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In the real estate industry, it is important to have a material supply agreement in place to avoid any future implications. A material supply agreement will make sure the quality, quantity, and continuous delivery of whatever material is needed during the process of construction. But making a comprehensive agreement might take a lot of time. This article has been written to help lawyers understand the core aspects of a Material Supply Agreement in the real estate sector and to teach them how to draft one using AI.

Introduction

The Zoom interview was going perfectly fine until the General Counsel’s face turned serious. ‘Draft a complete material supply agreement by Friday,’ he said in a firm tone.

My heart sank. This wasn’t a theoretical interview anymore – this was my upcoming career on the line, and I had no idea where to begin.

If you’re a real estate lawyer, law student, or anyone involved in construction contracts, this story might sound painfully familiar. But here’s why you should keep reading:

Every year, real estate developers in India lose millions due to poorly drafted material supply agreements. These losses aren’t just about money – they cascade into:

• Project delays that trigger RERA penalties
• Quality issues that lead to expensive litigation
• Supply chain disruptions that damage reputations
• Cost overruns that slash profit margins
• Post-pandemic supply chain disruptions have made water-tight agreements crucial

What’s worse? Most of these problems are completely preventable with proper legal drafting.

And here’s the good news for you: 

While there are multiple challenges, we also have our tools and technology in our favour. The same agreement that once took me a sleepless night to draft, can now be crafted in hours using AI as your co-pilot. 

But here’s the catch – AI alone isn’t the answer. You need to know how to direct it, what to watch out for, and most importantly, how to review and refine its output. 

Before learning the drafting part, you should know what exactly is a material supply agreement. Once you have a clear understanding about the concept of material supply agreement and the purpose behind using the same, you can easily comprehend the drafting part.

What is a Material Supply Agreement?

You must be wondering, what is it that makes a material supply agreement so crucial for a real estate lawyer? Why was I asked to draft this agreement, in particular?

Let’s just say that the entire real estate sector is built upon this agreement, quite literally. 

Imagine you’re building a skyscraper. Every brick, every beam, every piece of glass needs to arrive at the right time, in the right quantity, and at the right quality. One wrong move, and your entire project could come crashing down—literally and financially. 

This is what a material supply agreement ensures –the terms and conditions of delivery, including all the specifications regarding the type, quality, quantity; delivery schedule; pricing; payment terms and schedules; and any warranties or guarantees related to the materials supplied to the buyer. 

This ensures that a routine of expectations, deliverables, and risk management are clearly laid down, which are the cornerstones of any commercial relationship

As a lawyer, it is your core responsibility to ensure that the interests of your clients are clearly laid down, any potential dispute is taken care of, and in case disputes do arise, there are ample safeguards in place in the agreement to navigate them without much damage. 

What are the main challenges in drafting a Material Supply Agreement?

1. It is the technical nature of the agreement that causes a lot of problems. As a lawyer you need to understand a lot of technical specifications of the goods that are being supplied. If you do not understand the importance or necessity of a delivery schedule/process– you will fail in setting the right expectations. Think about quality of goods which include “tolerance levels”, technical standards for concrete, steel etc. If you do not get a clear and detailed understanding of these terms, and miss out on exact specifications, then there are significant chances that there will be issues in relation to quality of goods. 
2. One of the most crucial sections in material supply agreements for developers is the scope of work (SOW). Any sort of ambiguity in drafting deliverables, timelines, and milestones can lead to misunderstandings, disputes, and potential project failures. 
3. If the agreement is of such nature that there is sensitive data sharing, for example, in defense contracts — it is crucial that the nature of sensitive information is clearly defined. An all encompassing confidentiality clause is required, which lawyers often miss.
4. In cases where material supply agreements are a subset of a main construction agreement, you need to procure the parent Construction/Development Agreement for context, timeline adherence etc. Any difference in specifications can lead to a prolonged litigation situation. 
5. Not knowing the best alternative to the current agreement can lead to unfavorable terms, such as unrealistic deadlines, broad warranties, or disproportionate liability. For example, if a Developer doesn’t know that they are getting the same quality of goods at a cheaper price in the market, they will stick to whatever is being offered to them. As a lawyer, you should always strive to find these out before closing on negotiations for your client. 
6. There are some very specific issues such as transit insurance — who is liable if anything happens to the goods while in transit? New developers may not have a holistic view of issues that may crop up while sourcing materials, and might miss out on communicating to the lawyer that this needs to be incorporated into the agreement. 

So, how do you avoid these potential pitfalls? The answer is in the next section. 

How AI is revolutionizing Contract Drafting

To begin with, let’s just say that all the problems I highlighted in the previous section can be predicted and understood by AI. 

