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Should contracts induce fear?

November 26, 2018

“It’s not scary enough.”

That was the comment by the legal team at one major corporation following a contract simplification exercise. They were concerned that the absence of intimidating language and the abandonment of traditional legal design made the document ‘too friendly’. In their view, it is important to induce a sense of fear in the counter-party as an added incentive to performance.

It seems they share this view with President Trump, who recently observed: “Real power is through respect. Real power is, I don’t even want to use the word, fear.”

So given the extent to which power is used to impose contract terms and conditions, is it legitimate to see ‘fear’ as a useful tool in achieving the best results?

It depends what you want

Professor James Heskett of Harvard University has written a useful article on this topic. Citing work by Amy Edmondson, he highlights the damage that fear does to interpersonal relationships – in particular, it “destroys teamwork, creativity, and innovation”. Hence within an organization, it is critical to create an environment of ‘psychological safety’, where people feel included, respected and valued. But to what extent does this follow through into external relationships and the way we go about negotiating or managing contracts?

In her book ‘The Fearless Organization’, Ms. Edmondson explains that psychological safety must be accompanied by an environment that encourages high performance standards. This issue of performance standards is obviously key to the world of contracting. Perhaps here we must distinguish between the type and duration of relationships, recognizing that in a simple transaction which is rarely or never repeated, fear is unlikely to do harm and may even be a positive influence in ensuring that obligations are honored or met. However, once we move to longer-term, more interdependent relationships, a contractor in many ways becomes an extension of the organization and will be far more impacted by feelings of psychological safety.

There is an analogy here to the ‘master-slave’ relationship that is often noted in the field of contracting and identified as a recurrent source of poor performance. Hence we once again have an indication of the importance of integrity between ‘the contract’ and ‘the relationship’. If teamwork, creativity and innovation don’t matter, then scary contracts can be the order of the day. Otherwise, ‘fear’ shoud be self-induced, reflecting a personal or organizational concern of not wanting to lose or damage a valued relationship, not something imposed through the terms of a contract.

 

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