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What Good Is Contract Law?

September 3, 2013

Back in 1963, legal academic Stewart Macaulay asked business leaders what purpose contracts have – and the answer he received was ‘not much’. At that time, most business was done without a contract and for those where a contract existed, it rarely came out of the drawer.

In previous blogs, I have reflected on the fact that my early experience of contracts was similar, although the situation varied by industry and also by geography (US firms were much earlier to adopt widespread use of contracts, but they had more lawyers and more litigious society). But now Professor Gillian Hadfield has resurrected Macaulay’s work and is seeking to update his findings. In an excellent article, she sets out some early research findings, which are (she acknowledges) based on a very limited sample of interviews.

Professor Hadfield discovered similar reactions with regard to standard business transactions. Where she found a big difference is in situations or industries where there is a high degree of innovation. In that case, even though there is no expectation of litigation, the investment in writing contracts is substantial and they are used in the normal course of business.

I would add to these observations with the comment that there are many factors that have elevated the use and importance of contracts in the last 20 years, even though senior executives may be unaware of them. Among these factors are issues such as IP, regulatory compliance, relationship volatility, frequency of change, increased international trade and the growth of long-term performance relationships (essentially the shift from product sales to services and solutions). Each of these drives a need for increased clarity and relevant safeguards which are achieved through some form of documentation – most typically ‘a contract’.

To illustrate this change, I think of the story one member told me. He was driving a project to standardize contracts for his company in all operational locations. They had large facilities in Germany. He met with the German management team. They listened politely and then said “It is a very interesting project, but not relevant here”. When he asked why, they explained “We don’t use contracts. Almost all our suppliers are local and we have done business with them for 30 years or more. To introduce contracts now would imply a loss of trust and would be very offensive”.

That was 5 years ago. Since then, the centralization of  Corporate Procurement and resulting consolidation of suppliers, more aggressive approaches to cost-cutting through competitive bidding, and a strong focus on compliance have resulted in more than half of those ‘traditional suppliers’ no longer working with the company – and Germany is using the standard contract for more than 80% of its business.

However, all of this perhaps illustrates that CONTRACTS are useful business instruments, but CONTRACT LAW may remain a rather incidental element. The two are not the same. The nature of these changes goes far beyond the world of law and they indicate the degree to which ‘contracts’ and ‘lawyers’ are no longer (perhaps never were) synonymous. I welcome Professor Hadfield’s work in this area and hope her research will continue. Indeed, I will be offering the IACCM member network as a way to expand the findings and develop a truly authoritative answer to the question ‘What good is contract law?’

4 Comments
  1. haward permalink

    Macaulay says in his seminal article “Contract , then , often plays an important role in business , but other factors are significant.”

  2. john jorgensen permalink

    Tim you’ll recall I am very much a fan of the relational contract theory, and how it can provide a useful framework for how contracts are used. I refer to Macauley who, in referring to Macneil’s work states that “…..one finds a list of factors to consider in making a judgment rather than neat answers. This leaves us uncertain about the judgment in a particular case. Uncertainty has its costs, but so do certain and precise rulez that defeat actual expectations and reasonable reliance.”…….beware the standard contract!

    • John, thanks for making this connection. It is indeed this matter of ‘managing uncertainty’ that I consider a critical issue. Many times, standard agreements are imposed as a way to deny or ignore uncertainty, whereas good contracting practices seek to address this factor and ensure that it remains visible. Otherwise, of course, the uncertainty is a hidden source of risk that frequently undermines results.

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