Unlike human brains with limited capacity for storage and real time processing, most AI tools have been fed tons of data, which they can access at any point in time. Which means various things like predictive analysis, natural language processing, ideation, tailoring unique solutions to specific problem sets. Let me break this down for you:

1. Imagine that you drafted hundreds of contracts in your lifetime and have the ability to remember each one of them, compare them instantly, and identify evolving patterns in areas like pricing strategies, dispute resolution etc.. That’s what AI does– it leverages massive datasets in moments and uses the information to create watertight contracts for any scenario. Even if your developer client fails to give you any specific information like transit insurance, AI already has it from previously drafted contracts. 
2. It can also understand, analyze and produce human language texts – which means, it can draft agreements in the tone you set for it. 
3. It can tailor contracts based on specific needs that you have. Instead of copy pasting from templates and not understanding which parts require change, if you give AI a template and specify your business needs, it will draft a contract that suits your client rather than producing generic clauses that do not help. 
4. It can also analyse and review contracts and tell you where exactly things are going wrong for your client. It can find risky clauses, loopholes, provide you with both legal and logical reasoning to help draft better contracts. 
5. AI ensures that contracts adhere to the organization’s policies and legal standards across all agreements. AI can update templates based on changes in laws and regulations, ensuring all contracts remain compliant. Standardized language across documents ensures clarity and reduces ambiguity.
6. Also AI cuts down the drafting time by at least 75%, which is of utmost importance for a lawyer, anyway. Traditional drafting could take 8-10 hours per agreement, but with AI tools like Claude.AI, GPT etc., the same work can be completed in just 1-2 hours.

But, as I have already clarified, AI cannot replace what you bring to the picture. It cannot exercise judgment and take care of nuances. However, if you do use AI smartly, you can definitely put together a contract that takes care of what your client wants and what he needs but doesn’t know. Add your nuanced judgment to it, and you have drafted a foolproof contract. 

Interesting, right? 

In the next segment, we will learn how to draft the Agreement, but before that, let’s understand what actually needs to be put in it. 

Key elements of a Material Supply Agreement

While each agreement may vary depending on the nature of the materials being supplied, a Material Supply Agreement has the following key elements:

Introductory Clauses:

• Parties to the Agreement: This clause identifies the parties involved, including their legal names, addresses, and other relevant contact information.
• Recitals: This gives a background to what each party has to offer and why they are coming together to form an agreement. 
• Definitions: This clause defines key terms used throughout the agreement to ensure clarity and consistency in interpretation.

Operative Clauses:

• Scope of Supply: This clause outlines the specific materials to be supplied, including quantities, quality standards, delivery schedules, and any other relevant specifications.
• Price and Payment Terms: This clause sets forth the price to be paid for the materials and the terms and conditions governing payment, including invoicing, currency, payment methods, and any applicable taxes or duties.
• Delivery and Acceptance: This clause specifies the terms and conditions for the delivery of the materials, including shipping terms, risk of loss, inspection procedures, and acceptance criteria.
• Warranties and Representations: This clause outlines any warranties or representations made by the supplier regarding the materials, including their quality, fitness for a particular purpose, and compliance with applicable laws and regulations.
• Dispute Resolution Clause: Given that it is a commercial contract, you would want to highlight how disputes, if any, are resolved in the future. 

Boilerplate Clauses:

• Governing Law and Jurisdiction: This clause is used to specify the applicable law and jurisdiction of the courts that will apply to disputes. 
• Amendments: This clause is used to state how changes to the agreement can be made, if required in future. 
• Severability: This clause ensures the rest of the agreement remains valid if one clause is deemed unenforceable.
• Notices: Defines how and where official communications should be sent.
• Entire Agreement Clause: This clause states that the document represents the full agreement between the parties, overriding prior discussions or agreements. 

Now we are ready to learn how to draft. 

Step-by-step process of drafting a Material Supply Agreement using AI

Today, we will use Claude.AI to draft an Agreement. I will tell you why I picked Claude after drafting the Agreement. 

Let’s consider a situation where Company A, a well-established construction company based in Delhi, is undertaking a large-scale commercial complex project. They require a reliable supplier for high-quality steel beams for the project’s structural framework.  

Company B, a reputed steel manufacturer located in Mumbai, fits the bill perfectly. Company A and Company B decide to enter into a Material Supply Agreement to govern the supply of steel beams for the project. The agreement will outline the specific details of the transaction, ensuring a smooth and successful collaboration.

The client, Mr. Rajesh Sharma, the CEO of Company A, reaches out to you, a seasoned lawyer specializing in commercial contracts, to draft a Material Supply Agreement (MSA) between the Parties. 

We will get into the specifications as we draft. 

STEP 1: Provide Claude with a specific role and the requirement. 

Prompt – I need you to draft a Material Supply Agreement for me. Act as a contract drafting lawyer and draft the same for me. I will give you the facts in the next prompt. 

STEP 2: Give proper facts and ask Claude to prepare a requisition list.

AI cannot draft a proper legal document without specific information about your business and legal requirements. Write the facts in as much detail as you can. 

At the same time, remember what I told you about AI. It has knowledge and training on hundreds and thousands of legal documents. To get a tailored draft for your client, instead of giving the information from your end and limiting the dataset, ask AI to ask you questions. It will scour its dataset and ask you the most relevant and important questions required to draft the contract for you.

Prompt – My client, Company A, a well-established construction company in Delhi, is undertaking a large-scale commercial complex project. They require a reliable supplier for high-quality steel beams for the project’s structural framework. Company B, a reputed steel manufacturer located in Mumbai, fits the bill perfectly. Company A and Company B decide to enter into a Material Supply Agreement to govern the supply of steel beams for the project. The agreement will outline the specific details of the transaction, ensuring a smooth and successful collaboration. Your job is to draft a material supply agreement for my client. 

Ask me both legal questions and factual questions that you need to know in order to draft the agreement

Claude generates a list of factual and legal questions as asked. I am not writing them here. You can see them with the list of answers in the next prompt. 

