Renuka Sugar

Meanings of some Words and Phrases in Contracts

Freedom of contract – Freedom of contract is the freedom of individuals and corporations to form contracts without restrictions subject only to some legal prohibitions. The Indian Contract Act does not lay down specific articles unlike other Acts. It only provides a number of limiting principles subject to which the parties can form their own clauses. So long as the parties do not infringe some legal prohibitions, they have complete freedom to formulate their own rules, promises, penalties and other items on mutual determination.

If a contract is silent about a particular aspect, the Indian Contract Act 1872 or other relevant acts can be invoked and hence these acts provide a back-up in case of omissions. For example, if a contract for sale of goods is silent about taxes, Section 64A of the Sale of Goods Act, 1930, applies. However this section cannot be invoked, if the contracting parties have specifically agreed otherwise in regard to inclusion or exclusion of such taxes).

Privity of contract – Only parties to a contract have standing to enforce it i.e. only parties to a contract may sue for the breach of contract and recover damages (although in recent years the rule of privity has been diluted somewhat).

Assignment of contract – An assignment comprises the transfer of rights held by one party, the assignor, to another party, the assignee.

Novation replaces the original party with a new party. For a valid novation, (i) all parties must assent to novation, (ii) there must be a previously valid contract, (iii) the duties provided for in the contract be extinguished immediately, and (iv) a new, enforceable contract need be created.

A parallel concept to assignment is delegation, which occurs when one party transfers his duties or liabilities under a contract to another. A delegation and an assignment can be accomplished at the same time, although a non-assignment clause also bars delegation.

The common...