Steven Phelan on Innovation In Contracting
Entrepreneurs seek to provide markets with new value through innovation wherever they can identify an opportunity. Their vision is broad enough to include free market institutions such as contracting, where they identify new and better ways to expand the mutuality of value and better relationship models than those in the traditional legal approach.
Key Takeaways and Actionable Insights
Traditional contracting starts from an adversarial mindset.
Traditional contracts are written in anticipation of conflict. They aim to anticipate everything that can go wrong. Then they try to put every contingency in black-and-white. Clauses are inserted to give one party the upper hand over the other. This approach fosters negative behaviors that undermine the relationship and the contract itself. Often, little room is left for flexibility when conditions change in unexpected ways, leading to costly problems like litigation, mediation/arbitration, renegotiation, churn, and shading (withdrawal of effort by one party due to lack of trust).
A new form of contract called a relational contract aims to address the problem.
A relational contract approaches negotiation not from a transactional perspective but from a relational perspective: what are the best provisions to ensure a lasting and mutually beneficial relationship between the two contracting parties? Instead of focusing on how the value pie is divided between two parties,
Article from Mises Wire