STEP 3:Answer the questions asked by Claude and ask it to draft the agreement 

I very diligently answer all the questions asked by Claudel. The quality and detailing of the draft depends upon how detailed your response is for the questions asked. 

Here are the legal answers to the questions that you asked. Legal answers:

1. What is the applicable law that will govern this agreement? Indian Contract Act or a specific state law? 

Ans: Indian Contract Act.

2. Are there any specific regulatory requirements or licenses needed for the type of materials being supplied?

Ans: No. 

3. How will intellectual property rights like patents, trademarks, or copyrights be handled, if applicable?

Ans: No intellectual property involved.

4. What dispute resolution mechanism would you prefer- litigation in courts or arbitration?

Ans: Arbitration is the preferred dispute resolution mechanism over litigation in courts for resolving disputes under this Agreement. With following specifications:

• The seat of arbitration shall be New Delhi.
• The arbitration tribunal shall consist of three (3) arbitrators.
• Each party shall appoint one (1) arbitrator, and the two appointed arbitrators shall jointly appoint the third arbitrator by mutual consent.
• The language of arbitration shall be English.
• The decision of the arbitration tribunal shall be final and binding on the parties.

Note that it is usually the paying party that holds the power to determine the jurisdiction but, again, it is subject to negotiations. The seat determines the jurisdiction of the courts which can hear issues in relation to interim reliefs, challenge to the award made by arbitrator etc. And, preferably, go for arbitration over litigation to save costs and keep the proceedings confidential, in case any arise. 

5. Do you want to include any limitations of liability or indemnification clauses?

Ans: The Supplier will indemnify, defend, and hold harmless the Buyer from and against any and all claims, damages, liabilities, costs, and expenses arising out of or resulting from any defect in the Materials or any breach of this Agreement by the Supplier. 

Sometimes the indemnification can be bipartite as well, and will depend upon the client. 

6. Are there any particular termination grounds you want covered beyond breach of contract?

Ans: Repeated rejection of materials to be treated as material breach of this Agreement and shall lead to termination. 

7. How will force majeure events like natural disasters be addressed?

Ans: Neither Party will be liable for any failure or delay in performing its obligations under this Agreement if such failure or delay is caused by an event or circumstance beyond the reasonable control of the affected Party. The Party affected by the Force Majeure Event shall notify the other Party in writing within seven days of becoming aware of the occurrence of such event.

8. Do you need any non-compete, non-solicitation, or confidentiality terms for either party?

Ans: No

9. What will be the desired contract term/duration and any renewal terms?

Ans: This Agreement will continue till the completion of the project unless terminated otherwise.

Here are the factual answers:

1. What are the product specifications?

• Total Quantity: 2,500 metric tons of structural steel beams
• Detailed Specifications:
  • Steel Grade: IS 2062 E250 (High Tensile Structural Steel)
  • Beam Sizes: Ranging from 250mm to 600mm
  • Minimum Yield Strength: 250 MPa
  • Minimum Ultimate Tensile Strength: 410 MPa
  • Manufacturing Standard: Fully compliant with Bureau of Indian Standards (BIS)

2. What is the delivery schedule?

The delivery shall be phased as follows:

• First Phase: 625 metric tons (25%) within 2 months of contract signing
• Second Phase: 1,250 metric tons (50%) by the 5th month
• Final Phase: 625 metric tons (25%) by the 8th month

3. What are the delivery conditions?

Delivery Location and Conditions

• Primary Delivery Site: Commercial Complex Project Site, Aerocity, New Delhi
• Delivery Hours: 8:00 AM to 6:00 PM, Monday to Saturday
• Delivery Method: Supplier to arrange and bear all transportation costs
• Risk Transfer: Upon successful delivery and acceptance at the project site.

4. What is the payment schedule?

The Buyer shall pay the Supplier the prices for the Materials as set henceforth:

• Total Contract Value: INR 37,50,00,000
• Price per Metric Ton: INR 1,50,000
• Price is fixed and inclusive of all taxes, transportation, and handling charges

5. Who will be responsible for transporting the steel beams?

The Supplier shall deliver the Materials to the Project site or other designated location specified by the Buyer.

6. ​​Where and how will the inspection of the steel beams take place—at the supplier’s facility, upon delivery, or both?

A mutually agreed third-party inspection agency shall conduct rigorous inspections both at the Supplier’s manufacturing facility and the project site upon delivery. 

7. Are there any quality specifications?

The Supplier shall provide comprehensive quality guarantees, mandatorily adhering to IS 2062 E250 standards and maintaining Bureau of Indian Standards (BIS) certification. 

Draft the agreement for me based on this information. 

Ideally, all the questions that Claude has posed, should be sent as a requisition to your client. Have them answer these questions before you proceed with the draft. If your client has not given you any detail of the supply whatsoever, you can make the list of questions even more comprehensive. The more you know the better. 

STEP 4: Read the draft 

I will reiterate that AI is just a co-pilot and not a replacement for human work. You can use AI to save some time but the final editing requires human intervention. 

In the draft below, which was generated by Claude, I have added explanations (in italics) for every clause for your understanding. I have also made some manual edits in the draft which you can see are in red.

