What comes to your mind when you think about contracts?
- Perhaps, you immediately shiver at a thought of tens of pages of hardly understandable legalistic text.
- Or maybe you think of legal-tech solutions, smart contracts, fast, easy, powered by artificial intelligence.
- Or you believe that contract is just a formality and that you will later patch something up from what you find online.
None of the above would be a good basis for a long-term sustainable and mutually beneficial relationship.
But what will?
In the Harvard Business Review (September 2019 issue) there was a great article (by David Frydlinger, Olivia Hart and Kate Vitasek), entitled “A New Approach to Contracts”. In it, the authors described the so-called formal relational contract, which is a flexible framework designed to foster collaboration in complex strategic relationships over the long term.
It is still a contract. Essentially.
There are still all the necessary, legally enforceable parts to it, except that there is also something else - a special ingredient aimed at making this contract truly sustainable.
In fact, that’s nothing “groundbreakingly” new.
They go by different names: relational contracts, conscious contracts, value-based contracts or even - integrative contracts.
There are also different methodologies for negotiating them.
What unites all of them is that these contracts are unique to each relationship and they are meant for matters that are way too important to trust the one-size-fits-all form downloaded from the Internet, or written into a code for a smart contract.
They are sustainable contracts.
These contracts are based on solid legal principles, avoiding the endless array of irrelevant paragraphs and include a flexible contract structure, shared documented goals, and efficient guiding principles to use should the unexpected event occur.
And no, it is not about trying to squeeze as broad a definition of force-majeure as possible.
In the transaction costs economics, there is a concept of contract incompleteness (Williamson, 2009; Hart, 2016), which is one of the reasons for having those lengthy overly complex contracts, trying to anticipate every single potential, possible and even a highly improbable twist of fate.
That’s not working.
You probably know by now, that even the most sophisticated perfect contract, with the clause above clause and all those “including, but not limited to”, yada yada yada - will still have gaps. Inevitable.
How are these new sustainable contracts different?
Before we reply to that one, let us ask you: what do you know about mediation?
In short, that’s an out of court dispute settlement mechanism. A very efficient one. And yet - it is neither a court nor an arbitration, where the judgments are enforceable.
Why does it work then?
The answer is very simple: it is self-enforcing.
Because the true alignment of underlying interests has been established.
Because the conflict has actually - effectively - been solved.
Sustainable contracts also are self-enforcing.
That is so because both parties align on their core interests.
They have an incentive to fulfil their obligations and respectively - not to default on them.
In the words of Levine (2003): “reneging would bias future trade terms against the deviator or even end the relationship”.
Isn’t it all too fluffy?
No, in fact, it is not.
Did you know that 75% of the time, contractual provisions are honoured even where there is no legal sanction for their breach?
Besides, in many relationships, it is not even possible to reduce important terms of the arrangement to well-defined obligations.
In legal theory, there is a gardening example - when a gardener is entrusted with taking care of the garden in summer in the absence of the owner and with no way to contact him.
- Can one foresee all the possible things that could happen? The weather changes? The sudden plant sickness? Oh, many things! No! The classic solution is the introduction of the ethical standards in combination with the “best efforts” clause.
“Best efforts”, “best endeavours”, “good faith”, “reasonable care”,... Slightly different concepts, that are coming from different legal systems, yet all essentially aimed at introducing the moral element into the law of obligations.
Though in the absence of the initial alignment between the parties on goals, interests and expectations, hardly helpful.
Lawyers would probably think of the distinction between the obligations of means and the obligations of efforts? Sure. Also, the UNIDROIT principles on international commercial contracts provide for that (see Article 5.1.4 - Duty to achieve a specific result. Duty of best efforts).
Yet this is again trying to squeeze the complex relationship into a tight legal frame with legal terminology.
What do you need instead?
- A change of mindset. From the adversarial mindset of “Otherwise I will sue you” to a cooperative, creative, “let’s make it work”, problem-solving mindset.
- An alignment of interests and expectations, instead of trying to avoid and mitigate all the possible risks.
- Common principles, objectives and goals.
- Gain and pain sharing.
- A combination of bonding and monitoring arrangements.
- A framework for continuous improvement.
- Clear performance metrics.
- Communication! This one can be underlined. Twice.
For which types of agreements would such contracts work?
For numerous, but especially:
- Joint ventures
- Most of the agency relationships.
But practically, for every situation when there is a wish to enter into a long-term sustainable relationship.
At Starks we have developed our own step by step approach to guide you:
- from point A - your wish to enter into a sustainable contract
- to point B - the established working mechanism to support your mutually beneficial cooperations with other like-minded companies out there.
True sustainability requires sustainability in your contractual relations as well.
Drop the old non-working way.
Choose sustainable contracts. Choose Starks.
Are you ready to bring sustainability to your contractual relations as well?
Reach out to us at firstname.lastname@example.org
See also our video on YouTube --> https://youtu.be/TBR_KQU-Xk0 and once you are there, do not forget to subscribe to our channel.
Starks. Your lawyers for sustainability.