, excessive liability, unfair deductions, termination and recovery risks