MATERIAL SUPPLY AGREEMENT

Explanation – The title of the agreement describes the purpose of the agreement you are drafting. Claude has named it correctly as Material Supply Agreement. If there is any error  in title, the entire agreement is looked at to determine what the agreement is actually about. 

This Material Supply Agreement (“Agreement”) is entered into on this __ day of ____, 2024, by and between:

Company A, a company incorporated under the Companies Act, 1956, having its principal place of business at [FULL REGISTERED ADDRESS] (hereinafter referred to as the “Buyer”)

AND

Company B, a company incorporated under the Companies Act, 2013, having its principal place of business at [FULL REGISTERED ADDRESS] (hereinafter referred to as the “Supplier”)

Explanation – This section should include the names of the parties entering into the agreement, including their place of incorporation, registered office addresses, and a clear designation that identifies each party’s role in the contract. 

For example, in a material supply agreement, you might designate one party as the “Buyer” and the other as the “Supplier” to establish their respective positions and relationship from the outset. 

As you can see, Claude has done it properly. 

WHEREAS:

1. The Buyer is a Construction Company and is engaged in the construction of a large-scale commercial complex project located in Aerocity, New Delhi, India (hereinafter referred to as the “Project”);
2. The Supplier is a renowned manufacturer of high-quality structural steel beams with extensive experience in supplying materials for large-scale construction projects;
3. The Buyer requires high-quality steel beams for the structural framework of the Project;
4. The Supplier represents that it is fully capable of manufacturing and supplying the required steel beams to the Buyer’s specifications;
5. The parties desire to enter into this Agreement to establish the terms and conditions governing the supply of steel beams for the Project.

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows:

Explanation – The recitals, or often known as “whereas” clauses, serve as the narrative introduction to the agreement. It provides critical context that further explains why the parties are entering into this particular contract. 

These paragraphs should communicate the business background, motivations, and objectives of each party. They paint a broader picture of the commercial relationship by highlighting the mutual benefits and specific circumstances that have brought the parties together. 

In our material supply agreement, the recitals should explain the buyer’s ongoing construction project and the supplier’s capability to provide the necessary steel beams and this will set the stage for the detailed provisions that follow. You can see that Claude has drafted it properly. 

1. DEFINITIONS AND INTERPRETATIONS

1.1 “Materials” shall mean the high-quality steel beams to be supplied by the Supplier as specifically detailed in Schedule A of this Agreement.

1.2 “Delivery Date” means the date of complete and acceptable delivery of Materials at the Project site.

1.3 “Material Breach” means any failure to perform obligations under this Agreement that substantially affects the purpose of the contract and entitles the non-breaching party to remedies, including termination.

1.4 “Defective Materials” means any Materials that fail to conform to the specifications outlined in this Agreement.

Explanation – The Definition and Interpretation clause is a foundational section in any agreement, ensuring clarity and consistency in the use of terms and phrases throughout the document. It establishes a shared understanding between the parties by defining key terms and setting rules for how the agreement should be read and interpreted. This clause is especially important in material supply agreements, where technical terms, industry standards, and procedural references often appear. 

Explanation – The scope of supply clause is the heart of the agreement, meticulously defining the exact nature of the goods or services to be provided. This paragraph must leave no room for ambiguity, specifying precise quantities, detailed specifications, and any unique requirements. It should comprehensively outline what the supplier will deliver, including technical specifications, quality standards, and any particular characteristics that are critical to the buyer’s needs. The language should be explicit enough that both parties have a crystal-clear understanding of the exact materials or services being exchanged. Here is what was drafted: 

2. SCOPE OF SUPPLY 

The Supplier shall supply to the Buyer, and the Buyer shall purchase from the Supplier, the steel beams (“Materials”) as per the specifications, quantities, and delivery schedules set henceforth:

2.1 Quantity and Specifications

The Supplier shall supply:

• Total Quantity: 2,500 metric tons of structural steel beams
• Detailed Specifications:
  • Steel Grade: IS 2062 E250 (High Tensile Structural Steel)
  • Beam Sizes: Ranging from 250mm to 600mm
  • Minimum Yield Strength: 250 MPa
  • Minimum Ultimate Tensile Strength: 410 MPa
  • Manufacturing Standard: Fully compliant with Bureau of Indian Standards (BIS)

Explanation – Quality and inspection provisions form a crucial protective mechanism for the buyer. This clause should articulate the specific quality standards the materials must meet (e.g., IS 2062 E250, BIS certification), detailing the benchmark specifications, acceptable tolerances, and the process for quality verification. 

It typically grants the buyer the right to inspect materials before shipment, establishing a clear mechanism for ensuring the goods meet the predetermined standards. 

The paragraph should outline the inspection process, including who bears the cost of inspection, the timeframe for quality checks, and the specific resources available if the materials fail to meet the agreed-upon standards. Furthermore, categorizing repeated quality failures as a material breach underscores the seriousness of non-compliance and provides the buyer with legal remedies, including termination of the agreement. 

3. QUALITY CONTROL AND INSPECTION

3.1 The Supplier shall provide comprehensive quality guarantees, mandatorily adhering to IS 2062 E250 standards and maintaining Bureau of Indian Standards (BIS) certification. 

We had missed providing this information in our factual questionnaire. 

3.2 A mutually agreed third-party inspection agency shall conduct rigorous inspections both at the Supplier’s manufacturing facility and the project site upon delivery. 

