Contracts - Who needs 'em!?

I was reading a post over at AdamsDrafting's blog the other day called "Can Contracts Be Counterproductive?" which links out to an article in the UK's TimesOnline by Sathnam Sanghera entitled You can't write trust into a contract. I'm pretty sure most legally minded folks will probably cringe when they think about proceeding in any meaningful business relationship without some written understanding of the parties' think is supposed to happen. 

But to answer the question, can contracts be counterproductive? Sure. They tend to slow things down. I'm sure we've all heard at least anecdotal evidence of deals being closed on the golf course. But I'd be more than a little surprised if the salesperson whipped out a contract on the 18th hole after "closing" the deal. The fact is, coming up with a written memorial of an agreement can take some time. There are so many "what ifs" out there that failing to address them can be disastrous. It might be cheaper and easier on the front-end to simply shake hands and call it good, but that will only take you as far as the first problem you have.  At that point, it might be much more expensive to figure out the next step.

Deepak Malhotra of Harvard and Negotiation Genius fame aptly points out where contracts can go wrong in his article "When Contracts Destroy Trust."
  1. Contracts that are too rigid can be problematic if they lock parties into arrangements that don't allow for adjustments as circumstances change.
  2.  Contracts can erode trust and goodwill if the contract structure assigns roles and obligations without enough information to properly balance the parties obligations. 
  3. Some contract terms can even signal mistrust: Performance based pay, earn-outs and vesting schedules may communicate to the other party that you believe they cannot deliver without some extra incentive.
Bear in mind these points when approaching your next deal and try to strike the balance between a handshake and an unreasonably rigid contract. 


watch said...