What does a commercial contract do?

• Author: Swais, Nishan

Most everyone knows that a contract -- whether oral or written -- is simply a legally enforceable agreement. But what, practically speaking, does a contract -- and, in particular, a commercial contract -- actually do?

A commercial contract does three important things in the eyes of the law:

Determines Your Rights and Obligations

A contract determines the rights and obligations of the persons it binds. By setting out those rights and obligations in a contract -- say the right to receive delivery of a certain good and the obligation to pay for that good when it arrives -- those rights and obligations become legally enforceable and therefore determinative of how the parties to the contract must conduct themselves in order to avoid running afoul of the law.

By the same token, a contract is also capable of changing or completely revoking the rights and obligations that a person might otherwise have under the law. For example, by disclaiming any warranty in a contract for the sale of a good, the seller of that good can contract out of the implied warranties contained in sale of goods legislation.

For those reasons, no contract should ever be taken lightly. It is important that you read your contracts thoroughly to ensure that they do not take anything from you which you do not want taken from you and that they give you everything you want or require.

Allocates Risk

A contract is also a means of allocating risk among the parties to it. Say, for example, you build garden fences for a living. You contract with a nail supplier to purchase a certain quantity of nails so that you can build a fence for Mrs. Hannessen.

Who should bear the risk of loss if the nails aren't delivered to you? What if the nails are delivered, but three months after you needed them? What if the nails are of such a poor quality that they can't hold the wood together?

In each case, Mrs. Hannessen has a legal claim against you for a breach of contract (i.e., because you can't fulfill your contract with her to build her fence). Should you assume the risk for the losses resulting from that claim or should that risk lie with the nail supplier? Common sense says it should lie with the nail supplier -- but does your contract say so?

It is one of the purposes of any contract you enter into to try to anticipate these contingencies and address them in advance in the contract. In part, that means knowing what can go wrong and who is responsible to fix it when something does go wrong. In...