3.3 The Buyer reserves the absolute right to reject any materials that deviate from the specified standards, exhibit visible defects, or demonstrate structural inconsistencies.

3.4 The Supplier shall replace any rejected materials within fifteen (15) days of receipt of notice of rejection.

3.5 All costs incurred in relation to such replacement shall be borne exclusively by the Supplier.

3.6 Repeated rejection of materials shall be deemed a material breach of this Agreement and shall lead to termination. 

Explanation – Delivery and acceptance clauses establish the logistical framework of the agreement. This paragraph comprehensively details the delivery process, including specific locations, timelines, and the precise method of delivery. It should clearly define the point at which risk transfers from the supplier to the buyer, and outline the buyer’s rights and responsibilities upon receiving the materials. The clause typically includes provisions for how the buyer will inspect and accept (or reject) the delivered goods, specifying the timeframe and process for raising any concerns about the delivery.

4. DELIVERY AND ACCEPTANCE 

4.1 The Supplier shall deliver the Materials to the Project site or other designated location specified by the Buyer, in accordance with the delivery schedule set forth in Annexure A. 

You can include a separate delivery schedule as Claude has drafted or make it part of the Agreement. I prefer to include it in the Agreement itself and here is what it will look like, when drafted in the body of the Agreement:

4.2 Delivery Schedule

The delivery shall be phased as follows:

• First Phase: 625 metric tons (25%) within 2 months of contract signing
• Second Phase: 1,250 metric tons (50%) by the 5th month
• Final Phase: 625 metric tons (25%) by the 8th month

4.3 Delivery Location and Conditions

• Primary Delivery Site: Commercial Complex Project Site, Aerocity, New Delhi
• Delivery Hours: 8:00 AM to 6:00 PM, Monday to Saturday
• Delivery Method: Supplier to arrange and bear all transportation costs
• Risk Transfer: Upon successful delivery and acceptance at the project site.

4.4 The Buyer shall inspect the Materials upon delivery and notify the Supplier of any defects or non-conformities within 15 days of receipt.

Explanation – The pricing and payment terms represent the financial backbone of the agreement. This paragraph must explicitly state the pricing structure, including the total cost, any potential price adjustments. You can make the payment schedule an Annexure or include it in the body. 

It should detail the currency of payment, specific payment methods, and any penalties or interest that may apply to late payments. The clause typically specifies the invoicing process, including what information  must be included in invoices and the exact timeline for payment after invoice receipt.

5. PRICE AND PAYMENT TERMS 

5.1 The Buyer agrees to pay the Supplier the total contract price of INR 37,50,00,000 at the rate of  INR 1,50,000 per metric ton of Materials according to the payment schedule appended to this Agreement as Annexure B. The price is fixed and inclusive of all taxes, transportation, and handling charges.

5.4 All invoices must be submitted in original and must show the breakdown of the tax structure and the value payable at the prevailing tax rate, with a clear description of goods. All the payments and transactions shall take place in INR through [Payment Mode] within 30 days of receipt of invoice. The payment shall be made after the invoice has been sent by the Seller.  

Explanation – Warranty provisions offer critical protection to the buyer by guaranteeing the quality and performance of the supplied materials. This clause should comprehensively define the extent of the supplier’s warranties, including the duration of coverage, specific performance guarantees, and the process for addressing any defects. It typically outlines the supplier’s obligations in the event of material failure, including repair or replacement provisions, and may specify any limitations or conditions attached to the warranty.

6. WARRANTIES 

6.1The Supplier warrants that the Materials supplied shall be free from defects in materials and workmanship for a period of 12 months from the date of delivery. 

6.2 If any defects are found during the warranty period, the Supplier shall, at its own cost, replace or repair the defective Materials within a reasonable time.

Explanation – Indemnification clauses allocate and manage potential risks between the parties. This paragraph should comprehensively outline the circumstances under which one party will protect the other from potential losses, damages, or legal claims. In some cases it is two ways indemnification. 

This clause typically specifies the types of claims covered, the process for making indemnification claims, and any limitations on the extent of indemnification. The language should be carefully constructed to provide meaningful protection while maintaining a fair balance between the parties’ interests.

7. INDEMNIFICATION 

The Supplier shall indemnify, defend, and hold harmless the Buyer from and against any and all claims, damages, liabilities, costs, and expenses arising out of or resulting from any defect in the Materials or any breach of this Agreement by the Supplier.

Explanation – The term and termination clause defines the lifespan of the agreement and the conditions under which it can be concluded. This paragraph should clearly state the initial duration of the contract, any automatic renewal provisions, and the specific grounds for termination. It should outline the notice periods required for termination, the process for ending the agreement, and any obligations that survive the termination of the contract. The clause provides a clear exit strategy and protects both parties’ interests in case the business relationship needs to be dissolved.

8. TERM AND TERMINATION 

8.1 This Agreement shall commence on the date first written above and shall remain in effect until the completion of the Project, unless terminated earlier in accordance with the provisions of this Agreement. 

8.2 Either party may terminate this Agreement upon 30 days’ written notice to the other party in the event of a material breach by the other party, provided that the breaching party fails to cure such breach within 7 days of receiving written notice of the breach.

