Preparatory Steps explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The preparatory steps come in two parts: interview the parties with fifteen probing questions covering purpose, terms, risk, quality, disputes, termination, confidentiality and IP — then work through ten steps from understanding the business to professional development.
What must be settled before a word is drafted
Before commencing to draft any agreement or contract it is necessary to have complete understanding of:
- the subject matter to be drafted;
- the objective and quantifiable parameters and the qualitative indices of that subject;
- the timelines for performance from either side;
- the grievance redressal mechanism; and
- the modification and termination clauses.
To ascertain these, the handbook says, an interview with the parties and certain homework is called for. Those are the two halves of the preparatory steps.
The fifteen questions
| Group | Questions |
|---|---|
| Purpose and scope | 1. What is the primary objective of this agreement? 2. What specific outcomes do you expect — the key deliverables? 3. Are there any specific concerns or issues the contract should address? |
| Terms | 4. What are the key obligations and responsibilities of each party? 5. What are the payment terms — amount, currency, timing, conditions? 6. What is the duration and any renewal terms? |
| Risk and compliance | 7. What are the potential risks — financial, operational and legal — and how should they be managed? 8. Are there specific legal or regulatory considerations to be addressed? |
| Performance and quality | 9. How will quality be measured and verified — benchmarks, standards, acceptance criteria? 10. What are the consequences of non-performance or breach — penalties, termination, remedies? |
| Dispute resolution | 11. How should disputes be handled — arbitration or mediation, and which jurisdiction and legal venue? |
| Amendment, termination and exit | 12. Under what circumstances can the contract be terminated, and what is the process for orderly termination? 13. Under what conditions can amendments be made, and how are they documented? |
| Confidentiality and IP | 14. What confidentiality measures are required — is an NDA necessary, and what is the scope of confidential information? 15. How is intellectual property handled — ownership, use and protection of IP created before and during the contract? |
Of the fifteen, the intellectual property question carries a qualification that is easy to skim: IP "created before and during the contract".
Most IP clauses deal only with what is created during the engagement. The pre-existing material a party brings with it — templates, tools, methodologies, data, code — is the part that causes disputes at the end, because neither side thought to say who owns it or whether the other may keep using it.
The same point runs through question 9, on how quality will be measured and verified. A client will describe what it wants delivered; it will rarely volunteer the standard against which delivery will be judged. These preparatory steps exist precisely to extract what the client would not otherwise say.
The ten preparatory steps
- Understanding the business and its objectives. Detailed discussions with the client on operations, goals and what they aim to achieve, plus insight into industry-specific risks, practices and standards.
- Identifying relevant stakeholders. Determine all parties involved and their roles and interests, and consult key stakeholders within the client's organisation — management, legal team, technical experts.
- Comprehensive risk assessment. Identify financial, operational and legal risks, and develop mitigation strategies such as warranties, indemnities and insurance requirements.
- Reviewing financial implications. Analyse pricing, payment terms and tax implications, and ensure the terms are within the client's budget and financial capabilities.
- Legal compliance. Understand the legal context — contract law, corporate law and specific regulatory requirements — and work with legal professionals to ensure the terms are valid and enforceable.
- Drafting preliminary terms. Prepare a term sheet or memorandum of understanding outlining the key terms agreed in preliminary discussions, and use it for internal reviews and revisions before the full draft.
- Documenting precedents and templates. Review previous similar agreements for standard clauses, and customise existing templates to the current agreement.
- Clarifying technical terms. Ensure all technical terms are clearly defined, and consult subject-matter experts where the agreement involves complex technical detail.
- Planning for negotiations. Develop a strategy including key concessions and deal-breakers, and consider mock negotiation sessions to anticipate challenges.
- Continual learning and professional development. Stay updated on changes in accounting standards, contract law and industry practices.
Step 6 is the one most often skipped, and it is the cheapest of the preparatory steps to perform.
A term sheet or memorandum of understanding lets the commercial disagreements surface on one page rather than in the margins of a forty-page draft. It is far easier for a client to say "no, the payment milestones are wrong" against a short list than against a document already engrossed.
Note also the handbook's framing of step 5. It does not say the CA should substitute for a lawyer — it says to "work with legal professionals to ensure all contractual terms are legally valid and enforceable", and repeats the point in its pitfalls chapter: "engage legal counsel to review contracts, especially for high-stakes agreements." The drafting skill the handbook is teaching is one exercised alongside legal review, not instead of it.
Where step 2 changes the document
Identifying stakeholders sounds administrative, and it decides two substantive things. Who the parties are — a group company, a promoter personally, a subsidiary — determines whose signature binds and whose assets stand behind the obligations. And who inside the organisation must be consulted determines whether the document reflects what the business will actually do.
The handbook's list of internal stakeholders — management, legal team, technical experts — is a reminder that the person instructing the CA is often not the person who will perform the contract. A service level negotiated by a finance director and never shown to operations is a service level that will be breached.
Practical checklist
- Run the fifteen questions as a written interview, not a conversation.
- Get the answer to question 15 on IP created before the contract as well as during.
- Pin down how quality will be measured before drafting the scope.
- Identify every party and confirm who has authority to bind each.
- Consult the people who will perform the contract, not only those negotiating it.
- Issue a term sheet before the full draft.
- Arrange legal review for high-stakes agreements.
- Define technical terms with input from subject-matter experts.
Common mistakes
- Starting from a template before completing the preparatory steps.
- Leaving pre-existing IP unaddressed.
- Drafting a scope with no acceptance criteria.
- Going straight to a full draft without a term sheet.
- Never speaking to the operations team.
- Treating legal review as optional on a high-value contract.