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Commercial ethics – a universal need

March 5, 2018

In the context of human exchange, when do we need contracts and what should we use them for? I’ve been pondering those questions in the context of two very different situations – one being an article on commercial contracting in South Africa’s informal sector, the other being the recent collapse of Carillion, a major outsource provider based in the UK.

Contracts and ‘norms’

The first article, written by two South African academics, contrasts the use of formal contracts by the corporate sector with the use of social norms in ‘the popular economy’. It observes that humanist values – which have no basis in law – govern the informal transactions and trading relationships that operate within the native community. The authors (both being lawyers) are asking whether there should be a ‘dedicated indigenous law of contract’, distinct from the ‘centralized law of the state’.

The examples of the South African social norms that make contracts unnecessary seem to me rather universal. For example, local reputation is important within any integrated community and the creation of alternatives to the formal banking, insurance and financial services sector has been quite normal for many years. ‘Private law’ operates not only within physically conjoined communities, but also across whole areas of commerce, such as diamond traders. As I have observed in other blogs, the ubiquitous nature of contracts is a relatively recent development and has in large part been driven by the erosion of more localized relationships and the need for honorable behavior.

Contracts and power

And this brings us to Carillion, which is a sad story of commercial ineptitude and – in the view of many – less than honorable behavior. It is a story in which contracts abound – and perhaps illustrate the extent to which many contracts today are not instruments of integrity, but rather instruments of power and imposition. In Carillion’s case, the value of contracts was overstated; it appears that customers did not care about the reasonableness or practicality of the terms they were imposing. Carillion seems to have had little concern about its workers or its sub-contractors, operating with zero-hour contracts for the former and draconian payment terms for the latter.

What can we gather from this? Certainly contracts have a valuable purpose. They are needed to memorialize transactions and prevent disputes. They should also be a reliable and auditable record of obligations and value, which would enable effective assessment of the health of a business. At their best, they provide an operational framework that supports a mutually successful outcome for the transacting parties.

But often contracts are not like that. They are in fact established precisely to override social norms and reasonable values. In these cases, they are about power and distance – and ultimately they undermine sustainable economic growth and social development. Carillion is a prime example, where those with existing power and wealth seem to have emerged better off and those with little power or wealth have been left with nothing.

A nobler purpose?

If contracts are going to increasingly regulate human interaction, it seems to me that we can no longer ignore the extent to which they should be reflecting ethical principles. Equally, they should be structured in a way that allows effective economic analysis. Until then, it seems to me that South Africa – and indeed most other communities – might be better off sticking with social norms.

And finally, is it time that contract and commercial professionals start to operate with a more formal ‘Code of Practice’?

 

2 Comments
  1. “In the context of human exchange, when do we need contracts and what should we use them for?”

    Here’s an example of “creeping contractization” of human exchange that was in this morning’s NY Times. It has it all. Even mentions blockchain!

    • Dick
      Thanks for bringing this to my attention. I guess to the extent that contracts are about bringing clarity to situations, this qualifies …. and perhaps its an inevitable consequence of a global environment, driven by social media etc etc. But it seems rather sad.

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