Explanation – This section outlines what qualifies as a Force Majeure Event, providing examples such as natural disasters, wars, strikes, or pandemics. By clearly defining these events, the clause ensures that both parties understand the scope of its application, reducing potential disputes over whether a particular event qualifies as Force Majeure. 

The requirement to notify the other party within a specific timeframe ensures transparency and allows both parties to plan accordingly. The obligation to mitigate damages ensures that the affected party makes reasonable efforts to reduce the impact of the Force Majeure Event, such as seeking alternative solutions to meet obligations.

9. FORCE MAJEURE CLAUSE 

9.1 Force Majeure Event
Neither Party shall be liable for any failure or delay in performing its obligations under this Agreement if such failure or delay is caused by an event or circumstance beyond the reasonable control of the affected Party (“Force Majeure Event”). Force Majeure Events may include, but are not limited to, acts of God, natural disasters (such as floods, earthquakes, or hurricanes), fire, explosion, war, terrorism, civil unrest, government actions, embargoes, labor strikes, pandemics, or any other event that renders performance impossible or impracticable.

9.2 Notice and Mitigation
The Party affected by the Force Majeure Event shall notify the other Party in writing within seven (7) days of becoming aware of the occurrence of such event, detailing the nature of the event, its anticipated impact on the performance of obligations, and the expected duration. The affected Party shall make reasonable efforts to mitigate the effects of the Force Majeure Event and resume performance of its obligations as soon as practicable.

9.3 Suspension of Obligations
During the continuance of a Force Majeure Event, the affected Party’s obligations under this Agreement shall be suspended to the extent they are impacted by the event.

Explanation – Governing law and dispute resolution paragraphs establish the legal framework for addressing any conflicts. This clause should specify the jurisdiction whose laws will govern the interpretation and enforcement of the agreement. Usually the paying party’s jurisdiction is adopted as preferred jurisdiction as per business standards. 

It typically outlines the preferred method of resolving disputes, whether through negotiation, mediation, arbitration, or litigation. The paragraph should provide a clear, structured approach to managing potential legal conflicts, often specifying the location and process for dispute resolution to provide certainty and predictability.

10. GOVERNING LAW AND DISPUTE RESOLUTION 

10.1 This Agreement shall be governed by and construed in accordance with the laws of India. 

10.2 Any disputes arising out of or in connection with this Agreement shall be settled amicably through good faith negotiations between the parties. If the parties fail to resolve the dispute within 30 days, the dispute shall be referred to arbitration in accordance with the Arbitration and Conciliation Act, 1996.

10.3 All disputes, controversies, or claims arising out of or in connection with this Agreement, including any question regarding its existence, validity, interpretation, breach, or termination, shall be referred to and finally resolved by arbitration in accordance with the Indian Arbitration and Conciliation Act, 1996, as amended from time to time. The arbitration shall be conducted as follows:

• The seat of arbitration shall be New Delhi.
• The arbitration tribunal shall consist of three (3) arbitrators.
• Each party shall appoint one (1) arbitrator, and the two appointed arbitrators shall jointly appoint the third arbitrator by mutual consent.
• The language of arbitration shall be English.
  The decision of the arbitration tribunal shall be final and binding on the parties.

You can change this according to what’s suitable to your client. 

Explanation – The miscellaneous clauses serve as the final safeguard in any agreement. It addresses various administrative and legal details. This section typically includes clauses about the entire agreement (confirming that this document represents the complete understanding between the parties), amendment procedures, confidentiality obligations, and other critical administrative matters. It ensures that the agreement is comprehensive, adaptable, and protective of both parties’ interests.

11. MISCELLANEOUS 

11.1 This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior or contemporaneous agreements, representations, and understandings, whether written or oral. 

11.2 No amendment or modification of this Agreement shall be valid or binding unless made in writing and duly executed by both parties. 

11.3 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assignments.

Explanation – This section is called the execution section and it provides final and  formal conclusion to the agreement, with signature blocks that allow authorized representatives to formally bind their organizations to the contract. This final section should include spaces for the full names, titles, and signatures of authorized signatories from both parties, along with the date of execution.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

For Company A (Buyer)                 For Company B (Supplier)

Name:                                               Name:

Title:                                                  Title:

ANNEXURE A: Delivery Schedule 

ANNEXURE B: Pricing Schedule 

STEP 5: Review and retain

In the Agreement drafted for this write up, the facts were limited, so that you understand the core principles of a Material Supply Agreement and how to use AI. With complex facts and specifications, it might take more than one prompt to get a workable draft. 

But remember, you have to give really detailed facts to generate a good first draft. If you think some clauses are not drafted properly, you can ask Claude to retain the draft while changing whatever sections require change. 

You can also give Claude a template or sample draft and ask it to change the specifications and your business needs after providing it with factual and legal information. That way, if you want your draft to have a specific structure or tone, it can adapt to the same. 

But sometimes even after repeated prompting and trials, you get a shabby draft? What is the reason behind that? Here’s a trade secret for you— you are not working with the right AI tool. 

Choosing the right AI Tool

As important as it is to know and follow the right prompting structure, it is equally important that you pick the right tool. It is crucial to select the appropriate AI-powered contract drafting tool for maximizing efficiency and ensuring legal reliability. 

