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Contracting & Cooperation

March 18, 2010

Sadly, I only became aware of the work of Ian Macneil when I read his obituary. I wish that I had met him, because his work on contracting aligns closely with the views and mission of IACCM – and offers yet another legal and academic underpin for our vision of the future. Several of his ideas yield critical insights to the work of any contract, legal or procurement professional.

 Ian recognized that classical legal practice failed to address the needs and reality of business-to-business contracting. He observed that classical principles are based on assumptions of selfishness which mean that each party seeks to operate at the expense of other parties. He argued that this overlooks the reality of business contracting, which in fact occurs only because the parties have recognized a potential for mutual gain and understand that this can be realized only if they are willing and able to work together.

His writings then go on to illustrate how narrow perspectives and transactional behavior will undermine the relational aspects of a contract. He depicts how companies have choices regarding the depth of the relationship they wish to form – and how this depth must drive very different contract mechanisms. This connection between economic theory and behavioral reality has been increasingly embraced by top economists – but is still largely absent from the practice of law and is severely challenged by the ‘commodity price’ strategies of many Procurement groups.

“Classical law,” comments Macneil, “views ‘cooperation’ as being of little interest and external to the contract.” Yet in business, contracts arise precisely because the parties recognize there is more to be gained by cooperation than by separation. Successful contracts therefore operate with mechanisms that foster cooperation  and depend on the parties consciously adopting a cooperative attitude. As an example, they must accept that ‘damages and losses are not precisely quantifiable and it is pointless to try’ (unlike the theories that govern classical law, which assumes precision in these areas).

Good contracting, Macneil tells us, ‘escapes the classical legal model and is replaced by very different adjustment processes of an on-going administrative kind. This includes internal and external dispute resolution structures … the relationship becomes a mini-society with an array of norms beyond those that centered on the exchange and its immediate processes.” In this, he is clearly alluding to areas of contract and relationship governance, information flows, transparency and performance management.

There is a further point in Macneil’s work that especially struck me. He made the observation that classical law – and its attitude to contracting – is built on the premise that the parties are operating within ‘a common base of presumed rules’. In today’s global economy, this presumption is of course a fallacy. The parties frequently have very different beliefs and understanding of ‘the rules’ – whether legal, economic or social. This again points to the fundamental inadequacy of most contract development and negotiation processes. It illustrates why parties who seek to use power to impose their view of ‘the rules’ will almost inevitably destroy the potential value that could have been achieved from the relationship.

This idea that cooperation is the fundamental underpin to contracting is obvious – yet is also a revelation. And with this insight, it must lead all of us to ask what aspects of our behavior threaten cooperation; what areas of our terms and conditions support and enable it; what techniques and tactics in negotiation establish the framework for mutual success. Although aspects of the law represent an important underpin to contracting, the real essence of the process is that it must establish and define the reason for cooperation, the economic exchanges that will occur and how the parties will structure and commit to ensure the gains are achieved.

Intrinsically, most experienced contract professional know this already. Yet we still struggle to put our knowledge into operation. We still revert to our use of ‘potential external sanctions’ as the way to drive behavior. Reading Macneil’s will help us to think in a new way – and more importantly, to challenge the old way. Today’s business realities depend upon great thinkers such as Ian Macneil. We must ensure his ideas are put to use.

I will be writing more on this topic when IACCM publishes the result sof the latest ‘Most Negotiated Terms’ survey, which will be available in the next 2 weeks (and announced at the IACCM Amercias conference next week).

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