Termination clauses in distribution agreements sometimes carry a quiet sting: a provision that if the distributor exits, the company alone will decide whether outstanding dues are settled in cash or in goods. A formulation seen in practice reads: "If the Distributor terminates the agreement or stops the business with the Company, it will be the sole discretion of the Company whether to settle the outstanding in cash or against goods." Settling in goods is not inherently prohibited. What makes the clause vulnerable is the sole, unfettered discretion vested in one party: under Indian law it is likely to be unenforceable or substantially weakened, principally under Section 23 of the Indian Contract Act 1872.
Why Section 23 Reaches One-Sided Settlement Clauses
Section 23 supplies the statutory basis for striking down one-sided terms:
The consideration or object of an agreement is lawful, unless — it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.
The operative limb here is "opposed to public policy". Indian courts have not treated public policy as static: the doctrine has evolved to reach unconscionable bargains, particularly unfair terms arising from gross inequality of bargaining power. An unconscionable contract, in the language of the commentary, is one in which one party has an unfair advantage, the other has no meaningful choice but to accept the terms, and the terms are so oppressive that they shock the conscience of the court.
The Law Commission of India, in its 199th Report on Unfair (Procedural and Substantive) Terms in Contracts, identified the structural gap: neither the Contract Act nor the Sale of Goods Act contains a general provision allowing courts to relieve a weaker party of terms merely because they are unreasonable, unconscionable or unfair. Courts have bridged that gap through Section 23 itself, most readily where a clause grants arbitrary and unreasonable discretion to one party. The questions a court will ask of a settlement-discretion clause are direct: was the distributor in a position to negotiate it, and could the distributor realistically walk away? Where both answers are no, the clause is at severe risk.
The Brojo Nath Ganguly Test for Unconscionable Discretion
Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, AIR 1986 SC 1571, remains the controlling authority on unconscionable discretionary clauses. The Supreme Court struck down a service rule that permitted termination of a permanent employee on notice without assigning reasons, holding it arbitrary, unfair, unjust and unreasonable, and therefore opposed to public policy and void under Section 23. The Court's wider proposition:
Such contracts which affect a large number of persons or a group or groups of persons, if they are unconscionable, unfair and unreasonable, are injurious to the public interest. Such a contract or such a clause in a contract ought, therefore, to be adjudged void.
The parallels with a unilateral settlement clause are close. Both confer unfettered discretion on the stronger party. Both operate without objective standards or any obligation to give reasons. Both arise in relationships of unequal bargaining power: employer and employee there, supplier and dependent distributor here. And both allow arbitrary outcomes that strike at the weaker party's financial position.
Courts have carried the framework into commercial dealership disputes. In Classic Motors Ltd. v. Maruti Udyog Ltd. (Delhi High Court, 1996), where a dealership termination clause was challenged as unconscionable, the court's inquiry ran along three lines: whether the agreement was a standard-form contract imposed by the dominant party; whether the weaker party had meaningful choice in negotiating it; and whether the clause imposed arbitrary and unreasonable obligations. A settlement-discretion clause invites the same three questions, and a small channel distributor will usually answer them the way the challenger wants: the clause is imposed unilaterally, cannot easily be negotiated away, and creates a contingent liability with no objective measure.
Recent authority reinforces the trajectory. In Strescon Industries Ltd. v. Union of India (order dated 3 February 2026), the Supreme Court, dealing with arbitration clauses, held that a clause allowing one party unilaterally to appoint a sole arbitrator gives rise to justifiable doubts as to independence and impartiality, hinders the other party's equal participation, and, in public-private contracts, violates Article 14 of the Constitution. The holding is specific to arbitrator appointment, but its animating principle, that equal treatment applies at all stages and clauses excluding one party's participation are suspect, signals how courts now read one-party discretion in commercial contracts generally.
Two limits on this analysis deserve honesty. The unconscionability doctrine is still evolving and its application is fact-specific: a large distributor that genuinely negotiated the clause is far less likely to escape it than a small, dependent one, and courts will look at the nature of the goods, the distributor's realistic exit options and how many distributors the clause affects. Indian courts have also not yet built a body of case law specifically on settlement discretion in distribution agreements; the principles come from employment and dealership contexts, and their transposition, while likely, is not guaranteed.