I, personally, check how the legal language is of a particular AI tool. For example, between GPT and Claude.ai, Claude has been trained on legal language data sets, so the drafts that are generated by Claude do not require a lot of edits. Models like GPT, Perplexity etc have more general processing and writing capabilities but do not have domain specific advantages like Claude. 

You can also look at other websites like Clausehound, LegalRobot which are free and specifically trained to draft contracts. 

But if you want to go pro and invest in some good tools, here are a few key considerations and features to evaluate:

Key features to look for in an AI Contract Drafting Tool

User-Friendly Interface

Look for a simple inbuilt design that facilitates contract drafting. 

What to look for:

• Drag-and-drop functionalities for templates:  Imagine that you’re playing with building blocks. You have different  sets of blocks in various shapes, and you can pick them up and drop them wherever you like to build a house.

In an AI contract drafting tool, templates are like those blocks. You can “pick up” (click on) a ready-made section of a contract—like the “Payment Terms” or “Termination Clause”—and “drop it” (drag and place it) into your document. This makes creating contracts super fast and fun, just like building a house with blocks.

• Searchable clause libraries for easy access: Think of this like a big data set of your favorite series, and you can search for what you need quickly. For example, if you want your favorite horror drama, you don’t have to dig through the dataset—you just type “horror” into a search bar, and it will appear.

In the contract tool, the clause library is that magic treasure chest. If you need a “confidentiality clause,” you just type “confidentiality,” and the tool finds it for you instantly. No more wasting time searching through boring papers!

• Step-by-step workflows to guide users through the drafting process.

Take for example: ContractPodAi, ClauseBase, ContractWorks etc

Legal compliance capabilities

Ensuring that contracts adhere to relevant laws and regulations helps mitigate legal risks.

What to look for:

• Regular updates to reflect changes in laws (e.g., GDPR compliance for EU contracts) –  Review the tool’s help center, FAQs, or support services. It should clearly explain:
  • The laws the tool covers (e.g., GDPR, Indian Contract Act, local labor laws).
  • How updates are handled (e.g., automated or manual).
• Preloaded templates customized for industry-specific or jurisdictional requirements.

Take for example: Ironclad and DocJuri. These are contract drafting software that includes automated compliance checks to ensure every document meets internal and regulatory standards.

Integration with existing systems

The next thing to look for while using an AI tool for contract drafting is how easily it can integrate with the existing systems. It is important that the tool integrates seamlessly with the systems your organization already uses, such as CRM (Customer Relationship Management), ERP (Enterprise Resource Planning), and document management systems. This is important because it minimizes manual work, reduces errors, and ensures that your team is working more efficiently.

What to look for:

• Compatibility with systems like Salesforce, Microsoft Word, and DocuSign: Salesforce is one of the most widely used CRM systems for managing customer data and relationships. If the AI tool integrates with Salesforce, it can automatically pull customer data (e.g., client names, addresses, terms, and payment schedules) directly into your contracts.

Microsoft Word is a commonly used word processing tool for drafting contracts. If the AI tool integrates directly with Word, it will make your task easy as you can draft, edit, and review contracts without needing to switch between platforms.

• API capabilities for custom integrations: An API (Application Programming Interface) allows different software systems to communicate with each other. If the AI contract drafting tool provides API capabilities, you can customize the integration to connect with other software tools your organization uses, even if they’re not part of the default integrations.

For example, if you’re using a custom ERP system or a homegrown contract management system, an API allows you to link the AI tool with these systems. This means that your contract drafting tool can access relevant data from your ERP system, such as project timelines, budgets, or payment schedules, and automatically insert them into contracts.

• Support for importing/exporting files in multiple formats (e.g., PDF, DOCX).

If you are working with a real estate development company which is technologically advanced, you could consider implementing these tools to cut down manual work and save a lot of time. This way, your error margin will also be reduced. 

But what are the issues with traditional drafting?

Common issues in Traditional Drafting

Here are the common issues with traditional drafting techniques:

1. Traditional drafting can be time consuming 
2. There can be ambiguity in language used in the draft leading to risky clauses and potential interpretation issues
3. You might end up writing long and complex sentences that takes away the essence of what you wanted to convey
4. Lack of structure and flow in an agreement if you are new to drafting
5. Redundancy and repetition of ideas that can make document verbose
6. Usage of inconsistent terminology (e.g., “agreement” and “contract”/”party name” and “First Party” used interchangeably)
7. Errors in grammar or punctuation are the most common
8. If you use templates to draft or copy from older drafts, there can be a failure to update the outdated templates 
9. In technical contracts like a material supply agreement, the error margin is higher because you are bound to meet some specification or overlook some flaw entirely in the obligation terms

Customizing agreements for developers

While drafting a customised agreement for developers, you should keep in mind that creating terms that can address their unique needs, establish clear expectations, and minimize risks are very important. Here’s how you can approach this:

Addressing unique developer requirements

• Always draft a detailed scope of work to avoid any conflict that may arise in future. By pre-determining the phases of work, time frame for deliverables, specifying precise quantities, detailed specifications, and any unique requirements can help in the smooth enforcement of an agreement. Scope of work  should comprehensively outline what the supplier will deliver, including technical specifications, quality standards, and any particular characteristics that are critical to the buyer’s needs. 
• Include water-tight NDA provisions to protect any trade secrets, especially if the developer handles sensitive client data.
• Define specific deliverables, milestones, and performance standards to avoid scope creep.

