Build contracts on trust.

Business contracts are complicated. Filled with “heretofore” and “supplier shall” jargon and endless clauses that try to account for every possible scenario, contracts are usually only ammunition for court.

However, a forthcoming article in the next issue of Harvard Business Review suggests a new approach to business contracts, and thus business relationships: one built on trust.

The authors explain its advantages like this.

We argue that the remedy is to adopt a totally different kind of arrangement: a formal relational contract 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.

They then outline a five-step process to put it into practice. First, lay the foundation of establishing a partnership mentality. Second, co-create a shared vision and objectives. Third, adopt guiding principles. Fourth, align expectations and interests. And finally, stay aligned.

Contracts like this are the future. With increasing globalization and the pace of change, you can’t have the legal team draw up hundred-page contracts and amendments every time the business environment shifts.

You might think that doing business like this is fluffy and soft, but the authors assured listeners of HBR’s Ideacast that these hold up in court, in global and multi-cultural relationships, and in very complex, long-term partnerships.

Going back to my previous notes to you—“The Business of Belief” and “Simple words bring profits”—approaches like this provide opportunities for these businesses to have a set of beliefs. By “a set of beliefs,” I mean that, in order to keep complex relationships intact, they must appeal to a moral worldview in which they believe trust, integrity, honesty, and transparency are good things that should be honored by the parties involved. This is not the case for every business.

If, however, the purpose for their existence is to always maximize profits at all costs, these relationships will fall apart.

I want to keep thinking about how businesses can create a system of beliefs, principles, or values to maintain contracts—to maintain relationships—designed this way. Do respond to this email if you have any guidance on this.

Thanks for reading.