The Sale of Goods Act Provides No Mechanism for Forced Settlement in Goods
Where the outstanding amount is a money debt, the Sale of Goods Act 1930 gives the company no assistance. Section 3 carries the unrepealed principles of the Contract Act into contracts for the sale of goods, so the Section 23 analysis applies with full force. And nothing in the Act permits one party to compel the other to accept goods in discharge of a monetary obligation; any goods-based settlement right must be explicitly agreed, clear and unambiguous, and not unconscionable or oppressive.
The Act's own payment architecture points the other way. Section 31 makes delivery and payment concurrent conditions: the seller must be ready and willing to give possession in exchange for the price, and the buyer ready and willing to pay the price in exchange for possession. The unpaid seller's lien under Section 47 is conditional and possession-based: it lets an unpaid seller retain goods still in its possession until payment where there was no credit stipulation, where the credit term has expired, or where the buyer is insolvent. Once goods have been delivered and title has passed, there is nothing left to retain. Section 61(1) preserves the ordinary money remedies: interest, special damages, and recovery of money where the consideration for its payment has failed. Even express set-off rights are drafted in commercial practice as reciprocal, balanced provisions rather than unilateral powers.
A goods settlement also collides with a valuation problem the clause never answers: at what value are the goods tendered, cost, wholesale, retail or liquidation? Where a price falls to be determined and the contract is silent, Section 9(2) supplies only "a reasonable price", a question of fact depending on the circumstances of each case. A distributor pressed to accept stock can fairly ask what "reasonable" valuation applies, and the resulting ambiguity is construed against the drafter, which is the company. Any goods-based settlement must therefore be explicitly optional for the distributor, at a fair and objective valuation, and subject to the distributor's prior consent.
Unfair Terms Under the Consumer Protection Act 2019
The Consumer Protection Act 2019 added a statutory unfairness regime that echoes Section 23. Section 2(46) defines unfair contract terms to include those causing significant imbalance in the parties' rights and obligations, imposing excessive penalties disproportionate to actual loss, denying basic rights, or excluding liability for wilful breach or negligence. Consumer Commissions are expressly empowered to declare unfair terms null and void; under the current framework, the State Commission adjudicates unfair-contract complaints where the consideration paid does not exceed ten crore rupees.
A settlement-discretion clause displays exactly the asymmetry this regime targets. The company unilaterally decides the settlement method; the distributor has no countervailing choice, carries a contingent financial liability with no objective standard, and may end up holding depreciated or slow-moving stock instead of cash for money genuinely owed. Separately, Section 2(47) defines unfair trade practices to include conditioning trade in goods or services in an unfair, unjust or oppressive manner, a description that a systematically enforced non-cash settlement practice could attract where distributors are dependent on the supplier.
The important caveat: a distributor is not automatically a "consumer" under the Act, and jurisdiction depends on how a particular Commission characterises the relationship. The safer reading is that the Act's principles increasingly inform how courts view relational commercial contracts marked by superior bargaining power, not that every distributor can march to a Consumer Commission.
Competition Law: A Lawful Clause, a Risky Enforcement Pattern
The Competition Act 2002 does not prohibit such a clause per se, but two theories of harm are available. Under Section 3, a vertical arrangement attracts scrutiny where the company holds market power and the unilateral discretion forecloses the distributor's options, with the effect of substantially lessening competition. Under Section 4, if the company holds a dominant position in the relevant market, exercising the discretion could amount to abuse: exploiting the distributor's dependence, imposing unfair trading conditions (settlement in goods rather than cash deprives the distributor of liquidity), or limiting the distributor's ability to compete if it must absorb unmarketable stock.
Enforcement posture matters more than the clause on paper. If the company consistently settles "against goods" to avoid cash outflows across its network, distributors may characterise the practice as a tie-in or as anticompetitive imposition. The Competition Commission's toolkit has also expanded: the Settlement Regulations and Commitment Regulations notified in March 2024 under the Competition (Amendment) Act 2023 created negotiated exits for vertical-agreement and abuse-of-dominance cases, and the first settlement, involving smart-television distribution practices, was approved in April 2025 with a 15% settlement discount. Distribution practices are visibly on the regulator's radar. The drafting answer is proportionate, non-discriminatory application: goods settlement at fair market value, and a case-by-case right for distributors to negotiate the settlement method.
