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Would scrapping contracts lead to a better world?

December 8, 2013

Once again, surveys show that trust is declining. The latest AP-GFK poll reveals that only one third of Americans feel that most people can be trusted, down from half who felt that way 30 years ago. The report summarized why this matters by giving examples of the pressures that result.

“Social trust results in a society where it’s easier to compromise or make a deal. Where people are willing to work with those who are different from them for the common good. Where trust appears to promote economic growth.

Distrust, on the other hand, seems to encourage corruption. At the least, it diverts energy to counting change, drawing up 100-page legal contracts and building gated communities.”

So if contracts are one consequence of low levels of trust, might we force new and more trusting approaches by scrapping them?

Certainly adversarial contracting built on classical legal theories of risk allocation reinforces the absence of trust. It assumes there is a probability of poor or dishonest performance which may lead to a need for retribution or recompense.  This approach is also endemic to the United States and has been transported to many  other parts of the world by global corporations. It is sustained by a growing number of lawyers because it is what they are taught to do in law school.

We know from annual IACCM surveys that it is these risk-related terms that dominate much negotiation (indemnities, liabilities, liquidated damages, IP rights etc.). Therefore I would contend that contract and negotiation practices as pursued by many companies and law firms are indeed contributing to the erosion of trust and we might well be better off if they were banned.

But what would we lose if we had no contracts? Let’s say for a moment that we restricted the use of contracts to those who had at some point been shown untrustworthy. This would have the benefit of punishing dishonest or manipulative behavior, marking out such companies and increasing their cost of doing business. But would everything then work out well?

Our research suggests that it is not contracts that are the problem; it is traditional, legally-dominated contracts. In today’s more complex, outcome-based world, organizations need a disciplined way to ensure mutual understanding. Whether they trust or not, they are often dealing with complicated issues with many possible interpretations. They are also often dealing across cultures and languages. Opportunities for honest misunderstandings abound.

And that is why IACCM promotes a new perspective on contracting – as a mechanism to build confidence and trust, rather than to undermine it. Such an approach drives very different conversations and also very different contract design. Contracts become management tools, providing a clear baseline, being used for communication throughout the organization. They are most likely electronic and may never be printed. They are regularly referenced to establish how conditions or needs have altered and how the baseline needs to be adjusted.

A few weeks ago, I wrote about the use of virtual reality in building design – a highly disciplined approach that forces the parties to be precise about their goals and needs. This is not driven by a lack of trust, but rather to establish mutual agreement and confidence, resulting in lower costs, more timely delivery and higher quality. I suggested then that we need to think similarly about creating ‘virtual reality contracts’, where the parties convert their discussions into the opportunity for a ‘walk-through’ of the contract, such that it builds accord and true cooperation.

One Comment
  1. john jorgensen permalink

    Francis Fukuyama’s “Trust” which followed his book “The End of History and the Last Man” is a thought provoking read on the matter of trust in a global economy and comparative approaches to ‘contract’ ……..despite now being nearly 2 decades on!

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