Drafting specific payment and delivery terms

• Choose milestone-based payments or retainers. Specify acceptable payment methods and timelines (e.g., 30 days after invoice).
• Add penalties for delayed payments, such as interest or work suspension clauses.
• Establish realistic deadlines and allow for revisions. Include a mechanism for adjustments due to unforeseen delays.

Tailoring Dispute Resolution clauses

• Be specific with the governing law and jurisdiction, particularly if the parties are in different countries or states.
• Arbitration can be faster and more private, making it ideal for disputes over developer agreements.
• Specify the language and number of arbitrators and their appointment mechanism.
• Encourage mediation before escalation to arbitration or court to resolve disputes amicably.

And, once you have drafted an agreement, let a technical member from your client’s office read and ask you questions. 

If you are someone who still wants to draft contracts yourself, you can still use AI to manage risks for you. How?

Using AI for Risk Management in Agreements

AI can significantly enhance risk management in agreements by identifying potential risks, drafting mitigation clauses, and monitoring contract performance. Here’s how:

Identifying potential risks

AI-powered tools can analyze agreements and identify what might be the potential risks by:

• Scanning for ambiguous terms, inconsistencies, or missing clauses.
• Highlighting non-compliance with regulations or industry standards.
• Identifying clauses which can lead to interpretation issues or could be reworded to ensure clarity of obligations. 

Drafting mitigation clauses

AI tools can assist in drafting clauses to mitigate identified risks by:

• Suggesting balanced and legally sound language for indemnities, warranties, or limitations of liability.
• Customizing clauses based on specific industry or jurisdictional requirements.
• Recommending fallback positions during negotiations to address contentious issues.

Monitoring contract performance

Once an agreement is executed, AI can monitor its performance to manage risks effectively by:

• Tracking deadlines, deliverables, and compliance milestones.
• Analyzing ongoing performance data to predict potential breaches or delays.
• Sending automated alerts for contract renewal or changes in applicable laws.

Until now we have seen the uses and advantages of AI in drafting contracts let us also understand the:

Challenges in using AI for drafting contracts

While AI offers significant advantages in drafting contracts, there are several challenges that need to be addressed to ensure its effective implementation like:

Over-reliance on technology

If you rely heavily on AI can lead to blind spots, as the technology may overlook unique case-specific nuances or unexpected scenarios. This can result in generic or insufficiently customized contracts that fail to address specific client needs or risks.

Potential gaps in legal nuances

Since AI works on the advanced algorithm and the historical data, it may struggle to grab complex legal principles, cultural context, or jurisdiction-specific laws which is not possible without human interpretation. This particular thing can lead to drafting errors, such as inappropriate clauses or misaligned terms that don’t fully reflect the parties’ intentions.

Ensuring human oversight

If you draft Contracts solely with the help of AI without human review, there are chances that it may be missing critical elements or they might reflect biases implanted in the AI’s training data. Now this can seriously  compromise the enforceability of the agreement or result in unfair terms for one party.

Emerging trends in AI Legal Tech

Artificial Intelligence is rapidly evolving and addressing the complexities of legal work, especially in contract management. Key trends include:

• Advanced Natural Language Processing (NLP): AI tools are becoming more adept at understanding legal jargon, enabling better analysis, drafting, and review of contracts.
• Predictive analytics: These tools can predict outcomes based on advanced data, due to which it can aid risk assessment and negotiation strategies.
• Smart contracts: Blockchain-based smart contracts are efficient in automating execution and enforcement, especially in industries like supply chain and finance.
• AI-powered negotiation assistants: Emerging tools assist in real-time contract negotiations by suggesting optimal terms based on pre-set parameters.
• Global compliance solutions: AI platforms are integrating cross-border legal frameworks to ensure compliance with international regulations.

Last but not the least, let us see the implications for legal professionals.

How does AI impact Contract Drafting Lawyers

• Lawyers can transition their roles from manually drafting complex agreements to roles such as overseers and strategists, and can further focus on high-value tasks like negotiation and litigation.
• They can use AI for end-to-end contract management if they learn how to use it properly. In this write up, for example, we not only used AI to draft our contract but also to prepare a requisition list for our client. 
• For freelancers, it means higher productivity and more clients in the same amount of time. You just set up an assembly line by creating the right set of prompts. 
• Negotiations become easier as it takes AI minutes to identify loopholes and potential problems. The same work would take a human at least 2-3 hours, if they are exceptionally smart. 
• As AI takes on greater roles, ethical questions around accountability and bias will become more pronounced.

Either you take advantage of the tool available to you or you are left behind. Because lawyers, globally, have jumped the wagon and are already taking benefits of AI for contract work. 

And, especially in the world of real estate and legal tech, the only constant is how fast you can change and adapt. Are you ready to ride the wave?

FAQs

1. Can AI tools handle state-specific regulations in India?

These are LLM models and produce results based on the data you feed in them. For anything specific you need to first train the AI by giving multiple prompts and stating all the specific regulations you want to incorporate.

2. Is human review necessary for AI-generated contracts?

Well, we can not ignore the fact that AI has changed our lives in many ways. Our work life became simple and easy because of the integration of AI in it. But, AI can never replace the human mind. Since it is an artificial intelligence and you have to train it by giving multiple prompts, you can’t train it fully and human intervention is always needed.