Insolvency: Discretion Cannot Bypass the Collective Process
If the distributor slides into insolvency owing money, the clause fares no better. Dues arising from the supply of goods or services in the ordinary course of business are operational debts under the Insolvency and Bankruptcy Code 2016. Once the corporate insolvency resolution process begins, a resolution professional administers the debtor's affairs, claims must be filed and adjudicated within that process, and they are ranked according to the Code's priorities. A clause purporting to let one creditor unilaterally decide how its debt is settled, for instance by taking goods rather than joining the distribution of the estate, cuts against the Code's object of maximising asset value for all creditors, and a court would likely decline to enforce it in that setting. Any settlement discretion asserted after an insolvency filing is subject to the resolution professional's review and the committee of creditors' approval.
Redrafting: From Sole Discretion to Structured Choice
The commercial objective, keeping a goods-settlement option open, is achievable without the fatal features. Four principles do the work:
- Mutuality. No sole discretion; the mechanism is triggered by mutual agreement or by the distributor's election.
- Objective standards. Define which goods qualify (saleable inventory, excluding obsolete or slow-moving stock) and fix the valuation method (current wholesale cost, or fair market value determined by an independent appraiser).
- Distributor consent. Replace "it will be the sole discretion of the Company" with "the Company may offer settlement in goods, which the Distributor may accept or decline."
- A neutral valuation backstop. Valuation disputes go to a mutually appointed independent appraiser whose determination binds both parties.
A workable structure follows: cash within 30 days as the default method; an optional goods component, capped at a stated share of the dues (for example, half), drawn from defined saleable inventory at a defined valuation, with a short inspection window in which the distributor accepts or declines; any balance paid in cash within a fixed period; and a fallback under which declined goods are liquidated and the proceeds applied against the dues. For larger distribution networks, a settlement-committee variant, with one representative per side and a default to full cash settlement if the committee cannot agree within a short window, replaces discretion with negotiated good faith. Whatever the structure, nothing in the clause should waive either side's legal remedies, and the distributor's informed consent should be documented both at signature and at termination.
The redraft is not cosmetic. It removes the unconscionability objection under Section 23, gives the distributor the meaningful choice the Consumer Protection Act framework demands, avoids the foreclosure characterisation under competition law, and reads as a consensual settlement mechanism rather than a unilateral creditor right that an insolvency process would disregard.
Practical Takeaways
- Delete "sole discretion" settlement language: courts are likely to void it, or rewrite it, under Section 23.
- Make goods settlement an offer the distributor may accept or decline, never an imposition.
- Fix an objective valuation (current wholesale cost, or an average market price over the 30 days before settlement) and exclude obsolete or slow-moving stock.
- Provide an independent-appraiser mechanism for valuation disputes.
- Apply the clause uniformly across the distributor network; selective or discriminatory enforcement creates competition-law exposure.
- Treat insolvency separately: file claims in the resolution process rather than relying on contractual discretion.
- Document the distributor's understanding and consent to the settlement mechanism at signature and again at termination.
Key Authorities
- Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, AIR 1986 SC 1571 — unconscionable, unfair and unreasonable clauses in contracts between parties of unequal bargaining power are void under Section 23 as opposed to public policy.
- Classic Motors Ltd. v. Maruti Udyog Ltd. (Delhi High Court, 1996) — framework for testing dealership clauses: standard form, meaningful choice, arbitrary obligations.
- Strescon Industries Ltd. v. Union of India (Supreme Court, order dated 3 February 2026) — unilateral arbitrator-appointment clauses breach the principle of equal treatment; in public-private contracts they violate Article 14. Source
- Law Commission of India, 199th Report on Unfair (Procedural and Substantive) Terms in Contracts — no general statutory relief against unfair terms; the gap is bridged through Section 23. Source
- Indian Contract Act 1872, Section 23 — agreements whose object or consideration is opposed to public policy are void. Source
- Sale of Goods Act 1930, Sections 3, 9(2), 31, 47 and 61 — concurrent delivery and payment; possession-based unpaid seller's lien; reasonable price where none is fixed; preserved money remedies. Source
- Consumer Protection Act 2019, Sections 2(46) and 2(47) — unfair contract terms and unfair trade practices; Commissions may declare unfair terms null and void.
- Competition Act 2002, Sections 3 and 4 — vertical restraints and abuse of dominant position. Source
- Insolvency and Bankruptcy Code 2016 — operational-debt claims must pass through the resolution process. Source
This analysis reflects the law as at June 2026. It is published for general information and does not constitute legal advice.