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A new approach to contracts: finding the right balance

November 12, 2019

A recent article in Harvard Business Review added to the long running debate on ‘relational contracting’ and advocated ‘a new approach to contracts’.

As a long-term proponent of relational contracting, I welcome the advocacy for their use, but question the article’s proposition that such agreements should rely on legal enforceability. Indeed, while acknowledging that this is an option the parties may wish to pursue, my experience to date is that it is not necessary and often may be undesirable.

For many years, practitioners and scholars have mused over the relative importance and influence of ‘the contract’ versus ‘the relationship’ in generating positive outcomes. Most business people have tended to argue that it’s the relationship that matters; contracts only really become important when things are going wrong.

In this context, contracts have been viewed by both scholars and practitioners as ‘formal’ and ‘fixed’, whereas relationships have been seen as ‘informal’ and ‘adaptive’.

In the modern world, there are many reasons to challenge this traditional view and to point at the importance of the contract in establishing a platform of certainty, without which disputes are almost inevitable. Much has been written about what constitutes a ‘good’ contract, particularly since today they are far more pervasive and comprehensive than in the past.

My experience (which accords with the article) is that relationships require greater formality because of the scale of adaptability that is required in today’s long term or high value agreements. But if that formality is made contractual, there is a risk that it results in a loss of adaptability or is simply ignored by the post-award operational team. Indeed, it also entails the inevitable involvement of legal teams, which often means that momentum and the essential elements of collaboration are lost.

There are solid grounds for considering recourse under relational contracts at several levels which include:

  • renouncing legal enforceability for the entire contract and utilising some form of mediation, such as an independent neutral
  • developing relational principles that are separate from the contract and not formally incorporated within it. Mediation may be incorporated as an initial step in issue resolution.
  • incorporating relational principles in the contract and agreeing some form of ADR.
  • incorporating relational principles and retaining resort to legal enforcement. 

Such a discussion seems to me an important element of the process when seeking to build a shared accord and mutual trust. By recognising this type of adaptability we truly do start to introduce ‘a new approach to contracts’.

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