Formal Relational Contract: Establishing a Partnership Mentality

Description

Long term formal business arrangements often leave little room for the dynamic nature of a changing economy. A co-authored October 2020 Harvard Business Review article promotes the use of "formal relational contracts" as a means of obviating or limiting opportunistic behaviors by contracting parties allowing parties to consider and amend terms due to either unknowable circumstances or factors beyond the businesses control.

Similar to Agile, a formal relational contract allows parties to amend terms and reset objectives. However, a formal relational contract is one that specifies mutual goals and establishes governance structures to keep the parties' expectations and interests aligned over the long term. Designed from the outset to foster trust and collaboration, this legally enforceable contract is especially useful for highly complex relationships in which it is impossible to predict every what-if scenario.

Five steps to the framework of formal relational contracts are generally accepted. The parties typically must have mutual values and objectives prior to beginning any actual contracting with terms and conditions of the formal relational contract tightly aligned with those principles. The process also provides for continued monitoring and governance to adjust terms as needs require.

Listen as our expert panel discusses formal relational contracts and relational contracting, as well as how to assess the utility and desirability of using relational contracting in times of uncertainty.